Tuesday, July 12, 2011

Forex Trade of the Week: Is Global Growth Slowing?

SELL AUD/USD at 1.0650
SL:1.0720 TP1:1.0590 TP2:1.0530

Last month, I wrote about how the "Forex world" is divided into 3 regions: US, Europe and Asia-Pacific. Hence, to get a snapshot of what's going on around the Forex world, we only need to see the stories that unfold in these 3 regions.

Last week, all 3 regions had news which pointed traders to only 1 conclusion: global growth could be slowing. 

Let's have a look at all three news:

1. Europe: Moody's downgrades Portugal

Ratings agency Moody's downgraded Portugal's long-term bonds to junk status Ba2 from Baa1. Two reasons were given by Moody's. Firstly, that Portugal would not be able to meet the austerity targets of the EUR80 billion bailout package granted by the EU and the IMF 2 months ago. Secondly, it would have challenges returning to the markets to sell bonds.

The EUR/USD took a nose-dive at the news; and also did not recover when the ECB proceeded to raise rates to 1.5% last Thursday. This is a huge clue that traders are increasingly concerned with sovereign debt troubles in Europe.

2. USA: Non Farm Payrolls

Non Farm Payrolls only rose by 18k in June, less than 20% of the market's forecast, and the lowest in nine months. What raised eyebrows even more was the fact that the unemployment rate increased from 9.1% to 9.2%. This is one of the biggest clues that the US economy could be sputtering.

The USD/JPY reacted violently to the news, dropping about 80pips in the space of an hour.

3. Asia-Pacific: China raises rates again

China raised rates for the 3rd time this year, in an effort to cool searing inflation numbers. The consumer price index for June rose 6.4% from a year earlier, with sharp rises recorded in food, consumer goods and property. This is the largest recorded figure in 3 years.

Additionally, the Chinese government is slated to report GDP numbers tomorrow at 10am.

According to a median estimate in a Bloomberg survey, GDP is expected to come in at 9.3%, down from 9.7% the previous quarter. This would be the slowest growth in almost 2 years for China.

The expected slowdown is largely due to China's weakest import gain since 2009, which interestingly means that the US and Europe will have challenges exporting their way out of their own domestic problems.

Hence, with all 3 regions reporting dismal stories, it is not difficult to see where the world economy is heading for the rest of 2011.

Top News This Week

China GDP. Wednesday, 13 July 2011, 10am. I expect figures to come in at 9.3% (previous figure was 9.7%).

USA Core CPI. Friday, 15 July 2011, 8.30pm. I expect figures to come in at 0.1% (previous figure was 0.3%).

Trade Call

SELL AUD/USD at 1.0650
 On the hourly chart, AUD/USD has been moving in a range for the last 10 days. Support and Resistance is located at 1.0664 and 1.0786 respectively. The news in the market is causing fresh worries for a global slowdown, hence, the bias is for a short on high yield currencies. We will go long when prices close below the support level of 1.0664. Our entry is taken at 1.0650 and a protective stop is placed 70 pips above the entry price. This is a trend play and we will have 2 profits on this trade. 
SELL AUD/USD at 1.0650

 by Mario Sant Singh FXPrimus