2014 Could Be the Year of the U.S. Dollar

The United States dollar (USD) recently posted gains against the euro and the yen after minutes from the December meeting of the Federal Open Market Committee (FOMC) were released.
The minutes indicate two major developments: First, the U.S. Federal Reserve is on track to reduce its bond purchase program at a gradual pace. Second, the Fed's outlook for the U.S. economy is positive.

The FOMC minutes were released on Wednesday, January 8th. Earlier that day, the closely-watched National Employment Report from payroll technology firm ADP was also positive as it indicated that the private sector closed 2013 by adding 238,000 jobs in December. Forex traders responded quickly to the news, which caused the USD to rise against the euro and the yen by 0.3 percent.

Quite a few forex market analysts believe that scenarios similar to the one above will be more common in the year ahead. As the world's largest economy recovers from the Great American Recession and the global financial crisis, investing in the USD is expected to be a bullish move for the first half of the year.

USD Consensus for 2014
Trading the greenback is something that just about all forex traders get into in their lifetimes. The USD is part of the currency pairs known as the forex majors, which include the EUR/USD and the USD/JPY. The forecast for the euro and the yen in 2014 is not the brightest. In fact, many analysts believe that both the euro and the yen will perform very poorly from January to June.  The EUR/USD seems to even be on a downtrend from the year 2008, continually slipping lower in price than previous years.

The European Union economies are expected to languish over the next few months. The Bank of Japan is expected to flood the market with cash for the purpose of offsetting the immediate effects of a sales tax increase. The U.S. economy, on the other hand is expected to experience a gradual recovery in terms of employment, real estate and consumer spending.

The consensus on the USD index, which is currently at about 81.14, is that it will reach 85 by December 2014. The euro, however, could drop to $1.27 by the end of the year. This is not the first time that analysts are forecasting a significant fall of the euro, but they seem to be a bit more certain this time around.

The USD/JPY Continues to Rise, but Can the Trend Continue

This past week has shown a huge positive gain for the USD/JPY pair as there was a very large increase in Core Goods inflation, backing the BoJ's financial measures, only pushing the Yen's value down even further as it continues to fight for that 2% inflation goal and the USD is said to continue higher against the Yen setting record levels and gaining over 20% against the Yen's value.

However, as we look at the USD/JPY chart below, is the dollar looking to go even higher against the Yen?Over the course of just a few days the dollar has made incredible gains, making profits for many traders.

Looking at the chart below  there are several key features that need to be noticed first and foremost.

First, looking at the Bollinger Bands set on this chart, we can see that the last candlestick drawn fell below the first deviation band level, quickly dropping downwards, looking like it found a bit of support at the 104 level before buyers stepped back in and took control of the market.  However, the Bollinger Bands show that this market is looking as though is is very top heavy, with the USD/JPY oscillating between the first and second deviation, and still looking for some sort of support.  This floor may come a bit before the 104 level, as the middle band seems to be near that general vicinity consequently the pair may find a good floor right around where the middle band of the Bollinger Bands rests.   

The interval between the upper bands and lower bands and the middle blue bands indicate the amount of volatility this pair may contain.  The interval between the lower second deviation band and the middle band is much larger than in other parts of the chart, indicating a possibly high level of volatility that this pair may contain.

Notice how wide the band actually is in the most recent areas of the chart which also questions the actual strength of the USD/JPY and whether or not it will hold this level when the markets open on Sunday. This large interval points to a high level of volatility that we see recently with this pair.

Another level that should be noted is the 103.208 level which marked the previous high the market established several months ago and is noted on the chart above by the black horizontal line.  Since as of recently this pair blasted through this 103.208 resistance level and has not really looked to form some sort of support, it may not surprise traders to see a decline to this level in the near future to form a bottom for the continuing push upwards in the future.

Ultimately though, the whereabouts with the pair in the future is unknown, though some factors point upwards while others point to a possible pullback.  However, constantly keeping up with the market is paramount as is analyzing your trades before executing them.  Proper risk mitigation is key in this subject area as the USD/JPY possibly continues higher in the coming days and increases its volatility, becoming overbought and concerning traders. Or this pair may even look to drop down and find support somewhere else, though where exactly is not known.

Managing your risks in any market whether the it continues higher or breaks down is an absolute must for smart trading and lessening your risks you take when investing in currencies.

  

If the Grinch Takes a Stock Rally, Can Santa Rally FX?

As the Federal Reserve started their end of the year meeting on Tuesday, the stock market produced a slight drop due to speculative fears of a taper of QE3.  The long awaited news of a potential taper will be announced today, concluding the Fed's meeting.

What to expect from the taper?
We can expect to see risk-on-risk-off trading. Investors will start to liquidate riskier assets such as equities and risk driven currencies causing them to depreciate. Investors will want gravitate towards lower risk investments and currencies such as the US Dollar. The result is a bearish correction in the equities market, with a surge of demand towards safe-haven assets and currencies such as the US Dollar.

Looking at the daily chart below we can see how the US Dollar began appreciating due to mentions of a taper in mid October.

US Dollar Index
Daily Chart

Forex Outlook
If we analyze the current and future monetary policies of both the United States and Japan, we will see that the policies are taking two opposite directions. The Federal Reserve is looking to cut down on it's stimulus package, decreasing the purchases of mortgage securities and treasury bonds, while the Bank of Japan is try to boost growth through increasing their stimulus buyback programs.
After looking at the different directions the policies are taking, we can now conclude that the currencies shall react in a similar manner. As our Federal Reserve cuts down on money flow into the economy, the US Dollar will be higher in demand, therefore increase in value. As more of the Japanese Yen flows into their economy, the demand for the currency shall decrease, therefore depreciating the currency.

Below we can see how the two differing policies affecting the currency pair price. The most recent rally began in October with just talks of a taper. If the Fed decides on implementing a taper we can expect a continuation of this rally.

USD/JPY
Daily Chart

Trading the USD/JPY this past month.

If you went long USD/JPY last month this is probably how you feel.

Happy Holidays and get out there and do some trading!

-From your friends at FXC