- There are three general analysis techniques – fundamental, technical and conditional – and they rarely align for trades
- Typically, technical patterns and/or fundamental influence (events or themes) favor particular outcomes only
- We look at scenario and markets that show opportunity amid different outcomes while coordinating analysis
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It is uncommon that a particular currency pair or asset finds trade opportunity that aligns technical, fundamental and conditional analysis techniques to the same opportunity. It is even more rare when a market can align the different analysis techniques for opportunities regardless of the direction the price breaks or outcome of key event risk. When we manage to come across such anomalies, we have happened upon a potentially remarkable high probability and meaningful potential trade. The most common situations in which market can offer opportunity across different scenarios occur with a particular analysis techniques. Patterns like consolidating wedges can sometimes offer bullish and bearish breakouts or even range opportunity given the proper motivation. On the fundamental side, a highly charged and speculated-upon event risk can generate enough impact that it can deliver a substantial move regardless of its outcome. These are interesting situations as they bolster probability of an active trade but don’t often leverage potential (large scale moves) as well.
In a different mixture, when we can align conditional, fundamental and technical elements in the market; the results can be a stronger and longer lasting drive in the target asset. This can depend on specific outcomes for the individual legs however (such as a dovish event risk and bearish currency response). A good example of this situational analysis is the S&P 500. While the trend has been bullish long term, the fundamentals have offered limited support and pace has not drawn much in the way of speculative excitement. The same skewed preference exists for the Dollar. The currency has been battered for the past seven months as the premium found in its monetary policy advantage faded. Recently, there has been a calcification towards building up a more hawkish veiw of the Greenback through its interest rate advantage. That said, the drop has significantly reduced its premium and made it far more responsive to a recovery in lost ground. For pairs like EUR/USD, AUD/USD and USD/CAD where the Dollar’s losses have been more intense and/or extensive, the upcoming NFPs report will carry significant potential.
Through the FX market, we can often find opportunities in particular currencies that can align to favorable outcomes depending on the counter currency. With the RBA rate decision this past week, there were Aussie Dollar based pairs that aligned to bullish, dovish and even neutral outcomes for the policy decision. For a more explicit hawkish view, the AUDUSD having cleared 0.7850 has turned a much larger tide that offers years of upside potential. In an explicitly dovish scenario, the AUD/JPY is among the most over-leveraged Aussie crosses and thereby a stretched pair with considerable reversal potential. And, for the more balanced technical backdrop with controlled fundamental implications; the GBP/AUD presents as a measured range view. Moving forward, the NFPs represents one of the most prominent fundamental sparks for volatility speakers. What’s more, the technical mixture presents trade potential for different outcomes. The EUR/USD and USD/CAD have driven massive, multi-month anti-Dollar moves. Therefore, a rebound in the Greenback’s favor stands out prominently. On the opposite end of the spectrum, the USDCHF seems one of the few pairs suited to a Dollar retreat where it is so ravaged elsewhere. Yet, in comparison to US jobs report; Canadian employment stands to be one of the most expressive of volatility events. After its massive run up extended crosses like the USD/CAD and CAD/JPY to exceptional extremes, reversals look far more threatening/opportune. We discuss the value in aligning your analysis views in today’s Strategy Video.
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