Volatile markets give plenty of fresh sentiment drive

What a few weeks we’ve had in the market in the recently! The human cost to the current coronavirus crisis is mounting, and fresh deaths are being reported day by day. And the content of this post is bittersweet too. Bitter, because of the sad coronavirus outbreak which has driven so many sentiment shifts, and yet sweet because of the case studies it provides to demonstrate how traders can use sentiment to trade with. So, let us focus now on the markets.

Read on below to see examples of trading with fresh sentiment. The first off is the simplest trade of them all, vanilla USD longs via the US dollar Index on USD safe haven strength.

Case study #1: DXY Longs

For example, on March 18th a trader opened up three US dollar index longs with the following rationale:

USD strength is expected for the foreseeable future as the liquidation of equity longs, commodity longs, and a number of other financial instruments is resulting in cash positions. The USD is, as the most traded FX currency, the most liquid and movable currency so the USD demand is expected. There are also USD funding issues.

Risks to the trade: Any positive coronavirus treatment or cure news might invalidate this outlook and potentially see USD safe-haven flows reverse as equity markets recover.

The trader has closed his longs on two positions and he is running a third at break even. He intends to hold that into next month.

Case study #2: AUDUSD Shorts

For example, on March 17th a trader opened an AUDUSD short position with the following rationale:

It is widely expected that the RBA will be cutting interest rates this week (March 19) and launching a quantitative program. Furthermore, with equity markets falling that will result in flows out of the commodity-driven AUD. The USD remains strong on increased demand and funding issues driving the USD higher.

Risks to the trade: Any positive coronavirus treatment or cure news will invalidate this outlook and strengthen the AUD.

This was a buy the rumour, sell the fact type of trade. Once the RBA had done what they were expected to do, the trader closed the trade for a gain of +272 points.

Case study #3: USDCAD Longs

For example, on 17th March a trader entered a USDCAD long trade. The rationale was as follows:

The Canadian dollar is weak as US oil hits lows from 2003 on multiple factors: high supply, falling demand, and Saudi planning on ramping up production to maximum levels are all keeping oil sold on retracements. With around 50% falls this month in the oil market, there is heavy selling pressure for oil which is also dragging down CAD. With considerable oil exports, there is a clear link between CAD strength and oil’s strength. USDCAD and oil have around a 96% negative correlation, so when oil goes up USDCAD goes down and vice versa.

Risks to the trade: Any positive coronavirus treatment or cure news will strengthen oil and the CAD. Also, any renewed cooperation between Russia and Saudi regarding production cuts will support oil and thereby weaken USDCAD.

All of the trades in these examples were taken without leverage.