Pairing a weak currency against a strong currency is a basic market skill that intraday traders use daily. Which currency is likely to be strong and which is likely to be weak? Pairing the two will help determine direction. The same principle also works for swing trading too. So, here is another ‘worked example’ of a current FX pair that demonstrates how to pair strength against weakness.
On the 23rd of June, a strong of European PMIs printed below the market’s minimum expectations. French services and manufacturing PMIs missed Germany’s data missed too and these fed into a eurozone miss as a whole. So, this was the first clear indication that growth was slowing in the eurozone.
On June 28 French consumer confidence was down, but Germany’s was up. However, on June 29 Eurozone’s final consumer confidence was down to -23.6 below the prior of -21.1 and the lowest expectation of -23. On June 30 German unemployment was up to 5.3% from 5% prior. Inflation on July 01 was a headline read of 8.6%. Since then the German balance of trade on July 04 came in at -1 billion and the prior was revised down from 3.5 to 3.1billion. The French final PMI data was revised down lower on July 05 and German industrial production missed expectations at 0.2% m/m.
This raises the prospects of the eurozone heading towards a recession and should keep the euro pressured as long as the data supports that view.
It may seem odd to call the JPY the ‘strong’ currency here as it has been incredibly weak all year. However, we are looking at relative strength or weakness – not absolute. The JPY also has some reasons why it could suddenly strengthen. Japan has been maintaining its ultra-loose monetary policy (this is what has kept the JPY weak). However, Japan’s domestic markets are pressured by the weak JPY as it makes imports dear. So, investors are wondering if/when Japan might signal some kind of exit to their loose monetary policy by perhaps not defending the band on the JGBs.
The risk is clearly tilted to sudden JPY strength, so this is why it can qualify. Furthermore, the JPY tends to gain seasonally from here over the summer months.
A clear major level where sellers may re-engage is at the 140.00 level. Stops can be managed above 144.50 and targets can be around 135.00.
Major Trade Risks
The major risk here is if there is a shift in either the monetary policy outlook from either the ECB or the BoJ. If the conditions change then the position can be exited to reflect the changing macro conditions.