When One Door Closes


IF YOUR NOT IN NOW - Volatility could really pick up later today and into tomorrow, with the market taking in two major central bank rate decisions and a monthly US employment report. As things stand, the US Dollar is firmly in the driver's seat at the moment and should continue to be very well bid on any form of a dip. At the same time, if you are not currently positioned long the US Dollar, it is hard to recommend jumping in, with the Buck having already run so far. So what options does this leave you with? I would say the best strategy for now is to wait for a Dollar trade to set up and in the interim, look for trades that are non-Dollar related. 

IT'S ALL RELATIVE - So for example - I have long exposure in EURCHF and AUDNZD at the moment. Both trades haven't really done much yet (see Trade Journal below), but both are non-USD pairs and eliminate the US Dollar side of the equation. Clearly the Buck has been a major story, so eliminating it as a variable, all of a sudden opens our eyes to relative value plays away from the Buck. Maybe I don't see anything in EURUSD or USDCHF, but I like the chances of the Euro outperforming the Franc. Maybe I don't see anything with AUDUSD or NZDUSD, but I like the idea of Aussie outperforming Kiwi. Anyway, I think it is important to be able to look at the currency market like this. Too many people are fixated on the Dollar.

ELIMINATING A KEY VARIABLE - Earlier this year, I attended a conference. At the conference, there was a panel of portfolio managers, all talking about the same theme of monetary policy divergence and favorable US Dollar yield differentials. Pretty much everyone expressed concern with the emerging markets, while everyone agreed the Dollar was a good place to be. But I was excited to see things get really interesting when the panel eliminated the US Dollar from the equation. All of a sudden the panel was breaking down the emerging markets and discussing which EM currencies they felt were more exposed, and which they still liked having exposure to. And with this came some compelling trade ideas.

Some of my best trades over the years have been in non-USD pairs. Via @joelkruger

MORE DOORS - One such idea that has since performed remarkably was RUB/INR. The Ruble has since collapsed while the Rupee has been a clear EM outperformer. The point I am trying to make is that it is always good to take a step back and look for opportunities elsewhere. Of course, don't force and let the market come to you. But open up the possibilities for more markets to come your way. At the moment, EURGBP is another interesting one. The market has taken quite a hit in recent trade and perhaps it could soon be poised for a recovery rally. I don't have any trade here just yet, but I have that door in sight and am waiting for it to open. 

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