Forex Trading : FX Trading

Continued declines in prices pushed commodity currencies lower. Conflict between Russia and Georgia increased investor nervousness in Europe, not helped by significantly weaker economic data, prompting exits from European equities and the currency.

The Westpac-MI consumer sentiment rose 9.1% to 86.2 for August and consumer inflation expectations fell to 4.9%, mainly on lowering petrol prices, while the Wage Price Index rose 1.2% in 2Q2008, taking the annual reading to a record 4.2%. The RBA monetary policy statement clearly signalled an easing bias, anticipated to begin as early as September, and AUD fell against most major currencies. The forex trading market has priced 75bps in cuts into AUD/USD, and the 12% tumble between 15 July’s high of 0.9849 and the current close at 0.8653 could lead to short-term consolidation near that level; on daily charts, RSI has not risen above 30 during the month of August, falling Friday to 13.

The June U.S. trade deficit narrowed to $56.8bn, much more than market expectations, which will revise the second estimate of 2Q2008 GDP upwards. Retail sales in July decreased −0.1% m/m and consumer prices rose 0.8%, with headline CPI printing at 5.6% y/y, while industrial sales rose 1.7%, inventories rose 0.7%, and industrial production increased 0.2%. U.S. credit standards have tightened significantly and will continue to burden the housing market and consumer and business loans, while the fall in U.S. Treasury foreign currency reserves has prompted dealer chatter that the Federal Reserve has been intervening to support USD on the sly.

As expected, German 2Q2008 GDP printed at −0.5% and the Eurozone composite at −0.2%, with continued weak or negative growth anticipated for 3Q2008. Headline CPI for July was revised down to 4.0% y/y while core printed at 1.7% y/y, still too high to allow rate cuts. However, the forex trading market priced another 25bps of cuts into EUR/USD, which punched below 1.5000 at the week’s start, consolidated near 1.4900, then fell again to close at 1.4672.

BoE Governor King commented on the “chill in the economic air” as he lowered expectations for 2009 GDP, with U.K. unemployment rising to 5.4% and July inflation at 4.4%. GBP/USD fell for the eleventh consecutive day to 1.8626, its lowest level since October 2006, while EUR/GBP remained rangebound between 0.7800 and 0.8000, where it has traded since late April 2008, closing the week at 0.7876.

Canadian June factory shipments rose 2.1%, double market expectations, and trade surplus printed at C$5.76bn. USD/CAD consolidated between roughly 1.0580 and 1.0720, with a gradual downward drift through the week, while AUD/CAD closed at 0.9162, below its 200-period moving average on daily charts.

New Zealand June retail sales rose 0.9%; however, 2Q2008 sales fell −1.5%, with businesses caught between rising costs and lowering sales. NZD/USD consolidated between 0.6850 and 0.7075, a level not seen since October 2007, and AUD/NZD lost nearly 400 pips in a strong sell-off that lowered RSI to 19.4 and the close to 1.2260.

USD/JPY fell dramatically through the first half of the forex trading week, then reversed just as strongly when Japanese 2Q2008 GDP printed at −0.6%, closing the week at 110.50 with only a 0.3% gain. AUD/JPY again trades on fundamentals rather than the carry trade, falling beneath its 200-period moving average on daily charts and consolidating near 95.50.

One of the forex trading market’s many variations on continuation, a price channel is formed when a currency pair range-trades between rising or falling support and resistance levels.

A bullish price channel has an uptrend and is defined by its support level, e.g., by drawing a trend line from the lowest low preceding the trend and continuing up beneath the series of candlesticks or price bars. At least two “touches” by reaction lows are required and more are preferred as confirmation of the channel. A parallel line is drawn above the series to mark the resistance level and it is considered the channel’s price target.

On the other hand, a bearish price channel has a downtrend and is defined by a resistance line drawn from the highest high preceding the trend, down along the top of the series of candlesticks or price bars, again, with at least two touches required and more preferred as confirmation of the channel. The parallel support line is drawn beneath and is considered the channel’s target.

Price channels vary a good deal and they are not considered strong indicators. Not all have support and resistance that are precisely parallel, although that is preferred. Many times a currency pair lacks respect for its price channel boundaries, spiking above resistance or below support, only to withdraw back between its lines. Because of this, each technical trader when drawing a channel must consider the best placement for the boundary trendlines, determining their location and relevance based upon trading experience.

Below is an example of a bullish price channel. This is the current daily chart for AUD/NZD:

Because this is a bullish price channel, its origination point is support at 1.1334 (the purple horizontal line at the bottom of the illustration) reached on 25 March 2008. The support line (medium green) is touched twice, once on 30 May and again 16 July. The resistance line (yellow) is traced roughly between 8 and 22 May then reached again on 10 June. On 24 July the currency pair could not force its way through horizontal resistance at 1.2966 (also purple, at the top of the illustration). On 31 July the heikin ashi price bar touched support again, then on 4 August it closed beneath support and the channel was broken.

When a currency pair’s price action consistently falls short of reaching its goal, it becomes an early warning alert of a possible incipient reversal. As shown above, during June and July, when AUD/NZD could not reach the resistance level (the target for a bullish price channel), it indicated the trend was losing momentum and enthusiasm. The actual break beneath the channel, however, was due to changes in the Australian dollar’s fundamentals, as the Reserve Bank of Australia clearly signalled a future relaxation of monetary policy and lower interest rates.

The obvious method of trading a price channel is to buy at support and sell at resistance, as is commonly done in range trading. However, as the illustration above shows, the technique is not without risk. As with any forex trading strategy, confirmation for a potential trade should be obtained through technical indicators prior to entering the market.