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Finding Trades that Avoid Trade Wars is Difficult

Finding Trades that Avoid Trade Wars is Difficult

2018-06-21 03:57:00
John Kicklighter, Chief Currency Strategist
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There is considerable technical appeal in trading currency pairs like EUR/USD, and EUR/GBP. The problem is the fundamentals. Both the influence of high profile and steadily unfolding themes as well as specific event risk represents extreme uncertainty. Rather than just a set up to a clear release whereby a break or reversal can be pursued after the event risk is resolved, there are factors at work that have no clear end date, considerable complexity and high profile impact potential.

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In general, I am trading to avoid the threat posed by trade wars, the Brexit negotiations and maintain a healthy appreciation for risk trends which could quickly snap to attention and deliver volatility to well-planned setups. In general, this means avoiding pairs that have spillover risk from the US-China trade war as well as the far more troublesome threat that the EU could escalate its own front with the United States. That definitely casts EUR/USD is a troubled light.

Brexit is another burden that can curb as much as it drives markets unexpectedly. The Parliament vote this past session alleviated immediate fears, but the long-term issues remain. That fact will lend the Sterling little opportunity. Add to that the uncertainty of the BoE rate decision and Governor Carney Mansion House speech, and there is far more risk than reward.

To move further from the source of uncertainty and probable volatility, the first stage out may be USD/JPY. This is not a neutral pair it reflects trade issues and risk trends. That said, both currencies carry a role of haven and Japan has so far showed little interest in pursuing an outright trade war with the United States. That said, I think the risk of true risk aversion is high. If that concern were to come to pass, Yen deleverage will outpace the Greenback's liquidity bid in the short-term. A hold and retreat from 111.00 would be a good cue.

I'm even more interest in NZD/CAD. The pair was capped in its month-long upswing and the floor of the channel carving out the rising trend recent fell apart. If there is a break below 0.9100 with intent, I consider this a decent opportunity between monetary policy views .

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The other setup that looks appealing for its absences comes from AUD/CHF. There is little unique systemic risk here with the exception of the Australia-China trade tiff escalation. The SNB decision ahead hold very little potential and the Australian Dollar widely suffered its strongest decline in months. A rebound look appealing if properly motivated. A hold above 0.7300 is the aggressive approach while waiting for a break back above 0.7375 or 0.7400 would be more conservative with evaluating intent.

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