As promised in last week’s article in reference to macro factors such as the potential for correlation between a nation’s strengthening economy and a corresponding strengthening currency - this week we turn our attention to the positive news flow recently out of the USA and the corresponding strengthening USD.

This news flow has included better jobless claims rates, improving retail sales figures and positive comments from the Federal Reserve. As an FX trader, macro events such as these are important factors in setting your FX Strategy. As the Greece default (I mean “reorganisation”) diminishes from the headlines, attention has turned away from Europe and back towards the USA and China.

While the USA still has a long way to go to reach full employment and get interest rates back to some degree of normalcy the latest numbers do suggest that that is the direction things are headed. This is offcourse very important for the long term health of the US economy and also for the USD.  It will take many months (years) to get back to long term trends (housing construction included) and this could provide a significant tail wind of support for the USD over the medium term. Couple this with the USD being well below long term historical averages with many pairings (eg AUD/USD) and a reasonable case can be build for a rebound in the USD.

Meanwhile, on the other side of the Pacific Ocean, in China we are faced with a slowing (all be it from very high growth rates) of the economy. While under normal circumstances your FX Strategy may suggest this would lead to a declining Yuan, government currency intervention and the peg make this more complicated. We will be looking again at the Yuan in next week’s article as the Chinese Government recently made some comments of interest regarding their expectation for the Yuan’s exchange rate.

Of course, FX trading doesn’t just mean focussing on the USD in this scenario. When the USD goes up, other currencies must go down. As a case in point consider the AUD. In recent days the AUD has been falling on the back of a resurgent USD, rising US bond yields and a rising US equity markets.

So how you trade a macro trend can take a number of forms such as shorting the AUD. Add in the macro event on a slowing China and the breaks are certainly being applied to the AUD – so this is worth closer inspection for your FX Strategy as well.

By Friday Fundamentalist, Published on 25th of March 2012
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