ForexSpirit

The US dollar has had a blistering last few days, dropping 200 pips this week on EUR-USD. The move has seemingly been led by a softening of some foreign equity markets and 10 year US bond yields breaking above 5%.

The recent plummet in the Shanghai stock exchange did not have an immediate effect like in February earlier this year. Instead there was a noticeable delay, but the ripple effect seems to have been felt regardless.

With scared money returning to hollowed ground in the States the dollar has gotten a boost. The higher bond yields also provide another incentive to repatriate money back into the country. The US equity markets finally stopped believing that the Fed might drop interest rates later this year. All these factors combined have resulted in a pretty dismal week for the Dow and S&P.

It does not look like these jitters have affected the carry trades as of yet. There was no effect on the USD-JPY pair and limited impact on the EUR-JPY and GBP-JPY (which was most likely just caused by the weaknesses in euro and sterling rather than any strengthening of the yen).

Early Thursday morning I placed three entry limit orders in the bottom half of my Q2, around 1.34, as this area had provided decent support over the previous few weeks. The orders at 1.3447 and 1.3422 were hit during Thursday’s NY session and the third entry at 1.3397 was hit on the dollar surge during Friday’s London session.

I was looking for at least two bread and butter trades from these three entries (i.e. 30 pips) given the prior support in the bottom half of Q2, but price moved though the support area like a hot knife through butter.

I had the patience to wait for price to drop from mid-Q3 down to mid-Q2. It looks like I need to work on my patience some more and let price drop even further. This is especially pertinent given my musings in early May where I was actively looking for the dollar bulls to make an appearance. While it might feel like they waited till I was distracted by other things and I’d pretty much given up on them making an appearance at all, I know that that is just how I see it now given my limitations in understanding what is really going on. The dollar bulls have finally burst into view, shook things up and made trading the majors interesting again.

With price now in my Q1 quadrant I still think that 1.3300 should provide a decent support level. Although it has only been tested a few times in the past and so its strength is in question.

With the carry trade still in place it should not be long before the money that has just made its way back into America will be off looking for greater returns in foreign climes once again.

As I plan for the worst and hope for the best I’ll be keeping an eye on how price reacts to the 1.33 level and looking to unload one or both of my higher Q3 entries if price remains in Q1 for too long.