Consensus Calls & Currency Trades

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By James Helliwell

Hello traders

I hope you’ve all had a good week!

Earnings season is upon us once again with many of the world’s biggest companies providing an update on how they faired in the first half of the year. In America, financials typically report first with the likes of JP Morgan and Goldman Sachs getting us underway this week. The consensus seems to rather pessimistic about the prospect of upside surprise for companies in general, with the popular narrative citing ‘peak multiples’ combining with ‘peak expansion’ in the economic recovery. Clearly this would leave many of the beneficiaries of the 1H ‘reflation trade’ at most risk of disappointment if this was to transpire as a result of weaker-than-expected earnings. In other words, there’s very little margin for error in many of the stocks which have led the recovery so far this year.

The following chart from Bloomberg also highlights how the broader market tends to see subdued performance following previous quarters of strong growth. If we are to see a disappointing earnings season unfold now, then it will likely signal that we have seen a peak in growth.

As we should all know by now, the bond market is rarely wrong when it comes to identifying the economic outlook. This next chart shows how traders in the swap market are now betting that the US Central Bank will fail to reach their target level for interest rates and may need to reconsider their plans to hike rates all together. In short, the bond market now sees a lower growth, lower interest rate environment with less inflation risk than previously expected (which should be good for more defensive growth stocks, as I am repositioning for in my personal portfolio).

Having set the scene with what the market is expecting, we should now turn to our process. With the stock market fixated on earnings in the coming weeks, I thought we would shift gears slightly and turn our attention to what is happening in currencies. Many beginners tend to be drawn to trading FX without ever truly considering the fundamental drivers. Our Checklists aim to plug that knowledge gap and provide a systematic approach to analysing the major currencies.

The US dollar is undoubtedly the most important given its long-held status as the world’s reserve currency. Here you can see a positive score which alerted us to a potential long setup this month, following a prolonged period of negative readings.

Here you can see how the dollar has strengthened versus its major peers since the score was updated on the 28th.  

This was mostly driven by weakness in the Euro and Pound specifically, which comprise the majority weighting in the dollar index. The Euro presented a score of -2, with the extreme in futures positioning the only positive to be found.

This has been one of the cleanest trades of the month so far, with the common currency falling from 1.1950 to almost 1.1750 in short order.

The British pound also flashed up as a potential short with a score of -1.5.

Although a little less impressive than the trend lower in the Euro, this still would have proven to be a profitable trade for our members.

To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.

Have a great weekend,


Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.

© Copyright 2021 Lex van Dam Financial Education. Further distribution prohibited.

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