Japanese Yen Falls to 5-Year Lows
Forex markets experienced a slowdown in general price momentum as holiday-thinned trading conditions are starting to become the central feature of the markets. It is important to have an understanding of how low liquidity conditions can influence the market, however, as there are alternative possibilities that can ultimately take form. First (and most common), is the possibility that prices slow as there are fewer daily traders to push prices in a trend direction that is easily identifiable. Many traders might opt to stay on the sidelines as major market moves are unlikely and successful trades will require close attention in relatively slow moving markets.
But the reverse scenario is also a possibility, if we see a few large hedge funds of institutional traders establish positions when markets are vulnerable. Low trading volumes mean that it takes less to significantly alter market prices. Ultimately, this means we are likely to see prices slow to a near halt, or become immensely erratic when most of the market is choosing not to establish positions.
Fortunately, there are some relatively clear strategies for dealing with both scenarios. Since we are currently dealing with range bound prices, traders should look to buy in near support and sell near resistance. Stop losses, however, are the most important factor as this is what ultimately protects against scenario number 2 (heightened volatility). When we opt to place stop losses just outside of short term ranges, it is possible to prevent significant losses while still managing to capitalize on the changing conditions present in the market.
The Week Ahead in Forex Markets
In the week ahead in forex markets, we are most likely to see a small drift higher in the US Dollar, as the currency attempts to correct from long term historical lows. This is made even more likely by the reversal in the Euro from important supply levels in the 1.3830 region. The market’s inability to even test this level suggests that the latest Euro rally has reached an exhaustion point. And without a sufficient amount of active market participants looking to established new buy positions in the Euro currency, profit-taking is likely at elevated levels.
This is also true for the British Pound, so we can expect some bullish momentum to start to accumulate in recently beaten down currencies. This would include the US Dollar, the Japanese Yen (which recently fell to its lowest levels in 5 years), and in the Swiss Franc (CHF). Major market changes are unlikely in the week ahead, but it is important to remember to use close stop loss levels as thinning liquidity can also lead to violent surges in volatility. Continued important will be placed on central bank commentary, as next week’s Federal Reserve monetary policy meeting will likely give additional clues as to the likelihood of stimulus tapering in the coming weeks and months. Most of the market is expecting no immediate change in policy, and this could create some short term declines in the greenback if this proves to be true.