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The historically 'safe' currency to hold in times of recessions is in a unique situation now with a couple factors in place. Here is why the yen is stronger today as well as some trade setups that could push its value either up or down.

Weaker Yen Now, Stronger Yen Later

The Bank of Japan has been consistently keeping the yen in a weaker state for a long time now as interest rates still remain negative. Keeping yields low and easing is all part of the process to bring strength back to Japan's currency over time. A major focus that BOJ governor, Haruhiko Kuroda, is economic recovery, so spending must be ample.

The yen is also subject to volatile swings in either direction. And as long as rates keep causing depreciation, investors will likely be short. However, should investors see a light at the end of the tunnel (which could be happening now), JPY might be priced higher and cause a surge in price.

Against the USD, however, it may not find a good enough advantage than if it were to be paired against a country like Canada, Europe or UK. Here are some setups that could be bullish for yen should the rally continue.

Yen Setups

GBP/JPY

yen

Pound-yen can't seem to break above what is now a triple top on the 1D timeframe. The pair seems to be ranging from the upward trend line to this top which is creating a sort of wedge pattern. The yen's recent strength could take price back down to the trend line for a third test.

CAD/JPY

yen

CADJPY works its way down as oil demand weakened and BOJ hints at working towards tighter policy. Price is nearing support around 102.700s with additional support from a rising trend line on the 1D timeframe. A break under this trend line could take price lower towards the 98.400s.

EUR/JPY

yen

EJ looks similar to GJ except for the double top on this chart. Price came down today and is also nearing a rising trend line paired with support on the 1D timeframe. Price could come down to test those levels again. Now that there is a double top, price may struggle to break higher than the 144s.

We may be entering another volatile week of trading as testimonies from spokesmen of US and Australian central banks are set to happen. Fears of a global recession have investors moving into risk-off currencies and indices around the world fall into bear market territory. In light of the current market condition, here are some of the best trade setups we see going into this week (6/20/2022).

Highest Trending

USD/CAD

best trade setups

USDCAD is one of the best trending pairs to trade right now as price has moved mostly sideways with a gradual slant upward. As oil prices take a break from its recent surge, the Fed pushed interest rates higher by 75 bp causing growing demand for the dollar. Price has touched a previous high and retraced from the 1.30700s on the 1D timeframe, establishing a double top. However, there is clean support right below in the 1.29680s where price can retest and potentially head back up into the 1.3s again.

Biggest Movers

AUD/CHF

best trade setups

Aussie pairs are catching the most volatility today with the RBA governor testimony in focus. Aussie-Swiss fell towards its March highs, but the pair bounced before it could hit a support level around 0.66800s. This support is also coupled with 61.8% fib level on the 1D timeframe which could serve as strong support for the pair should price move lower.

AUD/JPY

best trade setups

AUDJPY is up 0.55% today on yen weakness. Price came down to test the 50 DMA before rejecting the lows and shooting back up. Higher lows and highs have been established which suggests the uptrend will probably continue. With that in mind, the pair could go back up to test the highs around 96.900s on the 1D timeframe. Additional support lies below around 86.087.

Strongest Edgefinder Readings

CHF/JPY

best trade setups

CHFJPY is one of the strongest 'buy' ratings on the Edgefinder today at +4. The Swiss Franc is stronger this week for last week's recent rate hike decision from -0.75% to -0.25% interest. BOJ plans to keep the same monetary policy even though other countries are working to tighten over the next several months. Price jumped again today and is above previous resistance in the 137.800s. There is also a supportive trend line that the pair could bounce off from should price move lower.

GBP/USD

best trade setups

GBP/USD is now a -8 strong sell rating on the Edgefinder after unemployment and inflation exceed that of the US. All metrics are red except for GDP growth while the majority of retail is long this pair. Institutional interest is strong on the USD as the number of long contracts increased by 10% last week while GBP long contracts fell by 4%. Fears of an economic recession in both the US and UK point towards heavy risk-off sentiment which gives the dollar a considerable advantage in this situation. The pair just retraced from the recent gains it made in the last week suggesting that price could come down to test the lows again around 1.19392.

After a volatile week of trading, we look to Monday as we attempt to forecast the week ahead. There could still be some rocky sessions ahead. So, here is some fundamental analysis on our trading biases towards the USD major pairs.

EUR/USD

Bias: Bearish

major pairs

The euro has given back some of its gains this morning as risk appetite fades once again. The rumored 75 basis point hike on the US dollar became expected and brought some hope to investors. On the other hand, the ECB is not expected to raise rates any time soon which has investors concerned for the euro. Risk-off still remains dominant in global markets, so the euro-dollar pair may continue to decline in the meantime.

GBP/USD

Bias: Bearish

major pairs

Inflation in both the US and UK have reached 40-year highs while their central government’s take increasingly hawkish stances on their currencies. However, the Band of England couldn’t mimic the same hike in rates as the Fed which could be considered bearish for the pair. Both countries are in similar economic conditions, so it looks like the USD will be preferred over the pound because the UK couldn't match the Fed’s 75 basis point hike.

AUD/USD

Bias: Bearish

major pairs

Aussie-dollar showed very similar price action behavior towards the FOMC decision and is now giving back most of its gains from the last two trading sessions. Fundamentals for this pair are the same for EURUSD and GBPUSD. The dollar looks stronger due to the more combative approach by the Fed than other countries. 

USD/CAD

Bias: Neutral, Bullish-leaning

major pairs

The dollar has been extremely bullish against the loonie as oil prices decline. The commodity-driven economy has been showing more growth than in the US as the Canadian central bank works towards tapering while continuing with their tight policy. With the current shortage in supply and high demand for oil, Canada might still be able to have a leg up on the dollar, so the pair may have some volatile oscillations.

USD/CHF

Bias: Bullish

major pairs

Dollar-swiss sank prior and during the SNB’s rate decision that brought interest from -.75% to -.25%, a 50 basis point increase. Yesterday’s drop could have been overblown as the USD still remains strong in many aspects. However, the Swiss Franc does look strong when matched against currencies like the yen, the euro, and buck which are lagging on their monetary tightening process.

Global inflation, company layoffs, economic sanctions, geopolitical conflicts and so on have investors shuddering from the thought of investing. Volatility has picked up well beyond expectations as recession fears loom in the forefront of everyone's mind. With all these issues, it's hard to tackle markets when we have been so used to different monetary policy, risk-on sentiment and economic growth. As the FOMC meeting is just over the horizon, it is important to brush up on key concepts to help us prepare for market uncertainty. So, here are some ways to make money trading during turbulent market conditions.

Trade Risk-Off Pairs/Buy USD

What Does Risk-Off Mean?

Due to ever-changing market conditions, examples of risk-off pairs tend to change as well. Risk-off currencies basically are the ones that perform better in times of uncertainty, economic struggles, hawkish monetary policy or high inflation.

Here is a list of risk-off currencies that tend to do better in recessionary times:

Historically, these currencies have been considered 'safe haven' investments when the economy is suffering. USD has always been a safe haven because of the Federal Reserve and their decisions impact the global financial market. Ever hear of people making Swiss bank accounts to shield their money (or keep it hush-hush)? The Swiss Franc is considered risk-off because of it expendability with debt. As a constantly profitable and small economy in the financial sector, the Franc never really gets into deep waters like Germany, United States, Canada, Euro-Area, etc. which are much larger economies. Lastly, when US stock markets fall, the yen tends to appreciate, making JPY a historically profitable play in poor economic conditions.

What Pairs Will Move Up/Down During A Recession?

Here is a list of all the risk-off major pairs that would perform well/poor if a global recession were to happen now:

Bullish

  • USD/CHF
  • USD/JPY
  • XAU/USD

Bearish

  • GBP/USD
  • EUR/USD
  • AUD/USD
  • NZD/USD

You might have noticed that USD/CAD is not on the list. That is because the Canadian economy has been very strong as of recent. Their jobs data is better than the US and most other countries while the oil-dependent economy has benefitted from sanctions on Russia and supply-chain shortages. Overall, if the energy crisis on oil continues, the loonie will persist, but if oil prices fall, USD will overtake CAD.

Because of the Fed's impact on the world financial system, USD will continue to be strong especially if it's central bank continues to raise rates like it has been doing so far this year. Gold is also on the bullish list because of its extraordinary circumstance. Due to reasons mentioned in this article about gold, we think a recession would be a good opportunity to start building positions on gold for the long term.

Making Money Trading In A Recession

The process of trading in a recession can either be through the use of short term or long term plays. GBP/USD and EUR/USD tend to follow the US stock market (SPX500 or NAS100). If you have ever traded these indices, you would know how volatile they can be on a regular basis. This volatile behavior is mildly reflected on the pound and euro when it is up against the USD, but the correlation is generally the same as the SPX500. If one was to trade GBP/USD or EUR/USD, quick short plays might be the best option. Ranging plays would also work, but there might be heavy ups and downs along the way.

All forex pairs enter into long-term swings either to the upside or downside. But, some pairs like to take exuberant amounts of time in a single direction before changing course. These pairs are AUD/USD, NZD/USD, USD/CHF & USD/JPY.

Similar to the pairs just mentioned above, gold is another example of an asset that takes a long time to move, allowing for investors to build large positions over time. Commodities like gold also tend to perform their best during economic declines.

Key Economic News Today

Most weekdays offer the release of a flurry of economic data that can influence price action in the financial markets. Due to the surplus of information available, it can be difficult to parse and locate which indicators are most helpful in terms of fundamental and sentiment analysis. Here, we consider key economic news today, which I will be keeping in mind for identifying fundamental catalysts, preparing for future volatility, and devising trade setups.

Euro Area: Monetary Policy Statement & ECB Press Conference

This morning the European Central Bank (ECB) made plain their monetary policy intentions: they will be ending their quantitative easing program with the start of July and implementing an interest rate hike of 25 basis points that month as well, with another identical hike scheduled for September. This caused a great deal of volatility for EUR this morning, with buying pressure spiking before quickly being overtaken by bearish momentum. This is likely because, despite a change in tune from the ever-dovish ECB, the markets had already anticipated these plans, and the ECB’s key rate will remain in the negative even after July’s hike.

United States: Unemployment Claims & Natural Gas Storage

The past week saw 229,000 American workers file for unemployment claims, while only 205,000 claims had been forecast. An additional 97 billion cubic feet of natural gas was held in US storage this past week as well. Both data suggest a slowing US economy with more unemployment and less consumer spending, which is bearish news for USD. However, this information is merely the prelude for tomorrow’s CPI and Core CPI data month-over-month, expected from the Bureau of Labor Statistics at 8:30 a.m. Eastern Time. With economic health teetering in response to the Federal Reserve’s pivot towards hawkishness, tomorrow’s inflation data may be a significant fork in the road for USD. The DXY is currently surging today, clearing and then hovering around the 103 level intraday.

Canada: BOC Financial System Review

This morning the Bank of Canada (BOC) released their annual Financial System Review, in which they analyze Canada’s economic wellbeing and any significant threats they are wary of. They revealed particular concern about the effect of rate hikes on the global economy, as well as its effect on those in Canada contending with high household debt and a hot housing market. While they covered a broad variety of topics including cybersecurity and climate strategy, I personally interpreted the report as being rather dovish, though they did express less concern about the effect of rate hikes on Canada’s non-financial businesses. This may have prompted some of the CAD bearish momentum we saw this morning.

China: CPI (year-over-year)

Due tonight from the National Bureau of Statistics of China at 9:30 p.m. Eastern Time, China’s CPI is expected to hit 2.2% year-over-year, though CPI data from the past two months have surpassed forecasts. Considering yesterday’s report on China’s monthly trade balance exceeded forecasts by over $20 billion, it seems plausible that tonight’s CPI data will likewise reflect a booming economy. Though CNY functions somewhat differently than other currencies due to more centralized control of its value and limited access for traders and investors, it is helpful to monitor China’s economy as its performance has global implications regarding trade imbalances and industrial competition.

Key Takeaways

The dollar started showing weakness on some pairs today as investors anticipate a higher rise in inflation tomorrow. USD is looking especially weak against the pound, yen and swiss as dollar sinks against the swiss by over half a percent. Because of this mixed sentiment, here is a forecast of what we think the dollar pairs might do going into tomorrow's inflation report as well as next week relative to the currencies it trades against.

EUR/USD

ECB was expected to keep interest rates at 0% which came in as expected this morning, so no surprise here. Interest has been negative for a long time, so zero is a step in the right direction, but it is also not very promising when going against the other majors like the dollar, kiwi, loonie or even pound. Economists do expect to raise rates in July though, so traders might be pricing in the future hikes which are targeted to hit 1.3% by the end of 2022.

Our bias: There is a pretty strong correlation to the S&P, just like GU, so the thought of risk off sentiment and higher euro rates could be bullish for the pair. It would also depend on how CPI goes tomorrow on the USD. Higher CPI would mean Fed will try to stay the course, strengthening the dollar, but falling inflation could loosen up the Fed and weaken the dollar.

GBP/USD

With surging inflation in the UK, the pressure is mounting on the pound. The BOE is shooting for around the same interest rate as the ECB, at 1.38% by December. Boris Johnson survived the governor confidence vote, but the pound is now looking really weak from a fundamental standpoint. The Edgefinder thinks the pound is a strong sell which is concerning, especially as economists think inflation will hit 10% this year before curbing.

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Our bias: The question is whether the BOE is too aggressive on the pound during a recovering economy, or if they’re not aggressive enough to curb inflation. Outlook is weak on this currency, so the pound might suffer in the meantime.

USD/CAD

Canada’s version of Non-Farm Payroll comes out this Friday with the expectation of adding 28K jobs, which is 13K jobs more than the month before (economic expansion). Their bank is also aggressively hiking rates as well. Last week’s hike was 50 basis points while oil rises on supply chain issues with sanctions regarding Russia and Ukraine. So it’s helping out the commodity driven economy.

Our bias: Canada is like a powerhouse right now, I would not go against this pair. You’d be a loonie to short the loonie.

USD/JPY

The yen sank to 20 year lows while BOJ governor, Haruhiko Kuroda says he's not going to loosen his hawkish stance towards interest rates. They also left the key short term interest rate the same (-0.10%) which doesn’t seem very productive especially if the bank is trying to be hawkish.

Our bias: The yen is likely not going to be bullish for an extended amount of time at any point soon.

XAU/USD

The long standing war in Ukraine continues to drive up commodity prices due to supply chain issues and geopolitical tension. Gold’s performance also depends on whether the US economy slows down, so unemployment claims are something to look at as well as NFP, but NFP beat expectations last week. Bond yields and gold’s price go hand in hand and the US 10-year note touched above 3% today, suggesting weakness in the metal.

Our bias: We are mostly neutral on the metal and I think there are better things to trade right now.

SPX500

Bond yields also heavily affect the stock market as well as jobs data. Depending on CPI this Friday, the S&P will either look bullish or bearish for the rest of the week and going into next week. If CPI is higher, that would not be good for stocks in my opinion bc it will encourage the Fed to remain strong on the USD, especially with the beat in NFP last week. But if CPI is lower, maybe the Fed will start to tapering with the idea of relaxing their heavy hawkish stance.

Our bias: The SPX500 never really came down to hit a bottom before bouncing, and it never really hit any resistance before it retraced. So, I don’t really know where it’s going to end up. But I do see lots of bullish setups in the short term. Just looking for quick bounces and dipping out before the market gives it all back.

While there are many currency pairs worth buying and selling in the foreign exchange markets, many pairs worth watching fly under the radar of retail traders, particularly minor pairs. The EdgeFinder, an A1 Trading tool for traders aiming to holistically bolster their analysis skills, is helpful for identifying such opportunities for trade setups. Today we will look at which three pairs the EdgeFinder currently evaluates as most worth selling, and why. We will employ fundamental, technical, and sentiment analysis as we explore 3 pairs worth selling now.

GBP/CAD

3 Pairs Worth Selling Now

In terms of fundamentals, CAD has a narrow, but important, lead over GBP. While the UK has an unemployment rate 1.5% lower than Canada’s, the Bank of England has been slower to respond to their inflation threat than the Bank of Canada, lagging 0.5% behind regarding benchmark interest rates. Q1 GDP growth in both countries has been identical, percentagewise. In terms of technical analysis, we have seen a steep downtrend for over three months, plummeting from nearly 1.74 to 1.58, with 1.58 being a historic support zone. Considering the seasonality bias in CAD’s favor (historically performing well this month), we may well see a breakout to the downside, followed by a retest of 1.58 as resistance and continued bearish momentum. Regarding sentiment analysis, double the percentage of institutional traders long on GBP are long on CAD, and retail traders are strongly bullish on the pair, both bearish signals. Thus, this pair has earned a -6 rating from the EdgeFinder, a strong sell signal.

GBP/NZD

3 Pairs Worth Selling Now

Regarding fundamentals, NZD is far ahead of GBP. New Zealand has an unemployment rate 0.5% lower than the UK’s, and the Bank of England has been far slower to respond to their inflation threat than New Zealand’s Reserve Bank, leaving their benchmark interest rate a full 1% lower. New Zealand’s Q1 GDP growth was a whopping 2.2% greater than the UK’s as well. In terms of technical analysis, we are seeing a retest of resistance in the form of a steep downtrend since February 2022, with higher lows being formed as well. Considering the seasonality bias in NZD’s favor, we may well see a bearish continuation, making this retest a potential selling opportunity. In terms of sentiment analysis, retail traders are fairly divided on the pair, while institutional traders are similarly shorting both currencies, offering little information on the pair. Taken altogether, GBP/NZD has earned a -7 rating from the EdgeFinder, a strong sell signal.

EUR/CAD

3 Pairs Worth Selling Now

Regarding fundamentals, CAD is far sturdier than EUR. Canada’s unemployment rate is 1.6% lower than in the Euro Area, and the Bank of Canada has been far more aggressive than the European Central Bank regarding rate hikes, with their benchmark interest rate currently 1.5% higher. (This may change as the ECB is contemplating a more hawkish rate hike strategy.) Canada’s Q1 GDP growth was approximately 0.5% greater than the Euro Area’s as well. In terms of technical analysis, there has been a strong downtrend since summer of 2020, with the 1.34 support level recently being retested rapidly. Although seasonality bias weighs in EUR’s favor, the pair appears ripe for a breakout to the downside. In terms of sentiment analysis, institutional traders are somewhat divided on the pair, while retail traders are bullish, a bearish signal. Taken altogether, this pair has earned a -6 rating from the EdgeFinder, a strong sell signal.

Key Takeaways

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Eight days ago, Nick entered a trade and is now floating over 200 pips profit. Read about the ideas and processes behind his recent sell trade on EUR/CAD.

The Indicators

EUR/CAD

While using the Edgefinder, Nick saw that the pair had a pretty weak score of -4 which indicated that there could be selling pressure on the horizon. Other than a bullish trend reading, this pair had all the fundamentals going against it. Europe is now sitting at 0% interest rate while the loonie yields 1.50%. Inflation is also less of an issue for Canada. COT read neutral. Europe's unemployment rate was also weaker than Canada's. A bunch of -1 readings across the board signaled that sell pressure could be imminent.

The EUR/CAD Setup

EUR/CAD

This was where price was at during the analysis. Price had just bounced up from a previous bottom and was making its way towards resistance. The resistance was above at that triple top we see on the 1D timeframe. If price was moving upward with a sell bias on the Edgefinder, this triple top looked like a decent short opportunity.

The Trade

EUR/CAD

A signal was sent to the community once Nick took the sell trade. The goal of this trade was to catch a longer term swing and keep the SL distant from the entry to give this pair room to run. The entry was locked in at 1.37285 where that triple top had rejected price before.

EUR/CAD

A closer look provides us with a good idea of where Nick's targets were. That first target was between two support levels between 1.35886 and 1.35470. Targets aren't necessarily TP zones, but they can be used as signals to reevaluate the trade's strength or weakness depending on price action and new market conditions. It was also used to suggest when to move the stop loss. When the trade floated in profit, Nick moved the SL to break even to ensure that a bounce wouldn't cause a loss on the trade. The second target area is where the double bottom was he would look to realize profit.

EUR/CAD
EUR/CAD

After the pair moved over 90 pips in profit, Nick trailed the stop again to about 48 pips below entry (locking in around half of what is floating). It's been 8 days since the trade was opened and Nick is floating over 200 pips. The SL trailed once more to lock 174 pips, but the trade is still active.

Price has about 80-100 pips of room before it hits that double bottom support level, where the trade might close.

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The Bank of Canada (BOC) decided to hike rates again by another 50 basis points regardless of slowing economic concerns. The loonie is stronger today as a result of this. This is what could likely happen to loonie pairs after this news.

Economic Projections

BOC
https://tradingeconomics.com/canada/forecast

Analysts predict a Canada's GDP to dip further going into Q3 while annual growth rate sinks. Unemployment is expected to remain where it's at for most quarters up until 2023. The 2023 inflation cap target looks to be in sight if the BOC can keep their aggressive stance towards interest rates. However, their economy will probably take a hit in the meantime as policy makers attempt to get inflation under control.

CAD Pair Setups

BOC

CAD/JPY hits a previous top on the 1D timeframe to make a second test on resistance. After the BOC's recent decision, the pair could break above this level and head to the 104.000s. Price would just need to close above this level in the 102.700s to solidify that move higher. Support lies below in the low 100.000s and the 50 DMA underneath.

USD/CAD

BOC

USD/CAD sways back and forth as the demand for either currency keeps investors indecisive on direction. The pair is currently on support, and came back up from the lows of today suggesting a move higher. However, the day needs to close above this level to suggest a bullish move; plus resistance lies in the way at the 200 and 50 DMAs.

AUD/CAD

BOC

This pair looks like the most promising setup out of the CAD pairs. Good rejection from the highs on AC suggest that price will dip to the double bottom on the 1D. Especially after this rate hike, investors will probably seek the loonie over the buck for the time being.

The dollar is seeing some demand growth today as investors anticipate the upcoming Non-Farm Employment data. The DXY and USD pairs are on track to end the day in the green for the first time in four trading sessions. Here are some things you can do to prepare for this along with trade setups to take now in the wake of NFP.

NFP Forecasts & What To Expect

nfp
https://www.forexfactory.com/calendar#detail=122942

Based on the mixed forecasts between ADP and and Friday's release projections, employment is predicted to be somewhere between 295-325K new jobs added. Either way, analysts expect that jobs added will land somewhere less than last month's actual. This could push for a less aggressive stance by the Fed, although they were very clear about multiple 50 bp hikes in this year alone.

However, the Fed has been open to change their minds every now and then. Powell originally talked about raising rates by 25 basis points before inflation got worse than they expected. So, the Fed might just be taking extreme measures to cap inflation until circumstances call for another approach. In this case, less jobs added this month might prompt them to loosen up on policy.

What The Dollar Might Do

Throughout the week, we might see a stronger dollar in anticipation of NFP and unemployment rate. This is because the Fed's stance is currently on track to hit over 4% interest by the end of this year. And if policy stays the course, we could see a much stronger USD going forward. Investors might be pricing that in right now, so long setups might be opportunistic up until NFP.

USD Setups Before NFP

USD/JPY

nfp

There is already some bullish momentum on the UJ pair after price broke out of a wedge/flag pattern on the 1D timeframe. If price holds above the falling trend line, a move higher to 131.200s would seem likely. Additional support lies below in the 123.8-125 zone.

USD/CHF

nfp

USDCHF nears support at the 61% fib level and has support under that at 0.94619. The pair saw a huge sell off in the last couple weeks while risk-on pairs got to rebound. Price still has a little ways to go before it hits support, so it might continue to fall until that level is hit.

Setups Post-NFP

USD/MXN

The downtrend on this pair has continued regardless of the tight monetary policy on the USD versus the shaky value of the Mexican peso. If NFP beats, investors might start clinging to the USD which would drive price up to resistance and the falling trend line around 20.1000s. However, if NFP misses, policy makers might be pressured to weaken their stance and cause risk on sentiment in the market. If that is the case, UM could sink lower and keep the downtrend going while paying high swaps.

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