Trading China and the U.S. Dollar

World stock markets and notably the ‘inflation trade’ are off to a hot start in 2018.  One of the markets that we’re watching for clues regarding a change in behavior is China.  In early December, we anticipated the resumption of China’s advance and argued that AUDUSD would turn up as well.  The following is an excerpt from the 12/6/2017 SB Swing Update.

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FXI (China Large Cap) Daily (12/6 SB Swing Update)

China has been ripping while the AUDUSD has been limping.  The correlation may be about to come back in line.  FXI has dropped sharply for the last 2 weeks but is nearing support from several slopes (one short term and one long term).  Watch for support near 44.  I’m of the mind that this corrective low in China coincides with the big low in AUDUSD.

AUDUSD Daily (12/6 SB Swing Update)

I’m wondering if AUDUSD is going to spike into a Friday NFP low before reversing.  The chart sets up well for that dynamic.  Focus is on the trendline near .7495.  The week open at .7592 is resistance within the range.

As it happened, FXI bottomed on 12/7 and has rallied over 8% from that day’s close.  AUDUSD bottomed on 12/8 (after NFP) at .7501 and has rallied nearly 5% as of Friday’s (1/5) close.  We don’t pretend to know what’s going to happen in the future.  Rather, we form a market opinion based on price action (pattern, levels, etc.), sentiment, and analysis of data from our proprietary technical scans.  In early December, our opinion was that AUDUSD and China would turn up together.  Both markets have progressed to the point where our metrics indicate potential for a 2-way market in the near term (opportunities to trade both sides), especially in AUDUSD.  Certainly, the general direction of the USD is part of this story.  The following observation on 12/26 is a perfect example of how we analyze sentiment.

12/26 SB Swing Update

I came across this article today on the front page of the business section in the WSJ.  Headlines that include predictions are often the best ones to fade.  In this case, the implication is that the USD will decline despite the repatriation catalyst.

The USD accelerated lower after 12/26.  We’ve yet to see any headlines proclaiming that the USD is ‘likely to resume lower’ but when those headline appear it’ll be time to play a bounce…and maybe short China.  We’re monitoring the situation closely.  Good luck!