Forex Investment and Currency Trading

The oil market is trading like it is out of gas and we are bouncing right upon the 40-day moving average, a line which has defined the up trend since early February. As you can see from the chart below, a daily close below the 40-day would be very significant technically and should open up a quick move to 122.00 and a reassessment of the debate between “speculative momentum-driven bubble” vs. “legitimate structural rally”. The likely idea that momentum and index investors are responsible for the most recent price increases on the simple argument that the combination of increasing supply and falling consumption must eventually be reflected in a lower price. 

The 40-day MA (black line) has defined the trend this year – currently at 133.46

So if you are bearish oil, how do you trade FX? Many of the dynamics that we have become accustomed to trading in FX have fallen by the wayside since June, making a decline in oil that much more difficult to trade. EUR/NOK and USD/CAD, usually the stalwart FX vs. oil trades, have both completely decoupled from oil, showing no correlation whatsoever; so the best trades now are EUR/USD or AUD/USD. Interestingly, over the past few months the AUD/USD has had a higher correlation with oil than EUR/USD. 

The reason for being like Short AUD/USD and EUR/USD is:

• we are getting close enough to the Olympics that any distortions caused by diesel / fuel oil hoarding should be past
• be positioned for a substantial move lower in oil
• the performance of XLF (which is essentially the anti-oil these days) provides one more reason to be bearish oil
• after peaking at 8.5 shares of XLF per barrel of crude, the Financial Armageddon Index has now dropped all the way back to 7.0 and this bodes well for equities and short oil trades going forward

Today’s Trades:

• Short EUR/USD @ 1.5877, stop @ 1.5955
• Short AUD/USD @ 0.9785, stop @ 0.9855, take profit @ 0.9510
• Short AUD/CAD @ 0.9811, stop @ 0.9855, take profit @ 0.9510