I’m often surprised when I get talking with new ( and usually short-term ) traders – how little they really know or understand of the fundamentals, or of some of the “general under currents” running through currency markets.
At times I really do shake my head, wondering “How on Earth could one expect to have any success at this without spending the time, and making the effort to better understand what’s “really behind” a given currency move? and “what role that currency plays” in the grand scheme of things.
Seeing these low volume / large price moves in a number of currencies over the past 24 hours “should” push a trader to really test his/her skills and knowledge – in learning to differentiate what’s moving, in which direction – and “why”?
A simple example. The Australian Dollar. A strong currency or a weak currency? And then – why the hell would it be moving higher in the current investment environment? Ask yourself these questions BEFORE you consider entering a trade.
Hmmm let’s see..how bout the Reserve Bank of Australia outright stating they WANT a lower Aussie? Further “rate cuts” expected in Q1 2014? How bout some weaker than expected numbers ( not to mention some pretty serious debt/banking concerns ) out of China? Let alone the “old standard” carry trade coming off “should” risk aversion appear ( yes people “risk aversion” remember that? – the opposite of “risk appetite”?), the normal market dynamic where things go “down for a while” instead of “up all the time”?
Point being…..there are no “strong currencies” as the race for the bottom is still very much in play, and will continue to remain the market driver in months to come. You’ll need to see reports of strong economic growth “globally” and countries “raising interest” rates to even consider a time to be looking for “strong currencies” – and I can assure you THAT won’t be happening any time soon.
I continue to marvel as people “see what they want to see”, but the newsflash here, is that we are moving towards a period of “slowing and contraction” not “growth and expansion” so…..I guess you can read your headlines….and I’ll “write” mine.
Reading Market Moves When Everyone Else Is Blind
The problem isn’t just that traders don’t understand fundamentals — it’s that they think they can trade patterns and technical levels while completely ignoring the economic machinery grinding underneath. You want to know why most retail traders get slaughtered? They’re playing checkers while central banks are orchestrating a chess match that spans years, not minutes.
Take that Australian Dollar example I mentioned. Every decent trader should know that when a central bank openly campaigns for a weaker currency, you don’t fight them. Period. The RBA wasn’t making suggestions — they were drawing battle lines. Yet I watched countless traders pile into AUD longs because they saw some temporary strength and thought they’d discovered the next big trend.
Central Bank Coordination Is Everything
Here’s what separates professional currency traders from the weekend warriors: understanding that we’re living through the most coordinated monetary debasement in history. Every major central bank is actively trying to weaken their currency, but they can’t all succeed simultaneously. It’s a mathematical impossibility. What you’re seeing in these low-volume, high-volatility moves is the market trying to figure out who’s winning the race to the bottom on any given day.
The Bank of Japan wants a weaker yen. The European Central Bank wants a weaker euro. The Fed wants a weaker dollar, even if they won’t admit it publicly. And Australia? They’ve been shouting it from the rooftops. This isn’t some conspiracy theory — it’s openly stated monetary policy across the developed world.
Why Risk Assets Are Living on Borrowed Time
Every carry trade that’s been working for months is built on one fundamental assumption: that risk appetite will remain elevated indefinitely. That’s not how markets work. Risk cycles turn, and when they do, they turn hard. The currencies that have been benefiting from carry flow — your commodity currencies like AUD, CAD, and NZD — these aren’t going to just decline politely when risk appetite shifts.
I’ve been tracking the warning signs, and they’re everywhere. China’s credit markets are showing stress fractures. European banks are still sitting on massive derivative exposure that nobody wants to discuss. The USD weakness everyone’s celebrating is happening for all the wrong reasons — it’s not strength in other economies, it’s dollar debasement racing ahead of everyone else’s debasement.
The Coming Currency Reset
What we’re witnessing isn’t normal market behavior — it’s the endgame of a monetary experiment that started in 2008 and never ended. Every major currency is being systematically devalued, but the market can only process this reality in fits and starts. That’s why you’re seeing these violent, low-volume moves that seem to make no fundamental sense.
Smart money isn’t trying to pick the strongest fiat currency anymore. They’re positioned for the inevitable moment when this whole system hits a wall. Gold isn’t moving higher because of inflation fears — it’s moving higher because institutional money is quietly acknowledging that all paper currencies are suspect.
Trading the Transition
If you’re going to trade currencies in this environment, you need to think like a central banker, not a day trader. Every position you take should have a fundamental thesis that accounts for monetary policy, not just technical patterns. When the Reserve Bank of Australia tells you they want a weaker currency, believe them. When the data out of China shows credit contraction, understand that commodity currencies will eventually reflect that reality.
The rally you might be seeing in risk assets right now? It’s the market’s last gasp of believing that central banks can keep all the plates spinning indefinitely. They can’t. And when those plates start falling, the currency moves are going to be unlike anything most traders have ever experienced.
Stop looking for strong currencies. Start positioning for the currency that will be least weak when the music stops playing. That’s how you survive what’s coming.
Hopefully you don’t mind another USDJPY comment. Not for trade but for thought and analysis. Speaking of contraction and potential flight to safety, if US Treasury yields start to decrease that should really take the heat off USDJPY and perhaps other JPY pairs. I think the last correlation number I read for USDJPY and US Treasury yields was in the high 80’s….pretty strong. If treasuries don’t rally though on a flight to safety then…well that tells us something much different.
Huh……interesting that you’d consider U.S Treasuries “rallying” on a flight to safety.
It’s been my thinking that “gold” may take that spot next time around, as I for one sure won’t consider U.S Treasuries a safe hafe haven play.
Curious to know / understand more of what you’re thinking.
You mean maybe “older investors” rotating out of stocks, and perhaps into bonds?
I guess that was sort of my point….in the past often treasuries would rally in a flight to safety. We haven’t had a flight to safety in awhile and I’m interested to see what the market thinks this time around. Gold or will people actually think US longer term paper is safe enough to trade. My personal opinion is that gold is a better idea but I kind of want to see what the market thinks. If US paper doesn’t get bought this time around it says the clock got ticking earlier than I expected
You bet man…..ALOT to be learned from this next turn (when it finally materializes).
I am with you 100% in that the safety play will be very interesting, as well USD.
Personally…..I don’t envision Treasuries doing anything but bouncing, but certainly can’t wait to see!
As in I am in the fire n brimstone camp but I am expecting that to play out later down the road
Ya with the Fed sitting across the table, this kind of speculation can just as easily get turned on it’s head with a simple press conference / news announcemnt so…..the saga continues.
Personally, I’d love to see stocks sell off, bond yields pop “past” expectation, and have the Fed immediately step back in with additional QE , and just get it over with.
That would have the money printing continue ( as they want ) that would further depress the US Dollar ( which they also want ) while keeping a lid on interest rates. Then interest rates subside ( temporarily ) stocks take another “attempt to regain highs / go higher , Dollar type “crisis” / Japan “crisis” kick in or whatever other “global threat”…and the entire thing tanks hard.
There is no way this is all going to play out “naturally” if that’s even possible anymore as the Fed MUST be in the planning stages as to what to do next, with zero improvement in the real economy, zero job growth, all lowered earnings estimates / guidance etc….and this “token taper”.
I’m still of the mindset that there will be “significantly larger QE” on the horizon.
Ya I’m thinking much larger QE at some point as well. That is when I feel I will be more bearish because there are some large players (China) already mad about this monkey business. I can only imagine what will happen next time around….and a further announcement will “prove” that there is no way out.
We’ll feel more bearish sure….but hey! More QE?? Good right??
Fudge.
Markets will likely give it another kick of the can as Fed and Wallstreet try to “continue to keeps things inflated”, and the poor guys at home / seniors / middle class etc just go along with it “one more time”? “two more times”?
Unreal man.
My thinking is something “larger” ( as you’ve noted with China or perhaps crisis in Japan ) will throw a big fat monkey wrench into the Fed’s plans.
But then again….crisis / war etc……Fed wants those things too so…..
Yup. Speaking of Japan does anybody know of credible non mainstream news source for fukushima news? I’ve read some freaky stuff lately but I’m not so sure of the sources. Enenews.com is a site I’ve been checking into. Anybody have any suggestions?
It’s tough as I too struggle for accurate information.
We’ve got readers in those parts….lets hang in and see / hope someone can give us some “reliable news”.
Thanks for all your insights.
What is your position regarding the Canadian dollar versus US dollars?
Hi Jimmy.
I’m as bullish the Canadian Dollar as can be…..although it really depends “against what”.
Expecting USD to “eventually” fall considerably – I’d get short USD/CAD any day of the week.
“Hmmm let’s see..how bout the Reserve Bank of Australia outright stating they WANT a lower Aussie?”
The real price of a currency is the nominal price plus the short term interest rate plus the time differential. That is, for our purposes, the nominal price of the AUD today is not equivalent to the nominal price of the AUD ten years ago, but to that nominal price plus accrued interest. What the RBA said was that they would prefer to see the nominal price lower than to lower the interest rate. What they also said is that the price is more likely to be closer to 85 cents than 95 cents; which could mean what they regard as a reasonable range is anything from 0 to 89.99, with some cushion into the 90 to 94.99 area but not above unless something changes (which is precisely what you expect to happen, so that is puzzling to me). Consider this: when the AUD/JPY collapsed in 2008, the lows it reached were still above the carry adjusted AUD/JPY of not that many years before.
As far as I’m concerned, there is only one trade that approaches the level of stupidity of shorting AUD/JPY, and that is going long GBP/AUD. And you are “as bullish the CAD as can be”? Why in God’s name would you be bullish the CAD and bearish the AUD?
For all reading….please take note of the above comments, as we will “revisit this” at a later date.
I will now give myself a well deserved “pat on the back” for the use of restraint, as well patience – allowing others to openly express “a view” here at Forex Kong.
I don’t justify my trades, or ideas in general Andre so……
I wish you the best of luck out there.