FX Year In Review & A Look Ahead To 2019

FX Trading: A Look Ahead to 2019

Nobody will ever say that 2018 was not an exciting year, and a look ahead to 2019 suggests more ‘fun’ to come. It all started with the February sell-off in equity markets. At first glance, it seemed like the logical pause in a never-ending uptrend that had lasted since 2009.  However, the Energizer Bunny market resumed the steady climb, drawing back in the perma-bulls only to see them get carried out in October-December. There is, in fact, something happening beneath the surface.

The S&P’s are down on the year by nearly -8%. A very harsh reality for those who grew accustomed to steady and effortless returns. Many questions will start being asked. This is the just the first or second inning folks.

While FX markets did not initially enjoy the same volatile price action that equities did, that changed as the year wore on. 2018 was marked by a solid decline in the Dollar Index (DXY) that began in December 2017 and extended into February. Dollar bears have had to wait however as prices simply ground higher for the remainder of 2018. At this stage though, there is simply too much evidence mounting that points to another leg lower in DXY. It will require patience however as well as periodically reviewing the rationale for the trade. Staying power in a trade is best anchored by as much objective analysis as possible. The daily and weekly ‘zigs and zags’ in price action always flush out the weak hands.

  • Wave count, price structure and Fibonacci resistance suggest lower levels for DXY – see chart below
  • 3-month Risk Reversals suggest lower levels for DXY; higher EUR/USD
  • Narrowing interest rate differentials between the US and Europe favor EUR over USD….i.e. EUR/USD longs
  • Inverted US yield curve creates another headwind for USD

Risk Reversals Point to Lower DXY

So that is how I see the bigger picture unfolding in 2019. Naturally, there will twists and turns and adjustments along the way. Remaining nimble, flexible and open-minded keeps one ahead of the curve so to speak.

This way of thinking served us well in 2018. As noted above, FX volatility did not increase when equity markets got volatile in February. This was odd and of course disappointing. FX volatility had been declining for years and that is never what traders want to see. Nonetheless, you cannot impose your will on the markets. Remain patient, ‘listen to the markets’ and take a swing when your set-up develops. That is the epitome of professional trading.

Here is an overview of 2018 FX performance as well as performance going all the way back to 2008.

We averaged about 6 trades per month with trades lasting on average a few days to 2 weeks.

A solid 2018 allowed for us to keep our 10-year track record in really good shape.

Adding to that, our Aspen Alpha Managed Account took in four awards for 2018.

Have a question for me? Just ask.

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