We stick to our view about the correction of the US dollar, although it is recognized that this process could be close to completion. The main reasons for the corrective rally are still valid: the stabilization in China and a more peaceful stance of the Fed. Next week is full of American statistics. It can be the key to determine the future direction of Fed policy. Stronger data may mean the end of correction. Price of oil is another risk for the US dollar. The latest wave of decline of oil prices could put pressure on the US currency.
The US dollar has been in the trend. We bought 10 binary options on currency pairs with the American currency from 19 to 23 October. We did not use any particular currency pair in order to diversify. Our forecast has been mostly negative for the US dollar, so we opened 7 positions against USD.
Given that the current deposit rate is -0.2%, ECB President made it clear that the more negative its value in addition to the expansion of the asset purchase program is quite possible. This combination of higher liquidity and low interest rates is the most negative combination for the euro. Moreover, downside risks of inflation in the euro area highlight the continuing focus of the ECB to fight the high rate of the euro.
The single European currency has been used by us only 3 times: 2 binary options on a pair EURUSD and one – on EURGBP. At the same time, our forecast for the euro was optimistic: 2 Call options and 1 – Put.
Bank of Japan Is not Ready for Additional Stimulus Measures
Despite the current favorable environment for risky assets, we expect to support the Japanese currency. This week the meeting of the Bank of Japan will occur, where there is a revision of the inflation and economic outlook and many experts expect the expansion of monetary stimulus. However, we note that recent comments by officials of the Bank of Japan lowered the likelihood of stimulus at this stage. One of the leading indicators of inflation – the consumer price index excluding food and energy in the region of Tokyo, recently demonstrated an increase.
The Japanese yen, as the euro, as has not been traded often last week. Only 3 positions opened on the pairs with Japanese currency, at the same time, two of them were opened in favor of the yen, and one – against. This currency is still unable to determine the direction of movement after a sharp drop in late August, so we try not to trade currency pairs with it without much reason.
Capital Flows Support GBP
We expect that in the short term, the pound may continue to grow, benefiting from a favorable environment for risky assets. Sterling is very sensitive to global market conditions and it is closely correlated with the volatility of the financial markets. Besides investments from China are able to adequately support the British currency. We are dedicated to 1.5800 level in GBPUSD pair in the short term.
The pound was perhaps the only currency against which we had formed a definite prognosis. In all four cases, we purchased an option to increase against the British currency due to its significant oversold status on the daily chart. The probability of correction up is still high and we continue to look for entry points in the market in order to benefit the profit from it.
More Cautious Phase of CAD Movement
A more peaceful outcome of the Bank of Canada this week opens the possibility of a bearish outlook for the Canadian dollar in the fourth quarter. The stabilization of global markets and the potential fiscal stimulus by the new government, of course, offer support for the Canadian dollar but it’s not in coming months, as the Bank of Canada made it clear, the door to interest rate cuts opened. We will carefully consider the possibility of a Put binary option entry.
Prospects for the Canadian dollar are mixed. On the one hand, USDCAD pair substantially overbought now that makes fairly high the probability of deep correction. On the other hand, the price of oil, which significantly affects the rate of the Canadian dollar, does not show any significant preconditions for a reversal. Based on these assumptions, we tried not to trade binary options on the pairs with the Canadian dollar. Only 2 positions opened on USDCAD and these options were Call and Put.
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