In this post, I am not naming names. After all, I enjoy all of the messages I get – for the most part – from people that are trading around the world. The message was one that I have seen far too many times in the past, and it is based on technical analysis. In this case, it is the AUD/USD pair, but the market itself isn’t important. It is a common set up that I see from time to time, and every time it occurs – and fails – I get messages.
Looking at the chart above, its plain to see that the Australian dollar has seen a lot of support in the 0.67 area. Going back several years, we have seen the buyers come into the picture and get long. The message I just got was something like: “I am VERY LONG AUD/USD, and wondered how much stronger you think the USD can get?” This is the wrong way to think about it. I suspect that there are several reasons why this kind of thing happens, and they are fairly common.
To begin with, the person was from Australia. The “home bias” is a real thing in the currency markets by retail traders, and it does make a certain amount of sense. After all, I am sure that he walks the streets of Melbourne, Sydney, or Darwin, and understands that the world isn’t falling apart around him. So when he sees that – it makes the rate “look cheap.” However, he wasn’t asking the correct question.
Why in the hell would the USD fall?
The biggest trap that a lot of traders out there fall into is that there is some kind of magic on the charts. Yes, they can be important for entries and exits, but there aren’t people out there moving markets based upon some hammer. If it were that easy, there wouldn’t be losses. After all, do you really think that you have learned some magic secret based on a candlestick? Anyone with eyes could see that the 0.67 level matter for some time. You are not going to beat the market thinking like this.
You must understand that there are reasons for a currency movement. Billions aren’t traded by people looking at a pattern and pressing buttons. The big fish look at the markets from a cycle perspective, and are certainly smart enough to see the same things you do. In this current environment, there are a lot of reasons for the USD being strong. Here are just a few off the top of my head:
Bond yields in America continue to rise rapidly
China – Australia’s biggest customer, is in trouble
There is the ‘fear trade’, as the world is going into recession
There is a huge shortage of dollars. (Almost all debts internationally are in USD. As rates rise, there is a huge rush into the dollar before the debts become too heavy.)
The US economy is performing better than most others – at least for now
The Federal Reserve is going to kill inflation with tight monetary policy, no matter what
The EU has more difficulties than most people realize
The UK has almost as many difficulties as the EU
This list could go on for ages. The reality is that until the Federal Reserve changes it monetary policy, the USD is a wrecking ball that is going to overrun almost everything else out there. Do not get me wrong, there are a few trades that I think will make careers once things turn around, but we aren’t there yet.