One of my favourite themes is how the U.S. Dollar dominates the Forex market most of the time.
Once you understand that, you understand that most of what Forex traders are really doing is trying to exploit a U.S. Dollar that is getting either weaker or stronger. For several years now, during periods in which the U.S. Dollar is ranging sideways, there is usually little in the way of strong directional movements between other currencies. On a side note, following the U.S. Dollar, the most “trendy” currency is the Euro.
It has been obvious that over recent days, weeks, and months, the U.S. Dollar has been falling in its relative value against other currencies. This is the dominant feature of the market today and has been, on and off, for a while. So, which currency or currencies should we seek to be long of against this falling Dollar? In my “pairs in focus” item last Sunday, I selected the Canadian and Australian Dollar, as well as the Euro. This has worked well (so far) this week, which each of the three selections performing positively to date. I would also say that the situation looks the same today, more than halfway through the week.
Choosing which currencies to use as the counterparties to a trend in the U.S. Dollar is best done by seeing which currencies are exhibiting the strongest trends. To some extent this can be done very easily, for example, by looking for high values from the ADX (14 period) indicator on a daily chart, and trading the currency pairs exhibiting the highest values – from those USD currency pairs that are in a trend as defined by their movement in the same direction over both the previous 3 and 6 months. Below are the daily ADX (14) results from those 6 currency pairs as the market opened this week:
EUR/USD 38
GBP/USD 18
USD/CHF 16
USD/CAD 52
AUD/USD 28
NZD/USD 41
I did not choose the NZD/USD for two reasons: the ADX (14) value has been falling, not rising, and because it was (and is) below strong long-term resistance.
