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3 Surprising Pairs to Buy

Many retail traders are likely aware of how US Dollar strength has surged to decades-long highs over this past year. This is primarily due to the Federal Reserve’s hawkishness in response to staggering increases in the cost of living, as well as USD safe haven status as the world teeters on the brink of a global recession. While major pairs such as GBP/USD and EUR/USD are particularly popular for those aiming to go long on USD, there are other promising, less frequently traded pairs that are worth watching as well. Here are three such USD pairs to consider, all of which are viewed favorably by the EdgeFinder, A1 Trading’s market scanner software. These 3 surprising pairs to buy are listed in order of favorability, i.e., their respective EdgeFinder ratings and biases, along with some additional technical and fundamental analysis.

1) USD/CAD (Earns a 5, or ‘Buy Rating)

3 Surprising Pairs to Buy
3 Surprising Pairs to Buy

This pair is a bit unique in terms of fundamentals, because a portion of Canada's economic performance is predicated on exporting energy to the US, a primary trading partner, knitting their economies together. Regardless, the US economy has remained far hotter than Canada's, which reflects accordingly in the COT data above, as institutional traders clearly favor USD over CAD. Price action is retesting the lower depicted zone as support following a stunning breakout to the upside of trendline resistance in September.

2) USD/TRY (Earns a 5, or ‘Buy’ Rating)

3 Surprising Pairs to Buy
3 Surprising Pairs to Buy

This pair is an unusual case that might spook newer traders; after all, wouldn't fundamentals favor the currency with the higher interest rate, and high inflation to match? However, that has not been the case here as Turkey grapples with horrific stagflation, much of it due to the Lira's near collapse in value. Turkey's interest rates have not been allowed to rise accordingly in order to mitigate hyperinflation, sending this pair to historic highs. It appears a breakout to the upside of resistance may be occurring.

3) USD/ZAR (Earns a 4, or ‘Buy’ Rating)

3 Surprising Pairs to Buy
3 Surprising Pairs to Buy

South Africa's economy is one of Africa's strongest, having grown rapidly over the past few decades post-Apartheid. However, many structural problems remain, including an unemployment rate exceeding 30%. Similar to USD/TRY's fundamentals in a sense, this is another case where interest rate divergence is not as compelling for forex traders, since South Africa's economy is not overheating in a comparable way to the US. It appears that recent price action may have found a key support zone prior to trendline support.

Even More Bullish USD News

This morning at 8:30 am Eastern Time, the United States’ Bureau of Economic Analysis released even more bullish USD news. The Core Personal Consumption Expenditures (PCE) Price Index, which measures changes in prices for consumers (excluding volatile food and energy prices), rose more than expected month-over-month. A 0.5% increase was expected for August, with 0.6% being the result today; while a 0.1% margin may not seem incredibly significant at face value, it is especially noteworthy because this is the Federal Reserve’s favorite measurement of inflation. This will likely further embolden the Fed in their assumption that more interest rate hikes are necessary to cool a severely overheated US economy.

Best Pairs to Trade

The following pairs are ranked by the EdgeFinder, A1 Trading’s market scanner tool that provides supplemental analysis, as optimal pairs to watch for those who are bullish on USD. They are listed below with their respective ratings and biases, as well as some additional fundamental and technical analysis.

1) EUR/USD (Receives a -6, or ‘Strong Sell’ Signal)

Even More Bullish USD News
Even More Bullish USD News

As can be seen in the line items given for the EdgeFinder score summary above, the US Dollar beats the Euro in all listed categories except retail sentiment and GDP growth, with GDP growth being the Euro's only advantage. Sadly, this will likely not last long due to Europe's energy crisis, which has been exacerbated by this week's mysterious Nord Stream pipeline damage. This pair is on the verge of retesting both trendline and parity resistance, which could prompt a continuation of the downtrend.

2) GBP/USD (Receives a -5, or ‘Sell’ Signal)

Even More Bullish USD News
Even More Bullish USD News

Most of the categories listed above favor USD, while the Pound does have the upper hand in both GDP growth and unemployment. However, these two apparent victories for GBP are not what they seem, as the launching of UK Prime Minister Truss' growth-focused fiscal stimulus ambitions prompted a historic near-crash of the Pound earlier this week. Coupled with the Bank of England's subsequent dovish intervention and recent lukewarm efforts to mitigate inflation, there is little favoring GBP in terms of fundamentals. As with EUR/USD, a retest of resistance seems likely before the downtrend resumes.

3) USD/TRY (Receives a 5, or ‘Buy’ Signal)

Even More Bullish USD News
Even More Bullish USD News

All listed categories besides GDP growth and interest rate divergence favor USD. While these two factors favoring the Lira seem particularly significant, these line items are recontextualized in light of the tragic stagflation and hyperinflation that Turkey is contending with. With an astonishing 80% annual inflation rate, and unemployment over 10%, a 12% interest rate and recent positive Turkish GDP growth are sadly not enough to stop the Lira's crisis from transpiring. It appears we may see a breakout to the upside for this pair, followed by a potential retest of the 18.5 level as support.

Shock: Best Pair to Buy?

News for USD/TRY

Today, Turkey’s citizens and the financial world received astonishing news: Turkey’s central bank, the Central Bank of the Republic of Turkey (CBRT), decided to lower interest rates amid an inflation rate just shy of 80% year-over-year. The CBRT cut rates by a full percentage point, down to 13% from the previous 14%. Most orthodox economists appear to be baffled by this act of stimulus as Turkey grapples with a years-long economic crisis that has burdened the country with stagflation and a rapidly depreciating lira. Thus, it is almost universally regarded as a complete monetary misstep, as reflected in USD/TRY currently soaring 0.62% intraday.

Shock: Best Pair to Buy?

Erdoğan’s Economics

This dovish decision appears to be due to a concerted effort by Turkish President Recep Tayyip Erdoğan to influence the CBRT and deter them from their policymaking responsibilities. He has frequently tried to force their hand into preventing hawkishness, referring to interest rates as “the mother of all evil.” There are multiple factors contributing to this unique position of his, including esoteric views on the effects of interest rates (it is well documented that he believes interest rate hikes somehow cause inflation) and religious convictions. Given the ideological rationale behind these stances, as well as his increasingly authoritarian leadership, it is unlikely the CBRT will be able to pivot towards practical hawkishness anytime soon.

Shock: Best Pair to Buy?

EdgeFinder Analysis

According to the EdgeFinder, A1 Trading’s helpful market scanner for those desiring supplemental analysis, USD/TRY remains the top-rated pair for bulls. Earning a score of 5, or a ‘buy’ signal, USD beats TRY in every listed category besides GDP growth and interest rate divergence. However, given Turkey’s rampant stagflation issues that have only been exacerbated by recent high energy costs, as well as ‘real’ interest rates in Turkey being estimated at -16%, USD/TRY appears to have buying potential for the foreseeable future.

Has Everything Changed for Major Pairs?

This week the public received startling news: on Wednesday morning, month-over-month CPI (a proxy for inflation) in the United States had unexpectedly remained static, clocking in at 0% whereas a moderate 0.2% increase had been forecast. Core CPI (which excludes food and energy prices) likewise came in lower than anticipated at 0.3% month-over-month, while Thursday saw the Producer Price Index surprisingly decline 0.5% month-over-month. This prompted a mass selloff of USD across major pairs on Wednesday and Thursday, with the US Dollar Index (DXY) temporarily plummeting by 1.8% from the start of the week while stock indices soared. While demand for USD has recovered a bit since, with the DXY now down only 0.87% from Sunday, it is worth asking: has everything changed for major pairs?

Argument A: The Bearish Case for USD

A 0% month-over-month inflation rate may signal that the worst of price increases is finally over in the US. Annual inflation might have peaked, and consumers can breathe a sigh of relief now that three key events have occurred: 1) energy prices have dropped significantly due to a dip in demand, while US natural gas storage and oil barrel inventories also exceed expectations. 2) The Federal Reserve has embraced monetary policy hawkishness, and their rapid 50-75 bp rate hikes have worked, successfully restricting borrowing and thus curbing demand. 3) Despite a tight labor market, the US unemployment rate consistently hovers around 3.5%, granting a subtle degree of price stability.

Argument B: The Bullish Case for USD

Unfortunately, despite 0% month-over-month inflation being a welcome respite from high inflation, this one piece of data does not capture the full economic picture. Here are three reasons to expect high inflation to continue in the US: 1) though having fallen, energy prices could likely remain volatile and high because underlying global energy supply problems (e.g., mutual sanctions on Russian exports, OPEC’s unreliable output, energy dependence) have not been resolved. 2) Considering the scale of monetary stimulus over the course of the pandemic, and the double-digit federal funds rate that was historically implemented to stamp out high inflation, it would be shocking if these past few rate hikes were enough for the Fed to bring 40-year highs to an end. 3) The hot labor market may cause wages to further play catch-up, contributing to core inflation.

My Bias: Bullish (With a Grain of Salt)

Despite this particular cooling CPI report, I am retaining my bullish bias on USD, though admittedly with less confidence than before. The international and domestic economic conditions at work do not appear to have changed in a significant fashion as consumers still grapple with the consequences of an unprecedented money supply, labor shortages, and energy instability. However, if US inflation data continues to fall behind market expectations, I will certainly reassess this bias.

Best Pairs to Trade

According to the EdgeFinder, A1 Trading’s market scanner that helps traders conduct economic and sentiment analysis, here are two optimal pairs to trade for USD bulls: 1) GBP/USD, which has a score of -7, earning a ‘strong sell’ signal; and 2) USD/TRY, which has a score of 4, earning a ‘buy’ signal.

This 1 Pair Worth Buying

While there are many currency pairs worth buying and selling in the foreign exchange markets, often pairs worth watching fly under the radar of retail traders. The EdgeFinder, an A1 Trading tool for traders aiming to holistically bolster their analysis skills, is helpful for identifying such opportunities for trade setups. As we wait for tomorrow afternoon’s big FOMC news, today we will look at a unique pair: USD/TRY, the US Dollar Turkish Lira pair. It is the only one that the EdgeFinder currently evaluates as being strongly worth buying, and we will discuss why. We will employ fundamental, technical, and sentiment analysis as we assess this 1 pair worth buying.

Fundamental Analysis

In terms of fundamental analysis, data is disproportionately bullish. Although Turkey has experienced recent GDP growth while US GDP has contracted, the Turkish lira has suffered a near-collapse in value, with year-over-year inflation currently at an unbearable 73.5%. Although the Central Bank of the Republic of Turkey (CBRT) currently has interest rates around 14%, this has not been enough to successfully mitigate economic suffering, as stagflation persists and unemployment hovers in the double digits. Tensions between Turkish President Recep Tayyip Erdoğan and the CBRT regarding monetary policy have not helped. Thus, in this unusual and tragic case, substantially higher interest rates than the US is not a bearish signal for this pair.

Technical & Sentiment Analysis

This 1 Pair Worth Buying

In terms of technical analysis, the pair has been trending upwards for years. 2021 saw a staggering breakout to the upside, reaching a high over 18, then selling off to below 11 before price action found support and resumed trending upwards. Price action is currently testing these previous resistance zones again, with weighted moving averages functioning as support while a breakout to the upside seems likely. In terms of sentiment analysis, according to the latest COT data, over 75% of institutional traders are long on USD, while such information is not available for TRY. Meanwhile, only 25% of retail traders are long on this pair, another bullish signal. In light of the economic pessimism in Turkey due to the lira’s instability, sentiment for the pair seems strongly bullish.

Potential Trade Setups

The Edgefinder gives USD/TRY a score of 6, earning it the software’s only ‘strong buy’ signal. However, I hope everyone will nonetheless be careful trading this pair, as it has often been extraordinarily volatile. Using small positions and careful stop losses would be particularly wise here. In terms of possible points of entry, conservative traders could wait for tomorrow’s FOMC news as a potential bullish fundamental catalyst.

Even if the news unexpectedly means a surprisingly bearish turn for USD, you could still potentially use the new selling pressure to wait for a retest of the 16.5 zone as support. Given the unfortunate economic circumstances influencing TRY, even bearish news for USD would likely not have the same long-term implications for this pair as for others.

Key Takeaways

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There is a significant degree of risk involved in trading securities. With respect to foreign exchange trading, there is considerable risk exposure, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.
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