Emerging Market FX: Opportunities In ‘Exotic’ FX Pairs

Exploring Exotic FX Trades

Welcome to our new weekly segment where we will explore trading opportunities in the what are traditionally considered the exotic foreign exchange.  As brokers scramble to attract more clients they have sought to increase the instruments that they offer to their client base.

This move by retail brokers has opened up new market opportunities to foreign exchange traders as spreads and liquidity in these once thinly traded markets improve.

These markets still don’t offer the same depth of liquidity as the majors. I wouldn’t advocate scalping the one minute chart as the best way to maximize the opportunity here. However, by coupling a broad understanding of the Fundamental and technical landscape it is possible to position trade in these markets for an additional boost to your P&L.

So let’s wade in and take a look at a pair I have on my radar right now.

Singapore Dollar (USDSGD)

SGD The Skinny

The Singapore Dollar is the domestic currency for the Island of Singapore, one for the worlds premier  financial centers boasting a robust domestic economy driven by larger oil refining business’s and a thriving port that acts as a core hub for trade in the far east.

The currency is issued and managed by the Monetary Authority of Singapore (MAS). The MAS implement a band for trading levels for the SGD, the band is used to defend against imported inflation and maintain an export driven competitive advantage.

Fundamental Take Away

In recent statements by the MAS, reference to a ‘tightening of conditions’ in the domestic labour market were omitted. The ommission has led market watchers to infer that we may be about to witness a decline in the jobs data. A pullback in labour figures would suggest the MAS would move towards a neutral path within the trading band at the October meeting.

Recent inflation data has declined to levels not seen since 2009 driven by the drop in accommodation and travel cost inputs. Headline inflation fell by 0.8% year over year in August, while core inflation moderated to 0.2% year over year from 0.4% in July.

Markets expect no material change in policy from the MAS as they continue to venture toward a zero percent policy stance. Driven by a declining domestic growth picture combined with a distinct lack of inflationary pressures as demonstrated by August inflation data. The ensuing inflationary concern is exacerbated by growing concern regarding the domestic jobs landscape.

To put these issues in context the government clings to the belief that inflation is set to rise into the back end of this year and early 2016 as accommodative budgetary measures and a stabilisation in oil prices should begin to reap reward. However, the fly in the proverbial ointment could be a more serious deterioration in the labour environment which would negatively impact the perceived pick up in consumer demand, which is needed to prop up inflation data.

Technical Take Away

With a grasp of the fundamental landscape we can now move to the technical set up to see where the near to medium term trading opportunities maybe located.

Medium Term

The weekly scale chart shows that as with most FX pairs USD strength is the main driver of trade. The Singapore currency has been in a downtrend since the second quarter of 2015 after posting a low in May which was a rest of previous resistance as support in the 1.32 region, highlighted in the charts.

SGD_2015-09-29 11_33_23-

Near Term

As of today’s close we are going to potentially register a double top against the September highs, Pin Bar aficionados will be  paying close attention to today’s close, to enter counter trend short positions.

usdsgd2015-09-29 11_38_39-

Trading Take Away

  • I am looking for the potential pull back to develop and test the ascending trendline/ horizontal support structure highlighted in the chart
  • As price tests this support zone in 1.40 region i will be looking for Psych and Lin Reg to find support at their respective midpoints
  • Will be watching for a daily reversal bar to enter long positions leaning against 1.39 targeting a move to the upper end of the projected bullish channel at 1.45