Friday, August 16, 2013

Fun and games with the US dollar

Regular readers will know it is our view that the US dollar is in an uptrend. One way to capitalise on this is to sell gold. This has to do with the fundamental belief that investors who flocked to gold as a hedge against a damaged greenback in the wake of the Great Financial Crisis are now reversing their positions. This takes a little time.

So we set the Omicron Forex Silver Trigger algo routine to monitor for opportunities to go short gold against the USD, especially after a retrace.

It looked as if this opportunity had arisen yesterday (Thursday August 15th), when the US consumer price index (CPI) matched expectations and US jobless claims fell to the lowest level since late 2007. All good for the expectation that Quantitative Easing (QE) will be tapered soon, resulting in a resurgent dollar. So the Silver Trigger initiated a trade.

All went well until there was a lull in the firing, which encouraged us to move our stop to break-even. This caused the routine to take off half the position.

That turned out to be a very good move. The fall in gold started to reverse and this reverse soon became a rout. It turns out that the market is now worried about inflation. This could, indeed, be expected to result in a delay in raising interest rates after QE has been stopped. However, this is a long time in the future, certainly in market terms.

Here is where gold wound up yesterday. A thin holiday market could also be a factor here:

For us the whole episode demonstrates the value of a conservative approach combined with algorithmic trade management software that is able to handle such events in this way.

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