Thankfully, trends in the FX market, especially for USD pairs, have been clear and obvious for the past 6 months or so.

This makes positioning a simpler endeavor than in stocks, but a little more nuanced than in crude oil and gold.

Here’s a chart of EURUSD.

Since last Thursday, the EUR has traded against the USD in a similar way to US equities, That is, sharp falls followed by spikes higher that recoup almost all the previous day’s losses. 

However, the single currency broke below 1.11 today (2 March), and is firmly back in its bearish trend, which began in May last year.

As such, the EUR is best traded in the same way as oil and gold, and for pretty much the same reasons.

Firstly, the technical picture is extremely weak, with the downtrend very well established at this point. Even perceived ECB hawkishness in early Feb, which pushed the EUR almost to 1.15 hasn’t been able to reverse the EUR’s fall.

Secondly, the fundamental picture aligns with the technical one. Demand for USDs globally is rising, and has been rising since June of last year. The broad dollar index illustrates this very clearly.

The rising demand for Dollars points to increasing difficulty in USD funding conditions around the world, i.e. in the eurodollar markets. Why this may be the case is beyond the scope of this discussion; the takeaway here being that demand for Dollars has been rising for about 8 months now.

Naturally, Russia’s war in Ukraine won’t do anything to alleviate the Dollar situation. On the contrary, it is likely to exacerbate it, if only for the uncertainty and volatility war introduces to financial markets and the global economy.

Consequently, long USD positions have this strong tailwind going for them.

Although different currencies do present different opportunities.

While the EUR is weak, the AUD has held up very well.

From the chart above, you can see that after the initial sharp drop last Thursday, AUD has actually moved higher. This is likely due to commodities prices rallying in response to the war, especially in oil and gas.

However, the trend for the AUD is very bearish, and has been so for a whole year now. This makes the AUD more difficult to trade than the EUR, since the technical and fundamental pictures do not line up.

More adventurous traders might look at AUD’s rally towards resistance (from the upper end of its bearish channel as well as at 0.7315) and look to open a short position since the medium term trend is bearish.

Others might prefer a short term punt to the upside, betting that rallying commodities can drive AUD even higher.

Finally, more conservative traders would choose to avoid trading the AUD at all, especially since EUR weakness makes that a more compelling short.

The key idea here is to understand that different currencies are reacting differently to the Russian invasion of Ukraine. From there, the best USD trades can be identified by looking for an alignment of current technical and fundamental considerations. 

More currencies will be covered in tomorrow’s edition of Macro Edge.

Lastly, here’s a look at the Ruble, which has also been in the headlines this week, and why it might be best to avoid trading it right now.

The Ruble has been in free fall over the past week, with the weight of financial sanctions and the removal of some Russian banks from SWIFT really weighing it down.

Some traders, especially relatively inexperienced ones, will look at the chart above and be itching to short the RUB for a quick profit. Which is understandable given the severity of its fall.

However, it really isn’t as good an idea as it sounds.

Why?

Simply because of liquidity considerations. Most brokers know, and are directly affected by this, and should have already taken steps to prevent their clients from taking on new RUB positions across the spot, CFD, and possibly even futures markets.

The reason for this is that brokers have to either take the other side of your trade, or find a counterparty in the market to do so. The former means that they will have to hedge their long RUB exposure (if you’re short, your broker is long), which is extremely difficult if not impossible to do right now.

Very few in the market want exposure to Russia at the moment. This could be due to current sanctions, fear of future sanctions, general uncertainty and accompanying high levels of volatility, or simply because they want to take a moral stand.

Whatever the reason, the result is the same. If they can’t hedge their positions, they won’t open one for you; after all, the survival of their business could depend on it.

The same applies to the latter scenario. If no one in the market wants exposure to Russia, they can’t find a counterparty to take the other side of your trade. I.e. you can’t short the RUB no matter how much you may want to.

There simply isn’t enough liquidity.

Now, let’s assume that you somehow managed to open a RUB short. Even if the RUB keeps plummeting, as seems likely, it doesn’t mean that you can book your profits.

Why?

Because of the same problem mentioned above – liquidity. Managing to find a broker or counterparty to take the other side of your trade now in no way means that you can find one or the other when you want to exit.

In other words, it is quite possible that when you do want to cover your short, liquidity conditions have worsened to the point where you can’t do so. This would leave you stuck holding a RUB short, and very vulnerable to both short squeezes and large gaps at the open.

Obviously, neither is a desirable position to be in.

Remember that liquidity is one of those things that everyone takes for granted until it disappears. And, those left holding the bag when it does disappear are almost always the ones who suffer the most.

Even if you can short the Ruble against the USD, think twice before you do so!