Forex Market Commentary
What a technical fuss!
I want my readers out there to become aware of the pitfalls
of trading on their FX platforms. FX platforms provide their quotations to
their retail customers on the basis of their own buying and selling on credit
with a commercial bank and then set quotes to their own retail customers via their
platforms. FX platforms provide a whole array of charting services to help the
retail FX trader as well as some news wires relevant to the FX market. But do
you think for one moment a bank dealer has time to look at Elliots and Fibonaccis?
The whole time I was a dealer I was pressed with 2 phones on my ears making
spreads between bank A and B buying and selling for a book for commercial
reasons for customers that want to buy and sell currencies for import/ export
reasons. This is 80% of the daily market and the other 20% is central bank open
market operations. Within this context hedge funds buy and sell and push market
prices with large block orders. Within this context of commercial buying and
selling your Elliots and Fibonaccis can go out of the window and your small FX
platform position can get wiped out when the large block orders come in and
move interbank spreads so fast that the FX platform cannot cope. Cite the SNB
decoupling from the Euro currency last January 2015 where several FX platforms
nearly went bankrupt. Thus in writing these articles Im trying to make my
readers aware that there is a huge disconnect between the commercial banking
world and pricing for currency and FX platforms as per case illustrated SNB vs Euro last January 2015.
The most important reason I write this blog is to make my readers understand the difference between all these retail trade platforms and the multiplicity of trade advisories and the reality of a bank dealing room through which I was privileged to enjoy my Forex career as a Dealer.if you are going to trade forex then learn to understand how the giants think and move and don't become too reliant upon charts. Learn your economic fundamentals of interest rates and you will have a firm foundation to trade both short and long term.1. Commercial and Central Banks equate demand and supply for money and the value thereby through the Frankfurt-London bank dealer DEPO - Interbank Market axis that mirrors the start of the New York cut and becomes 80% of the global institutional currency market.
2. Large hedge funds track the price action in the interbank world and move large speculative funds mostly through OTC currency options to move prices away from equilibrium in order to create money-making opportunities. Now if the whole Interbank Market was just stuck at equilibrium we wont be making any money at all like in the 1970's. But along came the hedge funds and notably George Soros in the early 90's who demonstrated that he could push a currency value away from equilibrium at the then ERM GBP/ DER 2.95 parity an make a whole bunch of money swinging the rubber band before market forces snap it right back.
Within this context, one world away, lies the world of the retail FX trader who is really three steps behind the real market action of the Interbank Market. That is why i am always calling for extreme caution because every now and then a huge event occurs and you have no control and no hedge to protect you on a retail FX platform. So coming back to my title - YES the smart traders already knew the Fed Chair Yellen move and made their OTC positions and with this knowledge of hedge fund strategies I did state very clearly last November that a call for 4 multiple 25bp rate hikes on US rates was way far fetched sensational journalism. Ok so the NFP this weed was lacklustre and the Univ. Michigan confidence just about there, but the smart traders already knew that the hiring had to slow down at some point anyway; this is not new news. So, actually I don’t know what’s all the fuss about with FX platform journalists screaming murder on the USD? To me it just looks like a suspicious bait to churn the small trader as usual and as you know by now I'm rooting for the little guy to stand up in this FX world.
Let's look at some basic economics now sans the detailed analysis; please bear with me. To reflate the US economy in 2008 the US Fed embarked upon a massive program of bond repurchasing to put money back into the system so that commercial banks can start lending to each other again at ease after Lehman Brothers collapsed and clogged up the veins of the banking dealer network. This process of Q.E once initiated in 2008 sought to devalue the USD. it was at this point with the depreciation of the USD that crude oil prices shot up to $100 as a cheaper USD made commodity purchases in the global currency benchmark far cheaper. So China built large inventories and countries like Canada and Australia boomed on their exports of resources. The US economy carefully nurtured back to sound health, the Dow Jones started rising on low bond yields and a low USD. In 2015 the QE program was deemed a success and the US Fed ceased the program of liquidity pumping. So now Q.E. over and job done and the US economy marches on with a growing Down, expanding GNP and healthy property and consumer retail market; what next? In the cycle of economic activity what happens next is the exact opposite of Q.E. which means more bonds are issued to take money out of the public hands and rates go up and USD value climbs. Thus within this context the USD has to go up viz a viz a stagnating euro land and Japan and China and all this staggering talk of the demise of the USD is nonsensical and smart hedge funds will be making their global macro play after the pause in the USD sideways trading comes to a halt and valuation increases once again.
The whole industry of the retail FX is designed to push small traders unwittingly to take positions and who cares if the small trader loses. Stockbrokers are guilty of churning accounts always so why not FX platforms encouraging the small trader to do their own churn and burn? If a small trader wants to survive in this market then he or she needs to understand how the commercial banks and central banks work and how the hedge funds think with their global macro strategies, and then identify trends and work within those trends.
So once again; last November 2015 when analysts were calling for a multiple
rate hike scenario of 4 increases of 25bp each I did state that Fed Chair
Yellen would only have room for 1 -2
rate hikes of 25bp because 1. The US economy is currently unbalanced with a
racy property and retail market vs a downcast energy and manufacturing sector
and most of the labor growth was a spurt of summer hiring to winter season with
an inevitable slow down in hiring to pan out in Q1-Q2 2016 and 2. In an
election year do you think that US Fed Chair Yellen would dare plunge US
equities and wipe of billions of Dollars of shareholder and pension fund value?
I think not. So, the reaction to Monday’s speech amazes me. Top it off we have
some pretty sensational journalism going round this week announcing the death
of the USD which I am convinced is a bait to small traders to pile into long positions on the Euro but I advise extreme caution because Monetary Economics 101 will snap back reality. Absolutely amazing!
OK, monetary economics 101. The USD is not going to dramatically
collapse in 2016 for any valid fundamental reason in spite of all these chartist technicians
calling for the collapse of the USD. Get real! Take out these wild reports and
see the true economic value of the USD set within a very important Global Macro
analysis:
POINT 1 - The US forward yield curve is rising viz a viz it’s major
counterparts chiefly, the Euro Zone, China, Japan and the UK in that order.
Please note the interest rate fundamentals.
International investors faced with choices where to place
their money in a low inflationary climate are going to pour money into US
equities and bonds and therefore they will have to sell their Euros, Yuan, Yen,
Pounds and what have you in order to purchase US equity and bonds. That very
fact of yield divergence creates the grounds for larger Dollar purchases viz a
viz it’s counterparts. European pension funds and ETFs watching the glamor on
Wall Street are going to sell their Euros and buy USD to take part in all the
corporate earnings and good tidings and mergers and acquisitions going on in
corporate USA.
If you ran a large hedge fund would you be parking your money
in the most liquid global currency contract at minus 0.4 percent on overnight
deposits in Frankfurt when you could park your money at Fed funds rates rising
to plus 75 basis points this year? The reality for the EUR/ USD is that the
interest rates would diverge even more and hence the current flutter is no more
than a temporary hiatus than a sensational cry. The reality is that ECB rates
are more likely to hold at minus 0.4 this year and US rates to increase to plus
0.75%. That is an equation for yield divergence that traders will take a look
at all over again once the initial shock is over. A yield divergence will not
justify the USD to fall too far against major counter-party currencies. Moreover
the ECB will be extremely unhappy to watch the EUR/ USD pierce the 1.14 – 1.20
area for a sustained period of time. More likely the EUR/USD is going to trend
sideways for the remainder of 2016 between 1.05 and 1.20. Technical traders
maybe looking for a top-side breakout in their charts. But the realities of
yield differentials will soon come to play and it is very likely the ECB will
step in again and sell EUR/ USD with any significant push above the 1.15 mark
as an appreciating Euro currency would snuff out its morbid export sector. So where all these writers get off with these sensational
reports beats me. Altogether, Fed Chair Yellen, as stated last week, is doing
an amazing job in soft landing the US economy holding inflation at 2%, keeping
GNP steady at plus 2% annual and trying to temper and balance the needs of
different sectors o economy. Firstly she has managed to wean US corporate off
the concept of zero interest rates. Remember the swoon of the Dow every time it
came to FOMC meetings last year? Remember the song and dance when the Dow
collapsed to 14,000 because everyone thought the world was going to end with a
25bp rate hike? All those theatrics are now over so what a great job fed Chair
Yellen did in tempering Wall Street politics with national monetary
requirements. Secondly, Fed Chair Yellen, following on former Chairman Ben
Bernanke and his solid QE program, pumped liquidity into the system to
basically write debt to carry not only the excesses of USA 2008 but the entire
defaulting and collapsing Euro zone and Japan and China, and still show
positive GNP and a growing housing and labor markets. Why is USA 13 trillion in
debt? Go ask Europe and China who is giving their economies a helping hand.
Without the US Fed allowing the USD to rise to allow Europe and Asia gain
competitive edge to resuscitate their export markets where would Europe and
Asia be? Europe and Asia are still largely dependent upon exports to the USA.
POINT 2 - Now, economics aside, coming to speculation 2016 and the
USD, as we saw with Grexit and China Syndrome 2015, and now we have a huge
problem on the horizon concerning a possible Brexit. This is not a joke. If the
Grexit caused a flutter in the US bond and equities markets and if the China
Syndrome sent ripples across the oceans then a UK pull out of the Euro Zone
would have devastating consequences. Overnight the USD would be the have as
international investors panic and park their money in US Treasuries. Investors
would flee out of the Pound Sterling and the Euro and then we would be talking
about a nightmare worse than 2008 which would send the USD sky-rocketing
upwards. Brexit not only has the potential to derail the Euro Zone into a
stampede for the exit but the potential to swamp the US Fed with a tsunami of
US Treasury bids never to be seen.
Has anyone out there seen the movie – the Perfect Storm with George Clooney? Remember the deafening silence and gentle calm before the one final God Almighty? As a currency tactician myself I can just smell it in the air. If the SNB meltdown last January 2015 wiped out many small FX retail traders such as yourselves then do not dare to trade the coming Brexit. You trade the aftermath or you get dragged down into the abyss if several retail FX platforms get dragged under a force that may be the mother of all forces this decade! It's that scary when everyone is looking the wrong way on the USD. This is why I prefer advocating trading exchange-regulated currency futures; at least in fast moving markets you can look for the options put-call parity strike price and figure out a hedge when prices move fast but in your retail FX platform you’re likely to get drowned and every year comes along just one or two occasions where the oceans move against you. For myself I am in the middle of launching my own institutional currency trading hedge fund and I would not dare to venture into a pre-Brexit trade; you trade the aftermath. Since I’m always rooting for the little soldier out there on the turf I’m calling this caution. If internet analysts are calling a direction on the EUR/ USD take a few steps back and smell the air and listen.
Has anyone out there seen the movie – the Perfect Storm with George Clooney? Remember the deafening silence and gentle calm before the one final God Almighty? As a currency tactician myself I can just smell it in the air. If the SNB meltdown last January 2015 wiped out many small FX retail traders such as yourselves then do not dare to trade the coming Brexit. You trade the aftermath or you get dragged down into the abyss if several retail FX platforms get dragged under a force that may be the mother of all forces this decade! It's that scary when everyone is looking the wrong way on the USD. This is why I prefer advocating trading exchange-regulated currency futures; at least in fast moving markets you can look for the options put-call parity strike price and figure out a hedge when prices move fast but in your retail FX platform you’re likely to get drowned and every year comes along just one or two occasions where the oceans move against you. For myself I am in the middle of launching my own institutional currency trading hedge fund and I would not dare to venture into a pre-Brexit trade; you trade the aftermath. Since I’m always rooting for the little soldier out there on the turf I’m calling this caution. If internet analysts are calling a direction on the EUR/ USD take a few steps back and smell the air and listen.
CONCLUSION - So after the economics 101 and the brief synopsis of a
speculative nightmare for 2016, if you were running a large hedge fund, would
you be placing your bets on a long term appreciating EUR/USD for 2016? For the moment I would be
watching for signs in the OTC currency options in the interbank market for funds buying large yard
blocks with put strikes at the 1.10 – 1.05 on the most liquid currency contracts as a sure-tell sign that if the EUR/USD creeps up then be sure the ECB will step right in and sell EUR/USD to push the pair back down. EUR/USD 1.20 will dramatically hurt an already morbid Euro export sector and ECB supremo Draghi and Fed Chair Yellen will work closely to stabilize the currency at the 1.05 - 1.14 region this year as the equilibrium point.
Key notes for this week:
USDX - The US currency index took a beating this week on the not too stellar NFP data to cap it all. But do not make the mistake of reading too much into the weakening of the USDX. Closing at 94.609 the USDX sits near the 50 day m.a. near 94.3 and may slide further to the May 15 mark 93.5. But eventually the weaker longs will be flushed out and large hedge funds are looking for a point of re-entry considering interest rate fundamentals which drive the value of the USD.
EUR/ USD - For our purposes of studying the EUR/ USD this year 2016 we shall be keeping an eye out for yield convergence/ divergence signs and the economic reality is that with Euro rates on hold for the rest of the year in the minus 0.4 % region, that divergence will expand as US rates goes to 75 basis points and thus placing firmer bids on USD viz a viz the Euro. The EUR/ USD shot up this week way above the 50 day m.a. at 1.115 and looks set to re-test the Sept 15 high of 1.15. But bearing in mind the ECB dislike of an appreciating Euro currency be wary of any remarks coming out from the ECB in the week ahead that can make the EUR/ USd slip 200 or 300 basis points like a stone instantly. That's reality. longs have an an untenable and short window to catch it or the shorts will come in like a tsunami and they will. Right now it's locked horns between the longs and the shorts.
GBP/ USD - Our purposes of watching this pair would be to identify a trading opportunity on the GBP as the Brexit talks increase volatility. GBP/USD is gradually weakening . GBP is near the 50 day m.a. but the recent prop up at the 1,43 looks untenable and traders are getting that sinking feeling that we will be looking for a downwards break to 1,35. Shorts are in play still.
Gold bullion - Shorts are still in play. there is no actual fundamental reason bullion should test the 1300 and having failed at 1285 looks to drift at least to the 1200 for the moment. bulllion is falling below the 50 day m.a. at 1230. But we need be careful because although there are no fundamental reasons for gold to appreciate, as the UK referendum heats up on the Euro issue we need to keep an eye out for volatility on the gold bullion and USD as the two chief havens for safety. Shorts are fundamentally in play but watch out for the Brexit factor
Crude Oil WTI - WTI is just not there and as discussed last week and as anticipated the black energy has drifted below the $40 mark and shorts are well in control of this market as crude oil sits on the 50 day m.a. at $37. A Brexit has the potential to ruin the oil industry for at least a year and sink oil to $20. That's how critical the UK issue is if the Euro zone begins to unravel this year. Shorts are in play.
Important data:
FX:
EUR/ USD 1.139400 +0.001050 +0.09%
USD/CHF 0.95808 -0.00235 -0.24%
USD/JPY 111.6575 -0.7475 -0.67%
CNY/ USD 0.153330 + 0.00050 +0.1%
GBP/USD 1.423100 -0.013970 -0.97%
AUD/ USD 0.76820 +0.00070 +0.09%
USD/CAD 1.30085 +0.00250 +0.19%
NZD/USD 0.689395 -0.003105 -0.45%
Fixed Income Markets:
US Federal Reserve - +0.50%
US 30 Day Fed Fund 99.625 0.000 0.00%
US 2 year T-Notes 109.328125 -0.046875 -0.04%
US 10 year T-Notes 130.437500 +0.046875 +0.04%
ECB Base rate -0.040 %
Chinese interest rate PBC China 4.35 %
Japanese interest rate (BoJ) 0.10 %
Equities Markets:
Nikkei 16,164.16 - 594.51 (3.55%)
SSE Composite Index 3,009.53 + 5.61(0.19%)
Hang Seng 20,498.92 - 277.78 (1.34%)
DAX 9,794.64 - 170.87 (1.71%)
FTSE 100 6,146.05 - 28.85 (0.47%)
DJIA 17,792.75 Up 107.66 (0.61%)
Commodities Futures Cash:
Crude Oil WTI 36.66 -1.68 -4.41%
Gold 1222.430 -10.500 -0.85%
Indices:
USDX 94.609 -0.019 -0.02%
VIX 15.40 - 0.53 - 3.30%
Pieter Bergli - Trader X16
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Disclaimer - U.S. Government Required Disclaimer - Commodity Futures Trading Commission
Futures and Options trading involves risks of losses. No representation is being made that any reader and account will or is likely to achieve profits or losses similar to those that are being discussed on this blog http://forexeducationperspective.blogspot.com/. The past performance of any trading system or methodology discussed is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All trades, patterns, charts, systems, etc., discussed in this blog http://forexeducationperspective.blogspot.com/ are for educative and illustrative purposes only and not to be construed as specific advisory recommendations for actual trades. Disclaimer - http://forexeducationperspective.blogspot.com/ bears no responsibility for the trading actions of its readers.
* European Union laws require European Union visitors to this blog to know that cookies are used by Blogger and Google, including use of Google Analytics and AdSense cookies and in reading material from this blog do consent to the use of such cookies
A non-profit commitment to provide education on the properties of currency markets. Forex market commentaries and media reports for free
Disclaimer - U.S. Government Required Disclaimer - Commodity Futures Trading Commission
Futures and Options trading involves risks of losses. No representation is being made that any reader and account will or is likely to achieve profits or losses similar to those that are being discussed on this blog http://forexeducationperspective.blogspot.com/. The past performance of any trading system or methodology discussed is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All trades, patterns, charts, systems, etc., discussed in this blog http://forexeducationperspective.blogspot.com/ are for educative and illustrative purposes only and not to be construed as specific advisory recommendations for actual trades. Disclaimer - http://forexeducationperspective.blogspot.com/ bears no responsibility for the trading actions of its readers.
* European Union laws require European Union visitors to this blog to know that cookies are used by Blogger and Google, including use of Google Analytics and AdSense cookies and in reading material from this blog do consent to the use of such cookies
