The engine that's driving the value of the USD 2016
Now in 3 easy charts I am going to show you why exactly the USD is moving as it does in 2016 in order for you to reach a deeper insight into how currencies move in general.
So now what's going with the USD viz a viz major currency pairings like the EUR, GBP and the Yen?
The first answer that comes to the mind of the astute observer is obviously what's going on in the forward yield curve of the US treasury and the earnings/ price value of US equities. The answer is so obvious when professional fund managers are choosing year-on-year to current date returns of over 3% on investment grade US corporates and an average of 10% year-on-year to current date on US equities over tepid Euro, UK and Japanese forward bond yields and equities.
Yes, but let's dig even deeper now and peel away the surface layer of what's really going on to discover the real engine and grandy-daddy of all engines behind the relentless long-term march of the USD.
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| courtesy finviz |
What is this VIX? This is the CBOE Volatility Index which is the measure of the implied volatility of S&P 500 index options.
https://en.wikipedia.org/wiki/VIX
Just take a look at the volatility of the VIX chart and notice how volatility on US stock options declined since the beginning of 2016 as the value of the USD started yielding some of it's major gains from 2015 against other major currencies. In fact stock option volatility has now become so low wouldn't you just think - what a great time it is to sell some stock options and collect some neat premium?
Wrong!
Every smart hedge fund trader knows that the heart behind the engine of the USD for 2015 and 2016 is the VIX and you can bet your house that every smart trader will be watching the implied volatility next week as some really key fundamental earnings reports come out form some major US companies. Forget your Deltas and your Thetas and forget considering selling options. Before every storm there is a silence and all smart traders are now watching the Vegas for any flicker that might cause a stampede before most traders can easily realize whats going on.
The flapping of the wings of a butterfly may cause a tsunami along the shores of the eastern US seaboard.
You can bet your house hedge fund traders are watching this change in options Vega before piling into the S & P 500 and causing another major drive in the USD. Watch those vegas! Watch those vegas next 2-3 weeks!
2. S & P 500
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| courtesy finviz |
The S & P 500 has reached the point where one of 2 things is going to happen in the next 3 weeks as all the earnings reports come in. The market will move sideways volatile and then break to the upside above the 2100 or the market may drop for 1-2 weeks like a stone, clear out some of the weak longs, then march on relentlessly upwards to the end of this year. Only the enormous implications of the Brexit has the true potential to derail the US economy for a good quarter and that remains to be seen if the EU will unravel this June. From the 1 year chart above already you can see last year the China crisis last summer caused a massive drop because everyone thought China was not going to appear at the next US Treasury auctions to continue adding to the already blossoming 19 trillion dollars of debt that the US pumped into the system to rid itself of the mortgage irresponsibility of the US banking sector from a decade ago. Then, the usual FOMC rate hike swoon finally came to a head at the end of last year when US Fed Chair Yellen started to decide enough is enough and officially raised US rates and Wall Street chairmen threatened to jump out of the windows and a whole load of tiresome drama and theatrics eventually passed out and we actually discovered that though the stock market dropped like a stone; it actually came back up again alive and well!! So now we know that Fed Chair Yellen can call their bluff again and raise rates one more time this summer 2016 thus adding fuel to the value of the USD.
Whilst the drama kings pen the death of US equities and call the Dow 10,000 giving the jitters to nervous investors, the really smart hedge fund traders are watching the Vegas on the equities options and waiting to make their pounce on a positive uptick or picking up the choice pieces should we see a quick drop. There's alot of cries going round about inflated values of US equities but hold on just for a moment; in an art auction people will bid a price of a work of art to any price they desire for the rights to own that art work. Similarly, people will bid up the price of US equities if they cannot find comparative performance in their own countries. Value is relative and the value of US equities is going to keep going up for 2016.
3. USDX
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| courtesy finviz |
Wither? The USD is not over-bought and has only slowed down last 4 months as traders came to year end, got over the rate hike swoon and have been relatively slow at the beginning of this year 2016 with their outlook on US equities and bonds. You can expect to see some major changes in the USD with equities earnings coming out these next 2 weeks. The current lull in the USD may turn as hedge funds start piling back into US equities and the key US equities options Vegas will be the first spark that sets the USD alight for the rest of this year 2016.
Point 1 - The US Feds will price short term rates another 25 basis points up whist counterpart central banks in Europe, UK and Japan may actually lower their rates in yet another attempt to kick start their economies.Therefore bond yield divergence. No questions.
Point 2 - US equities 2016 is going to outperform Europe, UK and Japan. No questions.
Point 3 - Central bank open market operations - Europe, UK and Japan. Since the 3 economic zones have a major export component for their respective GNP every time the EUR/USD hits 1.15 expect the ECB to sell EURO and hedge funds to follow suit massively if the rate hit 1.20. UK the Bank of England is not going to allow GBP/USD go over 1.55 and will sell to pressure Sterling down. The central bank Japan is already feeling the heat with YEN at 0.92 and any further appreciation will irk the central bank to buy Dollars. In a nation dominated by the Mitsibushi and Sony of the world 0.92 is like sitting in boiling water and Japanese exporters are just crying for the times before 2014 when the YEN was over 1.00 and exporters could earn good money.
In my macro-economic explanation of the USD valuation i hope that you will be able to embrace the panoramic view of whats' really going on behind the scenes every time as a forex trader you see prices moving up and down. in trading forex you also need to remember that the charts you use barely scratches the surface of reality. 95% of all forex trades are institutional commercial and speculative buying through spot and forward derivatives options contracts and so the charts you examine from your forex platforms providers may be way off the truth since they do not account for 95% of bank forex trading. That is why I am hoping you will read more on macro-economic subjects and try to see more into what's going on and then over-laying your chart analysis upon this new background of understanding how banks and large fund speculators inter-act to create current value.
Forex trading can be lucrative but it requires constant education and comittment to learning before you can understand what's really going on in the forex markets.. fundamentals and technicals must go hand in hand.
Another example is all the reports you see going round the internet telling you and bullying you to buy gold and gold stocks. Now hang on a minute will you! Let's talk some sense. What is gold bullion? We know that theres a physical demand for gold to make jewellery and find uses for industrial manufacture. OK, that's an actual quantifiable figure in terms of metric tons bought and consumer per annum. Then there's gold bullion for storage which is maybe 10% of the overall demand for gold in any year. So when all these writers are shoving reports in your faces telling you that you're about to miss the next gold train; hang on a minute! Ok, we failed twice the 1280 and even 1260 seems a tad too high and since jewellery and manufacture depends on the booming US economy it is more likely that we will come to terms with an equilibrium in the 1100 region as reflected last December during peak gold purchase season. So don't go and buy every single thing you hear. Do the analysis. take 3 steps back and ask you why are these people screaming at me to buy gold? Usually there's always an agenda. So don't end up listening to people and doing the great Jesse Livermore collapse on yourself. Do your own reality check and don't fall for sensational journalism.
Trade responsibly upon your own judgements because in today's world you can compete with the big boys and follow in their footsteps as they leave signs in the markets.
Another example is all the reports you see going round the internet telling you and bullying you to buy gold and gold stocks. Now hang on a minute will you! Let's talk some sense. What is gold bullion? We know that theres a physical demand for gold to make jewellery and find uses for industrial manufacture. OK, that's an actual quantifiable figure in terms of metric tons bought and consumer per annum. Then there's gold bullion for storage which is maybe 10% of the overall demand for gold in any year. So when all these writers are shoving reports in your faces telling you that you're about to miss the next gold train; hang on a minute! Ok, we failed twice the 1280 and even 1260 seems a tad too high and since jewellery and manufacture depends on the booming US economy it is more likely that we will come to terms with an equilibrium in the 1100 region as reflected last December during peak gold purchase season. So don't go and buy every single thing you hear. Do the analysis. take 3 steps back and ask you why are these people screaming at me to buy gold? Usually there's always an agenda. So don't end up listening to people and doing the great Jesse Livermore collapse on yourself. Do your own reality check and don't fall for sensational journalism.
Trade responsibly upon your own judgements because in today's world you can compete with the big boys and follow in their footsteps as they leave signs in the markets.
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| Earn Learn Forex Now |
Pieter Bergli - Trader X16
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