Forex Education Perspective: May 2016

Friday 27 May 2016

The Four Cornerstones Of Global Macro Trading And Understanding How Markets Work

Forex Market Education

Taking a look back at this week and considering a lot of journalism out there it can be said that a lot of people got this week totally wrong with a very poor understanding how markets actually work in synchronization with US interest rate policy. Perhaps this is why the words of the FOMC and Fed Chair Janet Yellen are probably the most studied words in global markets today. US interest rate policy affects the whole world and because the global economy is so dependent on the US economy it is very critical that we get back down to some very essential basics in understanding global macro-economics.

The four cornerstones of of global macro-economics are as follows:

1. US government interest rates - from 30 day Fed Fund to 30 year T-Bond.

2. The value of the US Dollar compared to other major currencies as reflected through the USDX.

3. The commodities markets particularly represented by the price of crude oil.

4. The US equities markets particularly represented by the SP 500.

The understanding how US interest rates move is based upon the monthly assessment of US macro-economic data such as retail inflation, unemployment rate, the housing market, consumer spending and manufacturing. Moreover, economists build their perspective of US interest rate policy around a pricing model which incorporates time-lag dynamics with the basic understanding that what is happening now may not actually show up in statistical evidence until 2-3 months ahead with data analysis, computation and final adjustment and revision. In this manner traders often forget the concept of time-lag dynamics and that is why sometimes they get caught in big mistakes as in the case of traders trying to buy gold bullion the last 4 weeks with the mistaken notion of an emerging gold bull market and shorting the US Dollar and shorting the SP 500. Bank economists work with very complicated econometric models to reduce the time-lag dynamics of US economic data and price expectancy of the future towards a price actuality in the present. Therefore with this understanding bank traders usually end up spotting a move far ahead of the usual journalism and small trader reports. That being said let's now turn to one of my favorite websites for educational material: Bookboon.

The cornerstone of the value of the US Dollar is the official interest rate of the US Federal Reserve. Therefore the study of US Treasury markets is vital for an understanding of the direction of the US Dollar. The bond markets are the domain of interest rates from overnight along the forward yield curve far out in time to perhaps 10, 20 and 30 years depending on which country and interest rate you are studying.

Please read the following book by Prof. AP Faure entitled "Bond Market: An Introduction".

http://bookboon.com/en/bond-market-an-introduction-ebook

Description

The debt market is usually categorised into the short-term debt market (STDM) and long-term debt market (LTDM), and includes marketable and non-marketable debt. The money market is comprised of the STDM and the deposit market (which is overwhelmingly of short duration). The bond market is the marketable arm of the LTDM. Bonds are issued by governments (all levels), companies and special purpose vehicles, and there are many types and many risks to holding them. The bond market is an important asset class, yielding returns second to equities. The bottom end of the bond yield curve reflects money market rates (which reflect monetary policy) and its longer end reflects the shorter end, expectations in respect of the shorter end (which includes future inflation), as well as confidence.

Always use your own better judgment and try to build a picture of trade logic combining both technical and fundamental understanding.

Pieter Bergli - Trader X16

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Forex Charts - 27th May 2016

Forex interactive charts for currency traders. Learn and earn currency trading by understanding chart patterns.

Global FX Weekly - 27th May 2016 - US rate hikes very likely in July

Forex Market Commentary

Fed Chair Janet Yellen has given the strongest possible hint today of US interest rates arising by 25 basis points in the next 4-8 weeks.

Wall Street did not swoon. This is a game changer. We now have strong evidence that US corporates can fare well enough with a mildly appreciating interest rate climate as evidenced by strong US retail sales, strong housing data and oil consumption. Recent economic data coming out of the US all indicate that Summer 2016 is going to be a great Summer and so the US Fed now has the window to raise rates to temper any possibility of inflation reaching it's target of 2%

All this upbeat economic data has sent the USD value soaring by near 5% the last week.

Economic data now suggests that US new home sales spiked to a more than eight-year high in April 2016 . New home sales, which accounts for 10% of the housing market, jumped a massive 16.6% to an annual rate of 619,000 units, The National Association of Realtors (NAR) reported that existing home sales climbed 1.7% in April 2016. These are very strong signs that the US consumer is faring well andthis supports US equities prices.

Please turn to Bloomberg for global bond yields:

http://www.bloomberg.com/markets/rates-bonds

In my global macro analysis the major barometers I am look at for 2016 are as follows:

USDX     95.750     +0.611 +0.79%

USD is set to for further appreciation with a possible US interest rate hike 25 basis points in July. Long positions are in play with a view to testing the 100 mark by the end of the year.

EUR/USD    1.11150     -0.00735 -0.66%

Outlook is now short. We are now approaching June and the ECB is going to face increasing pressure around the UK vote later in June. Hedge funds will be looking to capitalize on this pressure.

GBP/USD    1.46215    -0.00505 -0.34%

The vote is coming and anything can happen it is best to wait and observe and trade the aftermath. Shorts will come into play in June as hedge funds will seek to pressure Sterling and then switch to long on the assumption that a Yes vote appears.

10 yr US T-Notes     129.390625    -0.421875    -0.33%

Shorts are now in play. The bond markets especially the 10 and 30 year look very vulnerable with the increasing rhetoric around the US interest rate base.

Crude Oil     49.54     +0.06 +0.12%

US stockpiles are down and the market has jumped on the assumption that the US economy is about to set off with a jump. With the slide at 48 looking for a quick long entry after the ISM data and jobs data with a view to a run at the 55.

Gold     1212.975     -5.510 -0.45%

Shorts in play with no sight of support given the new interest rate hike climate we should see the 1050 support come under test somewhere in July.

SP500     2099.06     +8.96 +0.43%

We are now just shy of the all time highs and closing on Friday like this after a great week is very significant especially since Monday is Memorial day and markets are shut. Global money is now piling into US equities now we know that its only a matter of a few weeks before the next US rate hike. This is a major bull move signal in the making.

Dow    17873.22     +44.93 +0.25%
The Dow has shot up as global funds bid up US equities prices to earn superior yield/ dividend. The recent dip has shown some good entry points for global funds to enter the US stock markets.

VIX 15.40 - 0.42 -2.69%

Options volatility in the equities markets is very important to understand; the lower the VIX the higher the potential for underlying price growth.

Always use your own better judgment and try to build a picture of trade logic combining both technical and fundamental understanding.

Friday 20 May 2016

Global FX Weekly - 20th May 2016 - USD consolidation

Forex Market Commentary

Technically speaking the USD economy should be on the floor done and out for the count. But it isn't. In technical trading the golden cross and death cross form two very important signals (the 50 and 100 or 200 day moving averages) to indicate when a market is rising and falling in the medium term. In the last 26 years in the SP500 only on 2 occasions did the 50 day moving average sink below the 200 day moving average on the death cross formation and on both those occasions in 2000 and 2008 we had a massive crash in US equities markets. We have now hit the death cross on the nail. But what on earth is going wrong? The technical charts on the SP500 are screaming collapse; but reality is in the present and not necessarily in a chart and on the CBOE the equity options are being priced to reflect an upwards pricing probability. So what on earth is going on?

The difference between 2000 and 2008 lies in the shape of US Fed monetary policy. In the year 2000 free market economic ideas reigned and the markets were left alone to price money and risk. In the year 2008 for the first time in decades we saw the arrival of Quantitative Easing and artificial manipulation of the pricing of money and risk. So since 2008 the Dow and the SP500 stormed up to the heavens always knowing that the US Fed will continue with it's Neo-Keynesian interference in the pricing of money and risk. Thus coming back to the ominous sign of the death cross; remarkably the markets are shrugging it off because they know that the US Fed is there to interfere with the pricing of money and risk and also because the whole world is flat on it's face in any case. In a free market economy the government should not step into the money markets to determine the price of money; a central bank would look to the Treasuries and price money along the forward yield curve according to the demand and supply of money and risk. Europe and Japan and China are all engaged in various methods of artificially pricing money and risk and look where they have all ended up. So the sooner that the US Fed goes back to following the bonds markets then the better for the free market economy. That USA did not go the way of Japan in view of this major policy of interference is astonishing.

Set against this backdrop of government interference in the pricing of money and risk is the valuation of the USD. When journalists were writing about the impending collapse of the US Dollar and the next great gold train just by glancing at a few charts they either had vested interests or had a poor grasp of monetary economics.

At the heart of any economy is the banking and insurance sector which lends to corporations and individuals to build better companies and help people find houses to buy. If banks take customer deposits at say 3% and lend at 6% like in the good old days then banks would be regarded as profitable mainstay of the economy. But what would happen if US banks were forced to lend to companies and individuals at near zero interest rates? How on earth would banks make a profit given their costs of operation? The truth is that lower bond yields cause unemployment in the banking and insurance sectors which then ripples across the entire economy. Then that would open the door for the hideous specter of asset price deflation. Knowing this US Fed cannot allow US bond yields to sink any lower. Just look at the stock charts of some of the major US banks and see how their profitability has been driven lower and lower as bond yields sank last year. Given this fundamental understanding then the trade logic is for the value of the USD to stabilize this year and gently appreciate next year.

Please turn to Bloomberg - global bond yields
http://www.bloomberg.com/markets/rates-bonds

This week on the US data front the Sales of existing U.S. homes for April 16 rose more than anticipated. following he FOMC minutes last week there is strong evidence that the US economy continues to gather pace. Q1 is always about winter weather disruptions and April always catches the tail end of that and marks the real changes from winter to spring. The National Association of Realtors said that existing home sales increased 1.7 percent to an annual rate of 5.45 million units. This is higher than March's sales at 5.36 million units and February sales at 5.33 million units. With a strong property and retail market we know that we have a strong base for US economic growth this coming summer.

In my global macro analysis the major barometers I am look at for 2016 are as follows:

USDX     95.279     -0.027 -0.03%

USD is set to stabilize 95-93 I would look to temporary short 96 as I do not see a climb above 96 until after July 16.

EUR/USD    1.12220     +0.00154 +0.14%

Neutral outlook with a view to go long at 1.10 or short at 1.15 again knowing that the ECB is comfortable
with the 1.10-1.12 region.

GBP/USD    1.450650    -0.008850    -0.61%

The vote is coming and anything can happen it is best to wait and observe and trade the aftermath.

10 yr US T-Notes     129.765625    +0.093750    +0.07%    16:58

Shorts are now in play.

Crude Oil     48.44     -0.23 -0.47%

Shorts are in play at 50 we should see crude slip back to 40 given higher reported US stockpiles and then finish the year at the 50-55 region. So shorts at 50 and long entries at 40.

Gold     1252.33     -2.04 -0.16%

Shorts in play in the 1280s region and longs come into play at the 1230 region. Given a stabilizing USD this year there's little ammunition left to propel gold upwards and the onus is more upon support.

SP500     2052.32     +12.28 +0.60%

We are still eying the 38.2% Fib retracement to the 2000 level with a view for a serious upwards momentum to 2100 come this summer with strong data in Q2 being the fuel to propel. I am neutral the market is still undecided but another 1 or 2 strong data reports could well lift the upwards momentum.

Dow    17500.94     +65.54 +0.38%

Consolidation is the key word now. neutral outlook for next 4 weeks.

VIX 17.35 -0.62 -3.48%

Options volatility in the equities markets is very important to understand; the lower the VIX the higher the potential for underlying price growth.

Always use your own better judgment and try to build a picture of trade logic combining both technical and fundamental understanding.

Forex Charts - 20th May 2016

Forex interactive charts for currency traders. Learn and earn currency trading by understanding chart patterns.

Wednesday 18 May 2016

FOMC grows hawkish and bond traders singing "Kumbaya" go off the cliff!

Forex Market Commentary

Yes, in the trading world most traders fail to understand trade logic and end up like Gummy Bears walking up to the top of a cliff singing "Kumbaya" before falling off the precipice!

Firstly, technical charts are only a guideline and cannot be taken as the be all end all Bible of trading. Secondly, bank analysts are paid by industry exactly to say this and that because companies pay them to do so. Thirdly, sensational journalists have vested interests in whipping up traders into a frenzy. so the next time you hear a piece of news take three steps back and try to build your trade logic before you also go marching off hand in hand with the Gummy Bears because when you peel away at the entire surface, very little logic holds the entire picture together.

As I have been stating for some time now since the beginning of this year 2016, the USDX needs to trade in a sideways channel this year and cannot sink below the 93 mark for a long period of time quite basically because at this moment in time the US Fed is carrying the world. So now let's go over several points in the financial markets to lead up to our inevitable conclusion that the US Dollar should stabilize at the 93-95 level for the remainder of this year 2016. Currently the USDX has retraced upwards 38.2% very quickly since it's tumble from the 100 mark in January this year 2016 to the low on 2nd May 2016.

The following charts are from www.investing.com

Day Chart USDX:

Now let us try to build a logical rationale for markets and price behavior.

Firstly, the FOMC minutes. The US economy is sound and as usual sensational journalism has fed into wild speculation pushing up commodity prices such as gold with the fervent pitch that the US Dollar is dead meat. Now where on earth did that opinion come from? Nothing can be further from the fact and as a result you cant count how many gold longs got slaughtered yesterday. In economics there is a fundamental concept of time lags where events in time usually take some time to translate into the demand and supply equation and pricing of monetary assets. Equilibrium theory is based upon this concept of opposing forces eventually settling at a perfect pricing of demand and supply in the cash market until speculation drives prices into Disequilibria until again the market forces pull back like a rubber bang into a perfect state of equilibrium. The winter season hampers the US economy because of he weather. When it snows not too many people will drive their cars or shop around in the ice and sometimes floods damage crops and gale force winds knock down power lines. The effects of winter usually translate into April and May FOMC releases. Now here is the warning; that the FOMC should openly contemplate the raising of US rates by 25 basis points next month and issue such a statement when the US economy is supposed to exhibit weakness, is a massive implication of the fundamentals where the US economy trudged through the winter quite well enough and is all set for massive growth potential this spring and summer 2016. Thus, in ignoring the fundamentals of the US economy, many small traders got it completely wrong by ending up in short traps in the USDX and long traps at the top of the gold. This is a massive demonstration why a trader should not solely depend upon charts or listen to the journalists that screamed to enter gold for the next gold mania breakout when the exact opposite happened and as usual the large traders slaughtered the small traders caught in a long trap. I am overwhelmingly short at the 1290 - 1300 region.

Secondly, The SP500 - OK, well Carl Icahn took his massive short position bet and his fund IEP have some 11 billion Dollars capital base and with near 150% leverage we can safely assume that IEP have some 30 billion Dollars in leveraged credit to maintain this massive short position. This is why last week I clearly stated that although the SP500 may slide to the 2000 mark I would not dare enter a short position and remain neutral until evidence of a breakout to the downside for which evidence is starting to build as in the case of Warren Buffett's footprints. Massive buy support lies at 2030 and 2000. When every pension fund in the world has nowhere else to put money except USA to earn dividend you can be pretty certain the US Dollar is going to remain high bid. Warren Buffet recently revealed that this week he bought a 1 billion Dollar stake in Apple Inc. Why? because all those journalists screaming about insane price/ earnings ratios are dead wrong. When you place 100 buyers for a Giacometti piece in an auction room there's no telling where the price will end up because the auction will value the piece of art as a result of the pressure of the bid. The same principle applies to stock prices. If a share is 20, 30, 40 times earnings there is no hard and fast rule on fair value. Fair value is in the eye of the beholder who so desires to hold that stock. So Warren Buffett is buying on the dips and Carl Icahn is selling on the rallies. one of the two is dead wrong. But my hunch is IEP will wind down their shorts once the SP500 reaches the 2000 support and everyone in the planet starts piling in to buy opportunities like Google, Apple, American Airlines and several other stocks which gaped down and then recovered as buyers came flocking in hunting bargains for long term buy and hold for dividend. Also watch out for mergers and acquisitions because as stock prices slide down a little then companies with large cash balances will become prime targets for takeover bids and that's going to feed into Dollar strength. Yesterday US stock SAAS (inContact) soared 53% when it was announced that Nice Systems was going to acquire the company for $940m. Just now in Bayer AG makes preliminary offer to buy $42 billion valued MON (Monsanto). traders are going to jump for value whenever the SP500 dips. so dont bet on that US Dollar crashing at all.

Expect a massive volatility battle towards the Fib 38.2% and a high degree of probability of an upswing to the 2100 give that investors like Warren Buffett are looking for position entry as in the case of his purchase of an Apple Inc stake. Most likely Carl Icahn will cash shorts here and turn predator looking for bargains like Warren Buffett.

Day Chart SP500:

Watch the Day Chart AAPL, Juggernaut Apple inc on the Nasdaq:

Thirdly, the bond markets. FOMC data caused pandemonium in the bond markets as investors ran for cover on the 10 and 30 year and bond related stocks. here again i have pointed out the building up of buying pressure that cannot go any further up quite simply because the US FED has stated very clearly last month that it will never allow US yields to sink into negative territory. Yet how many traders missed this point. The entire world needs Dollars and Dollars are going to be bid and therefore the current cozy world of the bind markets is going to come under stress as prices cannot hold at such high levels as reflected in the day chart below where bond prices surged as a result of Dollar weakness since January this year.

Weekly Chart US 10 year Treasury:

Now at this point what we need to understand is not trade direction where many traders can get lost but trade logic which smart traders use to build positions. In a sequence of events let us look at the following two premises:

Premise 1- If the SP500 cash future falls then money spreads across the world and US Dollar weakens and commodity markets rapidly escalate in value.

Premise 2 - If the SP500 cash future falls then money spreads into the US bond markets driving US bond prices up and the US dollar finds strong support but does not appreciate rapidly like last year.

Premise 1 is highly unlikely. Why? Just take a look at global government bond yields and where exactly is the alternative investment?

Currently US yields are:

10-year U.S. Treasury:1.87%
S&P 500: 2.19%
30-year U.S. Treasury: 2.67%
MSCI AC World index: 2.7%
Russell 1000 Value: 2.74%
Investment-Grade Corporate Bonds: 3.2%

Now compare that to Japan 10 year at - 0.079% or Germany 10 yr at 0.16%

Premise 2 - is highly logical. Outstanding debt of G10 is at $39T and 90% of that is issued in US Dollar. The gold market is quoted in Dollar. Crude oil, 90% trades in Dollar. When the whole world is flat and the US economy is the only driving engine then firm Dollar bid. In US equities, even though aggregate earnings growth has fallen with a poor showing this earnings season, still US companies increased their dividends by 4.6% in Q1 2016.For this reason global funds which to drive into US equities every time their is a dip because investor appeal for dividend growth buoys all considerations for alternative global investments.

The alternative scenario for the US Dollar is very frightening. Fed Chair Janet Yellen moved very quickly to reassure nervous investors when the USDX collapsed in January 2016. She has very firmly stated that the US government bond yields will not sink into negative territory. If the US bond markets were allowed to rampage with higher and higher prices then lower yields would become a problem for the US banking and insurance sector. Since 2008 the US financial sector has been carefully nurtured back to strength. Lower bond yields and lower US dollar pushes US banks to become unprofitable and take that out of the US economy and you sweep away the entire foundation for the health of the US economy. Commercial banking is at the heart of any economy. Lower bond yields would undermine this vitally strategic market and Fed Chair Janet Yellen will never allow this scenario to play out. another logical consideration would be the coming US elections. She would not dare afford to undermine the US equities markets and shave billions of dollars of shareholder value and take away the value of US pensions. Therefore the FOMC plays a vitally critical role in keeping up the US equities markets whist tolerating a more gently appreciating value of the US Dollar. Allow the US Dollar to fall dramatically then invite the deflation trap and bankruptcy of the Us banking and insurance sectors. The US Dollar must stabilize and the USDX must trade the 93-95 band for the world to find stability in the global money markets.

Thus, in this picture of trade logic, the US Dollar needs to remain stable to support the potential for other global economies to expand. a collapse of the US Dollar has too many negative implications for the health of the entire global financial system.