Forex Market Education
Reflections On That Mexican Stand Off
Now let us turn to three weekly charts that will explain what exactly is going on in the world at the moment for truly we really are at the brink. In recent weeks Fed Chair Yellen has talked about US negative yields for the first time. She says that US negative rates are improbable but more she speaks so in an attempt to assure the world of a steadily growing panic in the investment community that the global specter of deflation is actually quietly building up and nobody in the global central banking community knows what to do about it.
Firstly, let us take a look at the following weekly chart on the USDX. In a nutshell you will notice how the USD has been trading in a sideways pattern since February 2015 when the major hedge funds started to unwind their long Dollar bets. In January 2016 the market started declining because the expectation of 4 further 25 basis points rate hikes diminished as the FOMC started appearing less hawkish in tone and conciliatory as data started to show a slow down in the US economy. The September 2014 upwards move from the 72 mark to 100 in January 2015 has a Fibonacci retracement 38.2% approximately at the 94 mark. Thus far the pull back in USDX has met the first Fibonacci and is now attempting to meet the 2nd retracement 50% at the 91.5 area. fierce support is found at this key area which large speculative hedge funds seem unable to penetrate because of the collective action of central banks and commercial banks swooping to purchase USD.
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| courtesy investing.com |
Secondly, let us now turn to the US 10 year yield weekly chart below where the heart of the battle is being fought in the determination of the value of the USD. In the 10 year yield chart below we will notice that US bond yields have been declining at an alarming rate the last 5 months since the expectation of further rate hikes vanished. The bond markets are bid up by global banks, pension funds, insurance companies and all kind of funds as the opportunity cost of finding alternative areas for yield growth continues to evaporate as the global economy slows down in 2016. With this key note in mind it is the US bond markets that are supporting the value of USDX since every time the Dollar dips global commercial banks are instructed to purchase more Dollars for institutional investors looking for fresh entry points into the US bond markets.
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| courtesy investing.com |
Thirdly, the US equities markets have become a prime are of investment for global funds and every time the Dollar slips the opportunity for acquisitions of US stocks grows. In the weekly chart however there are warning signs that the SP500 for large caps could be faltering as it nearly did last Friday with the poor NFP data. A 38.2 % retracement is expected and wouldn't be catastrophic for the US economy. Moreover, should a sell-off occur; where exactly will funds withdraw their money to? Gold and crude oil and CHF currency? That would be unlikely as the gold and crude oil markets are small and less liquid and the Swiss interest rate climate hardly positive at all. So the only true safe haven to take a huge cash out would be the colossal US Treasury market. Thus in the event of an equities sell off the USDX would come under pressure to decline but commercial banks would step in and buy and then that force would feed back into the US bond markets and so it is very hard for the USDX to sink lower than the 91 mark because of the current fragile state of the global economy.
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| courtesy investing.com |
In terms of US monetary policy yes truly it can be said that today we really are at a problematic point with global economic slow down as the IMF and US Fed have started to recognize through various press releases. Fed Chair Yellen is now carefully emphasising that negative bond yields will not happen which calms the US bond markets whilst at the same time she is allowing for moderate increments in interest rates at a rate that will not drive US equities into a state of panic. Indeed, we are at a very important juncture and stand at the brink because of investor nerves because the degree of risk of trouble brewing from China is increasing. Hence nervous investors fleeing to US Treasuries as a safe haven the last couple of months. What is remarkable that given an ongoing China crisis and morbid Japan and Europe, the US Fed is in the position to carefully nurture an expanding US economy with positive interest rates with the emergency brake of smaller mini Q.E. packages should a global meltdown occur should China collapse once again. The argument being that the US economic engine will simply outperform the world and grow revenue and eventually pay more taxes to pay off debt is the rationale to allow for 18 trillion Dollars of debt to be carried by the US Fed for the time being. Certainly the stimulus package of the US is what's carrying the global economy at this point of time. Therefore, within the structure of such an analysis one cannot expect the collapse of the USDX, US bond yields and the SP500 because the 3 areas have become inter-twined as a result of the Q.E. program started by former Fed Chairman Ben Bernanke. Whether it is a good thing or not that the markets have become so dependent upon official monetary policy and intervention in the price of money is an argument of economic theory that has yet to be fully analyzed as we are still very much caught up within the super cycle event of asset pricing determination by government in place of the free market wince 2008. Perhaps, should the global economy eventually kick start next year into recovery whilst the US economy resumes a more moderate growth, the recent story of government intervention on the free markets will become a classical text book case for future students of economics. However, should China ever implode and it's domestic forward yield curve descend and flatten down, then the chances of China becoming the new Japan will become ever likely and then the theory of government intervention in asset pricing would really suffer a tremendous knock-back as the global economy struggles to contain contraction next year. China holds the key this year; a recovering China will calm the global finance markets and give the US a much needed break in it's Atlas playing role of carrying the world economic order.
Pieter Bergli - Trader X16.
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