(POWELL): I WON’T BACK DOWN

When it gets close to the end of the trading week, I look at all my notes, cuttings and highlighted points from the previous few days to get my ideas framed around what I want to use as the basis of my weekly SOAPBOX piece.

By notes volume there were two events that dominated: -

FED POLICY
EUROPEAN VACCINE ROLLOUT

Whilst there is an obvious serious side to the vaccine rollout, my piece relating to the EUROPEAN UNION would have been a tongue in cheek piss take of the bloc once again, which, being honest is just yet another example of incompetence and bureaucracy at work, or not as the case was!

If you are NOT aware of Ursula Von Der Leyen’s political history when she latterly served as Defence Minister in Angela Merkel’s cabinet from 2015 thru 2019 please do your own research. Suffice to say it was NOT good, in fact, she was seen by many as a liability and to boot totally ineffective. It should therefore come as no surprise that being ineffective, she fits in really well in Brussels. She was obviously the perfect choice to lead the European Commission as President.

Now under pressure, following a monumental f*ck up on ordering vaccines plus the fact that member countries of the EUROPEAN UNION simply could NOT organize effective rollouts to get jabs in arms of their populations, she is blaming everyone except for the pen pushing jotter blotters in Brussels for the complete f*ck up involving the Vaccine Rollout.

The EUROPEAN UNION, debated for weeks whether or not to negotiate country by country to obtain vaccines or to act centrally, during which time they placed orders for vaccines much later than other countries. Yes, I know AstraZeneca have not delivered on quantities within the timelines contractually agreed but there is more than one supplier. Ironically, the EUROPEAN UNION singled out AstraZeneca last week about non deliverance, when many governments inside the bloc were not using AstraZeneca vaccines due to blood clotting concerns... you could not make this up.

Just to highlight the incompetence; FRANCE is back in lockdowns once again stretching from Paris to several other key cities. Wouldn’t you think that the European leaders would have clear priorities in place? At the end of last week, we witnessed more U-Turns from European countries than you would see from Taxi cabs on Shaftesbury Avenue on a busy theater night in London, UK.

Don’t forget GERMANY rising cases have initiated U-turns in policy vis-à-vis lockdown protocols...

The EUROPEAN UNION is in tatters over the vaccine rollout, much of the blame lies within, but as mentioned leaders are striking out at all targets only creating vaccine conspiracy theories about safety and effectiveness.

From a FX perspective, one must think that the EUR/USD is an obvious short as long as this paralysis in the EUROPEAN UNION persists coupled with US10YR bond yields on the rise, this only supports this trade.

I move on...

From a trading perspective, I am having a mixed performance. I am adding pips, +1,281 pips this month so far and +5,196 pips year to date, which is obviously the overall goal of trading, however, sometimes I feel like its one step forwards and two steps back at times. Nevertheless, I am adding pips and that has to be better than losing pips!

The big picture...

Trading motivation, conviction as well as the psychological trading mindset ALL remain focused. I have a clear 90-day plan in my mind. I have had to make a couple of course adjustments from my overall fundamental position and macro thoughts but this is normal.

Currently I am at 33.57% of my annual pip target of 14,480 pips. It would be great to have over 10,000 pips by the end of Q2 2021.

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1. THE SOAPBOX:

(POWELL): I WON’T BACK DOWN

Over recent weeks, I have been referring to FED Chair, Jerome Powell as “DO NOTHING POWELL” ... I came up with this name all by myself, although one can see the TRUMP influence.

Listening to POWELL last Wednesday at the FOMC Press Conference, my nickname was spot on. At one point, he even read prepared answers from pages in front of him. That is how careful and at the same how ridiculous things vis-à-vis the FED have become.

There will be plenty of column inches this weekend on this subject. Let me place my spin on matters FED. I will leave the highbrow economics to those who specialize in that area. All I am interested in is how does the FED effect my fundamental views for trading in the FX market.

Leading on the equivalent of a Jackson Hole speech in August last year, POWELL confirmed that the U.S. economy can run “hot” meaning that the 2% inflation target set by the FED will be flexible.
Bond Yields in the U.S. are rising. The 10YR has been thru 1.7% and 30YR thru 2.5%. Yields rising on the basis the FED will allow “an overshoot”.
POWELL said that the cash on the sidelines once deployed after the pandemic rescinds will add to inflation, but it will be nothing but transitory.
The FED is NOT discussing interest rate increases until at least 2023.
The FED policy is that it wants to see the FULL FACTS and ECONOMIC DATA before it acts.

I get all of this.

Below is a copy of a tweet I placed on twitter during the Powell press conference.

My basic question being how can the FED be sure an initial inflation move will be just transitory? For reasons I give later

The FED wants wage growth and full employment before it acts.

Michael McKee from BLOOMBERG asked the best question of all at the press conference which was swotted away and NOT answered by POWELL. Basically, around the subject what will make the FED act regarding Interest Rates or Tapering. Powell ignored the question. The answer to “what would it take” would have been the defining moment of the presser in my opinion.

All we heard was the FED is doing nothing.

Inflation 2.5% nothing
Inflation 3% nothing

The FED is going to wait until they are “deers in the headlights”.

Bond Yields (US10YR) touched 1.7% last week. Goldman has a target of 1.9% by the end of 2021 and TD Securities has 2% with the same timeline. At this rate we will be above 2% before Easter.

Price Stability and Full Employment are core FED principles and goals BUT... there is one factor of economics that has not been examined as far as I can see. When we see the G10 economies exit pandemic conditions how do we effectively manage inflationary pressures within SUPPLY & DEMAND chains that are f*ucked? The limited access to products created by raw material shortages and supply bottlenecks does in a usual economic assumption assume that demand driven inflation is almost always short-lived as supply will often rise to meet demand. Hence the transitory comments from Powell. However, we have never been in this place before so can one rely on history?

So, I am not too sure about that assumption standing good.

It is often said that BAD INFLATION comes from supply driven inflation as resources are NOT in place when required to meet demand. Looking back thru history, I recall OIL shocks that had inflation out of controls in both 1973 and 1978 that created an uncontrollable inflationary spiral for years that could NOT be controlled.

As stated already I get the FED stance, but what if they are wrong? They will be not just behind the curve but trying to fight at some stage in the future inflation that could be a struggle to control creating economic wobbles and uncertainty to fix.

In this scenario, the FED’s commitment to an easy monetary policy will be somewhat of a joke. So, what we have is a determined FED and by the look of it, Jerome Powell is in a somewhat I WON’T BACK DOWN mood and frame of mind. I like the TEFLON KING as well, as nothing is sticking.

That is how I see the economics.

However, above and beyond this we have a geo-political scene. What about CHINA, HONG KONG, TAIWAN, IRAN or NOTH KOREA. Interesting times ahead.

Moving on...

So, there is the backdrop from what is often referred to as the banker to the world.

The first thing I do is look at the inter-market relationships and see if they were 100% in sync to point me at what I need to do, and, with how to plan my approach to trading with a longer-term time horizon in mind.

US10YR increases = USD strengthens and equities especially growth stocks (tech) under pressure.
Yield sensitive currencies like CHF and JPY strengthen.
As equities fall = Commodity currencies (AUD, NZD and CAD) weaken.
We have a RISK OFF scenario = USD/MXN rises, usually the AUD and NZD crosses react the same way.
USD strength = pressure on OIL reflected in OIL based currencies like CAD, MXN and NOK.
S&P moves lower = AUD/JPY correlation lower.
I am NOT a Cryptocurrency fan by any stretch of the imagination, but Bitcoin is a great measurement of RISK at the moment.

I have enough to frame up a TRADE PLAN around the moves I would expect to see. Correlations do matter, they give help to trade confirmational bias and additionally help trade conviction.

The usual issues remain; Timing, Sizing and Risk Tolerance.

These issues are what makes FX Trading so much fun

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Firstly, before finally...

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Finally,

Always remember longevity in Forex trading can only be achieved through trading with good RISK, TRADE and HEAD MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility. Trade with a TRADE PLAN, basically, plan your trades and Trade your Plan.

Mental toughness is key, and this is all about emotional control. Your mind can do amazing things, but only when it wants to, threat and alert will get your mind’s attention.

“Everyone has ability. It always comes down to mind games. Whoever is more mentally strong, wins” – Mohammed Ali.

Finally, be GRATEFUL for your wins and COUNT THEM. Keep a POSITIVE MINDSET in play at all times, regardless of the market conditions.

Stay safe and wear a mask.

Final, final, please note I am taking a short two week break over Easter. The next DRIVE THRU blog and ZOOM after this weekend will be on the weekend of April 10th and 11th 2021.

Scott Pickering
The Pip Accumulator
Twitter: @pipaccumulator
https://weeklyfxdrivethru.com/disclaimer/
BLOG VERSION: #406 FREE NEWSLETTER
DATE: 21st March 2021