Here we are, the final DRIVE THRU before my summer break, which ends on September 5th, 2021, when I will return with blog #421 for 2021.
I am looking forward to the break, there are lots of little projects that I want to complete and, I feel, in the sense that coming out of lockdown here in Nova Scotia, getting the pandemic in the rear-view mirror, must give one a boost to enjoy the Summer as 2020 was not normal, although I am grateful we have not had the effects of the pandemic as severe here as other parts of Canada, or the world for that matter.
Whilst I am in break up mode, on the other hand, there seems to be a move or two remaining in the FX market, before we hit the summer doldrums. Previously, I had thought we were just going to drift after the June FOMC meeting, well I got that wrong.
Nevertheless, from next Monday until September 5th, no blogs, and no zooms. For FX PREMIUM subscribers, I will of course be managing trades, existing and new ones throughout my break, so I will be active on the subscriber only twitter feed @weeklyfxpremium.
The markets are testing my resolve with my longer-term positions and going into the summer I am holding trades for which my conviction rate is high, based upon what I believe are solid fundamentals. I am watching and noting what have some very been strong price moves against my preferred direction as an opportunity to add to my existing trades.
Month to date, I continue to (net) add pips to my totals but I am holding three of four good sized positions in play with the real opportunities not happening until mid/late Q3 or Q4 later this year.
Moving on again....
Over the past few weeks, seems like months given the news flow repetition, if I have read one article a day talking about inflation, I have read maybe 51 in a week!
- Is this all a grand scheme of FED conditioning?
- Are FX traders being converted into an FX version of a “Stepford Wife?”
- Is the FED’s version of inflation going to be TRANSITORY?
- What does TRANSITORY really mean?
I decided to dig around and try to assimilate all the knowledge from the past few weeks / months into a few paragraphs and give it the “Scott” approach for us lesser mortals to get our heads around the subject. The result of my efforts features as the SOAPBOX item in Section 1 of this blog.
Moving on for the last time...
During my summer break, as well as multiple BBQs on the deck, visits down to the Halifax boardwalk and the wineries in Wolfville, I will also be making several amendments to the blog format and my communication strategy. I did a little of this in May and I am not 100% happy, so this item is one of the little projects I need to get to grips with. I need a clean piece of paper, a glass of Jack Daniels “Fire” over ice, and a few marker pens to get this summer project moving forward.
I also have a couple of Personal Development courses to complete. The benefits of these will show in the TRADING PSYCHOLOGY sections of my trading support material through 2021 and beyond. Without doubt “Mindset” regardless of how and where it is applied is at the core of outcomes based upon any choice, action or decision we make, and this area of Personal Development sits perfectly in alignment with FX. It’s all how deep you, as an individual want to go, but even if you skim the surface of “Mindset” there will be benefits found to help all traders if they regard this a benefit or priority.
Life is all about choices and priorities. It was a great Personal Development guru, and a very funny man with perfect delivery / timing, who said: -
“If you really want to do something, you’ll find a way. If you don’t, you’ll find an excuse” Jim Rohn.
1. THE SOAPBOX:
INFLATION... WOT INFLATION!
Look, I am NOT an economist and lots of what I have read over recent times about inflation / the demand for the USD / Money supply / Bond purchases / Mortgage-backed securities (MBS) / Bond yields / Inter-market effects and correlations, basically what actions are Inflationary, opposed to what have a lesser effect, plus how the markets will or should react to various economic moves has given me multiple headaches trying to simplify it all. In fact, trying to break all of this down into bite–sized chunks, to try and get a formula to follow that makes sense and gives me a clarity has been impossible.
There are no straightforward answers.
Basically, because we have never been where we are today; by this I mean hopefully getting the pandemic in the rearview mirror. However, around the world countries are at different stages with regards to the pandemic. We are not in a one size fits all position. If the COVID-19 pandemic has shown us one thing that is never underestimate the virus. Lockdowns and curfews still exist.
Many parts of the world are still recording high caseloads and are struggling to get not just the first but second jabs into arms. There is no level playing field.
It is an awkward backdrop, when you reference the fact, the pandemic, especially the delta variant is still evolving and remains increasingly critical in South America, Asia, parts of the U.S. and several counties in Europe. The U.S. is making it’s move to change FED policy regardless of what it may lead to vis-à-vis a resurgence of the virus.
News and updates about the pandemic are all well and good but, I still needed clarity on the market risks and possible reactions to the potential proposed timeline of events that the FED is taking on board by entering a new cycle of monetary policy.
Risky, but I asked an economist friend of mine to see if clarity was possible ... bad move; total bollocks, theories, and what ifs, but no clear pathway to follow. Only conflicting results based on theories and could or should happens across very wide spectrum of possibilities and outcomes.
Basically, these are unchartered waters... Jesus, Mary and Joseph and their wee donkey, had I bitten off more than I could chew?
All I want to achieve with this blog is provide information on possible outcomes based on facts from the left side (the analytical) side of my brain. This is a struggle to achieve and frankly if the economic brains of the world offer no clarity, to me, this makes the FEDs approach and pathway to normalization pretty much impossible and open to all sorts of negative possibilities. My big fear is that they go down this road and the delta variant spikes out of control in the U.S. ... what then?
Not put off, with a lot of research undertaken, I still think its worthy of laying out what I have.
Where to start? ...
I decided to start with TRANSITORY.... Now we are sucking diesel!
Possibly the most used word when an inflation conversation starts on Financial TV. Great game for those with a drink problem first thing in the morning, every time TRANSITORY is used drink up....
The definition is below...
I must hand it to the FED, credit where credit is due, it’s a great word to define what they believe is happening with current U.S. inflation fears. But let’s remember, all financial data points are “passing”, “short-lived”, “temporary” “brief” or “here today and gone tomorrow” and create momentary instability.
So, if inflation is going to be temporary what is the current annual rate in the U.S? It sits at for the month ending May 2021 at 5%.
The following two inserts show the current rate comparisons for the past 10 years plus a table of year by year / month by month comparisons and how the inflation rate in the U.S. is calculated.
So, it is fair to say that U.S. annual inflation has shot up to 5%, last seen in the summer of 2008.
With the inflation rate at 5% and the FED funds rate at basically less than 1% what does this mean? I may not be an economist, but you know this cannot be good news for anything other than TRANSITORY from a countries economic outlook.
Now, I have so often written in DRIVE THRU blogs that the markets are not just bubbles waiting for a severe correction to take place, but that they are also rigged, manipulated, and basically built on a house of cards.
The current U.S. debt to GDP ratio hit highs at 118.90% after WWII, currently it sits at 107.6%. Government spending is in overdrive, and the solution right now is to print more, devalue the USD, basically kick the can down the road. It’s all part of the “Big Gamble” that the U.S. will see strong robust growth moving forward and higher wages for the lower and middle classes that will spend money on consumables. This hope, “The Gamble” will reduce the debt to GDP ratio.
My question here is can the FED keep buying enough Bonds to keep yields low enough based upon a future where inflation is already here, is it just TRANSITORY?
Most of the FED Bond purchases through its QE program comes from shorter-term Treasury Bills, which allows the FED to control borrowing costs and keep rates low.
I suppose its about “Glass half full or Glass half empty” ...
The bottom line is that the FED has manipulated the markets so far, and now it must normalize, firstly by removing the Monthly Bond purchases of USD$120 billion per month through TAPERING.
You may or may not know, that I am great believer in Personal Development. I believe that in every aspect in life Mindset is everything. If you want to change outcomes, it’s all about not just choices, actions and decisions but the will, the imagination, the intuition, the reasons and goals coupled with the drive to create a different result based upon the right mindset at the core.
One of the Personal Development mentors I follow has lost the run of himself by entering the Wealth Creation area at a time when equity markets are at their highs and the markets are at a crossroads. The whole approach scared the crap out of me and trying to retain an open mind was difficult as this PD guru cannot remain on point, he drifts... Timing is everything; I know... probably more money than sense. The epitome of a retail investor. He even admits to buying near the highs and now says that there will be a pullback / correction on the way. I am not worried about his uneducated, rather mindless approach and lack of market understanding, but he has now talked about rampant inflation in the U.S.
Holy Mother of God... rampant inflation in the U.S. I think I will find out what he is smoking, it’s obviously much better than the Jack Daniels effect! I think, the phrase here is “a little knowledge is dangerous”.
Below, is my definition of a country out of control. Argentina, inflation currently 48.8% and the Central Bank funds rate of 38%.
This is INFLATION... WOT INFLATION! and an example of mismanagement of an economy. No matter how bad the U.S. will / may get I for one just cannot see numbers resembling these being discussed by JEROME POWELL.
Moving on and getting back on point....
So far, all I can really get my head around is that the FED has limited tools at their disposal for the journey that they are about to embark on.
- Buy Treasuries
- Buy Bonds
- Buy Junk Bonds
- Buy Stocks
- Taper back Bond purchases or buy more
- Lower or Raise Interest Rates
- Provide Economic Data that supports their medium and longer-term strategies
I have no doubt some will add more tools but essentially with these tools they are to manage their dual mandate of Inflation control with Price Stability and attain full employment.
TAPERING is a well-used word in financial circles, almost as much as TRANSITORY. The FED is buying bonds to the tune of USD$120 billion per month. It does this to keep bond prices / yields low. The knock-on effect of this is that investors searching for yield only have RISK assets such as equities left in which to search for yield. The FED knows this and is therefore basically backstopping the U.S. stock market. Another knock-on effect of FED policy is that as equities rise the USD (DXY) falls in value. The FED knows this and is quite happy to sacrifice the USD.
The start of TAPERING is getting closer, and the markets are getting twitchy. When I state getting closer, I believe it will NOT start until 2022 but the details will be released between now and November, possibly at the Jackson Hole symposium at the end of August or at the FED Meeting on the 22nd of September, with the confirmation at the November 3rd FED meeting.
The insert below shows how the USD10YR Bond reacts to higher profile news releases and includes a few additional thoughts. This shows me that the FED will have a real job trying NOT to rock the markets. I expect huge volatility around any major announcements detailing a change in the FED Monetary policy.
Could the FED provide supportive economic data to lessen the blow, lessen the volatility that will be created when a policy shift is announced?
Let me give an example of supportive FED information provided once a quarter at FED meetings.... the “DOT PLOT”.
If ever there was pointless piece of data, this is it. My thoughts are contained on the insert below.
So, with all the above said...
I think that FED has screwed itself, primarily based on the fact its immediate response to a health issue was to treat it without much thought as being a financial issue.
In reacting to a pandemic, the same way as an economic malfunction the FED has itself backed into a corner from which it will virtually be impossible to escape without damage and economic fallout. Not even David Copperfield could get out of this one.
The U.S. markets cannot take surprises. To ensure an eventual smooth transition, we are talking a couple of months to digest the transition and be ready.
We do have one huge difference this time though. The FED has created bubbles in equities and the markets are totally corrupt, it makes the OIL market look 100% above board and totally honorable.
So, what next?
To remain logical, we first need to see the timetable proposal from the FED. At the end of the day, it will be equities that show us the RISK OFF / RISK ON effects of the FEDs moves. It seems blatantly obvious that RISK OFF should be the order of the day if liquidity, which is still abundant, is removed from the market.
After this, it all depends on the vocabulary used and at the end of the day how the FED manages downsides and the volatile moves that are bound to appear.
This process will be JEROME POWELLS “Finest Hour”. The question is basically is he capable of pulling this off?
One part of me says.... he is a DOVE and “once a DOVE always a DOVE” ... Will he have the balls for it and the probable fallout?
As an FX trader there are no suggestions with this one, other than, trade light and if possible be flat going into the FED meeting in September. Believe me when I say, I have analysis that if stacked portrait on top of each other could reach the moon and back, and maybe possibly circle the moon. It’s all conflicting, it’s all guesswork. We are on new ground.
2. WHAT CURRENCY PAIR HAS MY ATTENTION and WHY?
2.1: BACKGROUND TO MY TRADING STYLES:
Over the past few weeks I have received several emails etc. asking me what my process is for posting a trade. With this feedback in mind, over the coming weeks I am going to run through my process with a particular currency pair in mind, looking at all the stages I take into consideration.
Please bear in mind, I am a long-term trader with longer-term horizons so my process will be completely different to scalpers, range traders and some day traders.
Essentially, I am a “Swing Trader” looking for trades to develop. This style of trade for me I refer to as “Radar Trades”, with a time horizon of hopefully a few days or weeks, to a few months.
However, currently, I am looking deeper and looking to trade over a longer period. This type of trade style I call “(Core) Position Trades” and depending upon my conviction and market conditions, trades that I believe are longer-term over 9-12 months duration, these trades become a multi-positional (Core) Position trade.
2.2: THE POTENTIAL TRADE:
There are no potential trades that I am looking closely at, at the moment.
As we are entering the summer months my focus is on working through existing positions and adding to those already in place.
The exceptions to this are trades that were suggested in previous blogs detailed in the following section, section 3, in which, I am not yet positioned. Any thoughts comments and ideas are listed there.
3. FOLLOW UP ON PREVIOUS TRADING IDEAS:
3.1: CURRENCY PAIR - USD/CAD
TRADE DIRECTION: SHORT
DATE: 16th May 2021
BLOG REFERENCE: #412 FREE NEWSLETTER VERSION
Back in this trade once again with several positions. Following the Canadian Jobs data last Friday, I am expecting more TAPERING from the BOC.
I am SELLING RIPS and adding positions. I expect to be very active with this pair moving forward. We have the BOC Monetary Policy Statement and Press Conference this coming Wednesday.
3.2: CURRENCY PAIR – GBP/USD
TRADE DIRECTION: LONG
DATE; 23rd May 2021
BLOG REFERENCE: #413 FREE NEWSLETTER VERSION
I am still BUYING THE DIP with this pair based upon my longer-term views. Still very active adding and removing trades.
3.3: CURRENCY PAIR – EUR/NZD
TRADE DIRECTION: SHORT
“DRIVE THRU” BLOG DATE 6th June 2021
BLOG REFERENCE: #415 FREE NEWSLETTER VERSION
I am short once again; new pips are banked. I have multiple trades live and limit orders in place. I expect the RBNZ to be hawkish moving forward and we have a RBNZ Rate Statement this Tuesday evening for me, Wednesday morning in New Zealand.
I am still SELLING RIPS in this pair.
3.4: CURRENCY PAIR – AUD/USD
TRADE DIRECTION: SHORT
“DRIVE THRU” BLOG DATE 30th May 2021
BLOG REFERENCE: #414 FREE NEWSLETTER VERSION
This trade is now off my RADAR.
3.5: CURRENCY PAIR – NZD/USD
TRADE DIRECTION: LONG
“DRIVE THRU” BLOG DATE 13th June 2021
BLOG REFERENCE: #416 FREE NEWSLETTER VERSION
I am currently looking to buy dips to enter. I am looking to the RBNZ Rate Statement this week as hopefully the ideal time to enter.
4. THE WEEKLY FX PREMIUM - PERFORMANCE:
4.1: THE WEEKLY FX PREMIUM: MONTHLY PERFORMANCE:
4.2: THE WEEKLY FX PREMIUM: SUBSCRIPTION INFORMATION:
The WEEKLY FX PREMIUM is my subscriber-based FX support option, which offers, subscribers’ full access to my suggested trade set-ups and my market commentaries.
Further information about how to subscribe to the WEEKLY FX PREMIUM is also located at the top of my welcome page at https://www.weeklyfxdrivethru.com under the “SUBSCRIBE” tab.
5. WEEKLY FX PREMIUM SUBSCRIBERS:
6. CLOSING THOUGHTS:
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.
Finally, be GRATEFUL for your wins and COUNT THEM. Keep a POSITIVE MINDSET in play at all times, regardless of the market conditions.
The Pip Accumulator
BLOG VERSION: #420 FREE NEWSLETTER
DATE: 11th July 2021