WILL CENTRAL BANKERS SINK OR SWIM?

I had collected so many notes over the past few weeks during my Easter break from trading, with numerous options of topics to note in this blog. However, most of these were shredded given last week’s events. I heard a great quote from BLOOMBERG via Anna Edwards; “There is always volatility in markets and then there was last Wednesday and Thursday’s price action. The overview of last Thursday’s Wall Street sell off is noted below.

INFLATION, STAGFLATION and RECESSION fears have gripped investors forward thinking, irrespective of type, style, or size of investor.

What has captured my attention, and I will come back to this later in this blog is that we approach RECESSION fears across the board in developed countries BUT the dynamics of the economies are totally different. The one-size fits all and square peg in a round hole scenarios, in my opinion, are definitely factors to consider. The talk may be the same BUT the economic backdrops and data facing Central Bank Presidents and Governors are somewhat diverse.

Moving on...

Having recently had a break away from trading and taking time out to review processes and functionalities, I have decided to implement changes to this blog and its variants from today.

You will notice content changes in this week’s blog. Moving forward, the blog will be delivered either by video format via YouTube or in a written format similar to this and both will be posted to my website. FREE NEWSLEETTER subscribers will continue to receive links as usual as soon as I post website content.

Going deeper into the structure and content changes, I am looking to make a move to more chart-based reviews, and this is much easier via YouTube for obvious reasons. As a Position Trader, I will always have my thoughts and fundamental views on the FX market, and I know some of you like these so regardless of transmission style of the DRIVE THRU these will be retained.

The blog will be distributed between midnight Saturday evening thru to early morning Sunday NYC time for every weekend a blog is scheduled (see below).

1. MY FUNDAMENTAL THOUGHTS & VIEWS:

(This short section of the blog looks forward. I share my macro / fundamental thoughts and views for the coming 3-6 months on factors to consider from my Macro, Fundamental and Geo-Political perspective.
NOTE: This section may NOT alter much from week to week)

The Ukraine / Russia conflict is now into its third month and it looks like it could be a long war.

It is widely reported that that Russians underestimated how long it would take to take over 100% control of Ukraine. In fact, even if Russia did take control, what type of control would it be. The Ukrainian resistance, in my opinion, would be a continual thorn in the side.

It is very difficult to predict the FX market moves vis-à-vis this conflict as we are swinging one way then another based on a mixture of geopolitical news, war headline news, and sanctions against Russia headlines. However, we do have an underlying flight to safety, with the USD being the core beneficiary, and, in my opinion, over the short-term, I see no change with this view.

In addition, we are being bombarded with headlines about (HIKING) INTEREST RATES, INFLATION, SUPPLY CHAIN ISSUES and commentary related to possible STAGFLATION and RECESSION.

Working closely in the markets, it is so easy to get sucked in to believing what I see, read, listen to and watch is what 90%+ of the population is exposed to via various media. Most people however are not engaged in the financial markets to the same extent, BUT they are out there shopping, paying household bills so they will experience the effects. My point is, we are having a MINDSET SHIFT, as we are being fed negativity and our conscious mind readily accepts negativity, in fact, most people feed on this.

This MINDSET SHIFT will be seen more and more through future Consumer Confidence and Retail Sales data. This leads to employment changes and initially STAGFLATION then soon after RECESSION.

For those who have followed me for some time, Central Bank Monetary Policy is fundamental and core to my trading activity, views and thoughts looking ahead.

Central Bank Presidents and Governors are struggling with limited tools at their disposal to tackle spiraling energy and cost of living inflation. Initially, we witnessed unprecedented times vis-à-vis Central Bank one-upmanship on which, which bank official could be more HAWKISH. Now the same people are basically having to deal with raising rates into a RECESSION and sacrificing ECONOMIC GROWTH on the way.

In the past week or so, we have seen the RiksBank turn hawkish along with the Reserve Bank of Australia (RBA). Only the Bank of Japan (BOJ) has come out and doubled down on remaining DOVISH. The ECB has yet to fully show its hand, although as usual the ECB has leaked some Dovish and some hawkish. All other G10 Central Banks are most definitely hawkish.

No matter where a Central Bank stands, “Hawkish or Dovish” the market reaction to rate increases is now taking the economic data backdrop into consideration vis-à-vis the market reaction.

Many now question the credibility of Central Banks; have they mislead or were they simply out of their depth of forward guidance and overall policy. Are they just “winging it?”

The other pieces in the jigsaw that have my attention are: -

EMPLOYMENT: If jobs data starts to weaken it only fuels the STAGFALTION and RECESSION calls. From my perspective this is a “WHEN not IF” situation that Central Bankers with their heads buried in the sand and in denial will have to face moving forward.
SUPPLY CHAIN ISSUES: The Zero Covid policy in CHINA will create additional issues moving forward as CHINESE ports have been affected.
WORLD DEBT: Unprecedented. At some stage this will require attention. In addition, with INFLATION, Consumer Credit Card spending is growing. MORTGAGE REPAYMENTS will be on the up and defaults will increase. A housing bubble and weakening housing market is also in the future.
COVID-19: Hopefully this is for the most part behind us, BUT never say never. There were reports posted last week about NYC possibly bringing back “Mask Mandates” as infections are rising, and hospitalizations are increasing.

There are other items bubbling under, but for now, there are enough headline grabbing factors that will dominate the markets and for now with so much emphasis on Central Bank activities, this is where my focus lies.

Finally,

If you resonate with my long-term MACRO THOUGHTS and want to get into the trades with me as I develop positions, you will need to subscribe to the WEEKLY FX PREMIUM at https://www.weeklyfxdrivethru.com

2. THE SOAPBOX:

(TIME TO SEE) WILL CENTRAL BANKERS SINK OR SWIM?

Last week was a big week for Central Banks, with the FED, BOE and RBA announcing changes in monetary policy. All three Central Banks raised interest rates and provided forward guidance, but the market reactions were completely diverse.

THE RESERVE BANK OF AUSTRALIA (RBA):

Announced a 0.25%, taking the overnight rate to 0.35%.

This was a major, although hardly surprising change in policy, given that only a couple of months ago Philip Lowe, RBA Governor, was quite firm that policy tightening was in 2023. In his commentary, I noted “The economy has proven to be resilient, and inflation has picked up more quickly, and to a higher level than was expected”.

The market reaction was AUD strength, which one would have expected, about a c.70 pip rise, which subsequently gave way in a USD strength move that came through the market.

THE US FEDERAL RESERVE (FED):

Announced a 0.50% increase and Jerome Powell, FED Chair, announced that for the next two meetings further increases of 0.50% at each meeting were in the pipeline. Quantitative Tightening (QT), the start of selling off the FED assets purchased through years of Quantitative Easing (QE) would start to be sold at USD$47.5B from June 1^st getting to a maximum level of USD$95B by September.

The market reaction was for the USD to strengthen as one would expect as this was very aggressive policy tightening. But then, during the FED Press Conference in response to why not a 0.75% or 1.00% hike question, Powell dismissed these higher increases. The market reaction was for equities to rally and the USD to weaken. It was an aggressive turn... why? There are still more hikes planned, this made no sense to me at all.

As a trader you react, or you take the moves BUT it made little sense to me.

THE BANK OF ENGLAND (BOE):

The Bank of England hiked for a fourth time at 0.25% to 1.00%. Further hikes of a similar amount are expected in June and possibly August.

However, the cable weakened by over 2.3% down to just over 1.2330, its lowest level since June 2020 and treasuries sold off. Why?

Andrew Bailey, BOE Governor, issued a warning of 10% inflation in the UK. In addition, 3 out 9 voters on the BOE Monetary Policy Committee wanted a 0.50% rate increase.

Economists very quickly placed 10% into their projection models and soon it became clear that the UK was heading for RECESSION possibly towards to the end of 2022, but clearly in 2023.

The Bank of England revised forecasts spell out RECESSION (see below).

So, the upshot after its all said and done is that with cable the line of least resistance is lower and potential moves lower point towards a test in the coming days or weeks of 1.2000.

I would like to state the obvious here, just in case some you were thinking... A weakening currency only exacerbates a problematic inflation spiral. Hence the reason Andrew Bailey, looked like he has swallowed a wasp during the BOE Press Conference.

WILL CENTRAL BANKERS SINK OR SWIM?... you can mortgage your house on the following nugget.

I guarantee you that Christine Lagarde and the rest of the ECB Governing Council looked on at the Bank of England last Thursday, wetting their knickers on how the markets will interpret their move vis-à-vis tightening or moving to normalisation. June 9^th the next ECB statement and press conference is just a month away.

Look, as I see it the ECB will not in a million years be as hawkish as the FED even though the recent ECB sound-bytes are more hawkish from the ECB but will rate hikes be EUR positive?

Geographical factors such as proximity to UKRAINE and reliance of RUSSIAN energy makes ECB management more complex. The EUROZONE was already facing downside growth risks and upside inflation risks at the start of 2022. The UKRAINE war exacerbated this and revisions to economic forecasts have been huge making this in itself hard for the currency to absorb.

A Central Bank divergence trade is still on vis-à-vis the FED v ECB based solely upon the pace of interest rate increases. In my view, a tighter ECB policy is 50/50 that it will exacerbate weaker growth and deliver pain to the single currency (EUR). Without doubt the ECB faces the toughest challenge of all developed countries Central Banks.

Look, it's a mess. Every Central Bank has contributed in one way or another.

We had no inflation in the G7.
The general G7 inflation objective was a nominal 2% target.
We were told policies would deliver 2% inflation.
Next, we had 5% inflation.
Then, we were told it was TRANSITORY and sit tight!
Now, we have 8%+ inflation.
Central Banks are now sacrificing Economic growth, raising interest rates to try and contain rampant INFLATION.
Next, we will have STAGFLATION (if we are not already borderline).
Then we have RECESSION, and this should destroy INFLATION.

Here are some additional thoughts to ponder...

From a global perspective, we are in a mess economically, the chart below shows to what extent over recent years that Central banks have grown their balance sheets through Quantitative Easing (QE).The spike from COVID in 2020 is dramatic to say the least.“Helicopter money” (Printing money) simply has NOT worked and to introduce QE to fix a GLOBAL PANDEMIC was a bloody ridiculous idea, that was doomed to fail from day one.

I have written about this recently, in fact in last week’s DRIVE THRU. I believe that all Central Banks have “A PAIN POINT”.Central Banks claim independence but who are they trying to fool?Looking at the FED in particular, a 20% move lower from the 2022 high is c.3,850. From this level to c.3,650, 200 S&P points lower, I believe is where the FED steps in once again (see S&P chart below).
In my opinion, there is only so much pain that they will let Wall Street absorb.

I know Wall Street is NOT the economy BUT the longer-term damage if NOT tackled at some point would decimate the US economy already debt ridden to a point of no return in the short to medium-term.

Look, I know, its easy to play the blame game over the economy of a country. But for too long loose economics have prevailed and where have they gotten us?

Basically, on the brink, the precipice of a repeat of the 1930’s if action and strategies are NOT well thought out and reasoned.

Those (Central Banks) who got us here will have to bail economies out and print money once again.... and, so, the circle (a hamster’s wheel) starts rotating once again.

3. THE WEEKLY FX PREMIUM:

3.1 CURRENT PERFORMANCE:

At the end of last week, THE WEEKLY FX PREMIUM 2022 current position was as follows: -

MAY 2022 to date:
Total net pips = +365 pips

YEAR TO DATE 2022:
Total net pips = +7,154 pips
2022 pip objective = +14,920 pips
(48% of 2022 objective achieved)

3.2: THE WEEKLY FX PREMIUM – SUBSCRIPTION INFORMATION:

If you like my approach to the market and are wondering what my trades are like from, a live perspective and what is the WEEKLY FX PREMIUM all about, check out my website https://wwww.weeklyfxdrivethru.com

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 via Twitter, TwitLonger and ZOOM.

4. CLOSING THOUGHTS:

Always remember longevity in Forex trading can only be achieved through trading with a good MINDSET, 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.

Scott Pickering
The Pip Accumulator
Twitter: @weeklyfxpremium (Restricted feed - FX PREMIUM Trade Information)
Twitter: @theanalogtrader (Restricted feed - FX PREMIUM Market Commentaries & Views)
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BLOG VERSION: #453 FREE NEWSLETTER
DATE: 8^th May 2022