Well that was an interesting week to say the least. On Wednesday night, I was convinced that the FED had decided upon a change of direction with its monetary policy and by midafternoon on Thursday I was less certain.
I am now asking myself if these policy announcements followed by walk backs by Central bank leaders are coordinated or is it just pressure of the job or is it a bit of incompetence or both. Whatever way you want to describe it I would use the word unconvincing.
All we want as traders, especially with FX is clarity. We couldn’t give a rat’s hairy ass if its positive, negative, bullish, bearish, hawkish or dovish; we just want clarity.
I am now 100% convinced that we do not get clarity because the Central Bank governors / presidents are as much in dark as most people as to what is actually happening in their own economies. Everything now is so inter-linked we live in different times than that of Trichet and Greenspan and the old-school approaches are no longer relevant.
Last week I wrote about a TIPPING POINT. I think we are there a lot faster than I thought and it will be FX that starts it.
More is at play now that just gamekeepers turning poachers and doves becoming hawks. I see a possible major RE-STRUCTURE and RE-ALIGNMENT taking place in the FX market. It has the added spice of possibly occurring during the summer when trading volumes are low and markets thin and illiquid.
I also believe that the FED was the final nail in the coffin, the straw that broke the camel’s back to make this a real possibility.
More of this in the “SOAPBOX” later.
- LAST WEEK – MY TAKE ON SOME KEY EVENTS:
Despite a shortened week from my perspective there were still a few takeaways of note.
In no particular order, here is what floated my boat last week.
- CAD (BOC):
I have been critical of Stephen Poloz in the past through lack of decision, being far too “CONSERVATIVE” in approach, which is the Canadian way irrespective of political persuasion.
About a month ago, Poloz’s Senior Deputy Governor, Carolyn Wilkins (In Canada, we love full employment so there’s probably a great hierarchy, family tree spreadsheet inside the BOC), announced that the time to tighten BOC policy and look to raise rates was basically approaching. The USD/CAD exchange rate fell from the 1.3500 area and now sits circa. 1.2700. That is an 8 cents drop. Unbelievable; and in normal circumstances I would have said equivalent to a about a 1% -1.5% interest rate change. The BOC raised by 0.25% and it could be a one and done event this year.
Fair play; one of the biggest issues and maybe reasoning behind this rate rise had to be the housing bubbles in Toronto and Vancouver. 8 cents move in the exchange rate is the equivalent to a tax on house purchases for overseas buyers, who are really to blame for the housing bubble, squeezing prices up. Their cost to fund CAD$ has increased by the 8-cent move.
I expected on Thursday the day after the USD/CAD, GBP/CAD and EUR/CAD were slaughtered for a bounce back of sorts. Of sorts are the words to use. On Thursday feck all of a spike higher. The CAD languished around its lows. CAD strength is back.
- GBP (Employment Data, Export numbers and BREXIT):
A much better week this week for the UK data releases.
Employment numbers were good and Export figures positive. Deputy governor Broadbent also went on the wires and said that now is NOT the time to be raising interest rates. No doubt this support got him a big kiss from Mark Carney.
BREXIT negotiations are still on-going and leaks are almost nonexistent. Either the wine being drunk is so damn good those involved are incapable of speech to report on progress or they have done feck all but just look across the table at each other. Boris Johnson (UK Foreign Minister and BREXIT champion) did offer up a quote during the week, when in reference to the costs of the UK divorce from the EUROPEAN UNION, he said that the numbers quoted by the EU were extortion and that the EU could whistle for it to be paid!
So matters are progressing nicely.
- USD (Janet Yellen Bi-Annual testimony, CPi and Retail Sales):
Well she certainly surprised with her more DOVISH statement to the hill on the state of the FED and its Monetary Policy approach and progress towards its objectives. More about this later in the “SOAPBOX”
With regards to the CPI and Retail Sales data, it was really poor and the USD was taken to the woodshed and smacked.
The future does not look good for USD bulls.
- EUR (ECB):
It has been announced that Mario Draghi (ECB President) will attend this years FED symposium in Jackson Hole.
This announcement has fueled speculation that he may use this event to warm the markets up to the future of the ECB bond buying program. ECB TAPERING is the hot topic at the moment, we had all the shenanigans at the ECB forum last month in Sintra, Portugal when Draghi’s hawkish comments were attempted to be walked back by “unnamed sources!” … my arse; that was the ECB who pooped their pants when they saw the EUR reaction to a tightening policy.
I would say invest in “Depends**” because the entire staff at the ECB will be wearing them when the symposium takes place.
I would have thought that the ECB would stay tight lipped and say nothing or do nothing until the year end. If Draghi puts one word out of place, never mind an entire sentence, the single currency will rip higher on the mere mention of tightening never mind a TAPERING exit program.
** For those of you who live outside of North America.
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THIS WEEK’S ECONOMIC DATA RELEASES:
MY THOUGHTS ON THE ECONOMIC DATA EVENTS THIS WEEK:
- GBP: It is a big week data wise for the UK. We have CPi, Mark Carney’s testimony to the parliamentary committee on Inflation and Retail Sales.
I am still very cagey trading the cable at the moment. My bias was upside but the economic data of late has been poor switching my bias to sell. This week’s data will be confirmation of my switch in bias or just confusion.
- EUR: Mario Draghi has his Press Conference this week, when all eyes and ears will be on “TAPERING” clues. Whatever happens, the single currency will have its usual wild roller-coaster ride up and down for a couple of hours. I just cannot see Draghi committing to anything or hinting at anything. It is the status quo for me, especially with the Jackson Hole symposium attendance being confirmed all attention will be focused there.
- AUD: Jobs data this week. Good numbers will confirm the AUD breakout and poor numbers will bring back the sceptics. It could be an either way report. Winter employment data releases are always a bit of a lottery as seasonal employment comes into play.
We also get at the beginning of the week the last set of minutes from the RBA. If you recall, the last statement from the RBA disappointed the market and sent the AUD/USD lower by 100+ pips because the RBA stayed neutral. This could be interesting to read.
Will it affect the strengthening AUD that we have seen since Janet Yellen’s testimony earlier in the week?
- JPY: No doubt a yawn fest. I cannot see the BOJ saying or doing anything new except committing to the existing QE and QQE programs that are in place.
- CAD: CPi and Retail Sales data is released on Friday. More good numbers would in my opinion send the USD/CAD towards the next support area of 1.2300.
USD MAJORS – SUPPORT & RESISTANCE LEVELS TO NOTE THIS WEEK:
The charts below contain commentary (my thoughts and views), these are the USD major charts that are reflected in the spreadsheet above.
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- THE SOAPBOX:
AN FX STRUCTURAL RE-ALIGNMENT IS ON THE WAY
Last week I wrote about how I believed were we were approaching a TIPPING POINT in the markets. Whilst I believe 100% in what I write, I did not think that one week later we would be at said TIPPING POINT, in fact, in my opinion, we are at what is a STRUCTURAL RE-ALIGNMENT.
What do I mean?
Let me start with some pre-amble, the much-awaited Janet Yellen bi-annual testimony on Capitol Hill, which must have left many people shaking their heads wondering WTF. I found her unconvincing and dare I suggest this but it’s not going to be her problem to fix as her tenure is up early next year and her replacement will be the seat on the hill in front of the politicians.
I struggle with these U.S. committees, no one really asks questions and if they do they cut the answer short and most of the time we just get statements of position rather than questions. It’s all rather amateurish at times. Some of the committee members were more interested in scoring party points than actually being focused on the matter in hand. It does however, parade out in front of the world allegedly the best representatives of the people that the U.S. has… God help us all.
My thoughts / highlights / lowlights on the two-day testimony were: -
She said that Inflation should rebound, but the FED could alter policy if inflation softness persists. Basically, she is stuck with the 2% goal that hasn’t been achieved for, I don’t know 5 years, 7 years?
If I had set targets like this back in the corporate world that I did not achieve never mind beat, I would be out on my arse looking for a new job!
Her commentary was along the lines of FED POLICY should see the objective hit in the next few years. FED POLICY so far hasn’t done it, why on earth would anyone think that the FED has suddenly found the secret sauce?
FED BALANCE SHEET, INTEREST RATES and MONETARY POLICY:
This is what caused all the twitchy bottoms.
With regards to monetary policy, she was DOVISH. Although the Fed will begin TAPERING its balance sheet and although it will continue to gradually raise interest rates, interest rates will no longer be as high as before as seen in previous economic cycles and if inflation does NOT perk up the FED will slow down on raising rates.
The FED intends to raise rates as unemployment rates keep falling. Hmmn
On Day Two, Janet Yellen basically re-worked the same as day one although she did walk back comments made about whether she believed that there would ever be another great Financial crisis?
Day one it was No.
Day two we received this commentary. She talked about increased banking resilience and the fact so much has been done to strengthen banking capital and liquidity requirements should another crisis occur. She was happy to say that with Bank stress test results there was great improvement in risk management and capital planning.
She summed it up by saying that whilst the FED could never be confident that there will never be another financial crisis, there has been significant work and improvements made to best protect against an economic downturn.
I keep saying that she unconvincing, you can add unimpressive if you want. She talks the talk but I think no-one really believe a word that comes out of the FED as much as they used to. Everything is transitory, data dependent then that no longer appears to matter.
So; after all that, we received really poor CPi and Retail sales data on Friday last week and the USD received another whacking!
From behind my desk it looks like it’s going to be a long hot summer for USD bulls. I just cannot see how it can come back quickly from: -
- YELLEN’s change of focus, unimpressive, lack lustre performance on Capitol Hill. She has really said without saying it that rates are going nowhere in the near future. We may see the next hike in December 2017.
- A continuing bad run of weak / poor U.S. data after previously released poor data.
- The on-going political woes of the TRUMP administration. It just keeps scoring own goal after own goal. How did this guy ever run a business? It’s frankly shambolic.
- Normalization around the world by other G7 central banks. This will affect the USD as other currencies strengthen through their own Central Bank normalization policies.
Items 1 and 4 above are strategic and structural. These are not whims!
Janet Yellen’s Capitol Hill performance was in my opinion was possibly the final nail in the coffin that has instigated an FX STRUCTURAL RE-ALIGNMENT that could take place this summer when markets are slow and trading volumes are thin.
TRADING MOVING FORWARD:
Firstly, let’s not get carried away, even though it sounds like I have already.
We are trading in the summer. Ranges are always tested and it is a desperate time of the year for false breakouts and breakdowns. Having said that: - AUD/USD, NZD/USD, AUD/NZD, AUD/JPY, EUR/USD, GBP/USD, EUR/CAD, USD/CAD and CAD/JPY to name just a few currency pairs are in breakout / breakdown mode. Range extremes are being tested and should they be broken potentially big moves are afoot. Without doubt this move by the FED benefits the commodity currencies whether their central banks want it to or not.
NOTE: The BOC has already led the way and in the past month the CAD$ has appreciated by over 8 cents. I am not sure that the RBA or the RBNZ would appreciate such a move. They may not have much of a say in what initially happens. Right now, the AUD/USD and NZD/USD are in break out territory toying with really good and strong previous resistance levels.
With a move across most G7 central banks to normalize sooner rather later, the market is testing and pushing levels that during the slower thin markets could just give way and moves could be explosive. Perhaps, we will not see the usual false moves that we have seen in past summers.
We could see and I would NOT rule it out - a massive summer STRUCTURAL RE-ALIGNMENT.
Should one currency USD major breakout, it will affect its cross rates and then like a domino effect the market all pushes and pulls to re-align value.
In my opinion the big loser should this happen will be the USD.
- CLOSING THOUGHTS:
Nothing more to add here, I have said enough except,
Always remember longevity in Forex trading can only be achieved through trading with good RISK and MONEY MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility.
The Pip Accumulator
BLOG VERSION: #244 FREE NEWSLETTER
DATE: 16th July 2017.