THE WEEKLY FX DRIVE THRU
THE FX MARKET PLACE:
LAST WEEK’S NEWS – MY THOUGHTS:
If you trade any of the financial markets, you would have witnessed carnage during the past week unless you had your head buried in a bucket of sand like Stephen Poloz, BOC Bank Governor.
The unwinding of the JPY currency, the sell off of the Nikkei, banks stocks around the world getting crushed, oil selling off then bouncing then selling off again, the fear of local then a world recession all of these created a FEAR and GREED run.
With all the above said, I have yet to mention the little lady with a big stick (Janet Yellen, Fed Chair) who sat through her bi-annual testimony to a select committee on the hill, what I can only describe as a circus. I am really impressed with the way she stands her ground in front of these poorly educated up-starts who know very little other than to point blame and shuffle papers. No wonder Donald Trump has cross party support with the Washington protest vote. In the first hour last Wednesday, I counted 40% questions and 60% statements; this is an improvement from recent Q&A. I recall 75% statements once to Ben Bernake, I know that lots of people, maybe, the vast majority couldn’t care less, but for me politicians should be setting an example and not performing in front of the media like a collection numpties, which is what we have around the U.S. Eurozone and UK for example. Is it any wonder mainstream politics all over is suffering protest votes to fringe parties or candidates.
Away from politics…
FEAR rules right now and it’s dangerous.
The ripple effects of China and Oil were enough to be living with a week or so ago, now we have my list from above (JPY, Nikkei, Bank Stocks, Recession fears) to add to this.
Be careful, Monday is Presidents Day in the U.S. and markets are closed. Volumes will be lower and coming off a weekend with so much geopolitical news in the air, China coming back on line after New Year holidays… it could be messy at best, choppy guaranteed and decimation at worst.
WHAT’S ON MY MIND:
ARE WE HEADING INTO A STORM OF DEBT DEFAULTS?
I was prompted to write this article due to the fact that over the past several weeks the number of pieces written by economists at the behest of areas of the media has been increasing. Delving further into what I originally perceived to be nothing other than scaremongering, it got my brain thinking maybe there is some merit in exploration. I am more of a cynic than a doom and gloom person, having said that I hope this makes your grey matter move the way it did mine.
This piece draws together not just my original thoughts but also some deeper economic theories from the research, which I hope demonstrates the potential for the storm / wave of debt default in a format that is easy to follow.
I am a Forex trader, not an economist. I studied Government and Politics and British Constitution back in the day. However, it does not take a brain surgeon or rocket scientist to observe the fact that financial systems appear dangerously unstable.
The immediate effect of this is obviously a hit and test of political stability, but in my opinion confidence, if you like social stability will also suffer as FEAR grips.
Over the past few days, I have heard on BLOOMBERG and CNBC and read quite a few articles where the chatter relating to recession has become almost tantamount to a fever.
Is it worse than 2007?
I am not sure. What I do know is that with GDP levels at 1.0%-2.5% dotted around the globe, to slip into a negative is much easier than if inflation was good at 2%, which seems to be every central banks objective. Therefore, yes; recession is a fear.
Since 2007-8 the scene of the financial crash, global debt levels have once again increased. In a recession, the chance of these debts being paid or even managed in many instances would be, in my opinion quite difficult, as asset prices would nose dive rendering servicing of debt practically impossible for most.
In my blogs I often use the phrase “Burying one’s head in the sand like an ostrich”.
I do not want to be judged as a doom and gloom merchant, but I do worry that in todays world obsession with instant gratification and at times fear of reality if we have the balls to actually look at what we have regarding global debts.
Accounting for the fear of recession can we look objectively at what there is vis-à-vis large institutional debt and attack it based on an orderly fashion or do we once again go into crash mode with the “Too big to fail” Lehman Brothers and a potential equivalent of an AIG bailout on the cards?
My fear is that to address these issues is way beyond the current global backdrop. It is a “dog eat dog” environment especially with currencies and the fight for growth and inflation. Politically we do have leaders capable of managing this potential.
European banks, especially German are under real pressure and at least $1 trillion of debts (non-performing loans), have been admitted to and these are mostly associated with emerging markets. This is what we know, and as we also know from the EUROZONE there is bound to be much more under the counter.
There are massive social issues on the horizon should “bail-ins”, which is now the Eurozone bailout approach, be required for failing banks as off the street investors as well as large fund investors may have to cover debts from their deposits. If this were to happen we would have utter chaos and people would take to the streets. In my opinion, in this event, the 2007 crash would be viewed in history as minor news in comparison to what could be on the cards in the near future.
Bear in mind the ECB has conducted numerous bank stress tests over the past few years since the Financial crash of 2007-8. These tests were designed to show and alleviate concerns that the European banks could survive another crash. Right now, I am reading several theories that many banks are still under-capitalized and would simply fail under another crisis.
Let me re-iterate in this event, in my opinion, we would have panic, fear, chaos, and runs on banks and violence on the streets.
What starts all of this?
China
It really is hard to say. The PBOC / Chinese government want to devalue the Yuan to compete in the currency wars.
I have debated the longer-term effects of QE (Quantitative Easing) over the past year or so in the blog and decided that ultimately its effects are to bring spending forward but the future catches up with you. The Chinese government will be looking at all options should they want to enter currency wars with more tools over and above currency devaluation.
I think that since 2007 this has been brewing, certainly central banks have maybe not fully understood the effects of falling commodity and finished goods pricing. It was seen initially as a good thing as it meant that purchasing of goods could still carry on as the west exited the 2007-8 period.
Looking back flooding of the markets with cheaper options, only fueled DEFLATION. The fact that cheaper Chinese goods flooded markets hit domestic production and domestic labour rates and employment. At the same time the central bank support of QE masks the under-belly of what was happening.
Now, we have the FED trying to establish normality after a period of extensive QE and market accommodation. As we have seen this move to ‘normalization” is very difficult and challenging.
Every piece of bad economic U.S. economic data is viewed as a potential for a FED reversal, it is very challenging, very volatile and we have huge market uncertainty across all financial markets.
European banks were down 7% last week and I think it was a sector when we have had 7 days in a row of declines. Greece is back in recession, more stimulus is called for, and despite all of the EUR negative news the EUR/USD is now up for two weeks in a row.
Uncertainty, insanity, divergence, lack of correlations call it what you want, it is hard to trade on fundamentals alone at the moment and at times the technicals do not line up.
I have talked a lot about DEFLATION in the past two years. Hindsight is a wonderful thing, but I wonder if the central banks had let DEFLATION flow through the markets would we be in a better global position now?
Am I being unfair, I know that central banks do not know how to fight / eradicate DEFLATION. Liquidity yes, that is a prime function of a central bank, they can all improve liquidity but is that about all? Am I being unfair?
At the end of the day the FED is at the forefront, will they stoke the fire to create insolvencies around the world?
Janet Yellen is caught between a “rock and a hard place”, they are in the crossfires now for trying to normalize. If they remained accommodative the debt increases on all the free money.
From a Forex traders perspective what does all this mean?
The USD will be front and centre in my opinion. So much emerging markets debt is linked to the USD and commodities are also tied to the greenback.
If I recall 2007-8, it was the commodity currencies that were the easier trades. This time around with oil circa $30 a barrel and full scale currency wars in operation plus a China slowdown… carnage.
It would make the drama of the SNB peg removal seem a mere tranche of volatility over a day or to. Brokers would go under, rate spreads virtually impossible to trade and volatility so great you would have to be sidelined to preserve capital.
Equities, bonds, options, futures or Forex would be driven by news events. It would not be pretty, it would be carnage and moves would be swift, violent and at times without foundation of facts a complete gamble would ensue.
I have never seen an orderly approach to debt management, as denial is always the predecessor to the facts. In my mind it can only be dis-orderly.
I hope that this never happens but it is a real risk and not a fairytale or script for Steven Speilberg or the like to mull over. Speilberg might after the event should it happen!
COMING UP THIS WEEK:
THIS WEEK’S FOREX NEWS THAT INTERESTS ME:
(There are many more news items related to the Forex Market other than the ones listed below. These are the ones that interest me. You can go to www.forexfactory.com and www.tradingeconomics.com for a more comprehensive lists of all news events that are Forex related).
SUNDAY: CNY – Trade Balance.
MONDAY: EUR – Draghi (ECB) speaks.
MONDAY: NZD – Retail Sales and Inflation Expectations.
MONDAY: AUD – Monetary Policy Meeting Minutes.
TUESDAY: NZD – GDT Dairy Auctions.
WEDNESDAY: GBP – Unemployment Claims.
WEDNESDAY: USD – FOMC Meeting Minutes.
WEDNESDAY: NZD – PPi
WEDNESDAY: AUD – Employment Data.
THURSDAY: N/A.
FRIDAY: USD – Core and Retail Sales.
FRIDAY: CAD – Core and Retail Sales.
THE USD MAJORS SUPPORT & RESISTANCE LEVELS:
(In this section I have as usual kept my charts as minimalist as possible. With regards to charting in my opinion less is more!! I hope that they are clear. All readers regardless of level of experience should be able to follow my thoughts from my comments to the levels on the charts with ease)
My comments are contained on the charts.
EUR/USD – Weekly Closing Price: 1.1250
GBP/USD – Weekly Closing Price: 1.4493
AUD/USD – Weekly Closing Price: 0.7103
NZD/USD – Weekly Closing Price: 0.6619
USD/CAD – Weekly Closing Price: 1.3856
USD/CHF – Weekly Closing Price: 0.9769
USD/JPY – Weekly Closing Price: 113.24
CLOSING THOUGHTS:
Very simple this week; Monday is a U.S. holiday. I would advise being light with trading until Tuesday. Markets will be thin, volume light and probably highly speculative. Why put yourself through that?
There is a lot of high beta economic data this week. Trade on reality and not on speculation.
There will be reams of speculation this weekend, remember that’s all it is speculation.
Be savvy…
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.
Take care,
Scott Pickering
The Pip Accumulator
http://weeklyfxdrivethru.com/disclaimer/
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