THE WEEKLY FX DRIVE THRU
- THE VIEW FROM MY TRADE DESK:
LOOKING BACKWARDS, FORWARDS & SIDEWAYS (FOR GOOD MEASURE) AT THE FX MARKET
1.1: LOOKING BACKWARDS:
Last week it was all about U.S. Non Farm Payrolls, this week the FOMC meeting minutes from the meeting on September 17th took its place.
From my perspective, given that the NFP data came after the last FOMC meeting and following the meeting there was so much press coverage of why the FED kept rates on hold, I expected the minutes to be a damp squib. Basically, unless they were tampered with, nothing new would be seen. The minutes gave me nothing new and following the release of the minutes all the “FED speak” has been basically around who is up for a rate hike in 2015 and who is into 2016 and beyond.
The end result = limbo = uncertainty, which in turn equals twitchy bottoms behind the trade desks.
From a Forex perspective, this uncertainty has produced a break in commodity pressure and the commodity currencies; AUD, NZD and CAD in particular have all strengthened as a result.
However, do they not look a little over-stretched now?
My main article in section 2 of this blog makes a few observations on this point.
We also heard from the BOJ, who are keeping things on hold, but there is huge interest in selling JPY as the rumours about the BOJ adding further quantitative easing (QE) at the end of this month are gathering momentum.
Personally, I do not see that QE has ever worked. If it is meant to be just a currency manipulation tool, then it does work. However, the various central banks that have adopted QE believe it a policy weapon to boost and strengthen flagging economies amongst other things. It keeps stock market prices inflated by providing a backstop to institutions; if you know the FED will support the markets with cash you have nothing to lose. You may recall the cartoon of Ben Bernanke in a helicopter dropping wads of cash over Wall Street and Chicago, Bernanke then became known as “Helicopter Ben”.
The financial markets on Wall Street may have been supported by QE, but the consumer confidence of Main Street, well, it simply did NOT happen. Housing is still weaker than expected and the U.S. economy has NOT bounced. 7 years on and we are still waiting. I have serious doubts over the effectiveness of QE unless its single purpose (denied of course) is to bolster equities.
The poster boy of QE, the FED the biggest and best in the world should note that after 7 years of zero interest rates they are sh*t scared to raise interest rates from zero by 0.25%….. someone please give me a fecking break…. QE is not all it’s cracked up to be, and, simply put it just has NOT worked.
I just don’t get it. The sooner we have the media proclaimed “Rock God’s” who are the beloved central bank governors or presidents own up to the fact that we are in a currency war and admit that they haven’t got a clue on how to tackle DEFLATION the better. Maybe then, the markets will be able to move and react better, rather than give us this very false position of relationship pricing that we have at the moment.
So, will the BOJ add more QE at the end of the month?
Here’s my suggestion, Mr. Kuroda and Mr. Abe, give your dosh to me as I can waste your money just as efficiently as you guys can!!
I cannot pass up the opportunity to talk about the next presenter for a BBC TV programme called Jackanory (Google it).
Mark Carney, he’s off on one again. For the love of God, the UK is NOT going to raise rates ahead of the FED. In the name of sanity, who believes this guy? Every time he speaks at a major media event, he changes his tune and contradicts or denies what was previously said within a few days. I am not wasting more words on this man because it is just farcical.
Carney (BOE) and Wheeler (RBNZ) would make a great comedy stage act in the West End Theatres (London). They could be memory men, each testing the other on what they just said. With a few drinks it could be entertaining, but I wouldn’t pay for it.
1.2: LOOKING FORWARD:
MAJOR FOREX NEWS THIS WEEK 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).
MONDAY: AUD – NAB Business Confidence.
TUESDAY: CNY – Trade balance and CPi.
TUESDAY: GBP – CPi.
TUESDAY: EUR – German ZEW Economic Sentiment.
WEDNESDAY: GBP – Employment Data.
WEDNESDAY: USD – Core Retail Sales and PPi.
WEDNESDAY: AUD – Employment Data.
THURSDAY: USD – Core CPi.
THURSDAY: NZD – CPi.
FRIDAY: CAD – Manufacturing Sales.
MY THOUGHTS ON THE NEWS ITEMS THIS COMING WEEK:
To be frank, not a lot really warms my belly.
I am not short the AUD at the moment as I think there is a bit higher we can see with the AUD/USD. It feels strange not being short all the commodity currencies so I will follow the AUD news closely. In addition, the Chinese data will be interesting to follow.
I am bored writing about this next point, so you readers could be fed up reading it. The Core CPi and Retail Sales from the U.S. will be used to give hints on the FED rate hike. Maybe we are at the point of another weeks worth of crappy data from the U.S., which will kill off any thoughts of a rate hike in 2015. I can guarantee you that Janet Yellen will be beating herself up for not raising in September, or earlier in the year. Dithering never pays off in anything, it only frustrates and annoys all around you. The uncertainty will just go on and on hanging over the U.S. economy which by all accounts looks to be heading towards a recession if we carry on seeing poor data after poor data releases.
Time will tell.
MY KEY SUPPORT & RESISTANCE LEVELS THIS WEEK FOR USD MAJORS:
In this section I have as usual kept my charts as minimalist as possible. 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.
EUR/USD – Weekly Closing Price: 1.1361
We are range bound albeit in quite a big range as shown on the chart below; 1.1088 to 1.1459.
The daily chart looks bullish although we are now about 100 pips away from the highs seen straight after the FOMC “rates on hold” meeting last month. This could be a great area to short from if you have the patience to wait.
GBP/USD – Weekly Closing Price: 1.5315
Cable has been flip-flopping around as usual. We saw a couple of days last week when we were at the precipice only to see the bounce and then just as the market gets “bulled up”, bam…. the cable reverses.
Nothing new the GBP/USD is the master of false moves.
We look to be heading lower with the longer-term trend once again. From my perspective a break below through 1.5280 and definitely below 1.5200 should place the bears back in the driving seat once again.
AUD/USD – Weekly Closing Price: 0.7336
I read this pair wrong recently. I did not expect Glenn Stevens (RBA Governor) to go “girlie” and suggest that the RBA was now neutral. Add to this the commodity rush to buy this pair, which has resulted in elevating its value towards 0.7380, the 127.6% Fibonacci level. Looks like a great short to me at this level. Be patient and wait.
NZD/USD – Weekly Closing Price: 0.6694
I remember when I used to repeatedly call out to my parents from the back of the car when we were going somewhere exciting…. “Are we there yet?”
We could be, this is the area maybe to test a short. Remember the RBNZ is hawkish. At least that was the impression I got last time from “Wheeler the dealer” and his side kick English at the RBNZ.
USD/CAD – Weekly Closing Price: 1.2945
I took a massive hit with this pair last week. We move on…. upwards to infinity and beyond. Well not quite… all I wanted last week was 1.3350.
I see a BOC rate cut on the horizon after the election. The jobs data was surprisingly good last week. But alas…a huge word of warning, the job numbers came from the country that provided inaccurate jobs data for the best part of 2014. So it’s not just the Chinese data that you should question.
I live in Quebec, the poor part of Canada, it is geographically huge (like most parts of Canada) and it has a huge population percentage of the Canadian total. It is dogged with huge problems all self-inflicted with complete and utter bloody mindedness and stubbornness at the heart/root of the issues that have plagued the province for decades. Quebec is failing, it lacks investment; jobs are disappearing because of its deep-rooted issues. Companies just give up and move out. The tension over language dominates everything and no one gives a rat’s hairy ar** that Quebec is imploding. It is language that is perceived to be important. Not jobs, health, education and infrastructure…. just language. The downward spiral in Quebec has been gathering a pace for years; it personifies uncertainty in every aspect and definition of the word.
On top of the Quebec issues, we have crashing oil prices and the job cut backs in Alberta and the service industries that support the Canadian oil industry from Ontario and British Columbia. In addition, the exchange rate difficulties that lower oil prices have on the USD/CAD relationship with Canada’s neighbour the USA, flags… Houston we have a problem.
Consumer confidence numbers in Quebec have never been good but add in a few more provinces with issues and it’s not a pretty picture. Canada could mask the stupidity of Quebec, but not when more pieces of the jigsaw come apart.
If the oil price falls below $40.00 as I think it will, and we have a rate cut, which I think is a case of when and NOT if, we could have the USD/CAD at 1.5000-1.6000.
We are still in a bullish trend despite the recent sell-off. There are buying opportunities in my opinion.
USD/CHF – Weekly Closing Price: 0.9613
I am STILL long this pair.
I do expect it to breakout higher. I see 0.9550 as a big test should we drop to this level. I am prepared for it but do not like it. It is like an impending visit to the dentist hanging over me.
USD/JPY – Weekly Closing Price: 120.20
This pair is being speculated upon at the moment. Large-scale investors looking for a quick few dollars are banking on the BOJ adding more quantitative easing (QE) at the end of this month. I have already made my views known on the effectiveness of QE. That does not mean that I am correct. It is just my opinion. This pair could be one of those Forex great trades of “Buy the rumour sell the news”. 122.00 will be a key obstacle level of resistance to break, if the buying frenzy intensifies as we approach the end of the month.
1.3: LOOKING SIDEWAYS (FOR GOOD MEASURE):
This week I want to focus a little on liquidity and how the volumes in the Forex market are changing and how this affects us as traders.
The reason that I want to talk about this is that I noticed a huge change after the summer this year. In writing about this, I realize that the FOMC meeting that took place on September 17th may have been a deciding factor in low liquidity lasting longer than usual, with institutional and senior bank market makers staying out and away from trading activity for longer.
Volumes are down and liquidity is thinner. This means we have to be a bit more savvy. What do I mean?
This is not just about the hours to trade there is a knock-on effect for currency pairs to trade as well in my opinion.
The Forex trading hours are 24 hours a day 5 days a week. Within these hours there are peak trading times with good volumes of cash flowing in and out of the market and then there are thin trading times when liquidity and cash in and out is poor by comparison to the better volume hours.
Basically I see it as follows: –
The major financial centre times for trading are marked in RED by the hours that they are open.
Beneath this, I have what I call the previous best times to trade shown in BLUE.
At the foot of the table is what I am calling the best times to trade Forex shown in GREEN.
My revisions are based on times when there are what I call good two-way flows.
Just like trading the EUR/USD you know that it always has great liquidity and two-way action. The markets are the same.
The Forex market has changed and liquidity flowing through into the markets is stronger when markets open up to start trading and again when two markets are open together.
Overall, Forex market trading volumes are lower, less cash is being placed into Forex therefore it stands to reason that all the markets will suffer. The worst markets for liquidity are those open in Asian trading, these are now more likely to have wilder swing moves and we have seen some rather strange breakout moves only to be swatted back into line when London opens and liquidity improves.
Both London and New York are victims of lower liquidity, they are not exempt, but the fact is they are the powerhouses of the Forex Market and whilst lower volumes may be placed through these markets, volumes are still acceptable as they were in 2014, as far as I am concerned.
Without doubt, the European / North American session when running together offers the best trading conditions.
With regards to currencies, the exotic currencies, which see lower volumes in any case, will be more of a minefield if the overall market is starved of liquidity.
Therefore looking specifically at the Asian session, which in my opinion is the most troublesome. Trading the USD majors will always offer better liquidity along with the EUR/JPY, EUR/GBP.
Trading JPY pairs can be scary as well, but they tend to be driven by the USD/JPY so as long as you watch this pair you can be guided and it stands to reason that in Asian sessions the JPY pairs should have acceptable volumes. Only the CAD/JPY and CHF/JPY struggle a bit at times.
Trading exotics (EUR/NZD, EUR/CAD, GBP/NZD, GBP/CAD, EUR/AUD and GBP/AUD) can be difficult at the best of times due to the volatility, which even in a good strong market is awkward. In thinner trading sessions you can lose a lot of money very quickly if you are not careful with these.
Emerging market currencies in the Asian session, well I wouldn’t go there.
Basically, as long as you make a note to self that the Asian markets are going to be slow with volatile moments as countries come on line and liquidity improves for a few minutes, you will be fine.
I just think that as traders we have to be aware of everything possible that can scupper a great trade.
The solutions to the Asian markets: –
- Don’t trade them.
- Smaller positions with wider stops.
- WHAT’S ON MY MIND:
IS NOW THE TIME TO SELL THE
When the FOMC left interest rates unchanged on September 17th it was a game changer for commodities and commodity currencies. It took a couple of days for the dust to settle and a few more days for the commodity currencies to react but the chain of events, “the domino effect” took hold.
A lot of what has happened since is confusing at times, is the dog wagging its tail, or, is it the tail that is wagging the dog?
Oil, is the classic example of this. Despite the “rig count” reducing and inventories moving around a little, we are still in a pump it, pump it, pump it environment, or as it was once said “drill baby drill”. I know oil is a highly speculative hedging commodity and as I call them “the high-rollers” love to speculate on oil. My God, there is a vast range of speculators trying to nail down a futures price and buy forward. The oil market is from my perspective a real game of “chance”.
In addition, the media and markets look to OPEC for guidance regarding oil output etc. However, there lies another problem as OPEC does NOT represent all the oil producers in the world and as the body to represent oil producers it’s about as useful as a chocolate teapot. Russia, the UK, Norway, USA, Canada and Mexico are not in OPEC. Yet these are all significant oil producers and/or exporters.
Basically for over a year now oil has had a supply and demand problem. There is too much oil in the market and not enough people wanting to buy it. Thus, the price moves lower, as producers seek buyers. Oil is priced in USD.
Having just written that, the desire for these speculators to find a bottom in the oil market is huge. Probably given the cash at stake, bigger than any other open market.
As soon as the FED announced a hold on an interest rate increase, it reminded me of the equivalent of a Saturn V rocket lift off, like we used to see out of Cape Kennedy. It was slow to lift off, but as the dust settled the speed intensified and the chain reaction took hold after a few days of waiting and wondering.
A huge sigh of relief came through the markets after the dust settled, the “fat cats” could squeeze a bit more, and as a bonus the USD related commodities received a boost even though fundamentally nothing had changed.
The FOMC held rates, the USD weakened and everything related to the USD also weakened such as Oil, Gold and Copper.
The domino effect takes hold and the commodity currencies that were previously in the crapper also rally, even though nothing has fundamentally changed. The USD bolted and left the stable…
We still have the same problems, it’s as if a pressure cooker that has been building up pressure for a few hours is suddenly allowed to let off steam, that is what I think has happened. The USD was wound up so tight ahead of the September 17th meeting that many positions were taken off the table in the Forex market ahead of the meeting and as a result liquidity was much lower. It was noted that institutional traders squared off prior to vacations in August and decided to wait until after the FOMC before re-entering the market.
Boom…. there you go. You could almost hear the sound after the FOMC statement was released, digested and pondered about for a couple of days. What now?
The commodity currencies strengthened like crazy over the past two weeks and now they look over-stretched, over-done and tired.
There are opportunities on the horizon.
Remember nothing has fundamentally changed…
- Oil is in over supply.
- Gold is priced too high, there is zero inflation, so in my opinion no need to own a non-producing bit of yellow metal.
- The RBNZ, ECB, BOJ remain accommodative.
- The RBA is now neutral, but for how long, its not all about the Sydney housing market.
- The BOE according to Carney will raise rates ahead of the U.S. if deemed ready.
- The SNB are ready to intervene to weaken the CHF.
We have Forex opportunities, we are able to trade at levels that offer great risk / reward trades.
I just want to pick out the USD majors to highlight. Look at the charts of the AUD/USD and NZD/USD over the last two weeks or so (below), and, look at the extremes we are reaching. I am ignoring the cross rates in this article, but the moves in GBP/USD and in particular GBP/NZD have been spectacular, the GBP/NZD, in particular has received a Tony Soprano whacking.
My subscribers through my fee based Premium Service option will benefit, hopefully, from my thoughts of what to get into and when to enter.
I am not saying that there is a commodity currency sale on now right in front of us, but the AUD/USD and NZD/USD are in areas of great interest to short from and the USD/CAD in my opinion will soon be a great long trade again.
- MY FINAL THOUGHTS:
OVERVIEW OF TRADING TIPS & THOUGHTS FOR THE WEEK AHEAD:
Another week another chop fest!
I see absolutely no reason at all why the market drivers should change this coming week.
The economic data dump has some interesting points with China and Australia to factor in but in real terms FED speculation and the price of oil will dominate once again in my opinion.
It is a chop fest, but there are some opportunities dotted about. In my opinion, the commodity currencies offer us these opportunities. If you have the stomach for it look at the commodity cross rates as well but be careful. They are so reactionary, being caught the wrong side in such a twitchy market can be a cruel experience.
Trade smaller and wider to keep those hopes and dreams alive!
Whilst we may not all have bodies as flexible as gymnasts our trading minds have to be just as flexible to achieve longevity.
The Pip Accumulator