THERE ARE NO CURRENCY WARS UNTIL A CENTRAL BANK SAYS SO… YEAH RIGHT!

THE WEEKLY FX DRIVE THRU

THE FX MARKET PLACE:

LAST WEEK’S NEWS – MY THOUGHTS:

THE FOMC RATE & POLICY STATEMENT:

It seems such a long time ago since last Wednesday; that’s either a sign of age, tiredness or a couple of nights on the booze celebrating my wife’s birthday.

As expected Janet Yellen left interest rates unchanged. This was very widely expected; the focus was on the written content of the statement for future clues as to when the FOMC would next raise rates.

I am finding a lot of this statement scrutiny a little boring, but essentially the committee now states that they are “Closely monitoring global economic and financial developments” and for me the biggest line was the fact that they no longer view the US economy as “Expanding at moderate pace” but replaced this with “Growth slowed late last year”. In addition the FOMC is no longer “Reasonably confident” that inflation will hit 2%…I think that maybe the oil effect is starting to hit home and resonate with them.

Thank God for this, I was getting sick of hearing the word transitory when it came to the effects on inflation by oil. Transitory my arse; more like permanent!

Now the books are open on whether or not the FED will hike again in March 2016. It’s data dependent we all know that and dot dependent we all know that as well.

I feel really sorry for the FOMC following the Bernanke approach of making the FED transparent. Transparency is fine in a market that requires continual support, but when things are improving I believe that transparency is a hindrance. Historical economic opinions (e.g. “the dots”) by the FOMC are being used to hold them almost to ransom on future decisions and expectancy.

Analysts on Wall Street change opinions with the same frequency as the wind direction, yet the FOMC are pushing themselves into a corner. They have it out there that there should be between 4 and 6 rate hikes in 2016, with many more planned in 2017.

In my opinion, this type of communication should just be verbal, if at all, by Janet Yellen at press conferences.

I am not saying lets get back to the good old days of Alan Greenspan and Jean-Claude Trichet, when we all needed a codebook to understand what was being said, but maybe a middle ground would benefit not just the FOMC but the markets as well.

I think I may need to lie down, I cannot believe I was offering consideration to a central bank.

THE RBNZ RATE & POLICY STATEMENT:

Rates left unchanged and like every central bank the RBNZ are worried about reaching their inflation target.

This hints at more accommodation to support the NZD this year. The Kiwi fell on the data release but like Lazarus it rose from the dead and erased the losses with the NZD/USD within 24 hours.

OIL:

Oil squeezed above $30 and stopped around $35 in a rather frantic hour when it came all the way back down again, then bounced up to around $33 where it looks to be hovering prior to deciding what the next move will be.

I don’t know about the symbol WTi it’s more like WTF. Whoever, trades this commodity and makes money I congratulate you. It’s not my cup of tea at all.

The movement in the oil price played and continually plays havoc in particular with the USD/CAD and its crosses. 150+ pips moves a day in the USD/CAD are now fairly frequent.

Oil is still pushing and pulling the markets around; it’s “The Big Kahuna”.

There are rumours, denials and more rumours about an oil production cut. Yup, I can see that happening… NOT. Well maybe a token, but not enough to bring the supply and demand relationship in line and frankly oil production would have to cease 100% for a few months to rectify the imbalance. Is there that commitment in the dog eat dog environment of oil producers?

I think that there is more chance of Megyn Kelly voting for Donald Trump, in fact there is more chance of Megyn Kelly having Donald Trump’s babies.

BOJ OUTLOOK REPORT & PRESS CONFERENCE

I am covering this later in the blog.

THIS WEEK’S NEWS:

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 – Manufacturing PMi.

MONDAY: GBP – Manufacturing PMi.
MONDAY: USD – Manufacturing PMi.
MONDAY: AUD – RBA Rate Statement.

TUESDAY: GBP – Construction PMI.
TUESDAY: NZD – Dairy Prices & Employment Data.
TUESDAY: AUD – Trade Balance.

WEDNESDAY: GBP – Services PMi.
WEDNESDAY: USD – ADP NON-FARM Employment Data.
WEDNESDAY: USD – ISM Non-Manufacturing PMi.
WEDNESDAY: USD – Crude Oil Inventories.

THURSDAY: GBP – BOE Inflation Report, Bank Rate and Policy Summary.
THURSDAY: GBP – BOE Mark Carney speaks…
THURSDAY: AUD – RBA monetary Policy Statement and Retail Sales

FRIDAY: CAD – Trade Balance and Employment Data.
FRIDAY: USD – Trade balance and Non-Farm Employment Data.

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).

This week all my comments are contained on the charts.

EUR/USD – Weekly Closing Price: 1.0828

 

EURUSD D 30012016

GBP/USD – Weekly Closing Price: 1.4241

GBPUSD D 30012016

AUD/USD – Weekly Closing Price: 0.7081

AUDUSD D 30012016

NZD/USD – Weekly Closing Price: 0.6479

NZDUSD D 30012016

USD/CAD – Weekly Closing Price: 1.3968

USDCAD D 30012016

USD/CHF – Weekly Closing Price: 1.0227

USDCHF D 30012016

USD/JPY – Weekly Closing Price: 121.11

 USDJPY D 30012016

WHAT’S ON MY MIND:

THERE ARE NO CURRENCY WARS UNTIL A CENTRAL BANK SAYS SO… YEAH RIGHT!

Yet another sarcastic title for my featured article; originally from Liverpool sarcasm comes naturally to me and of course heaps of cynicism for good measure.

Since the start of this year I have three blog articles ready to go in my mind:

  • GREECE and the contagion revisited
  • CENTRAL BANK policies are polarizing
  • MAJOR BANKS and INSTITUTIONS FX targets 2016

This year so far, and we are not out of January yet has been so volatile and confusing at times to make sense of moves, it’s starting to make Thomas Jordan the SNB Chairman’s day in the history books last year look almost like a non-event. Well maybe not a non-event but the move by the SNB was a game changer event that has kept the central bank easing moves at the top of the agenda each month since last January.

Only the GREEK bailout tragedy / saga has had more time devoted to it. By the way before the end of 2016 there will be another bailout… ACT IV is on the way

Moving on and rather annoyingly as I was not at my desk…

Thursday evening / Friday morning (EST) up steps BOJ governor Haruhiko Kuroda for his press conference and completely surprised the markets with NIRP (Negative Interest Rate Policy).

In a copy cat move already made by the SNB, Riksbank (Sweden) and Denmark National Bank he announced NIRP to the token level of 0.1% for banks and other financial institutions holding YEN on deposit. This move he hopes will force lending, purchasing, manufacturing, increased sales and then inflation.

Quoting our good friend Mario Draghi (ECB)… Kuroda stated he would do “whatever it takes to reflate the economy and achieve the 2% inflation goal” and for good measure re extended once again (3rd time in 12 months) the target to achieve this 2% goal; it’s now mid 2017.

Taking a page from the SNB book of spin, on 21st January 2016 in Davos, he said that there was no way that he would be looking at negative interest rates.

So copying Draghi’s words and using denials of change similar to the way the SNB played the markets ahead of the EUR/CHF peg removal, did Kuroda say or do anything original?

Basically, lets not get carried away here. Yes, there was a massive move in the Nikkei equities and the FX JPY pairs understandably so, but after the initial gasp of breath the equity markets rallied, gave back and moved up a little again but basically settled down. Only FX really remained elevated; in my words, elevated = selling opportunities.

0.1% is not a huge NIRP considering the SNB is at 0.75%.

I think what we have to look at here are the future intentions of the BOJ. It is only a matter of time before most central banks will have a NIRP… in my opinion.

With Kuroda’s book of spin open on page one, chapter one titled: –

HOW TO TALK BOLL***S

He passed with flying colours in Davos, the world was snowy and a wee bit chilly but back in Japan all was well, the economy was moving forward moderately in line with all the expectations and negative interest rates were not being considered as an option.

Now on page two, chapter two: –

HOW TO INCREASE THE INTENSITY IN THE CURRENCY WARS WITHOUT SAYING IT’S A CURRENCY WAR

Hats off once again, nothing to do with currency devaluation it was all to do with inflation. Such a step-over would make Cristiano Ronaldo and Gerald Deulofeu proud.

What surprises me is that the BOJ has been fighting, dare I say it, DEFLATION since the early 1990’s. These Central Bankers are so good it’s only taken some 25 years to find a new policy weapon that may help.

Oil, China slowdown, emerging markets were also highlighted as reasons for this bold NIRP approach.

There is no doubt in my mind that despite central bank pleas to the contrary the actions by the BOJ should increase the currency wars with central banks around the world as they each try to outdo one another by achieving a sustained competitive devaluation to set against the backdrop of slowing world trade and failing commodity prices. The jury is out on whether NIRP will eventually help create inflation, but it has sent a clear message to the markets about the intentions of the BOJ.

So what now for the FED?

More importantly what does Mario Draghi do now at the ECB by way of response?

We shall wait and see. There is quite sometime now until the next ECB press conference and interest rate announcement, which is in early, March. Would you not just love to be a fly on the wall in Draghi’s office? Can you imagine the conversations that have and will be taking place between Frankfurt and Berlin about what to do in response?

If Draghi responds aggressively, I think that it’s fair to say GAME ON.

From a trading perspective, subscribers to the PREMIUM SERVICE will know that for about the last week or so I had been lining up short trades of the JPY pairs at higher levels. I still intend to do this and my updated charts are contained later in the blog in the PREMIUM SERVICE subscriber section.

On a general note, I do consider the moves upwards all fadeable. I rather foolishly left a limit order USD/JPY short open in one of my accounts and I was away for the BOJ release. I took a hit on this trade without even seeing it open and stop me out…argh!!

The USD/JPY was the only JPY pair that was in my short “sell zone” area. This coming week I will be looking to establish short trades in most JPY pairs if my price levels are reached.

We should remember that there will be the usual pushing and pulling in price action after a central bank policy shift so it makes sense to wait and not rush in until matters have calmed a little.

CLOSING THOUGHTS:

This is a big week for economic data on the back of the FED, RBNZ and BOJ. We have the BOE and RBA this week as well NFP and a cluster of PMi reports and Trade balance numbers, plus a few other employment reports away from the U.S.

I expect increasing volatility, especially after the BOJ policy shift. Do not be surprised to see and hear several ECB related quotes this week as the reaction to the BOJ change filters across.

It will be an interesting week, but also one that we must be careful with. The divergent trade is still in place. I do not see Janet Yellen reversing course. This is not how a central bank operates. It would however, not surprise me to see some commentary being unofficially released vis-à-vis the “Currency Wars” discussions / debates that will flood the news channels and Sunday morning financial programs on TV.

As traders we really have to be careful trading. Lower position sizes and don’t trade for the sake of trading. We really need to let the trades come to us, rather than chase. Believe me, I know that it is very tempting to chase these currencies at the moment.

There is only one solution in my opinion, trade lean and remain keen – that means trade with smaller positions with wider stops and be alert to moves.

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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