The Weekly FX Drive Thru
- The FX Market Place:
1.1: Last Week’s News – My Thoughts:
1.1.1: Oil and it’s Effects on the Broader Markets:
The big news item that dominated the financial news last week was without question oil. We saw prices fall below $30 a barrel. Oil is the most hedged, artificially priced market that there is on the planet. It is the most discussed when prices are high and no surprise the most discussed when prices are low.
At the moment, we have a lot of geopolitical news and market uncertainty and as a result oil has taken on the mantle of being the cause for everything negative or positive on the worlds stage.
Without doubt there are opinions on “Has oil bottomed now just below $30 now that this price level has been taken out?”, “Where is the bottom in oil?”, ”Where will the price be in 6 months time?”. All you have to do is watch CNBC or BLOOMBERG or turn on regular TV and there will be a reference to oil.
There is no doubt that of all the commodities on this planet oil is a key driver of economies. Its relationship to equities, currencies, other commodities, raw material costs, transport, … the list is just endless. Is it any wonder that when oil pricing reaches extremes that the world markets to coin a CNBC title are in “Turmoil”?
So with oil below $30.00 the obvious FX trades involve the CAD, NOK and MXN.
To an outsider, it seems to be the easiest trade inside the FX market. Oil prices moving lower buy USD/CAD, USD/MXN and USD/NOK. Unfortunately it’s just not that simple, and whilst I know that the exchange rates with these pairs can still move higher, we are so over-cooked, value is no longer equitable. I am not saying that these pairs cannot move much higher. For example extreme as it sounds, the USD/CAD could move up to 1.5000 and perhaps beyond. Therefore, we should be careful as we are over-stretched and the pullbacks can be without warning and violent, never mind sudden to boot.
By the way, oil could fall to $15-$20 a barrel, however, we may have bottomed already. Like every other trader out there my opinion counts for nothing in this market. What I can tell you without any fear of being contradicted is that the fundamentals for higher oil prices are not good. We have a classic economic law in play, called the law of Supply and Demand. Nothing has fundamentally changed in 12 months in fact with more suppliers of crude oil in the market it has gotten worse. Over supply and less demand = lower prices. As far as I can see all the strategic stockpiles the whole world over are full. There is little to no storage left. This is NOT rocket science.
However, we must NOT forget, there are thousands of “high-stakes” gamblers around the world, most of them hedge fund managers with some clients having more money than sense looking for a high-risk trade that will give a better return than the usual market indexes. There are bottom pickers out there. When oil is pushing lower due to basic economics, this is an irrelevance to the speculators. They will buy in a one-sided bear market like oil believing they have the bottom price as support.
Be prepared. Trading in oil or trading oil related currencies right now involves a higher than usual degree of risk. There are always counter-trend traders trying to be heroes. This is gambling. It is not being clever. It has more to do with ego than logic and technical analysis supported by economic fundamentals.
Still in the news, but in my eyes relegated to second position this week.
China is in transition. As long as China remains in transition mode the stability outlook in the Far East will be grim. China production is falling. GDP of 7% is a pipedream, the revisions lower to 5% as far as I can ascertain will also be impossible to achieve. Not wanting to worry anyone, but is the Chinese government hinting that GDP could be lower still? What the true actual GDP number is and what we are told it is may still, in my opinion, could be two vastly different numbers.
Devaluation of the currency is still the preferred tool to use to stimulate. This will be with us all this year and probably into 2017 as well.
1.1.3: US RETAIL SALES and PRODUCER PRICES:
Basically on Friday last week the market was reeling from WTi under $30.00 and all the markets were looking for was weak data to really sell off. US Core retail sales expected at +0.2% came in at -0.1%. PPI and Retail Sales came in on line at -0.2% and -0.1%, but the core numbers created a massive DXY sell off. In addition, the Nasdaq, S&P, Dow and DAX indicies plunged to lower levels.
On Friday morning before this news broke I closed out of all of my open trades bar one (EUR/CHF – long). I took the decision, advised subscribers that following a good trading week I felt that we could have a “bloodbath” type of day and that I did not want to participate. This decision was also taken because of the fact it was a Friday going into a long weekend with MLK day on Monday plus there is so much geopolitical news hanging over the markets I just do not see the need to have so much risk exposure when it can be avoided.
1.2: THIS WEEK’S NEWS:
1.2.1: THIS WEEK’S FOREX NEWS THAT INTERESTS ME AND WHY:
(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: CNY GDP.
TUESDAY: GBP – CPi.
TUESDAY: NZD – Dairy Auction Prices and CPi.
WEDNESDAY: GBP – Employment Data.
WEDNESDAY: USD – CPi.
WEDNESDAY: CAD – BOC Rate Statement and Press Conference.
THURSDAY: EUR – Interest Rate & ECB Press Conference.
FRIDAY: CAD – CPi.
1.2.2: 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.
The market is very stretched “over-cooked” as some people describe it plus we have a long weekend in the U.S.
If you are trading be very careful at this weeks open. I am expecting a great deal of volatility in the Asian session given the huge sell off in equities on Wall Street last Friday. Many of the pairs are hard to read as they are simply so oversold. Extremes are even behind the closing levels last Friday. Extreme caution should be taken in particular in the thinner volume markets.
EUR/USD – Weekly Closing Price: 1.0910
USD/CAD – Weekly Closing Price: 1.4530
USD/CHF – Weekly Closing Price: 1.0016
USD/JPY – Weekly Closing Price: 116.95
1.3: WHAT’S ON MY MIND:
ALL EYES ON STEPHEN POLOZ
In a week when Mario Draghi has a press conference it is a very unique and strange position for me to be writing about another central bank and central bank president instead.
Beating the ECB by a day, the BOC have a rate announcement, statement and press conference this Wednesday. Make a note in your diary this is probably the biggest BOC day for some time, and it is without doubt Stephen Poloz’s “Grand Day Out”. It is not going to put him into the household mane bracket like Thomas Jordan (SNB) who a year ago last Friday removed the EUR/CHF 1.2000 peg, but Wednesday is a big day for the Canadian dollar for a number of reasons.
- This time last year, Poloz surprised / shocked the markets with a 0.25% rate cut. Since that date the Canadian people have gone though a general election when twice winner Stephen Harper was ousted in October 2015 by literally the new kid on the block Justin Trudeau.For most of 2015, I was calling for further cuts and a further 0.25% cut was provided in July 2015 to take the BOC overnight rate to 0.5%. More was required, but as the general election came closer the chances of this happening became less and less. Canada had been in a technical recession for the first half of 2015 and the fear is we are already in another one right now as oil prices plunge and the economy slows.
- Despite all the smiling faces the Canadian economy is in trouble. Oil prices are plunging, the CAD currency (the loonie), is getting weaker and weaker daily as oil prices plummet below $30.00. Both oil and the loonie are trading around 12 year lows.
- As the exchange rate between the USD and CAD weakens the costs of bringing fresh produce north of the border increases. There has been price-gouging, price fixing in the Canadian economy. Consumer confidence is low. The lower oil prices have not been reflected at the pumps as the provinces have taxed and taxed gas/ petrol prices so much even at sub $30 a barrel pump prices are still above CAD$1.00 a litre. That’s the equivalent of well over USD$3.86 a gallon, where prices are now around USD$1.70 a gallon, which equates to CAD$0.44 cents a litre.CAD$0.44 cents versus CAD$1.00 actual is one hell of a difference in the eyes of a Canadian given that Canada is a world producer of oil.Whichever way you look at this, Canadians think that they are getting a rough deal. No tax breaks on gas prices to fund increasing food costs. This is not good news for a new government.
- Consumer spending is therefore slowing down. This will be reflected in home improvements, which will filter down faster than you can imagine into the general economy. No matter what the Trudeau spin-doctors spin -facts are facts. NO confidence = no spending = existing oil related economic problems are just exacerbated.
- Trudeau’s Liberals came to power promising to spend up to $10 billion on infrastructure amongst other things. I live in Montreal Quebec, which has been starved of money or it has been corrupted away. The centre of Montreal needs more than a facelift. Bridges have fallen; the roads are full of potholes, brickwork from the sides of buildings fall onto sidewalks etc. Its just not a pretty picture. I know that Quebec brings a lot of the problems on itself and it may be an extreme example, but generally speaking across Canada to varying degrees the infrastructure requires serious attention, rather than a repeat of botch job repairs that do not last.I fear that the money promised to infrastructure will be re-directed towards stimulus projects instead.
- Right now the only winners inside the Canadian economy are the exporters.
Is this failure to act by the BOC and Poloz earlier tantamount to “Burying one’s head in the sand”? I have been writing about this very point for months.
Canada was seen by the other G7 countries when the crash of 2008 happened, to be the golden bollocks of world economies because it had sound economic policies and a highly capitalized banking sector that indemnified it from the financial crash. That is a far cry from todays picture. What happened?
From my perspective no one could see (albeit the supply and demand data was there for all to read and analyze) that oil prices were in trouble. There was a belief that speculators would drive the price upwards. The simple facts that ruled were simple economic supply and demand and the small fact there was not an infinite supply of storage facilities.
For most of 2015 Poloz kept repeating that the prior interest rate cut effects were still working their way through the Canadian economy and therefore no more cuts would be required. This was pure “Head in the sand” economics in my opinion.
Now the headline writers are saying that this week the BOC could reduce rates to 0.25% now with 0% before the year-end plus introduce Quantitative Easing and also negative interest rates.
Holy mother of God… The golden bollocks of managing a countries economics my arse…what the feck is going on?
From a trading perspective where could this leave the CAD?
(For subscribers I have placed later in the blog the charts with levels that I will be looking at across the USD/CAD, EUR/CAD, GBP/CAD, AUD/CAD, CAD/JPY and NZD/CAD).
Well let me put it quite simply.
If you think that the loonie ripped higher when oil dropped below $40.00 and then subsequently $30, and if you think that when we had the surprise cut in Canadian Interest rates in 2015 the loonie stormed higher….”You aint seen nothin’ yet” as Randy Bachman would sing…
We currently sit around 1.4500 in the USD/CAD. A move towards 1.5000 a nice big round number is on the cards and would make a great algorithmic objective. The cross rates would in my opinion (except GBP which is under real pressure) move even stronger to levels not seen for decades.
Wednesday could be a big day.
If Poloz does nothing and tries to jawbone the markets he could be out of a job inside 90 days, if not sooner. Now that is what I call high stakes gambling.
- TIME OUT – “AT THE END OF THE DAY”:
The BOC and ECB dominate the news this week as far as I am concerned. Not forgetting the price of oil.
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. Last Friday, I really kept well away from the markets, I did not want to get involved and it was difficult.
We have a long weekend this weekend for the U.S. due to Martin Luther King Day. Markets will be thinner in the U.S. as participants will be fewer. Given the moves last Friday there will be an Asian reaction and spill over in the European session.
The BOC is Wednesday and the ECB on Thursday. But oil volatility will be everyday and Chinese news can break at anytime.
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.
The Pip Accumulator