Geopolitics – where we going !!

Well we can think all we like about Trump but the fact remains US is still the major economy so whenever US matters a word the markets react. US economy in a healthy state and looking good - one only has to look at employment numbers to gauge that - so the way markets reacted to talk of Tariff wars tells us that US equity markets may be a bit toppy with players looking for any excuse for a correction. The problem we have is the fear of the unknown with policy flip flop which is never going to end well. Then on the other side of the pond we have the UK whose economy is chugging along nicely but the Brexit overhang is still a big unknown. Then Europe - the union still has a few problem children. At the same time we have Libya, Iran, Venezuela, shale and OPEC and China.

Ok, alot to think about and we didn't even mention Nth Korea. So whats all this mean. Well volatility is back and its only going to get higher - not so bad if you know what you're doing. My plays at moment is still short the dollar against euro and sterling. JPY, sitting on the sidelines at moment.

Good luck all.

FX & North Korea

What do we expect in the upcoming week in the FX market. Well alot depends on tensions in the Korean peninsular. Last week was dominated by rhetoric from our favourite POTUS, which was around brute force and intimidation - ""Fire and Fury like the world has never seen before".

If the issues with Nth Korea escalate further then we should see more safe haven buying - yen, gold, suissy. US yields also told a story. On the other hand if things settle then USD may have a reprieve against the yen. Gold broke a significant trendline last week and it should continue north even if deescalation in Nth Korea given the benign inflation outlook in the US which still persists.

Euro is still showing resilience with dip buying occuring down around 117 but the key here was the CPI data released on Friday which saw the euro spike around 70-80 pips and closed the week at 11823 (50pips up on the previous weeks close). Look out for FOMC minutes being released to give a better picture on what members are thinking on importance of 2% inflation target and also there should be a clearer picture on what EZ are also thinking in terms of QE tapering.

Its August so trading could be thin this week so not expecting huge moves (Nth Korea excluded) so becareful of any whippy action. Out on alimb here but see euro trading between 119 and 11776 this week. Good luck to all.

Where to for the Euro !!

The Euro has had a great rise in 2017 to date and it would appear nothing can stop the common currency. There is good reason for this including
1. Being depressed for a long time - it has fallen from around 1.60 so on a technical basis needed some kind of pullback toward the 38.2-50% fibo of the fall from 1.40 at least in the medium term
2. USD weakness - Yellen and Co have been a bit doveish of late with muted inflation which has not been helped by low oil. Yes the US continues to talk about the rate trajectory still in place but inflation and Trump is making it hard to maintain a hawkish tone
3. Trump - the reflation trade started with tax cuts and healthcare reform and a very pro business stance. But nothing can get done and a non performing govt is starting to weigh
4. Eurozone whist not out of the woods yet has shown vast improvement over the past few years and now Draghi has started to mention reduction in QE. Whilst he was cautious in his speech last week the market reaction was having none of it - take the cues from market movers - don't fight it.
5. In a report by HSBC last week they are forecasting 1.20 by year end - Why?. Well their basis is that fast money ie specs have been quick to jump on the euro long bandwagon whilst medium and slow money has not yet put any force behind it. That is portfolio managers are still underweight euro stocks relative to the past and larger wealth and pension funds are yet to really increase reserves in the Euro. Thus when the last two categories start to increase allocation then this will be supportive. Hint: watch flows for uptick.
6. COT reports showing euro long positioning but not overstretched so still headroom.

Wow - I'm convinced but what about the downside. Yes need to be wary of US political issues being resolved as well as possibility of market thinking the run up has been to fast and coupled with more good numbers out of US such as GDP and an increase in oil may see a pullback. As always there is time to be all in but that doesn't mean being silly.

In terms of targets on the way up use the major fib lines especially where the fibo down from 1.60 and 1.40 are at similar levels.

Trump Trumped, Trumping

What is going on...POTUS has become the largest market distraction since well.... anything. Its been quiet difficult the past month due to the geopolitics everywhere from France, to Germany, Italy, US etc etc. So how should we play the market when the usual correlations are not driving and the whim of politicians make it difficult to know which way markets are likely to move.

Quiet simply markets work on fear, the fear of the unknown. So without throwing the baby out with the bathwater, we need to look for the largest unknowns and where we surmise the largest fear factor is. For example, if we look at Brexit we are only at the very beginning of a transitional phase. The full impact of the economic realities of Brexit is yet to be felt and how they will manifest themselves in jobs, inflation, housing, trade agreements etc is at this stage, a very large unknown.

On the other side of the pond we have Trump who is an extreme wildcard. Of course coming from the business side where the first 90 days matter, he is applying the same principles to running the country and I think we can all agree he has made quiet an impact to date. Temper this with the actions of FOMC and where we thought the $ might be a month ago has certainly changed.

So to counteract this in our trading we scale back notionals a bit and go with short term momentum. Now is not the time to go all in but rather act tactically to dart in and out quickly and where we may have looked for 90 pips we might look for 40. In terms of pairs, stick with the majors and skew toward those where they are not under to much political stress - think kiwi, aussie etc. Traders will be searching for something to latch onto to give direction and we should do the same.

US data – NFP

Last week was a bit of a mixed bag when it comes to employment numbers in the US. NFP broadly in line with expectations and trend. Unemployment fell to a level below the Fed target and all sounds rosy. However the fall in unemployment was mainly due to a fall in the participation rate which of course is not so positive. However all in all the prints were OK and should not dampen the Feds spirits to give us all a very merry Christmas hike. In fact markets are now pricing in 3 or 4 rate increases to come b4 end 2018 so again we will have the questions in 2017 of whether the next meeting will bring a hike or not. This for us is fun of course as brings plenty of opportunities for trading. As the Bureau of Labour Stats graphs show toto is a long way from 2010

ice_screenshot_20161203-180840

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JPY225 + usdjpy

Just thought I would write a little note about one of the aspects we talked about in the Members area this week - correlation.

We all here how difficult it is for new traders to let profits run and cut losses. Unfortunately its normally the other way round. I know it sort of sounds obvious but it does have a lot to do with the way we are hard wired from the beginning, however all it requires is acknowledgement and practice. Once we are in a trade there are ways of keeping us in control - one of those is monitoring market conditions. Ok so far just dribble.

One of these condition is the correlation between variables. One of the most followed and positive cross correlations is between the Japanese equity market and the USD/JPY pair.

JP225 Vs USD/JPY

JP225 Vs USD/JPY

When Japanese equity market is rising then normally the Yen is depreciating and visa versa as can be seen from the image above. But have a look how close the correlation has been since the Trump rally begun. Back to our our original point though of how can this help us stay in a trade longer.

Well if we know the correlation is strongly positive then why would you not let the JPY trade run when you have a equity markets supporting - our fear of markets abruptly reversing is diminished (never disappears of course)until otherwise noted. On top of this we have talk on a US rate hike becoming more certain, and Japanese govt still discussing stimulus programs etc. With all this in mind we should be comfortable with holding a position for longer and managing through a trailing stop. This week we had a Yen trade where we earned over 400 pips by piecing the puzzle together. Thats why we learn the whole process not just fundamentals or technicals. The more we add skill to the equation over luck the better.