Climate Change is no Longer a Threat, It’s a Political Clash

Most investors wonder about the best investment decision amid the chaotic uncertain stance caused by the geopolitical circumstances which crystallized through the G20 summit. G20 summit or the G19+1 as the BBC preferred to describe it, held various topics on its agenda. Some of them were terrorism, Middle East tensions, North Korea threats, Ukraine, women entrepreneurship and globalization. Despite the importance of Trump-Putin first meeting and their discussions about the US election interference importance; globalization and the Paris Climate agreement  grasp the biggest attention.

The Profound Greenhouse Gases Dilemma

Decades ago scientists have predicted the global warming problem as unprecedented rise in temperature, ocean ice melting and rising in sea levels which will lead to disappearance of some cities.

According to NASA, a layer called Greenhouse around the earth consist carbon dioxide, methane and nitrous oxide gases that form a specific goal to protect the earth temperature. The greenhouse gases maintain the optimum amount of sun rays and reflect the rest in the space to keep the earth temperature around 15 Celsius.

The emissions of these gases have some natural factors as cultivation, decomposition of landfills, ruminant digestion and manure management associated with livestock. These natural factors have natural effects reflected on the greenhouse layer that does not disturb its nature.

On the other hand there is the human factor which is represented in burning fossil fuel caused by coal or oil.

The picture shows the unprecedented levels of pollution by NASA
The unprecedented levels of pollution by NASA

These severe concerns of global warming pushed world leaders led by the former US president Barack Obama to put an end for the rising threat of massive greenhouse gases caused by fossil fuels.

The Paris Climate Agreement had 153 ratifying countries that agreed on mitigating the effect of the greenhouse gas emissions. This agreement was part of the United Nations convention on Climate Change (UNCCC) which is usually held on a yearly basis from the nineteenth. According to the statistics, China comes on the top of the list of greenhouse gases emitting countries with 29.4%, the US comes second with 14.3%. As a general idea, wealthier countries have double burden. On one side they have to reduce the emitted greenhouse gases from their factories, and on the other side they have to help (financially) the developing countries on damages that may occur due to the treaty.

Trump’s Electoral Pledges

Trump did keep his promises to withdraw the US from the Paris agreement, and he shocked the world on June 1st when he announced that the US will not be part of the Paris Climate agreement . The Republican senator, Rand Paul, explains that the agreement will make the US a total loss of 6.5 million jobs; moreover, the industry will lose billions. It does sound extreme; however, even if it is true the same effect is going to be applicable on every other country.

Regardless to the unethical withdrawal by Donald Trump which put his counter parties in a very embarrassing situation, the step considered entirely illegal. According to ‘article 28’ of the Paris agreement which is concerned with withdrawals, it requires a notification to the depository three years after the agreement became effective (effective in November 4th, 2016 for the US), and the actual withdrawal came just one year after the depository of the notification. That’s is a breach of agreement…

Trump Face to Face with Merkel

Some difficult discussions that revolve around the Paris climate agreement were expected to be an issue during the G20 summit, especially when Trump stands alone to face the headwind from the other team led by Merkel. It wasn’t the first meeting between Trump and Merkel. Earlier this year, Trump gave a speech in the NATO meeting and accused Germany to be a very bad role inside the NATO, and said they should pay more for the coalition. The funny thing is that Trump refused to let it go, later he documented his words on twitter. Moreover, he added another conflict about the unfair trade balance between Germany and the US. Merkel respond was sharp and clear by saying that Europe has to defend itself in the security issues, ignoring the USA.

On the summit held in Hamburg 7-8 July, Merkel deplored trump’s stance on the Paris accord, and stated that the 19 nations renewed their pledge to implement the Paris deal on climate change, and she described that by “irreversible”.

Theresa May tried to build some kind of coat arm trying to defend Trump by saying that he has a belief that the US could rejoin the accord again, which provoked Merkel.

The new French president Emmanuel Macron had an effective role to announce that Paris will welcome another weather summit on December 12th and he will never be despaired of convincing Trump to change his mind.

The joint summit statement ended the discussions with some nice words about the US stance from the climate agreement, however mini conflict between Trump-Merkel creates a separation in the G20 group.

Globalization and Trade

The G20 summit originally aims to achieve the purpose of a stronger and more balanced inclusive growth, through sharing benefits and trade. Every country expressed its willingness to cooperate on the international trade side including Russia which expressed its readiness to show more cooperation with the free markets system.

On the other hand Trump opposed the G20 ideology with a solely comment that the US is ready to make a new trading deal with the UK. Add to that, his prior actions towards NAFTA and TPP are well absorbed by the global leaders.

The G20 Shadows on the Markets

Trump announcement that the US will cease the Paris agreement caused all global major indices rise to new historical levels. Coal prices soared to 5 years high at $84, since his inauguration.

The chart shows the coal price index after Trump withdrawal speech in June 1st 2017.
Coal price index after Trump withdrawal speech in June 1st 2017.

At the beginning of the year, many investors ware shocked by the advice that coal producing and mining companies’ stocks will soar after the withdrawal decision, which didn’t happen. The biggest two companies in the field, ARCH coal depreciated from $84 which was the peak before the elections and dropped to the $70, Peabody energy dropped to $25.

WTI Crude Oil Daily Chart
Oil prices since Trump’s decision through the G20 with continuous depreciating price

Oil prices completely ignored the decision and continued to depreciate, but it wasn’t only oil prices that ignored the controversial announcement. Saudi Arabia is the biggest oil exporter worldwide and the only Middle Eastern representing country that is not represented in the G20 by its ruler. The monarch decided to send the former treasury minister which puts a lot of question marks amid the crisis facing the Saudi Arabia with its neighbors and the recent political crisis occurred inside the ruling family itself.

The global warming issue is far from being solved, it is not only a natural threat that civilization will have to deal with but a political clash that world leaders must find a way out. It is a matter of opinion, however democracy will have to decide this conflict. Trump and Merkel, please speak for the people, don’t make global warming a political clash.

Why the Next Financial Crisis Will be in our lifetime

The previous week was heavily filled by the appearance of high profile personalities. From one side we had the ECB forum, where we heard the developed central banks’ chairmen. But nothing was more ironical than the speech of Janet Yellen in the British academy, UK. Yellen sent a reassurance message to the masses that we are not going to see another financial crisis in the close future. Analysts criticized her speech with bitter words; nevertheless they are divided into two groups.

First team is much more sentimental, their critics are built upon the geopolitical situation. They see that the conflict between the white house and the Federal Reserve and the Russian interference in the US election probe will heavily impact the economy and might cause the US economy big cracks.

The other side have much wider dark outlook to global issues like global growth, BREXIT shadows and the comments of central banks leaders that contradict Janet Yellen optimistic outlook.

Janet Yellen’s conclusion was built on the stress test report which was issued on June 22nd, but let us first know what the stress test is, and the report outcomes. After the financial crisis the Federal Reserve established programs and frameworks to impose some regulations to assess the financial institutions’ activities to avoid another default as the 2008 one. The Federal Reserve is conducting annual assessment for the Bank Holding Companies (BHC). This assessment is divided into two steps: first one is the DODD Frank which was enacted in 2009, which oblige the 34 Banks to present an annual sheet for its financial situation. The second step is the Comprehensive Analysis & Review, which uses the DODD Frank to assess whether financial firms with $50 billion or more in total assets are sufficiently capitalized to absorb losses during the stressful conditions, while meeting the obligations of both creditors and households’ loans.

The Federal Reserve projections are based on three macroeconomic scenarios: 1. Baseline – not issued yet 2. Adverse 3. Severely adverse. In other words the Fed assumed some hypothetical economic conditions with adverse or severe adverse conditions and these conditions might face the economy at any time. The purpose is to recognize whether the BHCs and financial system will absorb these sever shocks. Upon that, the Fed will issue its final conclusion if banks are ready to absorb any coming shock for the economy as the 2008 one.

The second scenario, the adverse scenario will come in the form of global economic activity weakening in the period between 2017-2019 across USA, UK, EU, Japan and some developing Asian nations. Economic instability might occur in long term fixed income assets, and steepening in the yield curve of these countries. Also the adverse scenario predicts that US GDP will slide 2% more than the pre-recession period (1%) in the first quarter of 2018, the unemployment will increase to 7.25% in the Q3 of 2018, short term interest rates will fall near zero again, and the 10 year yields increase to 2.75% by the Q2 2017. The spreads between investment corporates bonds and long term treasury yields will widen to 3.75%. Equities will fall 40%, while houses prices fall 12% in 2018 Q1.

In this adverse scenario, the Fed suggests that losses may be $322 billion. The biggest sector may default is the credit card by $70 billion which represents 24.5%, while the commercial and industrial loans losses would be $67 billion. On the other hand losses caused by the financial markets might be only $3 billion, yet $46 billion will be caused by trading and foreign counter parties.

The severely adverse scenario assumes an entire global recession, accompanied with corporates loans and commercial real estate markets high stress. This scenario assumes the US to reach the trough in 2018 Q2, 6.5% below the pre-recession period peak. Inflation below 1.5% in Q2 2017 and 1.75% by mid-2018, unemployment will reach 10% by the of 2018 Q3. Equities will drop 50%. Treasury rates will fall and remain under zero through the end of the period. 10 year treasury yields drop to 0.75 running gradually to 1.5% by Q1 2019. Spreads between investment corporates bonds and yield of long term treasury securities widen to by 5.5% by the end of 2017.

The severe adverse will result $493 billion losses for banks. The two major losses will be in the credit card and commercial & industrial loans by $100 billion each. On the financial markets side the securities trading and counterparties losses will come on the second level by $86 billion, while the securities losses will represent only $5 billion.

Back to the second team, this team is attentive to the BREXIT shadows and its impact on global economy, which is expressed in the comments of central bankers in the ECB forum synced with Yellen’s speech, which came so pessimistic except for Mario Draghi’s speech. For instance, Mark Carny stated that the non-investment businesses weakest in half century, while the investment businesses are the weakest condition since the crisis. He added that UK companies are facing multiple uncertainties and hurdles appears in the form of high risk and BREXIT. The BOJ’s chairman added that despite the enhanced unemployment rate, wages are still soft. Also he added that business investment is still sluggish, despite the drop of unemployment.

Despite the IMF continuous and contiguous reports of the global sluggish economy, the main concerns is about repeating the 2008 scenario. When Bernanke (former Fed chair) was asked about the  financial markets current situation he stated that the economy was in its best cases; moreover, MOODDY’s continued to give the MBS AAA grade.

Yes, the Federal Reserve has succeed to built up a stable economic track. Yellen did not refer to a financial recession, she is a smart women and we all do not know the things that she has forgotten.

Yet, economy is economy. As long as we continue the financial system as it is, a financial crisis is highly expected. The only questions remain are how? why?and when?

Final words

  • The main reason for the 2008 crisis was the lack of appropriate regulations under the 2005 prevention act, which came to obliged regular homeowners to convert their mortgages into uncollatrized asset and exposes thousands of home owners to credit default risk.
  • It is true that geopolitics are important to be taken in our calculations, but when Yellen speaks she is only concerned by the Federal Reserve mandate.
  • When Janet Yellen said that we won’t expect another crisis as far as our life time she meant that the amount of capital located in the US banks can prevent any foreseeable crisis in its bud, but she missed the true expression.
  • Despite that big capital being pumped in the US economy so far, for some reason this may change in the future. In 2016 the Yuan was added to the SDRs by the IMF, and starting from 2018 the Shanghai stock market will be added to the MSCI and many investors have expressed their cheerfulness for this news by stating that they will pump a lot of money into Chinese markets. This will be a pivotal change on the capital flow map and it will have a negative impact on US markets, which remained on bullish base for more than century.

Qatar in Boiling Water

Mideast unstoppable tensions’ shadows had always direct influence on the financial markets since the 70s of the previous century. However, the surface aspects of every single dilemma are usually hiding a devil fact in the details.

On June 4th a sudden rift between Arab countries took place amid major political and economic events. Saudi Arabia, Bahrain, Emirates and Egypt decided to cut ties completely with Qatar; in addition, Jordan had decided to downgrade the diplomatic ties recently. This rift came after allegations from the six Arab countries accusing Qatar by financing terrorism. The truth behind the incident could be far away from its aspect, which may lead to more financial turmoil.

Shadows of the Past Complicates Today’s Situation

Saudi Arabia and its rival Qatar are competing on taking on the leadership role of the Arab countries with different political perspectives. Qatar’s political line is clear and obvious in supporting the Arab spring revolutions and Muslims Brotherhood. On the other hand Saudi role seems to be ambiguous. During the fiftieth and sixtieth of the bygone century, Saudi Arabia was supporting Muslims Brotherhood against the socialist regimes in the Mideast, today it is against them. Today, Saudi Arabia oppose the Muslims Brotherhood; they are supporting Islamist groups in Syria and other places. In 2014 a similar conflict raised between the same sides around the political tensions in Egypt and the Arab spring direction, but it was settled down at the time.

In May 23rd the Qatari official news web site announced the outlines that included praising Iran, the necessity of withdrawing the Qatari ambassadors from gulf countries, also hoping that peace can find its way between Arabs and Israel, and also telling that Trump won’t last in the power for so long. From its side Qatar denied the incident and said that these announcements were made by the action of hackers penetrated the official web site and the official twitter account. Between May 23rd and June 4th no serious reaction was taken against Qatar.

The Trump Factor

The question is why the Arab countries waited from May 23rd to react finally on June 4th if there is any relation? Between those two dates two major events happened that prove that May 23rd web site announcements have no correlation to what happened in June 4th. In OPEC meeting on May 25th the GCC countries were all represented. Also on the Islamic countries summit in Saudi Arabia which Trump attended, Qatar’s ruler was in Riyadh alongside with all other leaders.

You might think that during that visit Donald Trump might play a direct role in that, but that is not a certain fact! One day before the Arab countries cut their ties with Qatar, a US Federal contractor leaked the NSA report proofing that Russia has intervened the US election. That leek came couple of days just before the former FBI director James Comey testimony on next Thursday. Now you can connect the dots.

From his side, Trump did not miss the chance to tweet on his account “So good to see the Saudi Arabia visit with the King and 50 countries already paying off. They said they would take a hard line on funding extremism, and all reference was pointing to Qatar. Perhaps this will be the beginning of the end to the horror of terrorism!”.

The Reflex of This Incident on the Markets

It is well known that any conflict arises in the gulf area leads to direct soaring in oil prices, especially when it comes to Qatar, the biggest exporter of the liquefied Natural Gas (LNG) worldwide. In this case, it didn’t happen for four main reasons. Firstly, the incidents’ result come to the mind of the other investors too. Secondly, the EIA announced on its monthly report of June that it expects increasing in the US oil production in 2018 from 8.9 mb/d to 9.3 mb/d; in addition, it is expected an increase of the LNG production from 73.3 to 74.3 bcf/d by 2018 without mentioning any concerns about Qatar which is producing third of the market needs. Third reason is the embargo made on Qatar by its neighbor does not include oil tankers owned by foreigners.

Fourth reason I mentioned previous week on my article “Yuan’s Arising Swing in the Markets”, which is the rising role of Yuan on oil that caused recently a decoupling between oil price and the dollar. Oil seemed to be much attracted to the USD/CNY pair.

USD/CNY compared to the WTI daily charts
USD/CNY compared to the WTI daily charts

The chart is showing how much the WTI is influenced by the pair positively since the US elections, which decoupled the negative correlation between the dollar and oil to from that relation with the Yuan. This pair is very influential on oil prices, because China is the second importer for oil.

FTSE NASDAQ Qatar daily chart
FTSE NASDAQ Qatar daily chart

On the Qatari side, the long term stable Riyal, which pegged by the USD, tumbled suddenly after the dilemma rose on the beginning of the month. The USD/QAR raised from 3.6414 to 3.6454, this movement considered dramatic and historical for this pair. This level has not been tested since 2007. Also the FTSE NASDAQ Qatar saw 600 pips drop in two days. On the other hand the other Arab countries’ stocks saw picking in prices.

Yuan’s Arising Sway in Markets

Last week we started to see a significant (two days) retracement on the stock markets worldwide starting from Japan passing through Europe; nevertheless, the US markets was the most affected. That was before markets rose at the end of the week.

Most analysts justified that by the big selling on banking sector, some others have noticed the oil movements. While all eyes were focused on the classic fundamentals, no one turned to the USD/Chinese Yuan chart. Despite the usual talks on the Chinese rising economic powers, investors couldn’t see the reflections of that influence on the reality. Everybody including me were dealing with China just as an emerging market, comparing it to the Brazilian and Indian economies. Red flags given by the technical analysis which I mentioned earlier last weeks in the weekly analysis reports were formed by the effects of the Chinese economic data and the American foreign policy. In this article I will try to highlight new dimensions for the recent other assets that are affected by the Yuan.

US Foreign Policy Shadows

No news when we say that the US is causing troubles with its allies, either we were talking about NAFTA, TTP, Paris climate agreement or even the NATO. The German anger was clear in Merkel`s speech after the NATO summit, when she said that the US president is not a reliable partner. I think that all the ongoing controversy on Trump`s action towards the foreign countries is deliberate. Remember when I wrote the article titled The Effects of the US Presidents on the EUR/USD Movements the final idea through this article was that the Republican Party policy leads the USD to bearish trend. The current policy is not spontaneous, on contrary it is deliberate to depreciate the dollar, and that what happen with the USD/CNY pair last week. Yet, it is not the first time to see a big drop on the pair; it was the first time to see that strong reflex on the stock markets.

Despite the previous points, the most significant political stance is the pressures made by the white house on China to appreciate its currency. The white house targets 15% appreciation, with more easing on capital movement.

Chinese Economic Data

It seems that the Chinese Yuan price step by step is determined by the supply and demand. Since the inauguration of Trump, some bearishness occurred on the USD/CNY pair with no direct effect on the stock market. Last week the Dow Jones had some volatility accompanied with the drop of the pair.

The rise of the currency came after a successful fundamental data for May. The unemployment data dropped to the lowest since 2004, the inflation climbed to 1.2% for the third month respectively. The Balance of trade rose to 380.48 billion Yuan, the highest since March. Current account is at its highest since the last quarter in 2016 at 190 billion Yuan.

USD/CNY Chart
USD/CNY Chart

Oil Prices and Moody`s are Changing the Correlation

According to the CIA factbook, China came the fourth in oil production by 4 million Barrel a day, and the second importer by 6 million barrels a day. The negative correlation between the commodities prices and the dollar is a constant fact stayed for decades; nevertheless, that norm looked different since the start of this year. Dollar price is obviously moving with oil prices and against stocks, on the other hand the Yuan is currently moving against commodities. Oil, metal prices and other raw materials used in industry have dropped dramatically this year against the Chinese currency, while gold prices kept rising.

USD/CNY Chart
USD/CNY Chart

USD/CNY daily chart since January 2017 is showing identical movements with oil price chart for the same period.

Oil prices daily chart since January 2017
Oil prices daily chart since January 2017

Earlier this week Moody`s downgraded the Chinese debt, with more fears from the coming years` increasing in the dept. This specific event came just before the bullishness of the Yuan; nevertheless, the Yuan acted strangely as usual by moving higher.

Since 2005 the PBOC took the first step towards free currency by releasing what is called the managed pegged currency price by changing the price according to the government concerns. In 2015, the government announced again that it is welcoming the demand and supply system to evaluate the currency by putting a price close to the real FOREX market prices. Because of the huge irrational movements occurring on the USD and the Chinese currency pairs (onshore and offshore) after the managed pegged pricing led by the government, the PBOC replaced the managed pegged system by the ‘counter cyclical system’. The counter cyclical system prevents the investors from the sudden losses occurred by the aggressive movements of the currency, by managing the price to the real fundamental data.

Summary

  • Markets formed a new correlation between the Yuan and the industrial commodities prices.
  • The Yuan influence in the financial markets became substantial starting from this year.
  • US policy harvesting the corps of liberating the Yuan price.

Bitcoin Price Analysis – May 26, 2017

The new asset has reached extensive new levels, which grasp the eyes of any person even if he is not an investor. Analysts may differ in the reasons that have led to that, and may differ also in forecasting the future of the Bitcoin price. In order to forecast the future of the Bitcoin, we have to review the last events during the previous period.

Fundamental reasons leading to the rise of that asset, could be the dovish statement of the FOMC, or the Trump-FBI dilemma. Probably “Ransomware” virus has pushed the Bitcoin higher after the hackers asked their ransom to be paid in Bitcoins; however, the Momentum is much stronger and it started earlier.

Technical Overview

As I mentioned before in my article “Rising cryptocurrencies” that Bitcoin is a mixed nature asset, thus it is important notice for analyzing the Bitcoin. Comparing the Bitcoin to the VIX and S&P500 we can find out that the three are correlated.

Bitcoin Chart
Bitcoin Chart

The previous chart is showing how much the VIX is a very good measure for the Bitcoin as much as the S&P500. The two orange arrows are indicating the general trends of the VIX and the BTC and it is obvious that they have a negative correlation.

Some important notices in this chart and the next one.  Firstly, sometimes the correlation is positive. In the blue arrow upside, we can see the US elections effect in late through the Trump inauguration in early 2017. Black arrows shown in the downside graph was within the BREXIT referendum in 2016, which also had a rare positive correlation.

BTC/USD Chart
BTC/USD Chart

Second important note is that when VIX started to change direction, we can anticipate the correction in the S&P500. However that fact, BITCOIN had been preceding the VIX itself in the recent times. That is noticed in the first chart from April as you can see the red arrows and the grey circles.

As a conclusion:

  1. The new mixed nature asset [Bitcoin] is analyzed regarding the general stocks.
  2. Bitcoin would be in the future a very good indicator for the stocks general trend.
  3. VIX is very negative so Bitcoin will keep bulling until the next UK elections on June 8th, but be cautious with the elections outcome that will decide whether if it will continue rallying or Bitcoin price will correct.

Weekly Analysis May 22nd – 27th 2017

The Previous Week

We had the privilege to be the first, who predicted the previous retracements occurred in the stock markets in our previous weekly analysis. Markets had retraced around 2.5%. Last week also we had seen enhancement in the UK inflation data, where the CPI came 2.7% vs expectations of 2.6  and the core CPI came 2.4% vs 2.3% expected. Moreover, the EU GDP came as expected and the previous 1.7% (YoY), and the Japan GDP came 2.2% vs 1.7% expected.

Next Week Outlook

The start of the week will be quite easy for those who want to adjust their mistakes or to take some scalps; however, starting from Wednesday the wind will start to blow. On Wednesday we have couple of speeches for Kuroda and Draghi, also we have the FOMC minutes release. On Thursday we have the UK GDP as well as the Japanese CPI. Finally on Friday we are going to be waiting for the US GDP.

Euro and GBP Pairs

I recommend strongly avoiding the euro pairs and the GBP pair hereon to the UK elections. Since a lot of swaps and hedge positions are going to take place against the Euro, the Euro will take a new path depending on the elections outcome.

Swiss Franc

Swiss Franc took a very bullish movement against all pairs, and specially the dollar. It seems that traders are using the Franc as a safe haven before the UK elections especially that the USD is facing long term bearishness and the franc is at historical support against all the other major currencies. In the next chart we can see that the USD/CHF pair had reached the bottom; in addition, the stochastic had formed a clear divergence on the 4 hour and daily chart. Now the pair is ready to bull back to the 23.6% at 0.9850.

USD/CHF Weekly Chart
USD/CHF Weekly Chart

DAX Futures

The DAX  and Nikkei as all other indices had retraced last week, as a result you have to be cautious during next week as all traders will start to jump into the indices to take advantage of this small retracement. The risk is still found; notwithstanding, the DAX will rise on Monday trying to recover. It will not be too far, until traders will average the risk and the index will start to retrace again.

DAX Chart
DAX Chart

More likely it will try to climb to the highest point before the risk aversion at 12800.

Rising Cryptocurrency VS Falling FOREX

Couple of years ago, when I first heard about Bitcoin, I rejected the idea entirely, believed that there is no way for that to survive. When you read about inventors through the history, they faced resistance. Same rejection faced the newcomer once it was declared in 2008 by the anonymous writer ‘Satochi nakamoto”. However, today, Bitcoin imposed itself as the best trade in the markets as it has reached 18,000,000% in 8 just years.

Cryptocurrencies sounds complicated, especially if we want to know more about the security of this system and the legal aspects. In this article we focus on Bitcoin as the leading first coin of its type followed by tens of other cytpocurrencies. We will discover all about cryptocurrencies, its history, the legal situation, usages; moreover, how to analyze and trade cryptocurrency.

What is Cryptocurrency?

Cryptocurrency is a digital currency asset, executed only electronically and not physically. It is not issued or subsided to any governmental body; instead, it is decentralized currency using block chains cryptography to circulate peep to peer without the supervision of central banks, in a short time with low cost. That is the definition for the “Cryptocurrency“. 

First let me demonstrate the genesis of cryptocurrency. On November 2nd, 2008, just one month after the collapse of financial markets, a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System”  was published under anonymous blogger “Satochi Nakamoto”. The general idea of the 9 pages piece explained cryptocurrency as a system that can execute all financial transitions online without going through the banking system by inventing a cryptic system, prohibits the doubling of the same transaction.

It is obvious that the banking system holds a lot of complications, despite modern technology. The reasons are infinity: tax system, terrorism, money laundering, high cost of money transfer, long and complicated phase before money delivery and insolvency of third world countries leading them to restrict money transfer in many cases. In other words, Satoshi Nakamoto tried to find a solution for the dinosaur banking system.

Cryptocurrency Insider Mechanism

Cryptocureny as ‘Bitcoin’ using what is called ‘Block Chains’ in case the coin holder decides to transfer it to another. ‘Block Chains’ are a ledger of cryptocurrency deals arranged in data batches called “blocks”. That occurs through cryptographic algorithmic equations called “chains”. In other words these chains are like serial numbers for every transaction, which enables “miners” to monitor the process.

The cryptocurrency trading process include four parties; the issuer (as Bitcoin), the currency buyer (transferor), the new buyer (transferee) and between the transferor and the transferee there is the “Miner”. The word “Miner” came from the verb “mine” like gold mining or coal mining. Miners do not represent any central bank or governmental authority, they are private parties getting paid from the ‘transferor’ upon the agreement of the ‘issuer’ in order to ensure the credibility and validity of the transaction.

Today, thousands of transactions are taking place per second for transferring cryptocurrencies and soon it will be millions and billions a second. Unlike FOREX brokers, investment banks and central banks that have back office to follow clients’ transactions , ‘The cryptocurrency issuer’ can’t monitor every single transaction; as a result, they have agreements with private technological companies, the miners, which are responsible to monitor these peer to peer transactions.

During the usual bank money transfer, transaction details revealed to banks only to the transferring parties, the cryptocurrency’s code (chain) is revealed to any ‘Miner’ wishes to revise it. As central banks have the monitory over every money transfer transaction, ‘Miners’ also fulfill the role of central banks in monitoring the transactions made by cryptocurrency’s holder. The question is; since it is decentralized process and everyone can watch any process, which miner has the priority to revise the money transfer transaction so that it can benefit from the reward? The answer is THE FASTEST miner who can hunt the flying transaction FIRST.

Cryptocurrency Legal Framework

Bitcoin was the first cryptocurrency issued in 2009. It is owned by a company called Saint Bitts located in Saint Kites Island. According to Bitcoin issuer, the Bitcoin will issue no more than total of 21 million unit of it.

However, some banks are reluctant; some other central banks are resilient enough to accept dealing with the facts on the table. The Bank of Japan was the first bank to take the initiative and accept Bitcoin as a yet legalized mean of payment, with some concerns regarding the security of the block chain system. The surprise here is that the People’s Bank of China allows Bitocin wallet brokers to work onshore and trading Bitcoin for Yuan and to place Bitcoin’s ATM machines in public places, but with some restrictions on transferring money outside the mainland. Other countries like Switzerland, Netherlands, France, Portugal, Argentina, Thailand, and even some African countries start to accept cryptocurrency. Nevertheless, most banks are discussing Bitcoin matters seriously; no country set the appropriate legal framework for it.

Bitcoin Transactions Processing

You might have heard a lot of stories about people that made fortune after  bought Bitcoins and forgot about it, like the man who bought a pizza in Italy for 9 Bitcoins and now the shop owner that sold him the pizza became so rich for, or the guy that bought Bitcoins for $27 and the value rose to $800 000. Believe it! It started with $0.01 and now it’s  worth $1800. But how can we trade Bitcoin?

Now, if you want to trade FX or stocks it is very simple. You only have to make one click from the computer mouse; however, the cryptocurrencies trading system is still not complete. The reason FX and stocks are dynamics is becouse they can performed instantly by the clearance authority. Clearance authority will let you do transactions instantly, and clear the ledgers between buyers and sellers by the end of the year. Bitcoin dynamic is still not resilient yet, it will incur you some effort. Firstly, in order to buy you have to open a wallet account with one of the granted mediators, second you can now buy or sell the cryptocurrency from other peer dealing with the same mediator; nevertheless, it is not done by one mouse click. You have to offer your coins for selling if you want to sell, or search for seller if you want to buy. After that you have to contact the other peer to conduct the deal. In addition, you can transfer coins directly through a mobile app “peer to peer” to a shop or someone holds the same app on his mobile and will exchange it for dollars or any other agreed merchandise. Recently, two FX brokers started to put some cryptocurrencies on their trading platforms. This feature gives you the choice to speculate on the cryptocurencies with the marginal system without own it.

Analyzing Bitcoin

Here is the most important part. As we are looking for true qualitative and quantitative methods to analyse this asset, it is important to classify “cryptocurrency” under one of four major classes of financial markets which are (stocks, fixed income, currencies, and commodities). Definitely no one needs time to discover that it does not belong to the fixed income class; moreover, it is not listed on the stock exchange (as currency not company). Yet it is called ‘currency’ or ‘coin’, we cannot consider it blindly as FX asset. Why? Simply because when we analyze the usual FOREX currencies, we need some fundamental data as the country’s GDP, CPI or the latest central bank minutes.

Apparently cryptocurrencies lack those things. In order to find out the answer we should see how people are using it. For instance, at the beginning, majority of users were gamblers, specially when the price was under 1 US dollar. By that time, stores owners liked that idea and started to adopt these currencies as mean of payment. Eventually it became widely used by speculators and merchandise traders in addition to safe haven seekers that turned to assets like Bitcoin as an absolute store of value just like gold.

From that point we can compare cyrptourrencies to other classical safe havens assets like Gold or USD. By Comparing Bitcoin chart to Gold chart you can find out that Bitcoin had pulled the rug from Gold as a safe haven.

XAU/USD chart from 2009-2017
XAU/USD chart from 2009-2017
BTC/USD chart 2009-2017
BTC/USD chart 2009-2017

From 2009, the starting date of Bitcoin to mid 2011, gold was bullish and Bitcoin had no big momentum by that time, but then in phase 2, from the end of 2012 to 2016 gold was bearish while Bitcoin surged constantly. Despite the fact that the first two phases have negative correlation between gold and Bitcoin, the third phase started to make both assets moving in the same direction slightly, or at least gold was choppy while the Bitcoin climbed.

DXY chart 2009/2017
DXY chart 2009/2017

Comparing BTC/USD to the dollar index, from 2009 to 2014 as the Bitcoin was stagnate, and no major movement over it, the DXY acted the same. Starting from 2015 the Dollar and Bitcoin have positive correlation.

I should mention that some cryptocurrencies companies have been listed on NYSE as GrayScal, which was listed in 2015 at $49 a share and today trades at $190. We can realize easily that the listed companies’ charts are correlated to the currency price, same as the correlation between the OSX index and oil price. With market capitalization of $28B for Bitcoin, this new industry looks prominent as much as the renewable energy industry or it may even lead the financial sector in the future .

Bitcoin Inv. Chart 2015-2016
Bitcoin Inv. Chart 2015-2016

An important question may arise, how could Bitcoin price be sometimes volatile, despite it is basically a store of value and banks do not clear short transactions? The answer is found in this article earlier, I have said that there are current brokers offering a marginal trading to the BTC upon CFDs. The Contracts For Differences (CFDs) are contracts that offer you to trade the asset without owning it. That kind of contracts can explain that some banks do not accept clearing process of Bitcoin short trades.

Conclusions

  • The most important is the economic nature of cryptocurrency. It is considered a new type of asset, which has a common characteristics between commodities and Currencies. It is affected by major events and used as a store of value.
  • Due to its special nature, Bitcoins are correlated with the USD and do not necessarily have positive correlation with gold.
  • Bitcoin is on its way to be legally recognized completely.

Weekly Analysis, May 15th-20th, 2017

Previous Week Overview

At the early beginning of the week we have seen the second round of the French elections ending by the winning of Macron. The result boosted the Euro to the highest levels before most of currencies, which was not seen since the US elections. The EUR/GBP pair was the less affected by French election results due to the strong bullish pound for more than consecutive 8 weeks. The pound was affected strongly by strong UK data since the beginning of the week. Mario Draghi speech in the Dutch parliament drove markets strongly, the speech was general and focused on different aspects for the EU economic progression. Also, we have seen a disappointment in the US inflation data, where CPI came 2.2% versus 2.3% expected and 1.9% versus 2.0% for the core CPI.

The Week Ahead Outlook

The current week’s economic calendar holds some motivational events that will give the markets some volatility after a while of stagnation. On Tuesday we have the UK inflation data; also we have the EU GDP. Next day the Japan GDP. By Thursday the Australian unemployment rate, and a speech by Mario Draghi in Tel Aviv University.

AUD/NZD

For those who trade hedge strategies, all the Aussie pairs are representing a good hedging opportunity. The AUDNZD pair is forming a symmetric triangle, with stochastic and seems as it’s breaking upwards. This is an indication towards a bullish pair towards the 23.6% level at the price 1.099. Otherwise, the pair may continue to retrace to the bottom line of the triangle at 1.033.

AUD/NZD Weekly Chart
AUD/NZD Weekly Chart

EUR/NZD

After the break of the falling wedge of this harmonious pair, the retracement resisting at 38% level currently. We believe that the price will start to go bearish from here on the short term to the level of 50% retracement (from the current bullish trend) at 1.5250. Moreover, the stochastic indicator on the daily chart is forming a clear divergence.

 EUR/NZD Weekly Chart
EUR/NZD Weekly Chart

USD/JPY & Nikkie Futures

Here we come back to the hedging trades. Yen is the best currency when we want to talk about hedge trading style, accompanied with the Aussie and the Kiwi. The USD/JPY is well known that it moves along side with the Nikkie 225, as result I see that hedging the pair between the level 61.8% of the down trend at 115.6 and 38.2% at 109 are the prospective movements. Comparing the USD/JPY to Nikkie Futures, we will find the following: 1- the price chart is forming a continuation shooting star. 2- However number 1- the price had touched the upper Bollinger band and getting ready for retracement. 3- despite the fact that  I’m not relying too much on the stochastic indicator in  stocks analysis, the Nikkei stochastic and major indices such as S&P and Nasdaq are having the same signal.

My conclusion that the UDS/JPY pair might bull up for a week and then start medium term retracement which may take 4 weeks.

Nikkei Chart
Nikkei Chart

Theresa May and Wells Fargo Finally Put Markets on Track Again

In my article “GREXIT is the Next BREXIT”  I have stated that when markets are moving in a certain way, then the big players knows something we don’t, especially if these are long term movements. By that time I referred to the rising wedge that was formed in the EUR/USD weekly chart, followed by the IMF annual meeting concerning the evaluation of Greek extended fund facility given in 2012.

The outcome statement of that meeting said that “Greece cannot grow out of its debt problem”, which was followed by the EUR/USD dramatic tumbling. That was a surprise for many, but it wasn’t for the big players, meaning giant brokers as JP Moran, Goldman Sachs, and others.

The conclusion was that there are two types of fundamental news. First is the open talk news (such as the FOMC meeting or employment data ), second is the conservative news type that no many traders or even the average analysts can predict. The last one affected markets dramatically during the last week.

Theresa May early election announcement, Wells Fargo big scandal and disappointing earnings report from Goldman Sachs were the big events of the previous week. The FTSE 100 formed a rising wedge that started from the referendum date and ended by the early election announcement. In this article I will try to illustrate the reflections of these actions on the market in the future.

Theresa May General Election Announcement

Last week, Theresa May shocked the markets by announcing early general election, despite her announcement on June 2016 that there will be no elections before 2020. She justified the decision by referring it to the opposing parties’. During her six minutes speech she exposed the ‘Liberal Democrats’ party – “they will grind the government business to the standstill”, she added that both ‘Labor party’ and ‘SNP’ said that they will vote against the final agreement of BREXIT.

Theresa May directed to the opposition by saying “it is your time to show that you are not dealing with politics as a game”. Since the early election is considered a bypass to the laws, it was necessary to have the approval of two thirds of the ‘House of Commons’ to trigger early election. Although conservatives forming 40% of the parliament, surprisingly the vote results came 522 members to 13 only. The news was instantly reflected  the GBP and the FTSE 100.

Goldman Sachs and Wells Fargo Lead a Correction

Meanwhile, investors expect a correction in US stock markets as the financial sector suffered this month after disappointing news.

Last week, a report published on the ‘Office of the Comptroller of the Currency’ revealed a scandal concerning Wells Fargo bank, the fourth biggest investment bank in the US. The report exposed the information that the bank used to increase its sales by opening around 2 million accounts to existing customers without their consent. A continuous complains came to the office in 2009. Also, it is important to mention that Warren Buffet is one of Wells Fargo investors, and according to CNBC his assistant stated that Buffet supports the board of administrators. The importance of that information is that the share price will stabilize sooner or later. Immediately after the disclosure of the news, WF share price tumbled from $56 to $51. After CNBC news price rebounded to $53.

Wells Fargo Chart
Wells Fargo Chart

Moreover, one of the biggest investment banks in the world, Goldman Sachs shocked the markets by missing both sales and earnings estimations combined this quarter. Major banks have achieved their earnings through fixed income revenues, which was the same reason why Goldman Sachs missed earnings estimations this quarter.

Goldman and Fargo are not the only stumbling banks. Despite the bright picture of the investment banking sector drawn by the media, charts show something else. JP Morgan and Morgan & Stanley are the biggest players on the stage. They missed earnings estimations; however,  shareholders opinion is reflected through the tumbling price even before the earnings season.

JPMorgan Chart
JPMorgan Chart
Morgan Stanley Chart
Morgan Stanley Chart

Markets Reaction – Technical Outlook

It is important to know how all these factors will affect the markets in the near future. First, let me draw your attention to the fact that since Trump’s inauguration markets consolidate and move irrationally.  US elections, BERXIT and the constant concern of more countries exit the EU caused markets a lot of turmoil. Stock markets are stretched and a correction is inevitable, especially European share markets. Investors pushed the Pound too low and estimated it under its real value. In order to get out of that trap something fundamentally should happen to loosen the strained market.

May’s announcement came in the right time as a reason for stocks markets to correct, as the markets get so stretched and can’t go higher.

In my weekly analysis published on April 4th, I put the FTSE100 futures on the top of recommended trades. After the long term wedge the FTSE 100 has formed, it dropped to 3 months low last week, as a result of May’s surprising announcement. The stochastic is still in the overbought position; in addition it is forming a clear divergence. The three months low drop that occurred last week didn’t reach the 23.6% retracementw which is a critical point. If the price will continue to drop in the week ahead, it will continue till the 38.2% level at 6680; however, if  price will rise, the price chart will form rising channel to continue till the 100%.

FTSE 100 Chart
FTSE 100 Chart

The FTSE 100 relies on the pound movement towards the coverage of its gap as well as the expected correction in the US indices as a result of the drop in the banking industry price.

The Sterling is the star of today. In the article “How to Solve the BREXIT Puzzle” I mentioned that the pound is in a dilemma due to the gap caused by BREXIT. The UK government played it very well and took advantage of this opportunity. Every piece of news concerning the BREXIT was used to lower the Pound; as a result, since June 2016, the pound caused markets to consolidate.

GBP/USD Chart
GBP/USD Chart

Looking at the GBP/USD chart we can see the technical side has reached the bottom to form an inverted head & shoulders, and crossing the neck line. The pair is expected to cover its gap between the retracement levels of 61.8% and 23.6% [1.385 – 1.3190].

Since I rely on qualitative theory [MFI],  red flags around the British Pound have been raised. The pair might move forward before it starts to retreat again after the French election.

This idea applies on the EUR/GBP as well. The Pair had reached its top just one week prior the election; on the other hand, the pound is at the bottom versus USD and about to break the falling wedge versus NZD.

EUR/GBP Daily Chart
EUR/GBP Daily Chart
GBP/NZD Chart
GBP/NZD Chart

With French election on April 23, next week will be significant to the markets. On the long term, a lot of SWAPs and hedge funds will bet against the Pound. Early UK elections , the expected US share markets correction ( investment banking sector) and the anticipated French election results will all turn the markets on the right track again.

Life is Not So Bad after Brexit, Qatar will Invest 5bn in UK Over the Next Five Years

Last week,  UK and Qatar held two days investment summit in Birmingham followed by Theresa May speech. May was brief and outlined some important points as the fact that they have signed a memorandum of understanding that will benefit 600 UK companies and will boost the employment process. From the Qatari side, this primary agreement will support their 2030 national vision in developing the infrastructure in different sides. Targeted verticals will be in education, science & research, tourism, culture, energy, financial services, development of small businesses and defense.

Dr. Liam Fox,  UK international trade secretary of state said in his speech that Britain will double its Export to support the trade with Qatar to a total amount of £4.5 billion. This will be an additional £2.25 billion in support for UK companies that export to Qatar, and for Qatari buyers in both the public and private sectors.

The Pound is Benefiting From the Agreement

As the UK government spared no effort to depreciate the currency since June 2016, The UK minister was smart enough to mention a very important point in his speech about the currency role in this beam of transactions. Dr. Fox added that “UK Export Finance support will now be available in Qatari Riyal“. That smart move will soar Investors’ Confidence Indicator without waking the Pound from its deep sleep. It is important to mention that the Investors’ Confidence Indicator tumbled to -42 after the BREXIT referendum in June 2016.

UK business confidence indicator 2006-2017
UK business confidence indicator 2006-2017

Qatar Has Continuous Endeavors to Invest in UK

The Qatari prime minister sheikh Abdullah Bin Nasser expected that long term cooperation would worth 5 billion pound; Moreover, during the summit the Qatari investors expressed their unperturbed confidence in the British economy.

The intended projects will include qualifying the Qatari stadiums for the football world cup 2022; however; no announcements on the military foreseeable cooperation. Qatari finance minister said during his meeting with Bloomberg that his country is discussing with other gulf countries over the possibility of bilateral free trade agreement between the gulf countries and the UK.

The most important side in that agreement is in the oil field since Qatar is the biggest liquid gas exporter. Dr. Fox said that shell investments alone worth $21 billion in Qatar, making Qatar the largest investor in this field. Qatar supplies UK with 90% of its natural gas, delivered to dock owned by Qatar in Kent.

The Kent Dock is not the only property owned by Qatar in the UK. Although Theresa May stated that Qatar is one the most reliable investors in the UK by 35 billion GBP, most of the investments in the iconic buildings in east London. Qatar has investments exceed buying some real states close to the Hyde park or Harrods, shared and some other hotels.

Qatari royal family bought the Olympic village in London that worth 556 billion pounds, Chelsea military barracks and the US embassy building. Despite the precedents properties, Qatar investment authority [as SEC in the USA] bought a big portion in London Stock Exchange by 20% in 2009 to be decreased to 6% currently. It is important to mention that Dubai Stock Exchange now considered the largest shareholder in LSE by 20%.

Qatar is an Economic Titan

It is very important in this paper to spotlight the Qatari economic situation. Qatar was ranked as the 18th worldwide by the world economic forum due to the big achievements in the financial markets and the big market size. The most significant fundamental indicator of the Qatari economy is the GDP per capita which is $74000 compared to $41000 for the UK and $51000 for the USA. Qatar GDP achieved 3.7% in the first quarter this year and 1.7% for the second quarter, while the UK achieved only 0.5% for the first quarter 2017 and 0.7% for the second quarter 2017. Unemployment rate in Qatar is the lowest unemployment rate in the world and maybe in history by only 0.2% within a population of 2.5 million, and it used to be 2.3% during the world financial crisis in January 2009.

Qatari Riyal has a great stability, since it is one of the petrodollar currencies which are dominated by USD. Qatar main stock index (QE) stops at 10 000 points, where the price was doubled between 2013 (about 7000 points) and 2014 (14000) after a fire selling occurred to stabilize at 10 000. According to a comparison made by Bloomberg, Qatar has achieved better than all of the emerging markets in the last three years.

The Chart shows the superiority of QE (in red) over the HSCI (in white) and Dubai (in blue)
The Chart shows the superiority of QE (in red) over the HSCI (in white) and Dubai (in blue)
Qatari stock market index 2010-2017
Qatari stock market index 2010-2017
USD/QAR price chart from 2011-2017 showing a great exchange price stability
USD/QAR price chart from 2011-2017 showing a great exchange price stability

Final Projection on the UK-Qatar Summit

The UK-Qatar summit ends just one day before PM May triggers article 50. It was clear that the summit was mostly for saving face and sending a message by proofing that the investments are still flowing after  BREXIT.

However, very few people can believe that the 5 billion pounds investment will enhance British economy. Especially that the EU is demanding UK to pay them 60 billion Euros as settlements and to reach a soft BREXIT. So it is all about the BREXIT, and the story did not end yet, we are going to see a lot until March 29th, 2019.

Market Weekly Analysis – April 4th-8th, 2017

Previous Week Overview

The previous week was quite important not only because we have seen the US GDP expand to 2.1%, better than excepted 2.0% and better than previous month (YoY) 1.9, but also we have seen the historical divorce of the UK-EU union.

In addition we have seen some important events on the economic calendar as the Japanese National consumer price index which came to be 0.3% better than expected of 0.2% and less than the previous month 0.4%. Also the EU CPI came to be 1.5% less than excepted 1.8% and even less than the previous month which was 2.0%. Canadian GDP was 2.3% VS 1.9% excepted and 2.1% for the last month.

Next Week Outlook

On the FXEmpire.com economic calendar we can see couple of major events next week. We have on Tuesday the Aussie rate decision with no expectations of a rate hike, any raise will lead to over appreciated AUD. Also Mario Draghi will speaks at the ECB premises in Frankfurt on Tuesday on the current situation. We are going to wait for the start of the month to see major events including the US employment data on Friday. The previous month had a huge raise on the non-farm payrolls numbers while the unemployment rate increased 0.1%. This week. it is expected to remain stable unemployment rate since it reached its normal levels, and 180K increase in the non farm payrolls.

Recommended trades of the week

FTSE – As the UK prime minister triggered the article 50 and send the EU official information to leave the EU last week, the markets started to react. FTSE futures have covered the BREXIT up gaps [discussed in the article: How to Solve The BREXIT Puzzle], and now forming a perfect rising wedge to start falling as a result of the negative consequences of BREEXIT. We predict the retracement on the FTSE futures to be at 23.6% level at 6970.

FTSE100 futures weekly chart
FTSE100 futures weekly chart

EUR/NZD – As we have seen the foreseeable breakout of the pair finally occurred last month, the pair tested the first level of retracement 23.6% at the price 1.5470. The stochastic is forming a divergence with the price chart giving us a signal for another breakout towards the 38.2 % level at 1.606, with a little probability of continuing the consolidation case for the next week.

EUR/NZD weekly chart
EUR/NZD weekly chart

NZD/CAD – The pair is continuing to form a rising wedge, which might last until the end of the year. The pair is moving smoothly with technical indicators. The rising stochastic trend is moving a long with the pair trend. The pair might retrace a title bit before it continues to go higher.

NZD/CAD weekly pair
NZD/CAD weekly pair

Good Luck

Everything you Need to Know about the US-Mexico Border Wall

You might think the US-Mexico wall is the first of its kind, or maybe that Donald Trump was a pioneer when he signed the wall executive order. If these are your ideas, let me tell you that you are mistaken. Building a wall on the US-Mexico border is not a new invention. Several walls were built between countries during history for several reasons. Until the end of the 20th century, the sole idea of building walls was the protect a country from its enemies; however, the reasons started to change by the new millennium. Today, anti-illegal immigration and anti-terrorism are the main reasons to build walls between countries.

Historical Glance on Prior Walls Costs

Looking backwards you will find many walls that were built in ancient time, one of those is the Great Wall of China. The Great Wall of China is a composition of several walls built to mark the territories of China. The first wall was built by some unified states to protect them against other warring states in the 7th century BC. The total length of the walls was 17ooo Miles with width of 4-5 meters, and 7-8 meters height. That size made it one of the world wonders. Despite the fact that it is impossible to know how much does that branched building cost, some people estimate the cost in different means. A famous research estimated the cost by $360B, which is by a simple calculation- cost $21M a mile, sounds exaggeration? Maybe, but regarding the thickness of the wall, the huge amount of rock stones used in the building and the high number of used labor may be logical. Most of the wall is demolished now, and it is only used currently as a touristic destination.

Coming back to the 20th century, Berlin wall is the second most famous wall. It was built in 1961 by the Eastern Germany government to separate them from the west. The length of the wall was 96 miles and 12 ft. height, 300 watch towers and 79 miles of fencing. According to Kate Drew, CNBC reporter, the wall cost $25 million by that time, which is $200M by today prices. By using your calculator it cost about 2M per mile by today’s price. It considered to be a low cost compared to the Chinese Great Wall and the Israeli-Egyptian Fence.

In 2010 Israeli law makers approved the build of 152 Miles fence with the Egyptian border, to stop the high level of immigration coming from Africa through the Egyptian borders. The fence cost $452 Million. By a simple calculation it cost 3 million per mile.

Trump’s Executive Order Obstacles

On January 25th 2017 President Trump signed the executive order regarding the continuation of the southern border wall, but first let me tell you the meaning of the executive order. The USA constitution allows the president to execute the laws passed by the congress – that’s why they call it executive authority, so the president is not executing his own ideas. The order holds the number 13767 for the Secure Fence Act passed in 2006. The allocated budget after the law ratifying was $1.2B to build 700 miles wall. Today the total executed area according to the homeland security department is 640 miles out of 1989 miles, which is the total length of the US Mexican borders.

The picture was published by the BBC, clarifying the built and no built parts of the wall
The picture was published by the BBC, clarifying the built and no built parts of the wall

Trump’s plan is characterized by its ambiguity. I cannot blame him for protecting the country from drug smugglers and illegal immigrants; nevertheless, I do not understand his insistence on bearing Mexico the cost of the wall. From one hand we hear that he will demand $1.2B before the congress as he recently said “I can build it inexpensive”, from the other hand he threats Mexico by a very sharp words. Moreover, Mexico is under constant pressure as Trump mentioned the possibility of withdrawing them from NAFTA and imposing big taxes on the imported goods from Mexico, same as what happened with the TTP. For months, I was very confused by Paranoiac position, but the next few lines will clarify why Trump was so keen that Mexico will pay the cost of the wall instead of the US government.

Some voices out of the Democratic Party say that they intend to give the Republicans a punch back. Next April on the 28th Trump will demand the required funds to built the wall. The same situation occurred in 2013 and so the Trump administration may face the shutdown again.

There are probabilities that the democrats may not pass the budget of the next fiscal year if Trump will demand money for the wall, especially if some republicans are not in the same trench with him. The shutdown usually occurs when there is a conflict between the executing and legislative branch regarding the funding to create the “funding Gap”. That happened during the Obama presidency, when the republicans had the majority of the house. Then, it happened because of the Obama Care Act, and more than 2 million of the Federal employees found themselves out of work for about 16 days. This will be the biggest block in the history since the next session to discuss the new year budget will be in September.

EUR/USD chart showing the big drop of the USD after he shutdown on Setember 20th and recovery after October 1st 2013
EUR/USD chart showing the big drop of the USD after he shutdown on Setember 20th and recovery after October 1st 2013

By looking to the second scenario, we will find that experts’ estimations for the demanded amount to finish the wall vary between $6B to $21B. If we look to the first phase of the building(640 miles) the cost of one mile is $4 Million. So for the remaining distance of 1349 miles the cost will be another $4 Billion, that is the required amount to built a wall.

The obstacles of US-Mexico wall will weigh on Trump’s administration and the US economy. It’s a classic case of politics and economy integration. Trump needs to pass a law that is fairly expensive and is not entirely accepted by all sides. Yet, Trump is Trump and he wants to ‘make America great again’.

How Does a Country’s Gold Reserve Affect its Economy?

Last month I watched one of James Bond’s movies called ‘Golden Finger’, which was produced in 1964. The story was about a villain who wanted to contaminate the US gold reserve in Fort Knox, his notion was to save gold bullions that will eventually multiply its price. As I was watching this movie, I wondered about the reason of any government to own gold, and how important is that process? What will be the consequences if the movie’s events occurred in reality?

At first glance you may think that all governments are rushing to own gold by all means; however, the fact is not exactly the same. Gold used to be the historical unique reserve asset by any government and civilians for decades due to its unique chemical specifications which made it unable to react with any element including acids, which made it a store of the value.

Nevertheless, that form was changed in the 20th century. All governments represented in their central banks or the treasury secretaries own a significant amount of reserve in the form of diversified portfolio of foreign currencies, foreign governmental bonds, and precious metals.

Most published researches and articles focus blindly on the gold amount owned by the governments regardless of how much gold represents of the total reserves. This research focus on the gold percentage compared to the total countries reserve, which will reflect the political and economical perspective of the policy makers of any country. The research classifies countries relation to gold reserves in two groups. First group is expanding gold policy countries; second, shrinkage gold policy countries.

The Gold Standard Era

Without delving too deep in history, in 1694 the Bank of England established the gold standard system to the world by replacing gold direct dealing with written banknotes to a promise of exchanging notes into gold when asked for that. This system was accepted worldwide, and stayed for more than two centuries to create an efficient economic system.

Under the gold system, the value of each currency was fixed in terms of gold, implied that the exchange rate between two currencies are fixed. The gold standard system put a lot of heavy weight on the big and smaller countries jointly. From the bigger countries side, the absolute ascending inflation for more than two centuries made the people doubt the capability of central banks in covering the banknotes into gold; as a result, speculators started selling off currencies to exchange it by gold. Such speculative actions depleted the central banks gold including BOE in the forefront. On the other side, smaller countries were enforced to raise their interest rates when rates were raised abroad; otherwise, it will find itself exposed to severe losses. Mass selloff of the local currency triggered the obligation of gold reserves or trade the local currency to other foreign currencies with higher interest rates.

During WWI the gold standard system was suspended by all countries, yet, the US remained on gold standard during the war. The war burdens left its shadows on countries, which were loaded by the war debts and hyperinflation. However, the most effected was the banking sector as many banks faced insolvency. By the end of WWI central banks made extensive efforts to reconstitute the gold standard system. Notwithstanding of printing large amounts of money bills during the war without its covering gold reserve, countries could reestablish the gold standard system. Despite these facts, the post WWI period lacked monetary stability, and countries including the UK itself seemed to give up the adoption of this system.

With the lack of political and ideological support of the gold standard system, central banks started to reevaluate its policies, especially after the world great depression era in the 30s. A significant amendments was made on the system by president Roosevelt.

Top Countries with Expanding Gold Reserve System

  • Untied states of America

As the markets crashed in 1929, UK left the gold standard system after the frequent attacks made by the speculators effected the pound price to float and to determined by the market forces. Countries started to disbelieve in the gold standard system, and one after another gave up the system.

By the collapse of the pound against the gold, speculators started to focus on US Federal gold reserve, which refused to give up the gold standard system. The US took new actions to recover the world crisis. One of the actions was to raise interest rates that was below 20% in order to break down speculations against the dollar. As the government pressured the Fed, the Federal Open Markets operations Committee (FOMC) was established to increase supply by decreasing interest rates on governmental and corporate bonds. Eventually the Fed and the government realized that they were not on the right track and they have had to change something. They realized that the gold was the pivot point of the fiscal policy and nothing can be changed without system revision.

By the beginning of President Roosevelt period, reconsideration of the gold standard system was a priority. It didn’t take too long to recognize that lifting the gold standard up was a key element to recover the great depression. Straightaway, Roosevelt took a decision to let the dollar price float against gold by resetting its value at significant low level.

WWII  burdens were insufferable, by that time every country took the decision to give up the gold standard system as it became very exhausting. In 1944, before the end of the war, the big governments signed the Breton Woods agreement, which stated currencies prices to be fixed to the US dollar instead of gold.

Nevertheless, the US Dollar should be converted in gold whenever there was a demand and gold to be priced at $38 per ounce. The final destination for gold role in the fiscal policy came in 1971 when President Richard Nixon decided to terminate the gold standard system and to replace it by the petrodollar system. Starting from that date, interest rates replaced gold and became the pivotal point of fiscal policy.

By that time, gold was out of the Federal Reserve fiscal policy; although the importance as a reserve asset did not diminish for the Treasury secretary. According to the world gold council, USA lead the countries gold reserves list. It stated that the USA holds 8133.5 (USD12 000 000 000) which consists 74% of the total reserves held by the treasury. The treasury is responsible to reserve the gold in deep storage since January 31 1934 in three places: Denver, CO, Fort Knox, KY, and West point, NY. US is the forth gold producer with 209 tons a year.

Moreover, If we’re consider the classification of gold percentage out of total reserves as no other country is keeping that high percentage of gold reserves but Tajikistan, the US is placed as the second on that list. A question should arise here, what does that means? a) USA, as the producer of the most dominating currency doesn’t need a large amount of foreign currencies. b) Gold has an inverse movement with the dollar, meaning that as the demand for gold rises by the treasury, gold price will go up and US Dollar will devalue. In other words, weakest dollar can boost economy, and higher reserved gold value.

  • European Countries Using the Euro

Similarly to the US policy, the Euro considered to be one of the world economy columns. Despite the fact that ECB holds 26% of its gold reserves by 504 Tons, every country in the EU represents its treasury by holding a separate amount of gold reserves. The form of ‘sell Euros buy gold’ as a reserve is a common policy within Eurozone countries. Germany comes second on the list by holding 3377 tons representing 68.8%, followed by Italy with 2451 tons representing 67.8% of the reserves. However, Cyprus holds only 33tons, represents 64.1% of its reserves. France 2435T 63.8%, Netherlands 612T 63.9%, Portugal 382T 59.1% and Austria 280T 45%.

The European countries maintain structured formula to hold high gold reserves of their total reserves(commodities, currencies, etc.). As the Gold standard system rules global economy, a country must sustain gold reserves in order to control its currency and economy.

  • Venezuela Learnt the Lesson

Venezuela, one of the top oil producer, was determined to hold anti-west policy, adopted the anti-dollar system by putting 64.8% of its reserves in gold instead of foreign currencies which represents only 187.5 Tons, the lowest in three decades.

That wasn’t the plan of Venezuela; in December 2009, Venezuela’s central bank released the “gold reorganizing”. They had a 10 year plan to increase gold reserves  – they didn’t declare the amount they plan to increase due to the financial crisis and the decreasing confidence in USD, and they called this year “the year of gold”. Actually the plan worked for while, where the reserved amount rose from 355T to 365T by 2011; Nevertheless, it didn’t work for a long time. The country faced a severe crisis in 2016 caused a sell-off of two thirds of its gold reserves in a lower price than 2010.

As a result, the increased amount bought after the 2009 “Reorganization” was sold by loss, and Venezuela is classified as shrinking economy. Important lesson we should learn from the Venezuela model as we go through this research.

Venezuela gold reserve since 1990-2017
Venezuela gold reserve since 1990-2017
  • Tajikistan

You may get astonished if you knew that Tajikistan, one of the poorest countries with 30% poverty, holds 81% of its reserves in gold, that puts it on the top of the list above USA. The 81% represents only 14.4Tones.

Tajikistan’s GDP was 7.8 billion in 2016, most depending on agriculture products and metals export. In fact, Tajikistan does not rely on gold for a reason, but because their main income rely on emigrated work force in Russia and exporting its product to neighbors countries like Russia, Turkey, Kazakhstan and Afghanistan.

Tajikistan gold reserve 1998-2017
Tajikistan gold reserve 1998-2017

Shrinking Gold Reserves Countries

  • United Kingdom

On the other side of the coin it seems that some emerged economies have different point of view. Unlike the rest of Europe, UK has a different gold policy. The UK decided on the 7th of May 1999 to sell a big portion of its gold reserve in a short period to replace it by a basket of currencies including the new currency (Euro). UK gold reserves dropped from 590 Tons on 1999 to 310 tons today which represents only 8.6% of the UK reserve.

UK gold reserve from 1999-2017
UK gold reserve from 1999-2017

The decision was taken after new amendments made by the BOE. The policy targeted the high unemployment rates and price instability occurred in the mid 90s that formed a huge drop in UK exports. Graham Yong, a senior manager of foreign exchange division in the BOE, said about the change of UK gold reserves policy: “holding in the reserve is amid at achieving a return on them by lending a portion to the market”. However the UK decided to decrease 2/3 of its gold reserves, yet, the kingdom still ranked 17 on the list by amount not percentage.

  • Commonwealth Realm

On the footsteps of UK, Canada and New Zealand followed, but more aggressively. Gold standard was adopted by Canada in June 14, 1853, and by 1999 the Bank of Canada decided to sell its gold reserves. The economic reasons that made Canada and New Zealand get rid of all of their gold reserves to be 0% remain unclear.

Australia is a country with a strong economy heavily focused on mining holds only 79.9 tons of gold reserve representing 6% of its allover reserves. Australia gold reserves raised slightly its gold reserves from 79.7 in 1999 to 79.85 in 2017. The Common wealth countries are some of the richest countries in gold mining field and hold the biggest portion of gold production combined. Australia is the second producer in the world with 270 Tons, Canada comes Fifth with 170 Tons, and south Africa comes seventh with 140 tons a year.

  • Chinese and Russian axis

China was the last country to join the gold standard system in the early years of the twentieth century instead of the silver cover. China ranked Fifth by the amount of gold with 1842 tons of reserved gold representing only 2.6% of its reserves which connect China to the gold shrinking policies countries.

On the footsteps of China, Russia followed to be one of the shrinking gold policy countries by holding only 1645 Tones representing 16% of its total reserves; however, doubts relate to Russian numbers since the central bank of Russia shows different numbers than those claimed by the gold council.

Gold as jewelry retail sales, both in China and Russia is extremely popular and those considered to be the cheapest places to buy gold. China ranked first gold seller with 455 tons, Russia comes third 250 tons yearly.

Final Words

The gold reserve is a wide topic and there are many subjects to be discussed. For instance, there must be connection among gold trade, gold reserves and gold prices. What are the effects of gold prices on governments reserved gold? and the most important question, what will be the impact after the end of raw gold? In general, I would like to sum up the main ideas of that topic:

  • However gold never loses its value as a store mean, its role in current economy differs from age to age. It started as a coin in itself, and then turned to standard cover of banknotes, later it took different path by being used as governmental reserves and classical uses (jewelry and store of value) including the medical and automobile industry. Moreover, the relation between banks and gold also changed from phase to phase.
  • We can classify countries regarding their gold reserve system into three types; a) USA and Eurozone that own the most desired currencies, have no way but to hold their reserves in gold and give a little space to less desired currencies. Bear in mind that USA is the fourth gold producer. b) Emerged economies such as the Commonwealth countries have different perspective by liquidating the reserved money to be used for development and other emerged countries had followed their footsteps – Japan and Switzerland. c) Emerging economies such as Russia, China and India adopt the same idea of the second group as an inevitable result to develop the currently stagnating economy.
  • Venezuela is a vivid exam of failed policy, by which a country insisted to ignore the facts by challenging the international monetary systems and stagnating all of its oil income into gold only. That was one of the reasons that caused the country a severe crisis in 2015, resulted that the reserved gold was sold in lower price in 2016.

Asian Markets Ignore North Korean Threats

Although 64 years have passed since the end of the Korean War, the continuous tensions still exist. Last week, North Korea launched missiles towards the Japanese water as a kind of disruption to the accident of North Korean president this month in Malaysia.

As a result, the US sent a military aircraft after the accident to South Korea to hold components of defensive missile system. According to the Washington post, there are some voices in the South Korean parliament demanding the return of the American nuclear weapons to the South Korean soil.

From the North Korean side, they did not deny the accident; moreover, they declared on the official TV that the missile launching was a training to hit American base in Japan. From the American side, secretary of state Rex Tilersson said “the US policy of strategic patience has ended”, President Trump tweeted “N. Korea behaved very badly”.

Last Saturday North Korea launched another missile test and a speech by the North President saying that the whole world will whiteness our victory and the history will remember the revolution that had happened this day.

Every day there are news coming from the Korean soil; however, this time markets completely ignored the actions. It seems that markets learned to live with that, especially as USD dropped after the last release of the Fed interest rates. Gold remains the fear safe heaven, rose last week from 1195 to 1228.

KOSPI index showing rising ignoring the current situation in the Korean peninsula
KOSPI index showing rising ignoring the current situation in the Korean peninsula

On the other hand South Korean index, KOSPI, rose from 2117 to 2164 last week. Chinese composite index dropped from 3268 to 3237. USD dropped against South Korean Won from 1144 to 1130.

Shanghai composite
Shanghai composite

Why the US Dollar Falls after Fed’s Rate Hike?

Immediately after the interest rate decision was released, the US Dollar tumbled and US stocks soared. Sounds weird to you? Currently, It’s seems as if markets push the dollar down in any economic result. obviously, markets priced in the expected rate hike, however, the US dollar leads the race before other currencies to higher interest rates.

I would like to point out that this case is found in the market couple of weeks ago. After the last US employment data showed better than expected numbers for both NFP and unemployment rate, EUR/USD climbed. Second similar action approved this form after ECB released its interest rates decision on March 9th. The decision hold no change and even no news from Mr. Draghi’s speech, however, the Euro pairs soared as if the ECB raised its rates. There are some fundamental reasons and technical indications towards that.

The Federal Reserve decided to raise its interest rate benchmark by 25 basis points from 0.75% to 1.00%. Janet Yellen speech holds many hawkish and strengthens point on the US economy, as rise in households spending and the most important point regarding inflation during the last quarters which reached the target of 2%.

The most significant part of her speech relates to the probability of the foreseeable raises in the interest rates “on a moderate pace” as she mentioned. According to Jeff Cox of CNBC, expectations are for two rate hikes later on this year, first on June and the second on December.

Behind The Scene, What Happened to The Markets? SWAPS!

In some of our previous analysis we motioned the influence on FOREX market by SWAPS deals. Swaps are a real under table or as I prefer to label it “the legal black market”. An increase in deals made by Bank of Japan and other speculators on USD in the form of SWAP agreements, especially on the raising fears in Europe due to the Greece financial crisis and the consecutive elections. Add to those speculations against oil due to some bad news coming out of OPEC upon the non-commitment by the productions cut deal. Such kind of circumstances leads the market previous two months to the conduct of consolidation and irrational movements

Another point was raised by one of the journalists in the press conference, which is the foreseeable imposed tax on US imports that will lead to the decreasing demand on dollar in case it was applied. Discussing that point may have heavy shadows to the USD price drop. As that point, it is ambiguous to get a keen result about it, Misses Yellen herself couldn’t answer the Journalist question.

Markets Reaction

The absolute reaction to the latest rate hike  has pushed further global share market, except for the insurance sector. EUR/USD soared once the interest rates announced. As we clarified before, swaps deals pushed the dollar higher as these overbought dollar contracts must be covered.

EUR/USD rose to 1.0707, 100 pips, consolidates for the rest of the day. I am expecting the pair to continue higher as the pair previously tested unbreakable support level. Next resistant level is 1.0825

EUR/USD Daily Chart
EUR/USD Daily Chart

USD/JPY is also likely to direct upwards with some little consolidation.

USD/JPY Daily Chart
USD/JPY Daily Chart

Significant rise in volume in the next days may lead to a great enhancement in the FOREX market. Euro reacted indecisively as the current prime minister on Netherlands seemed to be the winner.

Dutch Elections in The Shadow of Turkish Comments War

As Netherlands is about to start its race to the prime minister seat on Wednesday, Turkey declared comments war on Netherlands. The stretches broke out last week when the Turkish president lashed out at Germans describing them by “the Nazis”. That came after German authorities decision to cancel pro-Turkish government rallies. These rallies were scheduled by Turkish immigrants in Germany to support the AKP ruling party in the referendum scheduled on April.

Netherlands was not far away from the scene. On Saturday, Turkish foreign minister attempt to visit the Turkish embassy in Netherlands; hence, the Netherlands authorities barred him from entering the country because of fears that this visit may has connection to the rallies planed to take place in Rotterdam. Later on, at another incident, the Dutch authorities banned another official minister from visiting the embassy.

The Turkish Authority responded to the barring of the two ministers by summoning the Dutch ambassador to the foreign ministry three times, the last time he was informed by closing the Netherlands embassy in Ankara. Moreover, president Erdogan asked the international community to apply sanctions over Netherlands to breach the Geneva Convention concerning the embassy issues. From the Netherlands side, incumbent Prime Minister Mark Rutte said ‘ The comments were inflammatory’ and demanded an apology, while we didn’t see any comments from the other candidates.

The remarkable notice here that these three countries all have polls. According to David Chesal, CNN journalist, interpreting the situation that Erdogan is showing his supporters, can influence Europe in case he lasted in the authority.

The biggest Dutch candidates on this election are the incumbent prime minister representing the People’s Party of Freedom and Democracy (VVD) representing the right, and the far right candidate Greet Wilder of the  party of freedom (PVV). On American approach, Netherlands candidates are focusing on the immigration and terrorism issues in the highlights of high Syrian refugees’ numbers beside the terrorism and immigration issues, Greet wilder decided to raise the NREXIT flag.

As most of observers seeing that if Greed Welder wins, it will be a great victory to the Trump camp. Especially after Angela Merkel decided to join the camp by commenting on Erdogan comments by saying “Many things are changing actually. The character of the transatlantic relationship …. Nonetheless, tat partnership based on the shared values and interests extremely for all of us, I am going to have my conversation with Mr. Trump in Washington in my next weeks visit” she continued to say ” European nations will have to take no more responsibility for defense and handling problems of their own backyard including the Balkans”. That came as a respond to Erdogan describing Germany by Nazism. She was referring to Trump idea of the NATO suggested reconstruction – as Turkey is member in the NATO.

The financial markets react positively to the latest political events, despite the approach of the NL elections. NL 2 Years bond negative yields showing a strong trust in the government by that time. In addition, the AEX index has seen a strong bullishness in the last days despite the consolidation occurring currently in the rest of Europe and US indices.

NL 2Y Yields from May 2016 – March 14th 2017
NL 2Y Yields from May 2016 – March 14th 2017
AEX chart from January 2017 to March 14th 2017
AEX chart from January 2017 to March 14th 2017

The Euro is showing a great strengthen as well, despite the high probabilities of a foreseeable US Fed rate hike. Euro soared before all pairs without exception during the previous week.

EUR/ZND daily chart showing 500 pips rise in two weeks

EUR/NZD pair was the most gainer previous week; the chart shows 500 pips within two weeks. That strong movement came after a long term of a of paralysis in financial markets followed the trump inauguration. It also reflects how much the markets are satisfied and confident with the Netherlands outcomes.

The Effect of US Presidents on EUR/USD Movement

Whatever asset you decide to trade, the first lesson your mentor will teach you is to ‘look at the EURO DOLLAR long term trend’. Traders persistently try to predict the EUR/USD long term movements, ending up into circles.

The frequent question being asked by all financial data providers at the start of every year – what will be the direction of Euro Dollar in 2015, 16, 17, …? The usual answers will be like ‘we expect bearish pair because the FED is more likely to raise the interest rates’ or ‘bullish because the TROIKA decided to bailout Greece’! This possibly would be part of the game. However, I have been wondering about the real reasons behind this major pair, comparing it with US and EU stocks ending up with no direct correlation result. This article will unfold the most important fundamental factors behind EUR/USD movements and its correlation to the US stock markets.

U.S. Elections Influence

USA is a row model for the institutional democratic regime. Parties not persons are the main players on the political theater. Accordingly, party policy is dominating candidates’ planes. Ronald Reagan, George H Bush, George W. Bush and Donald Trump, are all players for the same team trying to reach the same goal. On the other hand Jimmy Carter, William J Clinton, Barak Obama are also applying their party’s economic and political unique agenda.

Without getting so deep in politics, the US ruling party casts strong influence on the EUR/USD pair. That influence reflects the strong correlation between the party’s political agenda and the USD price. Overlooking the political and social aspects, every team has an opposite economic agenda. In general Republicans tend to focus inwards as they focus on taxes levels, revising agreements entered into with other countries, increasing military spending. Democrats tend to focus on external expansion, decreasing military spending. Some of these policies depends on governmental spending to stimulate the economy, and others trying to reduce expenses in order to take control over inflation.

EUR/USD 1985-2016 [weekly chart], the Euro price history before 2003 was shown as a basket of 11 European countries' currencies.
EUR/USD 1985-2016 [weekly chart], the Euro price history before 2003 was shown as a basket of 11 European countries’ currencies.
It is obvious from the chart how much the pair is influenced by the US ruling party. Start at the rising red trend lines; they are all falling during the republican periods. Meanwhile, the falling blue trend lines representing the pair price during the Democratic periods. In other words Republican fiscal policy build upon weaker dollar; while, the stronger dollar is the result of the Democrats fiscal policy.

Ronald Reagan Era

As you read this part, I want you to assimilate it carefully so that we will come back to it later. Willam Niskanen (a member in Reagan council of economic advisers 1981-85) summed up the Reagan’s economic promises in four points:

  • Tax reducing personal Taxes from 70% to 28, corporate tax from 40% to 34%
  • Reduction of regulations
  • Reduction of governmental spending
  • Decreasing inflation by controlling the money supply money supply

Inflation before Reagan inauguration reached 13% and dropped to around 2% by the end of his second period; however, applying the first two points was not enough to control inflation. By looking to the second two points, we will find out that military funding increased during his first period by 35%. The excessive increase in spending against his plans caused inflation to increase from 13 to 15% during the first year; as a result, GDP dropped dramatically as much as inflation to historical levels. Interest rates soared to 20%; accordingly, Euro currencies tumbled before the USD between 1980 – 1985.

A question would arise here, where was the underlying success for that policy? And who was the big winner? The answer will be shown as you read this article, however you should know that Reagan has achieved historical unprecedented achievement!

Inflation rate during different periods of presidents [1970-2016]
Inflation rate during different periods of presidents [1970-2016]
US interest rate between 1975-2016
US interest rate between 1975-2016
US GDP 1970-2016
US GDP 1970-2016
EUR/USD [weekly chart during Reagan's periods]
EUR/USD [weekly chart during Reagan’s periods]

George H Bush – Constrained by The Past

When Alan Greenspan was appointed to be the Fed chairman In August 1987 by President Reagan, his vice president was his successor in the white house. The period of Bush didn’t hold new plans, as he came to find himself handcuffed by his predecessor’s results. George H Bush raised the slogan of “flexible freeze” on the big governmental deficit and the high expenses cutting from the GDP. The second point he was directed outwards, signing trade agreements with foreign countries, as NAFT (North American Free Trade Agreement).

EUR/USD was bullish during this period after Bush convinced Greenspan to cut the rates to stimulate the businesses [review EUR/USD, interest rate charts prior].

Bill Clinton – The Flourishing Era

“The only way for going wealthier is only by exporting” by words like these Clinton started his ruling, that was during the ratifying of NAFTA agreement in August 1993. In addition to his role in changing the GATT organization and developing it to include more countries with more up to date trading rules.

His policy was courageous and smart, ending up to results the served the American economy. His plan was to cut $500B from the budget, $225B of them from spending, and raising the rest form taxes including 1.2% special tax imposed on the wealthiest sector and increased the imposed taxed on the self employed sector from 30 to 80%. On the other hand, cutting taxes on small businesses in order to stimulate the economy.  Small business by one time reached 85% of the overall businesses.

By the end of Clinton period, USA had achieved the biggest surplus of governmental spending by 2.5% since the WWI. This was more than normal to drive the Dollar higher, not because of the speculating on the high interest rates, but based on solid land of real national income accompanied by stable inflation rate.

George W Bush – Numbers Speak for Themselves

I will not delve too much in that era because numbers are more eloquent than the words. Governmental spending increased 70% from $1789B to $2983B. The Bankruptcy Act 2005, which enforced all home buyers in mortgage to take equity out of their homes. This specific law caused the world financial crisis, followed by stripping out thousands of families their houses. Unemployment rocketed, businesses closed. The EUR/USD saw the highest historical levels by the end of his period.

Barak Obama – Fixing The Errors

Same as George H Bush, Obama’s policy was focused on getting out of the recession. Unemployment reached 10% by first year and governmental budget reached -10%. In July 2010 the DODD frank law by reforming wall street was approved. Two stimulus plans through taxes cutting first worth $787B and the second $858B. The famous TTP(transpacific trade and investment) agreement, and he ended his second period by starting trading partnership negotiations with European allies. By the end of his period, unemployment dropped to 4.7, governmental budget balanced to be -3.2 from -9.8.

EUR/USD pair tumbled during Obama’s two presidential periods, with some kind of long term volatility caused by the global financial crisis.

Trump Follows Reagan Footsteps

So far, the unfolded part for Trump’s policy plan is to invest $1B in infrastructure, and he has intentions to cut Taxes. Media had gave him a rope, according to Jeff Cox (finance editor for CNBC), corporate tax is the most important part inside Trump’s Tax plan. Cox added that trump – which happened already – reduce regulation, and of course the chew gum word creating jobs.

Timothy Speiss (tax adviser) added that, personal taxes is planed as following; personal income brackets to be reduced from 7 to 3 (12% – 25% – 33%).  Increasing the standard deduction to $15000 from $6500.

As we know Trump in the Real estate field, he didn’t forget to put deductions on mortgage loans (buying-building-improving) as part of the plan. We can bullet point them as follow:

  • Tax deduction
  • Reducing regulations
  • Reduction of governmental spending
  • Increasing military spending (as what Reagan did contradicting to his promises)

Now let’s go back to Reagan’s plan and compare it to Trump plan, it is identical. So I am expecting the same outcomes – economically- on EUR/USD, and stocks!

Trump Impact on S&P 500

Do you still remember the question about Reagan’s biggest achievement in financial history? S&P 500 made a straight rises all over the history. However, Ronald Reagan’s policies did not achieve so much to the American people; it caused the S&P 500 to soar in one presidency period more than any other president achieved in two periods of presidency.

S&P500 during Reagan’s started with 103 until the black Monday in 1987 reached 330 achieving 220% surplus (in three years only), then it retraced to 283 after the crash ending his period with 174% surplus. Followed by G H Bush, ended at 440 (51%) during one period.

During Clinton’s administration, which could be described as a best economically since WWI, S&P 500 closed at 1270 (193%) in two periods. No wonder that the S&P closed during the Bush administration after the world crisis in 740 which means -60%. Obama was lucky to receive the presidency just after the markets crash to achieve 206% in two periods; despite that, it was less than Reagan.

Analysts concluded that Trump’s tax plan would be ready before the congress on October and effective starting from 2018. Accordingly, it is obvious that trump is delaying to announce his plan officially (as Reagan) to earn some time and provide the S&P more momentum.

European Election and Other Major Events

EUR/USD chart shows an obvious effect of the European elections, BREXIT, 9/11. During the global crisis the pair wasn’t affected so much by these major events. One of the reasons is that the European Union elections effect is spread over many countries and during different times.

Trump Effect on The EUR/USD

Fundamentally, the same economic plan would give us the assumption that the pair may be bearish during the first period. However, Technically the EUR/USD price acting the same as it was during the start of George H Bush administration.

EUR/USD chart comparison between W Bush and Trump beginning their presidency
EUR/USD chart comparison between W Bush and Trump beginning their presidency

Putting it All Together

  • One of the strongest factor to affect the EUR/USD over the history was the US presidency
  • Trump policy follows Reagan policy
  • Trump is trying to gain some momentum for the S&P, before he announces his tax policy
  • EUR/USD is acting the same as when W Bush started his presidency

How The Markets Will React to The Next NFP Report?

US Politics Confusing The Markets

It is not a secret that since Trump inauguration, the markets are facing big turmoil. Unrevealed tax plan, consecutive executive orders, Fed – White house foreseeable conflict and fears surrounding European elections, are all fundamental factors causing the markets a lot of disturbance.

Number of FOMC participants’ assessing uncertainty and risk around the GDP raised from 1 to 6 members this month. On the same level FOMC participants voted for employment uncertainty raised from 1 to 5. Very low volume on US stocks and USD pairs consolidation are the main outlook on the markets.

NFP in Prospect

Job creation is the foremost indicator of consumer spending. Every analyst is monitoring the employment data this week closely, as these numbers will give them a clearer outlook for the next Fed rate hike. Expanding NFP means growing inflation, which will lead to imminent interest rate raise. Fed rate raise expectations reached around 95%. John Wraith (UBS head of UK macro rates strategy) sees that the wheel of consumption was week last quarter; however, he expects couple of rate hikes during this year.

ADP which comes two days before the NFP is usually used as the estimation for the NFP. Numbers released in February shows a great raise in employed people during January, 246K actual number Vs 165K estimated while December numbers was 151K. The ADP forecast numbers for this month are 190K which will be a big disappointment for the previous month numbers.

Some economists believe that unemployment shows the bigger influence on markets for the long term. Last month unemployment rate was 4.8% Vs 4.7% forecasted, it is forecasted to be 4.7% next month. Average hourly earnings has been under spot light previous months, last month it raised 0.1 more than its prior which was 0.3.

Markets are waiting the ADP on March 8th to forecast the NFP which will arise next day. ADP and NFP has shown a very close movements.

Markets on Thursday

EUR/USD – Suffered the consolidation during the previous months as it lacks for motivation and controlled by fears. Over estimated NFP will cause the pair to drop. I don’t expect a down trend for the pair further than 1.044 as it is a very strong historical support level. However, the pair will be thrilled to hear NFP and unemployment disappointing data due to the big amount of swaps occurred after the Greece news in Early in February. In such case the pair will retreat to 1.064 and might rally the next week towards the 1.0825.

The most critical situation occurs when the NFP released number is contradicting with unemployment rate, in such case I prefer to stay out of the market as the pairs will be so volatile as many trades don’t recognize the true direction of the USD. Markets usually focuses on the unemployment rate more than NFP for the long run trades, if the NFP numbers are more than expectations but under its previous month.

USD/JPY – same script for the Yen pairs generally and the USD/JPY specially. In case the employment data are better than expected Yen pairs are more welcoming to bull as news coming out of Japan showed fragility. Japanese adjusted trade balance (the most important japans indicator for my perspective) was 0.16T against 0.33T prior month and 0.28T forecasted. Also trade balance showed results in negative not shown years age, -1087B Vs -637B forecasted and +641B for the previous month. USD/JPY will soar to 115.5 to be the first pair getting out of the consolidated view.

Gold – Has started to bull back two weeks ago, trading currently at 1217. Unlike the USD pairs, gold started its retreat two weeks ago under strong technical indicators that it will continue on the medium term downwards.

Gold daily chart showing a strong overbought theme accompanied by significant stochastic divergence
Gold daily chart showing a strong overbought theme accompanied by significant stochastic divergence

S&P 500 – Previous week was bearish for all US stocks. Good employment data don’t guarantee long run bullishness for US stocks as the charts show low levels of volumes. On the other hand any correction caused by weak employment news on Friday would be very good as buying opportunities. The S&P 500 last correction was shown on January 2009, low stock volumes are showing that sellers are waiting for their move.

Weekly Analysis – EUR/USD, AUD/NZD, AUD/CAD, USD/JPY

Previous Week Overview

UK GDP result was 2.0%, underestimated the forecast of 2.2%, and under the previous Year number 2.2%. On the other hand we have seen over expected Canadian inflation number of 2.1% which was much better than the previous year number (1.5%). The number left significant effect on the Canadian dollar by Friday. Moreover, traders short dollar before other currencies after they doubted a next month interest rate hike according to the interpretation of the released FOMC minutes.

It is important to highlight the previous week forecast. EUR/USD as forecasted in our previous analysis, traded in narrow range (1.0620-1.0500). AUD/NZD raised at the opening of the week reached 1.0770, then dropped closing 20 pips lower at 1.0657. Yen pairs moved in a tide range. Finally, we forecast the CAC40 to soar at 4932, it soared to 4953.

Next Week Outlook

Next is the GDP week. We are expecting the USA, Switzerland, and Canada. I am not going to be exaggerating if I will say that markets are going crazy. We can see S&P 500 soaring without corrections, currencies are not compatible with technical indicators. Markets are fundamental justification, Trump tax plan and the elections in Europe are all influence markets price action.

AUD/CAD

The pair is showing good divergence, where we should expect the first target at 23.6 level (1.0015), then 38.2 level at (0.9930).

AUD/CAD Daily Chart
AUD/CAD Daily Chart

EUR/USD

Situation on the EUR/USD did not change as it is waiting for motivation. It is expected to continue to move in the same range between 1.0830-1.0520.

EUR/USD Range
EUR/USD Range

AUD/NZD

I anticipated this pair to drop during the previous week and I have a stronger believe in the upcoming week that it will continue to drop. Previous week chart formed a hummer; in addition to that you find the symmetric stochastic touched the top of the triangle as shown in the chart. I believe that pair is dropping to the 23.6 level at (1.0624) then 38.2 level at (1.0550).

AUD/NZD Chart
AUD/NZD Chart

Yen Pairs

As we mentioned in the previous month, it is still moving in range movements. We can also use this as good hedging opportunities. USD/JPY between (111.00 – 115.40) CAD/JPY (82.00 – 88.80) CHF/JPY (109.90 – 115.00) NZD/JPY(84.14 – 80.42).

CAD/JPY Daily Chart
CAD/JPY Daily Chart

Good Luck

Saudi Arabia and US Petrodollar System are Facing The End

Have you ever wondered about the reasons that made the United States dollar dominating the world; despite the fact that the United States, unlike Britain and France did not colonize half of the earth, the US has managed to control global economy and the US dollar is the main currency of the world businesses; in addition to that, normal people and private entities are dealing with the dollar as a safe haven for their long term savings investments. It is exactly the same as investing in governmental bonds or spot gold, but how did the USD get this power, and why dollar price is moving against the Gold and OIL prices. The answer is simple “PETRODOLLAR”.

From ‘GoldDollar’ to ‘PetroDollar’

On August 15th 1971, USA president Richard Nixon shocked the world by ending the Gold convertibility system. Gold convertibility system was born during the mid 40s within world war 2nd, when the USA appeared to be the new superpower upon an agreement known by Breton woods.  Upon Breton woods, it was agreed to establish the international monetary fund (IMF) which will work on ensuring the exchange rate stability by fixing rates between currencies. After this agreement, the US Dollar replaced gold as the exchange of any other currency or commodity. 1 USD set at 35 ounce of gold.

The US dollar extremely got overvalued; the overvaluation led to the unbalance in the American trade conditions. Moreover, the Vietnam War has made the Federal Reserve print more money, which made the idea of converting dollars into the US gold impossible. In addition, gold producers themselves, who are selling gold to the Federal Reserve, were using these dollars to buy it again for a cheaper price, it’s a closed circle.

And finally the cost of extracting and refining gold was much more bigger than 35 ounce per dollar. The inevitable result of finding new monetary system, pushed Nixon to give on his famous speech for ending this system as “we must protect the dollar from the attacks of the international speculators”, then he continued to say that he ordered the secretary of treasury to stop the convertibility of dollar to gold or any other assets, and to initiate a “New monetary system”. That was the birth of Petrodollar system.

1973 – The Oil Breakthrough

In October 1973 the war in the Mideast breakout resulted oil embargo from the Arab producing countries (OAPEC) until March 1974 (also known as 70s oil crisis). They call it the crisis; however, I call it the oil breakthrough. The world has seen many crises during the 20th century; for instance, Mideast wars in 1948, 1956, 1967 which in all of these dates the Suez Canal (an important oil transportation route) was closed. In addition to that, the Mexico nationalization for oil wells in 1938 and Iran nationalization for oil wells in 1951.

However there were many oil crises and embargos in the 20th century, the world didn’t panic. Why? According to Raymond Vernon in his books “The Oil Crisis”, before the 60s oil importing reliance was on the European resources;  however, by the 60s the shift was made towards the Arab gulf countries oil which was featured by low cost. The second reason is obvious, which is the end of gold convertibility era. From my humbled perspective the real crisis was during the period of August 15th, 1971 and March 1974, where the world found itself left with no monetary system.

Find out how oil prices can affect your wallet

The actual crisis period (1971-1974) threatened the US by stripping it off its worldwide pioneering, if they didn’t find an alternative to the Breton woods system. As fast as the 1973 oil embargo occurred, the Federal Reserve came up by the Petrodollar idea which was proposed by two men Ibraham Oweiss (American economist) and Peter Peterson (US secretary of commerce).

Sooner, Henery Kissinger (the famous US secretary of foreign affairs) made a visit to meet the king of Saudi Arabia (King Faisal) in 1974 as the biggest oil producer worldwide in order to convince him to go forward with the petrodollar system.

The idea has three axes a) the kingdom of Saudi Arabia accept to dominate its oil in US dollars only and convince other OPEC countries by the same idea, b) the oil revenues will reinvested in US treasuries (the recycling) c) USA will offer full military security to  Saudi Arabia. Those three axes offered the USA a new hegemonic after the end of the gold era.

Pros of The Petrodollar System

On contrary to the gold dollar system that made the Fed to pay 35 gold ounce per every dollar they print (as a liability), the petrodollar made a spontaneous cover to every newly printed dollar (without any liability). Many of capital markets traders cannot clear up the reason of why the dollar price is moving against oil price; in other words, if every barrel of oil equals X number of dollars, the more oil barrels sold the more US dollars demanded and the prices of both surge together and vice versa.

So why the US dollar is unlike the Canadian dollar price – Canada is a big oil exporter – which moves along with oil price, or Aussie and Kiwi which move with commodities prices. The answer is in Axis [c], the oil revenues are invested directly in the US bonds which will soar every time the US or any other country buy a barrel of oil. As a result, bond yields will drop, taking the new dollar investments to other assets as the US stocks and other currencies. The second reason is that speculators were always playing the musical chairs game by trading the commodities against dollar, trying to find a save haven.

The chart shows the strait downward direction for the US 30 years yields since 1987 as a result of the petrodollar huge amount recycling
The chart shows the strait downward direction for the US 30 years yields since 1987 as a result of the petrodollar huge amount recycling

Liquidity provided to the Federal Reserve another benefit. That was declared by the fed meeting directly after the petrodollar agreement in December 17th, 1974 by the statement of Mr. Holmes “…..but there is a possibility that a very large petro-dollar transaction may provide the Treasury with the cash it needs via an issuance of special securities directly to a foreign account.“.

Cons of The Petrodollar System

Ishak Ibraham, “Black Gold & Holy War” author, summarized the cons in two points a) the big amount of Saudi Arabia investments in the US Debt market makes the US economy relying on the Saudi OPEC money. b) If Saudi Arabia will decide to change the system to receive money in another currency, the dollar will collapse. c) Some voices warn from the relationship with Saudi Arabia, raising red flags highlighting the possibility that Saudi Arabia export terrorism to US relying on what happened in 9/11 and the secret report about the accident (the 28 pages) which is classified until now, might condemn Saudi Arabia for the attacks.

Facts on the table

Now let’s see the oil map and its current movement. On the production side the USA comes first by 11.7 million barrels a day, then Saudi Arabia comes second with 11.5 million, Russia, China, Canada, and Iran are exporting 6.8 million a day. On the other side, the biggest importers are USA followed by China, Japan, and India.

From the previous chart we can notice a very important thing, the USA was the first producer by the beginning of the petrodollar despite the fact that they chose to be the biggest oil importer from OPEC just for political reasons.

Despite shifting the US economy from industrial economy to capital circulation economy, the US is still the biggest producer & the biggest importer of oil.

Saudi Riyal vs Russian Sanctions

As the dollar dominated itself by the oil, SAR(Saudi Arabia Riyal) dominated itself by the dollar. This means that every 1 dollar = 3.75 Riyals constant goes up and down with the dollar. The idea of trading the oil itself does not guarantee the full protection of the currency. Russia is one of the countries who refused to subside to the petrodollar system. I was in Russia by the time of sanctions when the  Ruble prices fell from 25 to 80 versus US Dollar, oil prices propped dramatically from 140 to 25 a barrel.

Russia tried to conduct bilateral Ruble cross currency swap agreements with china, India and other countries; however, the situation did not improve. The trick was easy, US decreased its importing from Saudi Arabia oil and relied more on the local oil to make the supply much bigger than the demand.

Although American companies stopped working in Russia. Saudi Arabia, Venezuela, any other country cannot defeat the petrodollar system for one reason that you will know by the end of this article.

On the other hand, you can find countries like Norway which is the ninth oil exporter country and third natural gas exporter. Although Norway currency (corona) is floating and not pegged to USD, the government can control the price and protect itself from strong deflation by recycling the oil revenues in Euro, Dollar and Pound fund.

The Future Shock

If you hold a calculator, with a very simple calculation according to the numbers, you will concludes that the oil have 60 more years to be consumed. As a result, scientists backed up by governments are working on implementing the renewable resources of energy. Yes, I said implement and not find, because the renewable resource of energy is on land and not on paper.

There are many big companies using the renewable resources for cars, planes and factories. Tesla, Mercedes, BMW, BYD, Peugeot, Renault are examples for vivid cars walking down the street. Also, you have Canadian solar, REG, Brookfield and other companies that making their money through trading the renewable resources of energy. Moreover, they have a very high volume shares in the stock market.

So, the problem for the US is that the Petrodollar system, by force of nature, will die, and the US has to find different domination rather than the Saudi oil.

Conclusion

Despite this long article, there is a lot of excluded information. In general, the main conclusion of a very long research I did is as following:

  • Gold was, is and will be the absolute source of commercial transactions and safe heaven source.
  • Changing from gold convertibility to petrodollar was inevitable.
  • Gold convertibility, petrodollar, and any new system will be depended on technology.
  • Petrodollar proved its strength in the past, but might losing its steam in the future.
  • The new system will be determined by the one who owns the TECHNOLOGY.