Trading Currencies: The USD/JPY ‘Bond’ Remains so Attractive

In the world of trading, the saying ‘the trend is your friend’ has always been a good base for a trade. However, what is even more beneficial to a trade is a fundamental correlation such as that between USD/JPY and US bond yield. Adding to this is the trader’s mantra of staying with one product and it makes for a strong case to hold the course.

Over the last few weeks, we have continuously highlighted the correlation between USD/JPY and US bonds and that is unlikely to change any time soon as we stick to the descriptions in the opening paragraphs for trading with trends, correlations and single products.

US Yields Hit New Highs

US treasury yields climbed to new highs this week before quickly giving back all gains. This has been attributed to investors preparing for the announcement on President Biden’s new $4trn spending package – but whatever the package is, the conclusion is likely to be the same: medium-term inflation, which will push long-dated yield higher and higher still. Ten-year yields hit 1.77% on Tuesday before falling back down to 1.70% – but the trend suggests 2% is only a matter of time now, as reflected from the rising breakeven inflation rate which is at the 2.36% level.

Source: YCharts

USD continues to make broad-based gains. EUR/USD which was chasing $1.22 in a mere 14 days ago is now at $1.1712 – a five-month low. The AUD/USD is struggling to hold the $0.76 handle and is back below at $0.759 and looking weak.

But it’s USD/JPY that needs the most attention having now pierced through ¥110.00 for the first time since March 2020. After its several attempts, we see a new set of targets being created. The breakdown of a clear resistance line at ¥110 will have the technical analysts excited and they will be looking for confirmation that it will break for real over the coming days. The pair topping out at ¥110.43 before the 7-basis-point slide back to 1.70% in the 10-year took some of the heat out.

But with the forecast of 2% in US long-dated bonds and a likely pop from the Biden announcement, USD/JPY’s correlation trend suggests further upside is likely over the coming period.

Coming events/holidays to watch out

  • 2 April: Nonfarm Payrolls (March) – The Market expects the payrolls to rise for the third consecutive month to 647K (previous was 376K).
  • 5 April: Easter Monday bank holiday in Australia, New Zealand, and Europe; Ching Ming Festival holiday in China.
  • 8 April: The FOMC Minutes will be released.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: A Bit of Pop in the Pop-Gun Policy from the RBA

For the first time in years the RBA caught the market slightly off guard. Not around what it did, but more around when it did it.

The Board’s decision to extend its quantitative easing program by a further $100 billion, is something most had expected it to do. The second tranche program will roll out at the close of the first tranche which could be as early as April 9. The issue was that it has announced the second tranche now, which certainly wasn’t expected, as the market has been conditioned to believe the RBA would foreshadow this move at the April board meeting and ‘confirm’ this was the case and start immediately.

This wrong-footing announcement saw Australian bond yields plummeting with the Australian 10-year falling like a stone down over 8 basis points. The AUD went from $0.7660 to $0.7615 and eased further – it is battling to hold onto the $0.76 handle and with the pressure of a falling iron ore price, it is unlikely to hold this level in our opinion.

At the time of writing, over 75% of traders are going short on the pair:

Source: Data at 14:15 on Feb 4 (GMT + 11) on Mitrade

Cash rate for 2021 & beyond

What the RBA also signalled was that Australia’s cash rate is now ‘set’ until 2024. In fact, the statement suggests it could be longer than this noting that inflation would need to be ‘materially higher’ before rates could rise. Considering the RBA’s mandate for core inflation is 2% to 3% and it hasn’t been in this band since the third quarter of 2015 – 2024, maybe it is too short of a time frame.

It also puts a ruler through any idea that short-term inflation bursts will cause the RBA to raise rate prematurely. As nations come out of the COVID crisis with inflation rates that are coming from very low bases, inflation could ‘pop’ over a quarter or so. But the RBA is signalling it needs structural change – aka what the Federal Reserve is suggesting.

So, the RBA has shown it has some ‘pop’ in the RBA’s pop-gun policy arsenal, the caught is that it’s still too small for it to be sustained, and the Fed or ECB will run it over with similar packages of their own, which is something to watch out for.

Key Events to Watch in the Coming Week

  • BoE’s Interest Rate Decision – February 4, 2021 (GMT +11)
  • RBA’s Monetary Policy Statement – February 5, 2021 (GMT + 11)
  • Nonfarm Payrolls (Jan) – February 6, 2021 (GMT +11)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: The Return of Janet Yellen

The return of the former Fed Chair Janet Yellen to the forefront of US policy; this time on the fiscal side it’s one that the FX market will probably meet with glee.

A solid communicator and an advocator for ‘strong’ policy accommodation, Janet Yellen’s upcoming appointment to Treasury Secretary will likely mean that Joe Biden’s fiscal stimulus package will be one of mammoth proportions – and a potential short-term negative for the USD.

To highlight this point, here are some extracts from her speech that she gave about her upcoming appointment.

“We lawmakers need to ‘act big’ on the next coronavirus relief package,” she complimented by adding that the benefits of the package will well and truly outweigh the costs of a higher debt burden.

“As Treasury chief my role will be to assist in the rebuilding of economy so that it creates more prosperity for more people and ensures that American workers can compete in an increasingly competitive global economy.”

“Right now, short term, I feel that we can afford what it takes to get the economy back on its feet, to get us through the pandemic.” As rates are historically low and that debt-servicing payments as a share of the economy are lower today than before the 2008 financial crisis.

These are big statements and the ones that support the trade we have seen throughout 2020. A tidal wave of USD is likely to hit the markets in the foreseeable future.

Future of the USD trend

Her comments also back what the Federal Reserve has stated – that it will back the economy with quantitative easing and record low rates until inflation averages 2% – something that is at least 2 years off. Having US fiscal and monetary policy aligned will create some form of inflation in the future that is the intended goal and that the rates will therefore rise.

Ms Yellen’s statement coupled with last week’s statements from Fed officials show that rates for the foreseeable future will remain incredibly low.

This was seen in the movement of US treasury with US 10-year yield falling from 1.12% to 1.09% on Yellen’s remarks and have continued to fall.

Time to go ‘risk-on’?

The flip side of this is the acceleration of the risk trade with textbook moves in CHF, JPY and USD easing while the like of EUR, GBP and AUD shifting higher.

EUR/USD is now back above $1.21 at $1.2145, the GBP/USD is back above $1.36 at $1.3630 while AUD/USD is now above $0.77.

Key Events to Watch in the Coming Week

  • Fed’s Monetary Policy Statement – January 28, 2021 (GMT +11)
  • USA’s Gross Domestic Product Annualized (Q4) – January 29, 2021 (GMT + 11)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: With a New Year Comes a Review

Happy New Year – A time of renewal, a time of new thinking and a time of excitement for change as we look to the future (even in the time of COVID).

We like to use the New Year to ‘review’ and see if we need to ‘renew’ or ‘rethink’ our FX strategy, which is what we shall do for this week’ piece.

Differences in the Global Trading Environment between 2020 & 2021

What’s changed from 2020 to 2021?

  • New administration in Washington
  • Brexit is finally complete
  • US rates have shifted

What hasn’t?

  • COVID-19
  • Unconventional policy the world over
  • Geo-political tensions – particularly in the Pacific

2021 Forex Trend Forecast

We will be watching for reactions to these points from both the fiscal and monetary sides of policy this year but what this means for FX based on the current setting is:

USD: New administration will mean increased US fiscal stimulus, and President-elect Joe Biden has already announced that he is assembling a multitrillion-dollar relief plan that would boost stimulus payments for Americans to $2,000. The discussions of the stimulus had triggered bearishness in the currency for most of 2020, but what will happen as it becomes a real event in 2021? It probably risks creating a US ‘exception’ narrative and may lead to a rise in market discussions of the Fed tapering. Either way the USD is near ‘rock-bottom’ pricing and in the short term a snap back may be seen.

EUR: Real yields and equity sentiment remain the key drivers of the EUR, ECB remains sidelined and fiscal support is piecemeal and country specific. Over 2021 it’s likely to rise naturally. Economists at Nordea expect EUR/USD to peak to the 1.25-1.27 level during the first 6 months of 2021.

GBP: Brexit is over and the oversold GBP had snapped back with gusto to end 2020. However, post-Brexit reality is COVID, as the country is now under its third lockdown, which could cause a probable double-dip recession and a likely BoE rate cut in Feb. Bearish here.

JPY: It remains a solid defensive play. USD/JPY had weakened due to the USD’s slide, however if as expected the USD finds support, the pair will struggle to fall further, much to the relief of the BoJ, which is extended until September 2021.

AUD: RBA is out of ammo in the medium term and Asia’s thrust for copper and iron ore is driving the AUD hard. However, AUD/USD is vulnerable to a short-term pullback on a pausing USD and profit taking – medium-term outlook is bullish and short-term outlook is bearish.

Key Events to Watch in the Coming Week

  • President-elect Biden’s speech – January 15, 2021
  • Fed’s Chair Powell’s speech – January 15, 2021
  • Inauguration of Joe Biden – January 20, 2021

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: The Last Bit of 2020 Still Delivering for Risk

Almost nothing can stop ‘risk’ FX – GBP, AUD, EUR and NZD are finishing the year in incredibly strong up channels.

The GBP is the most interesting here considering the probability of a Brexit Free Trade Agreement (FTA) with the EU is, in the words of Prime Minster Boris Johnson, ‘below 20%’. With Brexit finally happening on 31 January 2020, time is gradually running out. As of Monday, the GBP is now in a net long scenario as seen here.

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Is USD’s downtrend going to stop anytime soon?

What is also interesting as we finish 2020 is the USD’s downward trajectory remains unabated.

After Biden named his US Cabinet members, investors tend to see more stability in US economy and its policy. In fact, the USD downtrend is actually accelerating as the forecasted stimulus hopes of Biden Administration and a Federal Reserve that is posed to do more start to become fact.

US House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin are inching closer to their COVID relief bill. The market is becoming more confident the bill will pass now that Senate leader Mitch McConnell, Senate Democratic Leader Larry Schumer and House Minority Leader Kevin McCarthy formed a bipartisan group and released a proposal for $748bn aid package excluding the two most contentious and partisan issues. This bill is seen as a ‘bridging’ proposal before a large and more board agreement is created under the new administration.

This proposed stimulus support is a huge USD negative as no other G10 currency can compete with the sheer size of the packages being put forward. This has seen G10 pairs explode higher with the GBP/USD up to $1.3445, a break above $1.349 would be a new yearly high for 2020. EUR/USD at $1.2168 continues to show that even in the face of COVID crisis across the Atlantic, risk sees 2021 in a positive light. This position was enhanced by the FDA announcing that the Moderna’s COVID vaccine is safe and effective in people ages 18 and older, clearing the way for emergency authorisation the same as the Pfizer vaccine.

The AUD may push even higher

Finally, there is the AUD/USD which is continuing to chase new 2 ½ year highs as export prices reach 7-year highs and the RBA holds the line on new packages.

Recently, the relationship between Australia and China continues to worsen. Australia will challenge China at the World Trade Organization over its barley tariffs. Despite this uncertainty, AUD/USD keeps its bullish trend.

At $0.7572 there is every chance the pair would test the level of $0.76 and would put the medium-term resistance at $0.79.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: One Down, One Still Very Much Standing

The 2 major risk events of the past 9 months continue to be the key drivers of FX risk trading.

  1. Caseloads of COVID-19 and a possible vaccine to it.
  2. The US presidential election.

The second point has now officially been ‘declared’ with President Trump finally allowing a transition process to President-Elect Biden to begin. This was probably seen as an ‘unexpected’ outcome considering the Trump team is still pursuing legal challenges in several of the swing states yet to official declare.

However, with Georgia officials declaring this week if there will be any legal challenge remaining, that could, in theory, be successful in the remaining states. Yet, it would still not be enough to get Trump to 270 electoral colleague votes that are needed to be re-elected. This ‘risk event’ is now officially over. However, the Trump presidency is not – that is still official until January 19 and there are still some risks here.

Is it time to go for risk-on markets?

The reaction to Trump’s concession was one of risk-on, the equity market made record highs in the US and the USD fell against all G10 currencies on the news, with risk currencies in the form of the AUD, NOK and SEK being the biggest movers.

AUD/USD is again through $0.73. While FX strategists at UOB group predicts that the pair may break above 0.7400 in 1-3 weeks’ time, the question for it over the final week of 2020 is will the risk levers continue to push it higher? And, will that mean a year-end target of $0.75 is still possible? The macrothematics suggest yes, but real events could still be a headwind.

Namely COVID-19 cases.

That first point is really the major catalyst now for further risk rallies or pull backs, and as discussed in last week’s note caseloads are still growing almost exponentially in the US and Europe, not to mention that global cases have already surged past 60 million, which is weighing on short-term confidence.

Beware of short-term risks

Case-in-point: the US consumer confidence fell to back into pessimism in November to 96.1 from 101.4 (100 is equilibrium). Future expectations deteriorated (fell to 89.5 from 98.2) specifically due to a resurgence in COVID cases and the subsequent restrictions. The Richmond Fed manufacturing survey for November fell more than expected, to 15 versus estimates of 20 and well down on last month’s record high of 29, most components slipped and the most notable was new orders down to 12 from 32.

This must be seen as a short-term risk for FX. Watch for possible switching to the JPY and CHF as traders cover possible volatility to end the year.

Key dates before the end of 2021

Major events that can bring volatility to the markets in the remaining weeks of this year:

  • December 10 – Vaccine Development: Some sources suggest that Emergency Use Authorization for both Pfizer and Moderna vaccines may potentially be approved on this date
  • December 14 – US Presidential Election: Members of the Electoral College will meet and cast their ballots for president and vice president
  • December 31 – Brexit: End of the transition period

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Cases Starting to Overwhelm the Vaccine

A question that you must ask yourself now is what holds more risk to FX right now – the record number of cases presenting in Europe and the US or the multiple vaccines that will be rolled out over the coming 6 to 12 months?

If we were arguing equities – market theory dictates that equities price 12 months ahead of time and come November 2021, the majority of the world will likely have been vaccinated.

But we are discussing FX and what is happening in the bond market in our view is the more telling stat for right now. US 10 treasury yields have been as high as 0.94% as presenting cases in the US are on track sometime early next week to be 200,000 a day. New York and Chicago ordering activity restrictions. Wisconsin and Michigan the same and even though Florida is resisting lockdowns, they are coming.

Infections are skyrocketing across the US and Europe

US fatalities have reached their highest point since May. Based on the data from Johns Hopkins University, the death toll in the US is now at 250,029, which is higher than any other countries. Also, hospitalisations have jumped 13% in five days across six states.

Then we look at Europe, Italy’s fatality rate is at its April peak, France is now ‘at capacity’ for hospitalisations and is the first European nation with over 2 million known cases. The UK and Spain have now reported 1.5 million cases and that figure will no doubt get bigger still.

This has to be a short-term drag, and the early data released for October, a month that saw cases starting to increase, suggests it is. US retail sales figures fell in the month of October (missed the market expectation of 0.5% and arrived at 0.3%), Europe data is showing signs of slowing. Stay alert and receive latest market updates on major events.

How is risk FX reacting to it?

This is causing risk FX to break up at the moment with the EUR separating itself from the likes of the AUD.

EUR/USD

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AUD/USD

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As the charts show, the risk-on trade is being applied to the AUD/USD pair, news of the vaccine and that Australia is managing the COVID crisis better than most is seeing it holding the November gains. EUR/USD, however, lost momentum even with the positive news from the vaccines, there is an interesting setup building here.

A pattern that we will be watching closely over the coming weeks as the northern hemisphere moves into peak winter.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Wanting Risk and Overbuying Risk are Two Different Things

Two big risk-on events this week have put a rocket under risk markets.

  1. President-Elect Joe Biden declaring victory but with possible checks and balances from a Republican Senate, a win-win according to the market.
  2. A COVID-19 vaccine from Pfizer and BioNTech providing very promising results from stage 3 trails.

The surge in risk buying has been going on now since Biden’s lead in major swing states took over (late last Wednesday night). The news that the stage 3 Pfizer/BioNTech trials (which is a very crucial stage in vaccine development) prevented more than 90% of symptomatic Covid-19 infections in over 40,000 volunteers is not only the most encouraging scientific advance to date, but it’s a sign that 2021 will likely be very different to 2020.

Too early to go for risk-on markets?

Risk FX initially took all of this as a signal to ‘turn on’ however as time progressed, it was also clear that risk has a dilemma. These positive external factors are over 6 months away from taking effect and possibly 9 months in respect to the COVID-19 vaccine reaching full herd-immunity. According to Pfizer, 50 million doses will be supplied by the end of this year.

There are some short-term risks that need to be considered.

EUR/USD

Second and third waves in the northern hemisphere are reaching new record infection levels (with the US recording over 130,000 cases in a single day), the impact on consumption and confidence will be huge. It may explain why EUR/USD has been patchy even after reaching a 2-month high.

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The pair clearly hit a resistance and that looks to be an issue for it going into the long winter months of the Northern Hemisphere. It is not helped by the knock-on from surging US yields.

Yet, according to the economists at Rabobank, they are optimistic about the pair as they have curtailed their predictions and revised their “three-month EUR/USD forecast to 1.17 from 1.16” and their “6-month forecast to 1.18 from 1.14” based on a lower expectation of the USD.

GBP/USD

The other issue is Brexit, the 31st of December is looming large, Westminster is far from united and the EU is running out of patience this could make the end of the year very tricky for the GBP. It is one risk to watch. Traders should also pay attention to the 26th of November, which will be the date when the trade deal must be negotiated and presented to the European Parliament.

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This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation and therefore it should not be relied upon as such. You should seek your own advice.

Trading Currencies: It Isn’t Over Until It’s Over

America has chosen Democrat Joe Biden as its 46th president of the United States. But it’s clear that President Trump will fight it out to the very end with legal challenges and recount petitions. This is far from over and currency markets are reflecting this.

Trends of Major Forex Pairs

Here are the ranges of the major pairs and the basket itself since the close of the polls on the East Coast to now.

EUR/USD

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The euro edges higher against the US dollar as the election results are awaited. As of the time of press, it hit the one-week high 1.18 threshold.

USD/JPY

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USD/JPY is traded with a negative bias amid a mildly softer tone surrounding the US dollar. Market’s hope for a blue wave victory is weighing on the USD.

GBP/USD

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After the BoE expanded its QE program by £150 billion and maintained cash rates at the same 0.1% level, GBP/USD jumped to near mid-1.3000s.

AUD/USD

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The Aussie pair continued to edge higher as the votes are counted. Analysts at UBS predicts that the Aussie pair is likely to surge towards 0.74 by Sep 2021.

DXY

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It is obvious that US dollar index is falling on the uncertainty that is coming from the elections. Its momentum remains weak near the 93.42 region.

As expected, if Trump took Florida, which he did, FX markets would react strongly and would see a repeat of 2016 becoming fact. It certainly led the bookies to flip their betting markets as fast as they did in 2016 on Florida’s declaration and that sent currencies with it. This will likely to continue in the interim.

Election Results & Beyond

Going forward, now there are several factors to consider:

What does the Senate look like?

Currently it looks like the Republicans will hold the Senate and could hold up policy over the next 4 years. Tax and regulatory reform were pillars of Biden’s campaign; this scenario might now be watered down with a Republican-held Senate.

Other Factors Not To Be Left Out

Elections aside, there are still several important issues that traders should keep a close eye on in the near term:

  • Nonfarm Payroll of October – Market is expecting the US economy to add 600K positions, with 661K jobs in the previous month. US employment sector is foreseen growing yet at a slow pace.
  • Covid-19 – Cases keep mounting in the US as there were more than 100,000 new infections recorded in a single day.
  • Brexit – 26 Nov will be the date when the trade deal must be negotiated and presented to the European Parliament. Yet, the UK and the EU are still stuck on the fisheries issues.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Waiting for a Blue Wave or Status Quo?

Under a week into the US election and there is also already a statistic that is standing out. Early voting in the US has reached 50.2% of the total vote cast in 2016. That puts the 2020 election on track for the highest ballots cast in US history. If a winner can be announced on Tuesday, it should be decisive, however nothing is assured in the lead-up to this election.

The volatility index (VIX), also known as Wall Street’s fear index, has been on the rise and it surged to above 40 on Thursday, which is its highest level since June. It is obvious that the US election uncertainty is adding pressure to the markets. Volatility is likely to be high and market gaps might appear.

Currently, the election is creating a very short-term ‘nervous lull’ in currencies as seen by the soft ranges in the USD.

Pairs That Are Worth Paying Attention To:

EUR/USD is holding between $1.1796 and $1.1839 despite COVID issues flaring in France, Italy and now Germany. Further shutdowns and possible cuts to workforce and social interaction heading to the winter months is a daunting prospect for the already faltering European economy. The analyst team at Rabobank predicts that there is “risk of a dip to 1.16 in three months”. The pair has some real headwind risks coming in the next 8-10 weeks.

GBP/USD continues to rise now above $1.30. This is despite the fact that Brexit is becoming a huge risk for the pair and that the UK is bordering on having to enact strict stage 3 lockdowns for a second time this year. Receive the latest updates on world news for your trades.

AUD/USD too has been rangebound, holding between $0.7110 and $0.7160. There is an array of data due out this week that might move the dial here. But the reaction to the CPI released on Wednesday was next to nothing falling 10 pips even with a better read than expected. The pair is waiting for the RBA next Tuesday where it is expected the RBA will enter the quantitative easing market.

Key Dates to Follow Next Week

  • Nov 3 (Tuesday) 14:30 (GMT +11) – RBA Interest Rate Decision
  • Nov 4 (Wednesday) All Day (GMT +11) – Presidential Election
  • Nov 5 (Thursday) 23:00 (GMT +11) – BoE Interest Rate Decision
  • Nov 6 (Friday) 06:00 (GMT +11) – Fed Interest Rate Decision

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Waiting for November

14 days to go in the US presidential election which is seeing the President racing around the purple states as fast as he can. The more rallies he holds, the closer this race will be come. Do not be surprised to see the polls tighten right up as he is targeting counties that only need a handful of votes to swing back to him.

This will put some volatility back into FX and indices and it will probably lead to some gapping and spread widenings the closer we get to election day. RBA’s deputy governor Guy Debelle describes the latest market behaviour as having this notable feature: “how sharply market conditions deteriorated and how quickly they recovered”.

Be mindful of this as the uncertainty and unforeseen results will see very sharp and quick movements, particularly in FX. Mind your stops and your positioning.

What are the major events that could turn the market?

Events moving the dial now:

  • House Speaker Nancy Pelosi declared she is ‘optimistic’ a deal could be reached on the latest COVID-stimulus bill and that the value would be in the range of US$2.2 trillion – the amount the Democrats have always wanted.

Curbing that ‘optimism’ was Senate Majority Leader Mitch McConnell stating that if a stimulus package comes before the Senate, passed by the House and also backed by President Trump, “[he] would consider it”.

Furthermore, Republican Senator Thune stated “it would be hard” to find enough Republican Senators to back a $1.8 trillion stimulus let alone a US$2.2 trillion bill.

  • European COVID-19 cases continue to surge. Germany had a record rise of 8,397, Italy 10,874 – the highest level since May and the UK 21,331 as it put Greater Manchester in a strict Stage 3 lockdown. Ireland too entered its strictest lockdown of the pandemic, it’s going to be a very long winter.
  • The final presidential debate on Oct 22 is expected to create momentum in the market as the second debate was cancelled due to Trump’s refusal to participate in a virtual debate after he was tested positive for COVID-19. The topics that both candidates will debate on in their final face-off are:
    • Fighting COVID-19
    • American Families
    • Race in America
    • Climate Change
    • National Security
    • Leadership

Varied performance in major USD pairs

This has led to very mixed movements in the USD against the G10, it was weaker against the European group but stronger over the Oceania currencies which is not what one would expect.

EUR/USD is now back above $1.18, jumping some 50 pips in 24 hours to a new 1-month high. Analysts at Danske Bank predicts that the euro may march towards 1.20 in December if there’s “a Brexit solution, a Biden win and an EU budget agreement”. On the Sterling front, GBP/USD continues to gain ground at $1.294. Get latest updates on the US dollar trend.

Compare this to the AUD/USD which hit a new 1-month low of 0.7021, this is a solid support level and should bounce, but it is clearly being tested. Weighing on the Australian dollar includes RBA’s dovish expectations. Early this week, when the RBA discussed the options of reducing the targets for the cash rate and the 3-year yield towards zero, AUD/USD slipped through the support level and traded around the key 0.7000 psychological mark.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Not All One Way (But Close)

It’s interesting how strong ‘risk-on’ trading has been over the past 3 to 4 weeks. The US dollar basket since the first Presidential debate has almost been in a downward linear trend that suggests the market is actually backing a change of administration at the White House.

Today (Oct. 15) was originally scheduled for the second US presidential debate in Miami, but it was cancelled after President Donald Trump said he refused to participate. Final round will be held at Belmont University in Nashville on Oct. 22.

DXY since September 28:

However, there are a few issues outside of the US election that are creeping into the trades.

AUD/USD – Challenging relationship with China

AUD/USD had been pretty steady around $0.7210 for a little while. However, news that China might be looking to freeze imports of coal from Australia broke the trend and knocked the pair to $0.7175.

Australian Treasurer Josh Frydenberg said in a conference this week that the linkages between China and Australia in terms of coal import are vitally important to the country, yet the relationship is mutually beneficial as well.

Australia’s economy has performed rather well through the COVID crisis and is likely to remain one of the better performing economies in the coming 12 months.

EUR/USD – Second wave is making a heavy comeback

EUR/USD is also coming under pressure as the second wave in Europe builds to levels not seen since the March peak with Italy’s active cases rising to 5,901 from 4,619, France now has 21,329 active cases while the Netherlands announced a partial lockdown by closing bars, restaurants and cafes from Wednesday as its active case start to impact hospitalisations. All this has seen EUR/USD down to $1.1743, a 65-pip fall, in 24 hours and is showing further weakness.

GBP/USD – Records highest daily rise of COVID cases since March

GBP/USD is suffering from the same issue as the UK’s second wave sees a new tiered lockdown structure. Currently there are 17,234 active cases, however it’s the fact that cases are now growing at a rate not seen since March that has GBP/USD on edge (~5000 cases a day). Hospitalisations stand at 3,905 but that number is sure to increase. GBP/USD fell 1% to $1.2935 and will likely fall further if numbers continue to spiral and/or lockdowns get stronger.

Vaccine news could drive the market

Given the fact that COVID is still impacting the market prices as the recent surge of cases has become increasingly worrying, headlines that evolve around the vaccine progress are likely to move the market prices dramatically. Just earlier this week when Johnson and Johnson paused its coronavirus vaccine trials after a participant experienced an unexplained illness, EUR/USD slipped below 1.18 and US stocks edged lower. Volatility will continue to be high in the coming weeks. Stay alert on news and manage your positions with risk management tools.

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Tweeting the Night Away

The Tweets that Broke the Market

Never forget how powerful 280 characters can be on FX especially when those 280 characters are in the hands of the US President.

For the past week, even when the President was diagnosed with COVID-19, markets both in equities and FX were moving in a ‘risk-on’ fashion on the belief that House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin would finally come to an agreement and pass the next COVID-19 stimulus bill.

But in the space of a 10-minute tweet spree from the President announcing [that he] “instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business”, that idea was dashed.

Currencies Against the USD Went on a Slide

Interestingly enough, this goes against what the Federal Reserve believes. Jay Powell has again been testifying this week that fiscal policy should and can be used to get the US economy through the COVID-19 crisis. A point can almost be summarised as: ‘there is never too much stimulus’.

Trump’s decision to scrap the next tranche of stimulus has seen the USD ratch higher, seeing the EUR/USD dropped from $1.1790 to 1.1735, GBP/USD has now fallen a full cent to 1 cent at 1.2875. AUD/USD was already under pressure from the RBA’s tone, then Trump’s tweet storm sent it to 0.7100. Receive latest price updates on 60 hottest FX pairs

Gold Also Crashes on the News

The same happened to gold price – the bright metal plummeted 2% from a 2-week high and broke well below the $1,900 mark to around $1,877 on the news as there was a wave of selling pressure kicking in.

From gold’s trend direction, it’s clear that the market was hoping strongly for a fiscal deal. As Daniel Ghali, commodity strategist at TD Securities, mentioned, “gold has actually conditioned from a safe haven asset into an inflation hedge asset”.

He went on to explain, “as an inflation hedge asset, the bottleneck here is actually inflation expectation. The market would need to see them rise further to pull real rates lower and gold higher.”

Gold often benefits from stimulus plans as it is widely viewed as a hedge against inflation and currency depreciation.

Future of the USD Trend

Why this news matters so much is that with the stimulus bill off the table, the election becomes the only game in town, and history is now your fundamental and technical gauge.

This chart shows all US elections back to 1992, what it highlights is that the USD has appreciated in the 70 days leading up to the November election when the incumbent administration has lost.

Chart, histogram

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Right now, the USD has just traded in green (mustard line) again after falling in line with the stimulus bill. With 26 days to go, the second and third presidential debates would be the key market focus. Considering Trump intends to participate in the debate on Oct 15 despite his condition, it would be interesting to see how it would go. Traders have to beware, the polls and any further signs that Trump is losing ground will likely see the USD moving higher still. Stay alert and watch the news closely

Upcoming events that may affect the trend of USD:

• Oct 15 (Thurs) 9:00-10:30pm EDT – Second presidential debate

• Oct 22 (Thurs) 8:00-9:30pm CDT – Third presidential debate

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Into the Final Straight

With the first US presidential debate on the 29th, we have officially entered the final phase of the 2020 presidential race, a race that is getting tighter than we realise.

Although most polls suggest a Biden win, how the final results will fall is still a mystery, and FX trading is reflecting this risk.

DXY’s Recent Uptrend – Could It Be A Telling of USD’s Future Path?

Since entering the final 60 days of the campaign, the US dollar basket has begun to pop and is trading in a strong upward channel. It has added as much as 300 points since the 60-day mark as seen in this chart. Check USD price today.

Keep an Eye on the Following Issues If You’re Trading DXY and USD

There are five main issues of the campaign that are beginning to take shape, and these issues, when discussed by the candidates, are moving DXY.

These include:

  1. The Supreme Court – the reactions to which can been seen from the 21st of September after the passing of Ruth Baber Grinberg.
  2. COVID-19 handling – this is a big issue for Trump’s re-election, over 60% of American are worried about the handling of the disease.
  3. Race and violence in the cities – Handling of this issue varies greatly between the two candidates and will spark fierce debate.
  4. The Economy and its recovery – polls suggest Americans see Trump as a better candidate here. If Biden wins, the initial reactions in FX and equities may be a slight negative from an economic reasoning.
  5. Validity of the Vote – this is building as one of the biggest risks in the market. The President continues to seed this idea to his supporter base – a contested election would put volatility front and centre and would ramp up risk-off trading.

How Is the Market Forecasting the USD Trend?

If we try to take a look at the market forecast of EUR/USD, we will notice that experts are mostly predicting a bullish trend for the pair in the long run. Given the high uncertainty surrounding the US politics as well as its economy, it’s obvious that the market is unsure how the USD trend may go. Nonetheless, as the election draws closer, the debates would offer fresh clues and ideas for USD traders.

Source: Data on 25 Sep on Mitrade (updated every Friday)

If USD’s Broad Weakness Continues, How Can Traders Make the Most of It?

With the election happening in just a month and with two more debates to go, it’s very likely that USD trend will go on a roller-coaster ride with unpredictable turns and loops. Yet, the good thing about trading forex or even index derivatives is that traders have the freedom to decide to go long or short based on the market’s trend. With derivative market’s characteristic that allows traders to buy/sell with leverage and relatively low deposit, traders can grasp more opportunities during this volatile period.

Mark Your Calendar! Most Important Events to Trade on for USD Traders:

  • Oct 7 (Wed) 7:00-8:30 pm MDT – Vice presidential debate
  • Oct 15 (Thurs) 9:00-10:30pm EDT – Second presidential debate
  • Oct 22 (Thurs) 8:00-9:30pm CDT – Third presidential debate

In the upcoming debates, the 5 issues mentioned in the above will be discussed and dissected by the candidates and it will surely drive FX direction and momentum. Traders should stay alert on the headlines of the debates as well as the overall US politics.

This article is prepared by Lucia from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Trading Currencies: Pulling One Out of the Bag

The RBA’s Policy Tools

The RBA appears to be ‘pulling one out of the bag’. Having exhausted all its policy tools in March by setting new records lows with cash rates and market intervention, the RBA’s communication has been that the Board hoped fiscal policy would now be the main driver for economic growth. In other words, the board was out of policy ammunition. Check out price of AUD today.

New Tools to Revive the Economy?

However, in a speech to the Australian Industry Group, it appears that maybe the Board has one more package to pull out to help ‘Team Australia’.

The package would likely include:

  • Cutting the cash rate to 0.1% from 0.25%
  • Extending its bond purchase objectives to capture 5- and 10-year bonds

(Considering it’s advocating for the Federal and State governments to spend up big, lowering the borrowing rates for government is a Team Australia move. It also looks like making this program open-ended.)

  • Expanded the Targeted Curve Control (TCC) program in the 3-year bond to target 0.1% rather than 0.25%
  • Term Funding Facility (TFF) also moved to 0.1% from 0.25%

What this means is that what is referred to as the ‘effective lower bound rate’ is being moved to a new ‘effective lower bound rate’.

When will this be happening?

The time of this action is now forecasted to be the same day as the Federal Budget – October 6. This would be a ‘double-whammy’ on the stimulus front for both the long and short term as huge amounts of monies are released into the economy.

The reactions in the AUD from the speech have been telling. Get price updates on AUD now.

Recent AUD/USD Trend

There is clear breakdown from his speech and now a second breakdown of a wedge pattern has occurred as economists line up to confirm the view that the Bank will move on October 6.

How is the market forecasting the AUD trend?

Throwback to last Friday, experts from derivatives industry were quite divided on the trend of the AUD in the coming week. Yet they were holding a bearish forecast on the pair in a month’s time. As the forecast is updated on every Friday, it is likely that the experts will have a consent on a bearish trend this week after Guy Debelle’s announcement on Tuesday.

Source: Data on 18 Sep on Mitrade (updated every Friday)

Keep an eye on the derivatives market

Volatility of the AUDUSD in derivatives market has recorded as high as approximately 34.6% since the beginning of this year, together with the 0.4%* price slam on the remarks on Tuesday. Forex is still widely traded over-the-counter, where traders are allowed to trade with leverage and relatively low deposit. With the product’s characteristic that offers traders the direction to go long or short, traders can grasp more opportunities during this volatile period.

Traders can observe the volatility, but be wary nearing the October 6 meeting as volatility will be high as there is a chance the Board could wait until November to move. Receive updated news that may affect the AUD price movement.

*Source: News from Mitrade

The article is prepared by Lucia Han from Mitrade. Get more in-depth analysis and explore their award-winning platform.

Trading Currencies: Out of Ammo

The minutes show that the Board is, (at this point) unwilling to entertain highly unconventional monetary policy tools such as negative rates or further quantitative easing policy and its only course of action is to ‘persuade’ fiscal policy to do more, something that is still falling on deaf ears.

This means the market knows the RBA can’t actually influence the Australian economy any further than it already is, which means, more importantly for traders, it can’t push down on the AUD.

This line from the minutes was the most ‘eye catch’ as it sums up the RBA’s dilemma:

“Members note that the AUD was broadly in line with its fundamental determinants, a lower exchange rate would provide more assistance to the Australian economy in its recovery.”

This comment basically concedes that there is no policy option on the table, and thus the AUD is free to roam as it requires, which would explain its continued push to test $0.74.

The ‘fundamentals’ the RBA eludes are solid:

Bulk commodities continue to strengthen as China continues to stick with its motto of “when in doubt, spend your way out”. For example, over the past three months Chinese iron ore imports have registered three record level which explains the why the price of iron ore is currently so high.

As observed from the trend of AUD/USD since the beginning of this year, we will notice that the pair has been on an uptrend since March.

Barring the Victorian issue, the Australian economy has recovered better than many global peers.

Couple this with the weakness in Europe and the UK as well as the disjointed recovery in the US, this all points to a strong AUD over the coming period, something the RBA would like to ‘right’ but just can’t.

The article is prepared by Lucia Han from Mitrade. Check out more about the company.

Trading Currencies: 8-Week Mark, a New Trade Challenge Begins

FX, equities and to some extend commodities have been trading on the re-opening global economy (as they should) and have exploded.

However, the fact that late last week the US equity markets began to sell off and the USD started to climb that ‘8-week pre-election pattern’ caught our attention for good reason.

If we look back at US elections, even including the unexpected Trump election in 2016, equities, on average, ease and the USD appreciates. There is no reason to think 2020 will be different, even with a controversial President and a once-in-a-generation pandemic.

Many would agree that a pullback in equities was coming ahead of both fundamentals and technicals. However, there is a clear sign that the US Presidential election is beginning to creep into trading. Something that will build further leading into the first Presidential debate on September 29.

From there, dates to watch include 15 and 22 October which are the second and third debates and then the day that matters is 3 November.

Going forward, the dollar basket is the market to watch and considering it’s coming from a very low base having been sold off in droves in the past 4 months, a steeper than normal 8-week Presidential election trade could eventuate, especially as the polls narrow and polls from swing states get released.

We are moving into an interesting short-term period, one that is likely to present interesting trade opportunities, but we will also see strong bouts of volatility, so be on guard for gapping and trade spikes.

For a look at all of today’s economic events, check out our economic calendar.

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