Trumponomics – Part 2

I have always wondered why banks and other financial institutions make their very highly paid staff issue reasoned, well-argued forecasts as to where a particular exchange rate will be at, say, 12 months in the future.

The main reason for my sense of wonder is why would anyone pay attention? These forecasts, no matter who makes them and no matter how big the name behind them, are almost always wrong, and no better statistically than random guesses. The idea that it is possible to predict Forex rates one year in advance would seem laughable to most Forex traders, as it does to me.

Now it is the turn of UBS Group AG’s $2 trillion wealth-management arm to go out on a limb, as they forecast USD/JPY will by at least 98.00 by this time next year: that would equal a fall of more than 7% from today’s price, and that is a very hefty drop for a major Forex currency pair.

The reason given for the forecast strengthening of the Yen and weakening of the U.S. Dollar is “Trumponomics”, i.e. the economic policies that are going to be pursued by the U.S. under the incoming Trump Administration which takes office in January.

UBS say that analysts are underestimating the protectionist side of Trumponomics and are instead over-emphasizing the reflationary element of tax cuts and increased spending on infrastructure. UBS go on to claim that these fundamental factors are bound to weaken the U.S. Dollar, and that the last thing the Trump administration will want is a strengthening U.S. Dollar.

To be fair to UBS, they are hardly alone in forecasting that the Yen will rise against the U.S. Dollar next year. JP Morgan are forecasting 99.00, which is quite close to UBS.

I have a suggestion to make: if the top analysts at JP Morgan and UBS are forecasting the Yen will rise against the USD over the next year by about 7%, they should have some skin in the game. How about half their salaries at least getting linked to the appreciation of the Yen?

One of the most foolish things any trader can do is make a forecast and trade based on the forecast alone.

If you have your own macroeconomic forecasts, a much better thing to do is to wait until you see the price moving strongly and decisively in the direction of your forecast, and then and only then, take the trade with confidence.

Fundamentals should be used as confirmation. Technical factors should always lead.

Economic Policy

More Brexit Confusion

I have written a lot about Brexit in recent weeks, because the story of the United Kingdom leaving the European Union is far from over, due to a few legal twists and turns.

Firstly, as is already known, English courts are currently ruling that the exit from the European Union cannot be triggered by the Government, but instead will require a vote by the British Parliament. This means that the exact terms of any Brexit, or even whether it happens it all, is still up for some debate.

In a separate but related development, it now seems as if the assumption that Britain’s membership of the European Economic Area (EEA) would automatically end upon a British exit from the European Union could be mistaken! Membership of the EEA requires free movement of people and tariff-free trade. Senior lawyers within this field are now indicating that they believe that a British exit from the EEA would require a vote by the British Parliament to have legal effect, and could not be triggered by a simple act of the executive.

This means that even if the British Government continues with its final appeal over the Article 50 ruling and gets its way, it is possible that an appeal over EEA membership could put the Government right back to square one in its democratically-mandated campaign to secure an independent Britain.

The British Parliament could vote to effectively keep Britain in the single European market, without technically contradicting the will of the people expressed in the Brexit referendum last June.

What does this mean for Forex traders? Essentially, it strengthens the case for a possible rise in the British Pound. Although the benchmark GBP/USD currency pair fell quite strongly today, it is no accident that in recent days and weeks the British Pound has been holding up much better against the strong U.S. Dollar than has the Euro and Japanese Yen.

The increased possibility of a soft Brexit or even no Brexit at all must be responsible for the recent relative strength in the British Pound.

Brexit

All Time Highs – Part 2

A little over a week ago, I wrote about how it is worth taking note of anything that is making an “all time high” (or low). “All time” in trading is usually taken to mean five years.

It was and remains a topical subject, because both the U.S. Dollar Index and the major U.S. equity index, the S&P 500 Index, were making all-time highs. In the case of the U.S. Dollar Index, it was only very close to making an all-time high.

I explained why all-time highs and lows are technically significant and are a time when trading with the trend can really put the odds in your favor.

Since I wrote that piece, on 16th November, the S&P 500 Index has gone on to make new all-time highs, and has risen by 1.71%. The U.S. Dollar Index has, over the same period, risen by 0.71%. Unlike the S&P 500 Index, it did not make a new all-time high on Friday.

It is worth noticing that stocks tend to move by larger amounts than currencies, meaning that if you can trade stocks or stock indices during a strong trend without paying huge spreads or overnight financing charges, it is usually more profitable than trading Forex.

As the S&P 500 Index is still making all-time highs, by the same logic, it is still worth trading. One of the pitfalls of trading trends, is that you can think to yourself it is too late to enter, a retracement is overdue, etc. You might be right, but the logic remains in favor of taking the trade.

All Time Highs

Trading Before a Major News Release

Most traders should be familiar with the following scenario: you’re waiting for a trade to set up and finally there it is, what seems to be a good entry presenting itself. Before you go ahead and make the trade, you suddenly realize (you should realize!) there is a high-impact data release due within, say, half an hour. In other words, close enough to the present moment to be a major cloud on the horizon.

Do you go ahead and take the trade anyway? It might seem to you that it’s a never-ending case of Murphy’s law: every time you take the trade, you get stopped out by the pre-release high volatility; every time you don’t, the trade goes shooting off in your intended direction.

The best advice I can give, is that we never know when something strange and unexpected might happen that is not scheduled. Therefore, it is important to always trade with stop loss set, in case there is an emergency.

Going beyond that, whether to let an impending news release that is scheduled stop you from entering a trade should probably depend upon what kind of method you are using to trade. If you are trading in the direction of a trend or short-term momentum, and your stop loss is not very tight, it is probably best to ignore the news release and take the trade anyway. There are several reasons for this.

1. “Accidents usually happen along the line of least resistance.” This means that in a strong trend, surprising news releases tend to match the fundamental case that supports the trend, so you tend to benefit from them over the long run.

2. Bull markets tend to over-react on positive news and disregard negative news. This means that if you are trading with an obvious trend, you should get a disproportionate boost from the news releases that support your trade.

3. There are a lot of scheduled news releases, especially for the most important currency in the Forex market, which is the U.S. Dollar. We tend to find enough excuses not to take good trades, don’t we? So, don’t give yourself another one without a good reason.

Now if you are using much tighter stop losses and just trading support and resistance in both directions, then of course, it is a good idea to avoid the half hour period either side of a scheduled news release.

You should always know when the major news releases are scheduled. You can use a calendar and check it at the start of your trading session. Why not download the DailyForex app for your smartphone to help you with this?

 

Yesterday’s Trade

The market has been quiet so far today, and news is a little thin, so I want to write about the trade I took for my own account yesterday as it illustrates some compound candlestick patterns which I like to use.

The first step I use in looking for trade entries is always to decide what Forex currency pair (or pairs) I should be trading, and in what direction. I try to keep it to a maximum of two. Yesterday morning, I decided that the best probability was going to be looking for long USD/JPY trades and short AUD/USD trades. This was due to the strongly bullish USD momentum we have seen over recent days, with the U.S. Dollar Index reaching new all-time high prices. The AUD and JPY have been the weakest currencies over recent days, which is why I chose them for the short counterparts.

I made two failed trade entry attempts during the early London session and lost a few pips. Later, as the New York session got going, I saw a nice set-up for long USD/JPY and made some positive pips.

I show the trade entry set-up in the 5-minute chart below. I started looking for a long entry after the candlestick just above the blue up arrow.

0122112016_usdjpy

Why here? Well, there were some good things about this area:

1. It is a double bottom. The last important low was made in the same area, and that can be seen a few candles to the left.

2. The key low of the day was below this double bottom, and can also be seen to the left on the chart. A higher double bottom is a bullish square root formation.

3. Note that the area of the lows of the double bottom is the same as the high of the previous area of congestion that the lowest low formed. This is a bullish “stair step” patter.

These three factors taken together convinced me that the price would be likely to rise to the next resistance level of 111.33 and maybe beyond that. It did hit 111.33 and was showing signs of going higher, but there was an earthquake in Japan that caused some volatility and turbulence which brought the set-up to a complete end. Fortunately, I took profit below 111.33 so came out ahead.

gbp1

Cable’s “Flash Jump”

As New York was getting ready to open today into a relatively quiet Monday’s market, the GBP / USD currency pair, one of the world’s major Forex currency pairs, rose by almost 100 pips in value in a matter of seconds. That equates to about 0.80%.

This very sharp and sudden rise was not triggered by any obvious news event or public piece of information.

By the standards of a “flash crash”, the movement was relatively small. Whether it was a true “flash crash” remains to be seen. It is worth noting that the last flash crash was also in this same currency pair and occurred only last month.

Some will see this as a sign that despite its enormous volume, the growth of high-frequency trading and black box algorithms within the Forex markets may be making the market more unstable and prone to sudden inexplicable movements in price.

British Pound

Brexit: Will U.K. Government Continue its Legal Appeal on Parliamentary Vote?

There have been some interesting developments in the U.K. on the Brexit front.

The Appeals Court recently held that Brexit cannot be triggered without a vote by Parliament, and there is some doubt whether Parliament would approve the Government’s exact exit terms or even whether it would vote its approval for exit at all.

The British government announced it would appeal the issue to the country’s highest and final arbiter of law, the Supreme Court.

Last Friday, the Supreme Court stated that the Scottish and Welsh devolved governments should have a say at any appeal. This would be very bad for the British Government, as both governments are strongly anti-Brexit, and could be expected to do everything possible to disrupt the Brexit operation.

This development has prompted some senior Members of Parliament from the governing Conservative Party to urge the government to drop its appeal and to get on with getting Brexit passed through Parliament as quickly as possible.

They say that Brexit would pass and cite fears that the Supreme Court might give a veto power to the Scottish and Welsh governments.

Importantly, though, it is worth noting that the Members of Parliament behind this move all supported the Remain campaign during the referendum last June.

Brexit

Finally, Some Peace and Quiet!

For the first time since the U.S. election one week ago, the market has been quiet and reasonably calm for several hours, offering little potential profit to be made. The upside of that is its nice to have a few hours to relax and count profits that have hopefully been banked already!

The reason why the market is quiet, is that there is a slew of several high-impact U.S. economic data releases due later (from the time of writing) when New York opens for business. With the U.S. Dollar making new all-time highs, the greenback is in strong focus lately.

Perhaps even more importantly, Janet Yellen, the Chair of the Federal Reserve, will be testifying to the U.S. Congress a little later today about the general economic outlook. This will be her first major input since the election last week and will be very keenly watched.

Of course, there is a near-unanimous consensus now that the Federal Reserve will raise rates by 0.25% in its December meeting next month, so it is not so much the case that analysts will be looking for clues there. Rather they will be looking to see if Yellen has anticipations about any changes in macroeconomic policy on the horizon from the incoming Administration.

Janet Yellen

All Time Highs

You might have heard that buying an all-time high is a great trading strategy with a positive chance of success. I agree!

For the purposes of trading, “all time” means five years.

The reason why it is in my mind today is because the U.S. Dollar Index reached an all-time high today.

Another reason is that the S&P 500 Index – the major U.S. equity index and by extension, the most important of all the global equity indices – is very close to reaching an all-time high. It hit a price of 2192.4 a few months ago (in August) and is not far off that level, reaching 2187.2 earlier today. It may well go on to make a new all-time high soon, possibly even later today.

It is true that there can be problems with breakout strategies, especially in Forex, and any strategy as simple as “buy the all-time high” is going to be some type of breakout strategy. A better way of managing it could be to seek to take only long USD trades when the U.S. Dollar Index is making a new all-time today, or has done so very recently.

To try to show you how well a “buy the all-time high” strategy can work, here is a little back test of a fast “long only” strategy using the 5-year high price. Buy the S&P 500 Index at the close of a day when it makes a new 5-year high and hold for 1 week.

Since 1971, it happened on 820 days, giving an average return (excluding transaction costs) of 0.65%. 54.27% of all the trades were winning trades. That is a total return of approximately 533%.

S&P 500 Index

Trumponomics

As the shock of Trump’s upset victory is slowly starting to wear off, attention is turning to exactly what kind of economic policies the new Presidential administration is going to pursue. It is a very big question, as the new administration seems likely to mount the biggest challenge to prevailing economic orthodoxy since 1980 or possibly even earlier.

News outlets are starting to zoom in on a “first 200 days plan” document which is being discussed by the Trump transition team, and which has been obtained by CNN.

The key proposals for discussion are:

  1. Renegotiating or withdrawing from NAFTA
  2. Stopping the Trans-Pacific Partnership Deal
  3. Stopping “unfair imports”
  4. Ending “unfair trade practices”
  5. Pursuing new bilateral trade deals
  6. Retain and return manufacturing jobs

The document suggests that Trump is serious about trying to effect real economic change, although how this might take shape and how watered-down eventual measures might be are very much up in the air.If such an agenda is forcefully implemented, it will mean some big changes for the U.S. economy, with some corporations big losers and other big gainers. U.S. government policies have increasingly become hugely influential upon the prospects of different industries and sectors.

As for the markets, stocks remain strong although the rally has slowed down, and it’s the same for the U.S. Dollar although the greenback is being boosted by stronger than expected retail sales data. The big story today is the bond market, which is being massacred with a big spike in yields explained as a reaction to an expectation that Trump will take strong measures to generate an economic stimulus. If your broker offers trading in government bonds, especially U.S. Treasury bills, it might be something worth looking at now.

Stock Market