Le Pen Flip-Flops on Euro

Today marks the halfway point between the first and final second rounds of the French Presidential election. There has been no movement in the opinion polls at all since the result of the first round became known one week ago: the polls are still showing Macron with a 20% lead in the straight fight between the two candidates. In my view, a lot of pundits are carelessly and thoughtlessly over-anticipating a potential Le Pen victory: I was wrong about Trump, but I will stick my neck out and say today, she will be soundly beaten by Macron. Polling was showing Trump close to and gaining on Clinton during the final few days of the 2016 U.S. Presidential Election, compared to the 20% gap we see here in the French polls. More importantly, there is no momentum in favor of Le Pen.

This is obviously why Le Pen has made a couple of changes this weekend that smack of desperation, as she tries to spark some momentum. Firstly, in return for promising to try to appoint him as her Prime Minister, she received the endorsement of Nicolas Dupont-Aignon. As far as endorsements from French political leaders go, that’s about it!

It was yesterday’s announcement, though, that was most dramatic: after signaling that she would seek an exit from the Euro common currency, she appeared to row back on that commitment, before flipping again within the past few hours! A short while ago she said We will have a national currency like all other countries, and we will have a common currency together,” she explained that euro should become the currency that will be used by “only large companies that trade internationally.” This does not make much sense, and in any case, such a muddle is likely to not cause any dramatic weekend movement in the value of the EUR/USD currency pair that would be visible when the market opens in Asia at the start of this week.

To provide some perspective, bookmakers were offering odds of about 5 to 1 on Trump winning the Presidential election just before the polls opened. Most bookmakers are now offering odds greater than 8 to 1 on Le Pen winning next Sunday 7th May.

French Flag

Eye on Japan

Later today the Bank of Japan is going to issue its usual monthly Monetary Policy Statement, Outlook Report and Policy Rate. The Yen has been one of the most volatile currencies during the past few years, and there is good reason for that – it is because the Bank of Japan had a challenging task in trying to manage the Japanese economy with its monetary policy. Initially, it was all about letting the Yen depreciate, and inflating the economy back to health. This was followed by signals that the fall had gone too far. However, lately we seem to be arriving at a place where the Japanese economy is more or less where the Bank of Japan wants it. Growth is picking up (helped by Chinese overperformance) and inflation is slowly starting to approach the Bank’s target. This suggests that a surprise from the Bank of Japan later is very unlikely (leaving aside the fact that surprises are always unlikely). One complicating factor is that the Yen is a safe-haven currency, so the Bank’s position is complicated by the fact that political tension can cause large capital inflows.

Does this mean that the Yen’s volatility of recent years is likely to decrease? Well, if we take the 30-day average true range as an example, it just made a new 1 year low a few days ago. It has been decreasing since the end of January, although the same has occurred throughout the Forex market overall, and the USD/JPY pair is still one of the most volatile of all Forex currency pairs. This suggests that the Japanese Yen still has a lot of action in it, and in fact it is nice to trade as it seems to move quite strongly after it “turns”. However, we are seeing more life come into European currencies such as the British Pound, so if there are no economic surprises or serious geopolitical tensions, it would not be surprising if the Yen became more stable.

Yen JPY

Exodus from Binary Options

Recent years have seen a new branch of the “Forex” world grow and take root, if I can mix my metaphors. That’s binary options, a type of trading different to “spot” which has always been offered by more traditional Forex brokers. The difference between these two types of trading tends to be confused. Both binary options and spot can be traded on the price of anything, Forex, commodities, CFDs, stocks, or whatever. The difference is how much the trader wins or loses depending upon the result. In “spot”, you trade the price itself, while in Binary Options, you trade a derivative of the price. For example, if you buy 1 lot of spot EUR/USD and the price goes up by 10 pips, you make $100. If the price instead goes down by 10 pips, you would be down $100. You can exit the trade whenever you want (if the market is open), and whenever you want.

Binary options trading is completely different. A typical binary option is a lopsided bet on where the price is at a specific time in the future. For example, if the price of EUR/USD is at least 1.0900 at 8pm London time tonight, you win 85% of what you bet. If it is not, you lose 100% of what you bet. So, there are two crucial features of binary options trading: a) to break even, you need to win at least 60% of your trades (given a typical payout of 85% on winners), and b) how far away the price is from the cut-off point is irrelevant.

When we consider that one of the most important maxims for profitable trading is “let your winners run”, we can see why binary options trading is a game for losers. The only way it can really benefit a trader, is if a trader has a very strong belief that a certain level is going to not just hold, but hold so strongly that there is a greater than 60% probability that at X time, the price will be on one side of that level. Such opportunities are few and far between and can only be exploited by true experts. So, for retail traders who do not have access to bank order flow, binary options trading is an almost impossible way to make any money.

I believe that these issues are beginning to percolate down into the collective consciousness of the trading world, and are causing many brokerage operations to move away from binary options. This is something we are seeing happen more and more. It also doesn’t help that, as traders lose so much money so quickly trading binary options, it is very attractive to criminals, who have set up a number of fraudulent binary options brokerages. These criminals have not only given binary options an even worse name than it deserves as a bad way to trade, they have also attracted to attention of law enforcement and triggered an increasing lobby for a worldwide ban on retail binary options trading. In fact, they have helped to give trading and Forex in general a dirtier image than they truly deserve, even given the other negative consequences that are an inevitable part of allowing people to trade freely.

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It’s Macron vs. Le Pen

I wrote yesterday that the high turnout was most likely to indicate a worse than expected result for Le Pen. In fact, the polls basically it right with a high degree of accuracy: they had Macron on 24.5%, Le Pen on 23% and Fillon & Melenchon at 19% each. The actual result was almost identical.

The election will now proceed to a straight fight between Macron and Le Pen on 7th May, and the same polls which predicted yesterday’s result so accurately are now forecasting a 22% margin of victory for Macron. It looks as if Marine Le Pen will be crushed in the second round against a mainstream candidate the same way her father was in 2002 when he was very comprehensively beaten by Jacques Chirac. However, it is worth noting that in this election, Chirac took 82% against Le Pen’s 18, whereas today’s poll suggests Marine Le Pen will win 39%, suggesting that the Front National has broadened its appeal over the past 15 years.

The result had a strong impact upon the market: relief that a main-steam candidate leads the race translated into a gap up to a 4-month high for the EUR/USD currency pair, while stock markets rose globally while safe-haven assets such as the Japanese Yen, gold and silver all fell strongly.

It would be logical to assume that New York will follow this sentiment when it opens, but the action has looked a little thin in recent hours and I have a feeling that an initial corrective sell-off is going to happen at the open. The market will then look to U.S. CB Consumer Confidence data due a little later, with a result above 124 likely to push stocks higher again.

Recent hours have seen rumors of an incident off the Korean coast, but it has not been verified and seems to be just a rumor.

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Polls Open in France

Round one of the French Presidential election has got underway, with polls closing at 8pm local time with initial results due at about 9pm. Initial indications are that the turnout is high and set to surpass modern records at over 80% of eligible voters. My gut feeling is that this shows a worse than expected result for Le Pen is likely, the same way that an above-average turnout helped the center in the recent Dutch election a few weeks ago. Continue reading…

Waiting for U.S. Dollar Direction

The market has been quiet so far today, which is typical when there isn’t much news scheduled for the London session, or at least that earlier part of it which does not overlap with New York business hours. There is also some U.S. Dollar-related news and events taking place later, and that is another probable reason for the quite dull trading that has been taking place so far. Firstly, there will be releases Unemployment Claims and Philly Fed Manufacturing Index numbers, which don’t usually create a lot of movement. Later, the U.S. Treasury Secretary Steven Mnuchin will be speaking at a Summit, and although it is not being billed as a major speech, I think this is where a spark for the market will be more likely to happen. Mnuchin and Trump have recently given some contradictory messages regarding the desirability of the relative strength of the U.S. Dollar, and anything Mnuchin may say touching on that could be influential. Continue reading…

British Pound Breaks Out

In a surprise announcement today, which took political observers completely by surprise, the British Prime Minister Theresa May announced she would seek an early general election, to be held on 8th June. The next election had been scheduled for 2020, three years hence, but as the opposition Labour Party announced it would support the early election, the new date looks almost certain to be confirmed by the end of Wednesday 19th June. Opinion polls point to a landslide victory for Theresa May and her governing Conservative Party, suggesting a majority of 112, the size of which has not been achieved by any Conservative leader since Margaret Thatcher in the 1980’s. The opposition Labour Party is forecast to win 183 seats, which would be its worst result since 1935.

What does this mean for the British Pound? It began to rise against all currencies as soon as the announcement was made, and when the Labour Party quickly backed the early election, it broke out of its long-term range. It has already made a high of 1.2729 against the U.S. Dollar, its highest price in more than 4 months, and well above the area it was trading in following the “Hard Brexit” announcement on 7th October:

GBP/USD, British Pound

The long-term triangle formation shown in the chart above looks to have been decisively broken, although the price could fall back down below 1.2610 within the next few days.

Traders who have been respecting long-term trends will have noticed that the GBP/USD currency pair was alreadyTheresa May starting to look bullish in recent weeks. Nobody can forecast political surprises such as this, but it is interesting how “accidents tend to happen in the line of least resistance”. It should also be remembered that the price is not far from recent and historic lows, which are always an attractive area for long-term buyers once the price starts to bottom out.

Why did the announcement make the market buy the British Pound? There are two theories, not necessarily contradictory. The first is that the election is very likely to produce a stronger and more stable government with a much larger majority in Parliament. The second, more doubtful conjecture is that Prime Minister May will use her mandate to negotiate a softer Brexit than had been backed by her current party representatives in Parliament.

Trump Talks Down the Dollar

During yesterday’s New York session, President Trump did an interview with Fox News in which he said a couple of things that the market took notice of, in addition to the generally increasing level of geopolitical tension regarding Russia, Syria, Iran and North Korea, with the issue of North Korea coming to the fore as we approach the weekend – but that’s another story. The President stated that the U.S. Dollar was too strong, and it fell immediately. He also implied that he was not keen on renewing Janet Yellen’s position as the Chair of the Federal Reserve when it falls due for renewal next year, although he also stated, “she’s not toast”. The President’s exact words were “I do like a low-interest rate policy, I must be honest with you…” which seems interesting in combination with his earlier remarks, almost as if he is trying to influence Janet Yellen’s policy on interest rates with a threat on her job. Of course, the lower interest rates can remain relatively low, the more jobs can be created and the more the stock market will rise, and the President obviously is in great political need of being able to point to concrete progress on the jobs front. The disappointing Non-Farm Payrolls headline number earlier this month may have influenced him into taking this statement. Continue reading…