US DOLLAR, FOMC, US FED & Others

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Original post - 10th May 2019 

Posted here - 10th May 2019

[Trade Deal Update] The latest is that the Chinese Premier and US Ambassador have begun trade deal discussions that shall continue into today. While the talks are on, U.S. tariff rate has risen from 10% to 25% on $200 billion category of Chinese goods as the deadline passed. Today could be a make or break day on this crucial issue.

 

Price action from the last few days demonstrate how all markets are interconnected and move in perfect correlation whenever there is a global macro-economic event in play. These are rare events & new traders should observe the price action closely to build their acumen on such correlations. Building on these basics in the real world scenario goes a long way in one's trading journey.

From a trading perspective, US indices & Oil are moving within a narrow range, back & forth with a 100% correlation. As S&P moves from 2840 to 2880, WTI does the same from 61.5 to 62.5 & vice versa. Similarly, all JPY, CHF, AUD, NZD pairs, also called risk appetite or carry trade pairs, are oscillating in their respective tight ranges. Base metals like Copper, Zinc, Aluminum, Nickel & Lead are doing the same.

In a nutshell, it shows indecision between traders on both sides, some anticipating a deal & others on the no deal side. Any new Trump tweet or news update will have HUGE knee jerk reactions. Large positions without stop losses can wipe out account in minutes. 

Trades made on binary outcomes is pure gambling and most professional traders stay out of it. Once the news is out of the way, there will be plenty of time to make fresh entries & points based on technical charts.

 

 

Original post - 6th May 2019 

Posted here - 9th May 2019

 

Events related to the US-China trade deal that may cause more volatility this week

1. A large Chinese delegation is set to visit Washington on May 8th. Markets shall react to all news feed & possibilities, be it, cancellation of the visit, deferred visit, visit but no deal, visit & a deferred deal, visit & a successful deal.

2. In an event the visit is cancelled or there is no deal, on May 10th, Friday, the 25% hike shall take effect. This shall also be an indicator of the extended trade war.

3. One likely middle ground possibility is for Chinese delegation to visit Washington and even if the deal is not signed before the Friday tariff deadline, President Trump could sign an executive order to hold the Tariff policy.

 

So, there is going to be a lot of volatility on both sides. There shall also be a lot of headlines and rumors. Please refrain from any urge to gamble the news/reports. Knee Jerk reactions can wipe out accounts in minutes.  Preserve your capital. Stay in the game for the long run. Wait for the right opportunity based on technical charts. Be patient.

 

"Patience is not simply the ability to wait - it's how we behave while we're waiting." - J. Meyer

Original post - 6th May 2019 

Posted here - 6th May 2019

[Trump Tariffs and its impact]

President Trump has been tweeting that "China paying tariffs to US in billions of dollars is helping the US economy". 

How far is this true?  Let's dig deeper.

What does Tariff mean?

It is a tax paid on imported goods. So, Chinese goods to the US shall be subject to extra tariffs of 10-25%. 
Example:- A Chinese television made in China imported by US company shall need to pay extra tariff of 10-25% before it is released by US customs to be sold to the US consumer.

Who pays the Tariff? 

VERY IMPORTANT TO UNDERSTAND THIS. Tariff is paid to the US Customs by the US broker representing the US importer, NOT the Chinese exporter. So, the Chinese government actually PAYS NOTHING.

What is the consequence of this Tariff?

Chinese goods get more expensive for US consumers. So, in the near term, US importers will suffer because of higher costs which shall either get passed to US consumers or get absorbed resulting in lower business profits or lower compensation to their employees. Eventually, Chinese goods shall get replaced by cheaper goods from another third world country which is not subjected to these tariffs. 

Will this help boost US revenue and economy?

The simple answer is NO. US expects to collect more than $3.7 trillion in taxes in 2019. The tariff revenue of $22 billion dollars is nothing more than loose change [~0.5%].

What will be the REAL impact of tariffs on the US economy?

No real HELP to the US economy as President Trump claims. US consumers will end up paying higher for the goods until they get replaced by another third world country that dosen't have to pay the import tariff.

Decline in Chinese exports would mean the Chinese currency shall depreciate. It shall also mean China would collect less US dollars and invest less in US treasury securities. 

China holds approximately $1.17 trillion of US debt/treasuries. As a reaction to its depreciating currency, if China chooses to sell even a miniscule percentage of this US debt, Dollar shall plummet and this would result in selling of USD and US debt world wide. So, US economy shall have far reaching long term negative impact from these tariffs.

Hope the data provides better perspective on Trump's tweets. Fundamentals in trading is all about understanding the deeper data, not the superficial headlines or tweets.

Original post - 10th April 2019 

Posted here - 5th May 2019

Member Query: Like Gold, Why is Yen (JPY) considered a safe haven? Why did JPY rise 200-250 pips around March 23rd against all currencies? Please explain in simple language.

Answer: Let's understand this with a simple hypothetical example.

Let's say there are 2 Banks - Bank A in your country and Bank B in another country. 
Bank A offers 5% interest rates on deposits & loans
Bank B offers 10% interest rates on deposits & loans

What would one do?

One can borrow funds from Bank A and deposit in Bank B to make an easy 5% gain as long as this difference/arbitrage remains.  This is called CARRY TRADE in financial jargon. Whenever you have funds available, you would always prefer to invest in Bank B because it generates low risk, guaranteed higher yields for you. 

Now, if A changes the interest rate policy from 5% to 11% on deposits and loans, what would one do?

One shall close the deposits in Bank B and bring back the funds to repay the loan to Bank A before this policy change happens.

This is called"CARRY TRADE UNWINDING"

Now, let's scale this to the global forex markets.

Japan = Bank A
High interest economies = Bank B


Since Japan has been struggling with deflation for many decades, the interest rate in Japan has been close to zero for a long time. This allows investors to borrow at very low interest rates and invest in other economies in assets that yield higher interest rates.

In the forex markets, JPY or Yen is continuously sold against other currencies like USD, GBP, AUD, NZD etc as a part of this carry trade. This continues as long as the world financial markets are showing demand improvement, stable growth, moving higher with small corrections. 

But, as soon as these high interest economies show signs of slow growth,recession,stagflation, investors UNWIND their carry trades resulting in JPY or YEN strengthening against all currencies.

On March 23, JPY gained against all currencies because of Yield curve inversion showing very early signs of slowing growth or recession in the future.

Carry trading unwinding results in strengthening of YEN or JPY and hence it is called a Safe Haven asset.

During the 2008 financial crisis, carry trade unwinding led to a drop of 
GBP/JPY from 250 to 120
USD/JPY from 125 to 88 &
EUR/JPY from 160 to 110
.
 

Original post - 27th April 2019 

Posted here - 27th April 2019

[US GDP Analysis & 2 cents] US released its GDP figures for the first quarter of 2019 that came in at a staggering 3.2% compared to a forecast consensus of 2%. In the normal course, the difference between actual and consensus is  in the region of -0.3 to +0.3%. But this time around it has been an uncharacteristic 1.2%. That’s a 50-60% jump in GDP figures v/s forecast.

A stronger GDP always supports the country’s currency. On the face of it, this should mean that USD is going to strengthen, precious metals are doomed in light of the inverse correlation, stock markets should rally CAUTIOUSLY, since on one hand, the US economy seems to have shrugged off all slowdown concerns, and on the other hand, higher GDP could trigger inflation expectations, which shall again bring the focus on US interest rates going higher, putting pressure on stocks. 

Plenty of news wires without any research whatsoever already carrying headlines that fear of a potential slowdown generated over the last few weeks is irrational and preposterous. It is all rosy for the US economy from here on.

IS THIS ALL TRUE? 

SHOULD WE BELIEVE NEWS HEADLINES THAT HAVE LESS RESEARCH AND DEPTH BUT MORE SENSATIONALISM for higher web traffic and advertising revenues?

SHOULD ONE JUST BUY DOLLAR, SELL ALL PRECIOUS METALS BASED ON THIS “SUPERFICIAL” MEDIA COVERAGE?

If this is true, why did Dollar and Gold see an inverse move on Friday? Are traders not buying into the news headlines from majors such as CNBC, Bloomberg, Reuters, Foxnews etc?

When one leaves the superficial news articles and researches deeper into the data, one discovers that most American businesses “out of fear” of the continuing deadlock between US & China on the trade deal have STOCKPILED HUGE INVENTORIES at an exceptional accelerated rate. 

While this helps the GDP numbers shoot up temporarily, but it creates a lot of pressure on US businesses to work this inventory off over the next few quarters. The consumer demand data in the US is already starting to slow down. Any breakdown in talks between US and China may bring US economy to a massive halt. 

Just because the word “slowdown” isn’t appearing in the headlines of news, dosen’t mean it is not happening or about to come. 

From a trading perspective, the next few weeks will bring out US trade deal details in the public domain & they shall have to be analyzed thoroughly and it shall bring some great multi-month opportunities in Dollar index, Precious metals, Base Metals and Indices. IT IS WORTH THE WAIT.

Also, requesting all members to banish the habit of trading on news headlines, tweets etc. Trading on news and tweets is the quickest way to blow up healthy accounts. The big guys/institutional professional traders know this behaviour of small players & run algos to hunt all SLs whenever headlines/tweets get released. Trading news/tweets is just gambling. Losing money in casinos is a lot more fun.

Did you know that most professional traders switch off from headliners - CNBC/Bloomberg etc and do not watch them, when they actively trade? Please read their interviews and you shall find this to be a common occurrence among all professional successful traders.

Professional trading is extremely data driven and scientific. There is no easy money. Only hard & smart work.

 

Jesse Livermore, one of the most famous traders in history after 30 years of trading in the US markets wrote in his book

“The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.” - Jesse Livermore

 

 

 

Original post - 21st March 2019 

Posted here - 23rd March 2019

 

[USD] Dollar strength is impacting commodities across the board including WTI. USD has retraced all of the losses that it incurred yesterday on account of FOMC knee jerk reaction. This is the whipsaw that we were referring to which lasts for several hours/sessions before and after FOMC trapping or deceiving small players on both sides. 

Yesterday, Dollar tanked and Gold/Silver spiked after FOMC. Today, the entire range has been reversed within 24 hours. 

This is exactly why we have been waiting on the sidelines on Gold/Silver.

 

Original post - 20th March 2019 

Posted here - 23rd March 2019

[Member Query] Can you please elaborate the shrinking of US Fed's $4.5 trillion balance sheet issue in FOMC and how it will affect markets?

[Answer] Explaining in SIMPLE words to help everyone understand

Let's say XYZ company is in a deep financial crisis and on the verge of complete collapse and is badly in need of some liquidity. 


ABC Bank comes to XYZ's rescue and buys all of XYZ's assets [Both good and bad], offers XYZ some liquidity/cash so that they can live to fight another day. 


While XYZ has a new life, ABC Bank is still holding on to all of XYZ's assets in its balance sheet. 
ABC Bank needs to figure out some way to liquidate/sell those assets.

What ABC Bank did with XYZ is called "QUANTITATIVE EASING" in economic jargon.

SCALE this above example now to the HIGHEST financial hierarchy within any country ->THE CENTRAL BANK

US Fed = ABC Bank in the example
Banking system that collapsed in 2008 = XYZ company in the example

After the 2008 crisis, to prevent a complete banking system collapse, US Fed bought $4.5 trillion of assets from the banking system to help them live another day. 

While the banks have survived, US Fed has $4.5 trillion assets in its balance sheet which needs to be SOLD or SHRUNK at some point of time. 


The problem here is if US Fed sold the assets, it will result in pulling money supply from the markets, thereby increasing interest rates in the US. 


Increase in interest rates means lower earnings for companies and higher USD. This shall create turmoil in the financial/forex/commodity markets.

This is the $4.5 trillion shrinking balance sheet problem that the US Fed is looking to solve through innovative ways without creating any turmoil in the markets.

We have made our best effort to explain this in simple words without using the complex economic/financial jargons.




Original post - 20th March 2019 

Posted here - 23rd March 2019

[FOMC Statement] Explaining in simple words 

US Fed has maintained a stand of increasing interest rates for almost a year which has strengthened dollar index from $88 to $97 during that period. Yesterday was a SURPRISE. 

While markets were expecting Fed to continue with its "hawkish" stand, Fed took a much more "dovish" position to increase the rates fewer times than previously anticipated since the Fed sees lower inflation, higher unemployment and slower growth in the future.

The surprise led to a knee jerk reaction with USD weakening across the board, DX tanking and Gold/Silver rising. The weekly closing price on all commodities, indices and Forex pairs shall be extremely important to decide the next direction. We shall be broadcasting views on each of them through the day today.