A Goldie with long term potential.I always look for rounding bottoms. Gold is consolidating here, but I think the miners will continue to catch a bid, especially the microcaps.
Interestrates
Downside straight to 2018 levels?The dollar has seen better days.
In the past 124 trading days, only 46 has been in the green for the dollar index.
Many factors have catalyzed this risk off-trend, and unfortunately, I believe even the key fundamental strength for the dollar has slowly diminished away during this pandemic.
Inflation is the dollar's demise.
Inflation in the United States diminishes two things. A) The buying power of the U.S. dollar and B) Real bond yields. Both factors disincentivize investors to hold U.S. dollars. Furthermore, with the Federal reserve implementing a new tool specifically to combat low inflation, it all but guarantees that inflation will rise in the near future, diminishing the U.S. Dollar's power.
Dollar printer.. go brrr...
The Federal Reserve balance sheet stayed relatively unchanged from 2015 to 2020, dipping below 4.5 trillion near the end of 2020. However, due to the increase of asset purchases to stabilize the financial system, their balance sheet swelled up to 7 trillion at the start of August. The buying back of bonds increases the supply of U.S. dollars in the money market, decreasing the value.
Low-Interest rates have made it cheaper to hedge against the U.S. Dollar.
Many overseas investors, including myself, are pleased to hear dollar weakness as it entails, I will get more U.S. dollars when I convert my New Zealand dollars to fund my brokerage account. However, if I wanted to sell positions and covert it back into New Zealand dollars, chances are the U.S. dollar's weakness will erase a majority of the gains made. However, with low-interest rates, institutional investors have found it cheaper to short the U.S. dollar to hedge their equity positions from further downwards pressure.
"Safe haven" trade has been given to Gold
We saw the U.S. dollar rally against other major currency pairs during the peak of the lockdowns in March as major investors sold off their risk-off assets to hold U.S. dollars. However, as the market reaches all-time highs, the U.S. dollar, with its almost guaranteed diminishing yield, has lost interest from investors in favor of Gold.
This is the main problem for the U.S. dollar. One of the only fundamental strengths that the U.S. dollar has had this year was when there was a rush to hold the greenback in the risk-off period we had in the middle of March/April. However, two things have changed since then:
• Market sentiment has favored Gold in Risk-off days
• "Risk-off "periods like March / April is likely not to occur again
Coronavirus cases continue to pile up in India, United States, Australia, and Europe – however, investors have continued to plow money into the equity markets. To put this into perspective, cases in the United States have only worsened since the peak of the recessionary period in March / April. However, the NASDAQ is up nearly 30% year to date. If the market is a voting machine, it has voted that the new normal is the Coronavirus running rampant everywhere, including the United States. Therefore, anything better than that should boost equity markets. And can things can worsen in the United States with regards to the Coronavirus?
The dollar is experiencing significant headwinds, both qualitatively and quantitatively. Investors do not want to hold it, future headwinds like inflation are destined to push it lower, and its only strength is slowly diminishing. Jack McIntyre from Brandywine Global Investment Management stated that "The dollar has been overvalued for a long time, and this might finally be a catalyst for a multi-year downtrend." Furthermore, he said that "As we've seen before when valuations have been stretched, policy or economic shocks can quickly change the currency's trajectory, and that's what it seems to be happening thanks to the Fed's swelling in the balance sheet, a surge in debt, and the way we handled the pandemic."
However, that is not to say it will lose its spot as the world's reserve currency. Liz Young, from BNY Mellon Investment Management, stated that what we're currently seeing in the U.S. dollar ".. is a pullback.." and that "it is a little too extreme to think the dollar is going to lose its reserve status anytime soon."
Bloomberg also stated that investors and traders are currently net short on the currency, with an increase in demand for puts options on the Bloomberg Dollar Spot Index, cementing a sentiment for a Bullish trajectory possibly to a level not seen since 2018.
The velocity of money is plunging so let's make some coin off itHardly surprising though, this has taken place whenever GDP contracts & unemployment increases as it certainly will this year. I think one would suspect that this could lead to risk of deflationary effects - which I know sounds odd when one thinks and sees first hand the rampant money printing and radical expansion of money supply, and inflation increasing. I am still heavily biased towards inflation arising over the next few years, with rates eventually rising to combat inflation - but I do want to be on the lookout for any hints as swiftly as possible that my ideology may be wrong.
I suspect this drop within the velocity of money is especially pronounced in hospitality industries, restaurants, hotels, aerospace, airlines, tourist destinations - where capital is not being exchanged as freely. We also have unemployment up so some individuals simply are being much more wary of purchasing wants, with potential needs still needing to be met on the horizon.
I think mfg's as well have had supply issues coupled with demand issues, with inventories only now ramping back up. With the low demand, and low supply this is a sour recipe that creates less opportunities for transactions, again hurting the velocity of money.
What does all of this mean? I think one needs to carefully weigh the proper strategies in the event inflation or deflation where to occur. In the event of the dreaded stagflation again, the writing will be more clear if that is to occur, but again we need to plan accordingly and develop strategies for each.
A simple strategy I am doing even outside of the fixed income corporate debt/Div yield strategies etc is within actual real estate.
If one were to acquire a home in this environment and inflationary affects play out, you essentially get to double dip on the inflationary affects in a favorable manner. the devaluation of the dollar will be an effect of the inflation. What does this mean for your mortgage?
The dollar amount of the debt side of the mortgage will decrease in value, relative to the purchasing power of the dollars within the debt. The debt itself gets eroded away from inflation. Very favorable if you have debt.
We want equity with debt of course though. And much more equity relative to the volume of debt. The equity of the home will actually be continuing to rise because the value of dollars continuing to loose value will require more dollars to purchase the same amount of equity - meaning the equity increases in terms of dollars.
So inflation will result in the loan decreasing in a dollar weighted comparison, while the equity in the home will increase because of the dollar's devaluation.
Equity relative to a home is one thing, but this comparison can be made with equities (stocks) as well, but I think the home comparison may be helpful in getting my logic communicated clearly.
Again, this does not mean to go wild longing equities - just like you do not want to go wild and start buying junk houses in the middle of Antarctica
We need to be tacticians with finesse
***If you have a great strategy please be sure to share it with me.***
Equities and their relationship to CPI InflationBull markets tend to follow a drop in CPI, once the deflationary relationship ceases and goes back into inflationary mode.
As it takes additional "devalued currency" to acquire the consistent amount of the equity in relation to it.
In addition, with low rates, this creates opportunities to take on debt (with equity as well) such as a home, as the loan itself will be eroded away in terms of the dollars within the loans purchasing power. While the underlying asset will appreciate in comparison to the devalued/inflated dollars relative to it.
So may be time to buy that home you were considering!
GBPJPY BEARISH CONT. UNDERWAY??HELLO TRADERS!
ITS THE LAST WEEK OF THE MONTH OF JULY AND WE AREN'T USUALLY VERY ACTIVE AROUND THIS
TIME DUE TO MARKET CONSOLIDATION AND ACCUMULATION DURING THIS TIME LEADING INTO A NEW
MONTH.
OVERALL BEARISH PATTERN ON GBPJPY
WEDGE FORMATION
HEAD AND SHOULDERS VISIBLE
ETC. ETC.
WE ARE USING ONLY 1.5% RISK ON THIS TRADE WITH A 1:4 RISK TO REWARD TARGET.
FEEL FREE TO COMMENT BELOW, SHARE OR LIKE!
THE TRADING REGIME! OANDA:GBPJPY
The best long-term indicatorOne of the main economic indicators for currency valuation is the real interest rate differential between the two countries / currencies.
The large flows of fixed income always go to where there is the highest real yield, interest rate discounted from inflation. The carry trade.
It is possible to see in the USDCAD example on the graph the great correlation between the interest rate differential and the appreciation / depreciation of each currency.
Currently, this indicator does not seem to make much sense due to extremely low inflation and low interest rates in the worldwide. However, the big draw is to know where the economic recovery will be faster, will create more jobs and income, will lead to an increase in inflation and consequently to an increase in interest rates and currency appreciation.
Make your bets!
I would bet on Australia and Europe, maybe that's why the dollar is so weak.
US 10 Year yield looks to be heading lower soonThe 10 year treasury yield looks ready to resolve its multi-month consolidation triangle to the downside. There's room for another run up to the .70% area over the next couple weeks, but I ultimately believe we are heading for lower yields. Note the fairly swift rejection from the rally above the 50MA at the end of May / start of June.
I'm not making any plays directly on treasuries, but watching closely because a definitive break lower in yields would signal that stock markets may be heading for a major risk-off move.
PBoC, Inflation and Jobless Claims – Week aheadThe markets continue to grapple with the immediate effects of the Coronavirus. The second wave in pockets of the world has forced cities to take active measures to control the virus. Melbourne, Australia has gone into a secondary lockdown while Florida and Los Angeles see cases surge, with the Mayor of Los Angeles stating that the city is “on the brink” and a Democratic representative from Florida reports the outbreak is “totally out of control.” Here is your week ahead
Monday, 20 July – Peoples Bank of China Interest Rate decision
China’s Central Bank, the Peoples Bank of China has been wary of cutting interest rates, even during the peak of the pandemic. Ma Jun, a PBOC adviser, stated in early April, “The PBOC doesn’t use its bullets all at once. China has plenty of room in monetary policy.” The PBOC has kept interest rates at 3.85%, after dropping it 30 basis points from 4.05% in April. However, forecasts and estimates expect the PBoC to keep rates as is at 3.85% this week ahead.
Tuesday, 21 July – Inflation rate YoY Bank of Japan
With 660 new cases of the Coronavirus yesterday, Japan has struggled to keep ahead of the virus after the world praised it for its lighter approach to restrictions. However, that approach, as seen similarly from Australia, has not bode well for the country. Japan has seen triple-digit daily increases for the whole month of July. This has caused consumption and spending to decrease dramatically. Analysts predict an inflation rate of 0.1%; however, there is a high chance that this may be pushed to the downside, which may put downward pressure on the JPY.
Tuesday, 21 July – Reserve Bank of Australia minutes
Australia is continuing to grapple with the effects of the Coronavirus, with Melbourne being put back into lockdown and the state of Victoria imposing mandatory mask restrictions. With RBA minutes earlier in the year having a tone of optimism, likely, that tone will not continue here. The second lockdown is a massive blow to the country, socially and economically. The Trans-Tasman bubble between New Zealand and Australia has been delayed, with economic activity in the state of Victoria plummeting. We may see Aussie weakness against its New Zealand counterpart as Australia reels back their reopening.
Thursday 21st July – Canada Consumer Price Index (CPI)
Canada continues to post double-digit daily Coronavirus cases as they, too, implemented a looser lockdown restriction like Japan and Australia. We saw a drop in the CPI from March to April as citizens decreased their spending. We saw a slight increase in the Month of May, however, analysts expect to stabilize around 137 for the month of June.
Thursday 23 July, US Initial Jobless Claims
With Initial Jobless Claims posting the smallest decline since March last week, the US jobs market is showing a slight rebound. However, we are all aware of the current situation with the Coronavirus cases in the US. Florida and Los Angeles are posting daily record numbers every week, while President Donald Trump focuses on reopening the economy and the US-China trade deals. I expect this number to slowly creep up as the full effects the second wave of the Coronavirus becomes evident. Analysts predict Jobless Claims to drop to 1.29m from 1.3m previously.
We have seen this mindset in the market, which discounts negative news and rallies on positive news. This is partially due to liquidity propping up many markets. Investors and traders must take this into account when placing trades.
USDCAD Short PositionWith an interest rate decision coming out at 1500 hours we can expect the USDCAD pair to carry bearish momentum as the Canadian dollar is expected to come out positive after the interest rate decision.
Five reasons to sell GBPUSD1- On 03/03 the real interest rate differential was 0.16 in favor of the UK and the big speculators were bought in 29k contracts(CoT). The value of gbpusd? Approximately 1.28
On 06/10 the real interest rate differential was 0.70, now in favor of the USA and the big speculators were sold at 36k(CoT). The value of gbpusd? Approximately 1.28
2- If we look at the latest OECD productivity data, we see that the United States is heading towards a faster recovery than the United Kingdom.
3- Despite the excess liquidity injected by the Fed and the recent increase in the search for riskier assets such as AUD, NZD and GBP, the fundamentals point to an appreciation of the dollar and a depreciation of the pound.
4- Technically we can see a consolidation between 1.21-1.27, and a selling pressure leaving the current top lower than the previous one at 1.28. The IFT RSI shows that we are in a possible overbought region.
5- The Brexit negotiation still seems uncertain and with no prospect of being concluded.
In addition, I don't see five reasons to buy the pound sterling. I believe in a correction until August 2019 levels, approximately 1.21.
EURJPY Potential Long PositionOn the H4 timeframe, there is a break in the double top pattern which is indicated by the black line on the chart.
At 0300 hours there will be an interest rate decision on the Japanese Yen so expect a bullish momentum in JPY pairs.
EUR/HUF Monthly Forecast (July)First wave of the Elliot has reached an end on a key level, correction is expected. Fibonacci 0.382 level is overlap with an another key level.
I expect the third wave (the end of the correction) there. The Fibonacci extension 61.8's line overlap with an another strong level.Likely we can estimate the third wave's strength.
The Central Bank reduced the interest rate, and planning to cut another more 0.15% in July.This means,the fundamental backround is given, the HUF (Hungarian Forint) will weaken in the next few weeks/months.
Long EURUSD on fundamentals and Technical AnalysisWith the recent risk off, the USD came up appreciating agaisnt most of its pairs. On the EUR i believe its a great opportunity to buy EURUSD with excellent risk return profile.
The interest rates being so low, the COVID crisis being prolonged in the US and Europe coming out at better level on this, the USD will be under pressure in the short run, having great potential of the EUR to get out of this long bearish trend.
"FED-PIG" PLAY - Metal Strangle - Long Palladium, Silver HedgePalladium is one of the most interesting niche long ideas that I've been following for some time. This rare metal has appreciated 3-4x in a very short period of time. That is pretty wild, given that it is a commodity that has always existed on Earth. While there are certainly gov't related supply controls, demand is skyrocketing due to its extremely limited availability and its rare chemical properties used to manufacture vehicles in the aerospace/automobile industries.
In fact, there seems to be some slight correlation between Tesla's share price and palladium's p/oz. Might just be a coincidence though.
In any case, the FED is likely to drop rates in order to keep in line with their efforts to push the market higher. Any sort of dovishness will be bad for everyone, unless you are somehow still holding a short position from 3 months ago. Otherwise, I think these FED minutes will serve as another catalyst and that it actually has not been fully priced in to the equities markets.
However, one way to play this is to strangle commodities to account for an ambiguous reaction to interest rate guidance. All else equal, silver is the obvious pick to short and gold, long. However, I think palladium can benefit more than gold from decreased rates because it is overlooked. Gold may have already priced the best case scenario in already, which is a fair assumption given recent institutional interest.
Thus, one creative play before 2 pm is to long Palladium forward contracts for next month and buy offsetting puts on silver miner ETFs.
Will be a fully fed pig by end of day, that I am sure of.
TVC:PALLADIUM TVC:GOLD TVC:SILVER
