US Dollar
We are entering a period of time in the financial markets where it is difficult to sustain trends. All over the world, monetary policy from the central banks has been mostly negative. Guidance from the Swiss National Bank, the Federal Reserve and from the European Central Bank has been that the economic slowdown in their respective countries and all over the world could move their hand to a form of action that would stimulate the economy. From lowering interest rates, lowering quantitive tightening measures to increasing quantitive easing. But what do the countries who have no more room to lower interest rates do? How much more of quantitive easing do you increase if you have already been increasing it for the last 7 years? Economies such as Switzerland and Japan could be in real trouble with the European Union not far behind. They have interest rates at or below 0%.
The United States policy makers where just barely ahead of the curve. They have raised interest rates while there was Trump mania and the tax cuts enacted by him. During the last two years of stock market stagnation they leveraged the tools at their disposal and now have wiggle room. They can lower interest rates from 2.50%, they can lower the portfolio tightening program to synthetically stimulate their economy. Also, they allow stock buybacks from corporate America which also acts as a way to float the market and increase stock prices while there is no real growth, creating a bubble in the process.
Looking towards interest rate decisions, investors are pricing in that the Fed will lower interest rates by the end of the year, with a combined probability of 73%. Considering economic data, trade balance is the most prominent indicator of domestic health. There was a sharp drop in imports of -$6.8 billion, indicating that there is a shortage of purchasing power and demand within the country.
Interest rate change probability, Chicago Mercantile Exchange
The equally weighted dollar average has the dollar pinned in the middle of a price channel it has been oscillating in for over 3 quarters. This is a result of the Euro and Pound giving up positions. If the next leg of instability for the world economy is to show itself in the near future, safe haven assets like the Swiss Franc, Gold, and the Japanese Yen will take the lead as a risk-off trades ensue.
Equally weighted dollar index
Pound Sterling
The British government and the Pound along with them seem to be totally confused on what action to take. The Pound has been in a flat and the British parliament has also been undecided on what direction they plan to take things. It has been a long and unproductive 2.5-year ordeal after the initial Brexit vote. The outcome is worrisome, Prime Minister Theresa May announced her intention to step down from the role of PM if she could get support for her Brexit proposal. It’s strange it had to come to this, the previous Prime Minister David Cameron also stepped down because of Brexit. There are many distractions to keep traders busy and no one knows what to make of the possibility of a new Prime minister. Could this solve the issue of Great Britain leaving the EU? Probably not. Will this help GB make new trade agreements with the surrounding countries, not to mention the rest of the world? Probably not.
Parliament voted on the possibility of majority support for any available solution. The outcome was no majority support for anything: no deal, no second referendum, no new common market, no UK customs union or anything else. This seriously undermines stability for Sterling and the UK markets for the foreseeable future. Both the EU and GB are equally interested in a positive outcome. As long as we avoid the destructive no-deal Brexit, the Sterling will find footing for a recovery.
But, if a proper trade agreement with the EU is not outlined there will be serious issues of economic stability. If British companies do not have access to trade partners as their EU counterparts have, Great Britain will be a begging nation open to anyone with half a desire to make trade agreements. Their neighbor Norway, part of the European Free Trade Association, has publicly stated that they do not want Great Britain a part of EFTA; “They are a bully” and “the benefit is just not there”.
The Sterling broke through the uptrend trendline and seems to be consolidating in a triangle pattern. If price stays below 1.31114, we could have a continuation to the downside and test 1.30000.
Pound dollar currency pair, daily graph
New Zealand Dollar
The New Zealand Dollar fell sharply after the rate decision from the Reserve Bank of New Zealand. There were no changes to monetary policy but they did make clear that the next move would be a rate cut. Market participants jumped on this open and clear language to capitalize and price in what would most likely happen in the near future. Trading the NZD could be done through a number of vehicles including the Japanese Yen, Swiss Franc and Pound Sterling where the volatility is present and the sentiment is neutral.
Currently NZDJPY has broken below the 200EMA and solidified there. The Yen will soak up any weakness the Kiwi may show in the time to come before the next interest rate decision from the RBNZ. A short trade could be enacted from the current price with a stop loss at the level of 75.58 and a take profit at 74.00
New Zealand Dollar Japanese Yen currency pair, daily graph
Analytical Department Olymp Trade.
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