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USD/JPY TUMBLES AMID DOVISH MINUTES, TIME TO BUY GOLD?

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By Arnaud Masset, market analyst, Swissquote Bank

  • EUR/USD may trade range bound again between the 1.1310 support and the 1.1438 resistance as traders are wondering whether further dollar weakness is sustainable
  • USD/JPY reaching its lowest level since October 2014 and the BoJ, unhappy with the current yen’s strength, further reduces the odds of the Japanese economy reaching the 2% inflation target. On the downside, the next support can be found at 105.23
  • We therefore expect Governor Kuroda to take action to put an end to the yen rally either by expanding the Qualitative and Quantitative Easing program and/or by cutting rates further into negative territory
  • Nonetheless, the 1-month USD/JPY risk reversal shift to -1.48 on Thursday showed that traders rushed to buy protection against further yen strengthening as they do not believe the BoJ has the tool or the credibility to remedy the situation
  • CAD and the NOK took advantage of the crude oil rally, both surging against the greenback. USD/CAD continued to reverse early week gains moving closer towards 1.30
  • Gold: Buying pressures are growing
  • With regards to the US rate hike, the price of gold in US dollar should have gone down but instead the opposite happened. This trend will continue as we firmly believe that the American economy is under pressure and that there is no current ongoing intervention.

As expected the March FOMC minutes were roughly in line with the remarks made by Janet Yellen during the press conference following the release of the rate decision. However, the minutes further dampened the market’s sentiment towards the greenback by highlighting the growing divisions among Fed members, especially concerning a potential rate hike in April. We can now also certainly rule out an April rate hike. EUR/USD held ground above the 1.14 threshold after testing 1.1392 in Tokyo. Over the last few days, the pair has traded range bound between the 1.1310 support and the 1.1438 resistance with traders wondering whether further dollar weakness is sustainable.

The Japanese yen surged massively against the USD amid the release of the FOMC minutes with USD/JPY reaching its lowest level since October 2014. USD/JPY fell more than 13% since June 2015, down to 108.95 from 125.86. The BoJ is most likely unhappy with the yen’s current strength as it further reduced the odds of the Japanese economy reaching the 2% inflation target. We therefore expect Governor Kuroda to take action to put an end to the yen rally. This could be done either by expanding the Qualitative and Quantitative Easing program and/or by cutting rates further into negative territory. The 1-month USD/JPY risk reversal shifted to -1.48 on Thursday as traders rushed to buy protection against further yen strengthening, suggesting that investors do not believe the BoJ has the tool (or the credibility?) to remedy the situation. On the downside, the next support can be found at 105.23 (low from mid-October 2014), while on the upside a resistance can be found at 110.81 (high from April 5th).

Crude oil extended gains in the late European session as US stockpiles contracted unexpectedly during the week ending April 1st. Crude inventories contracted by 4937k barrels, while the market was expecting an increase of 2850k. Inventories increased by 2299k in the previous week. West Texas Intermediate crude futures rose to $38.16 a barrel on the New York Mercantile Exchange, up 8.15% from Tuesday’s low. The global benchmark, the Brent crude, passed the $40 threshold, up 7.75% over the same period. Overall, commodities gained ground in Asia with gold and silver surging 0.49% and 0.47% respectively. Iron ore active contracts on the Dalian commodity exchange were up 0.95%, while palladium and platinum rose 0.06% and 0.46% respectively.

The CAD and the NOK took advantage of the crude oil rally, both surging 0.33% against the greenback. USD/CAD continued to reverse the early week gains as it moves towards 1.30. On the downside, a support lies at 1.2858 (low from March 31st). USD/NOK tested the 8.2528 support once again but the number of sellers was not sufficient to break it to the downside.

Yann Quelenn, market analyst: “Time to buy gold? Since December the yellow metal has sharply increased and is now trading between 1200 and 1200 dollars per ounce. For many people, gold is useless as it does not provide dividends but still it seems that buying pressures are growing. However, in the last four years, gold has lost more than 30% of its value and a lower gold price indicates confidence in central bank actions. Ironically despite massive intervention by policymakers around the world (QEs and low rates) and a risk-off sentiment that dominates, gold has been in constant decline. With regards to the US rate hike, the price of gold in US dollar should have gone down but instead the opposite happened. This trend will continue as we firmly believe that the American economy is under pressure and that there is no current ongoing intervention.

The price of gold is composed of the physical and paper market. The paper market is far larger compared to the physical market. The ratio is an astonishing 200 vs 1. Most banks issue mainly paper ounces driving down the price of gold, resulting in a major counterparty risk. In the result of difficulties in the banking sector, the price of paper gold will decrease. However, as physical gold is also included in the overall price, this legitimises the purchase of physical gold which is undervalued. Banks are also experiencing massive exposure to derivatives. When we look at the balance sheet of Deutsche Bank for instance, one can guess how it is possible to be exposed as much as up to 25 times the German GDP. Another important issue is the premium paid for gold on the physical market and this has never been so high due to scarcity.” —

Today traders will be watching foreign currency reserves from Switzerland; industrial output from Spain; budget balance from Sweden; Halifax house price from UK; industrial production from Norway; manufacturing production South Africa; building permits from Canada; initial jobless claims from the US.

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Trading Strategies

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Trading Strategies 1

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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Economic recovery likely to prove a ‘stuttering’ affair

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Economic recovery likely to prove a ‘stuttering’ affair 2

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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European trading firms begin coming to terms with the new normal

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European trading firms begin coming to terms with the new normal 3

By Terry Ewin, Vice President EMEA, IPC

In recent weeks, the phrase ‘never let a good crisis go to waste’ has received a large amount of usage. Management consultancies, industry associations and organisations, including the Organisation for Economic Co-operation and Development (OECD) have all used it in order to discuss how the current crisis, caused by the Coronavirus pandemic, presents an opportunity for new and worthwhile change.

The saying is also commonly used to indicate that the destruction and damage that is caused by a crisis gives organisations the chance to rebuild, and to do things that would not have previously been possible. This has the potential to impact financial trading firms, where projects that this time last year would not have made much sense now appearing to be as clear as day. In Europe, banks and brokers alike are beginning to think about what life will look like post-pandemic, and how their technology strategies may need changing.

We can think of three distinct phases when it comes to a crisis. Firstly, there is the emergency phase. This is followed by the transition period before we come to the post-crisis period.

Starting with the emergency phases, this is when firms are in critical crisis management mode. Plans are activated to ensure business continuity, and banks and brokers work to ensure critical functions can still take place so as to continue servicing their clients. With regards to the current crisis period, both large and small European banks and brokers were able to handle this phase relatively well, partly due to the fact that communications technology has reached the point where productive Work From Home (WFH) strategies are in place. For example, cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders from across the continent to keep working throughout lockdown. From our work with clients, we know that they were able to make a relatively smooth transition to WFH operations.

In relation to the current coronavirus crisis, we are in the second phase – the transition period. This is the stage when financial companies begin figuring out how best to manage the worst effects of the ongoing crisis, whilst planning longer-term changes for a post-crisis world. One thing to note with this phase, is that no one knows how long it will last. There is still so much we don’t know about this virus. As such, this has an impact on when it will be safe for businesses to operate in a similar way to how they were run in a pre-pandemic world. But with restrictions across Europe starting to be eased, there is an expectation that companies will start to slowly work their way towards more on-site trading. For example, banks are starting to look at hybrid operations, whereby traders come in a couple of times a week, and WFH for the rest of the week. This will result in fewer people in the office building, which makes it easier to practise social distancing. It also means that there is a continued reliance on the technology that enables people to WFH effectively.

Finally, we have the post-crisis period. In terms of the current crisis, this stage is very unlikely to occur until a vaccine has been developed and distributed to the masses. Although COVID-19 has caused mass economic disruption, many analysts are predicting a strong rebound once the medical pieces of the puzzles are put into place. It may not be entirely V-shaped, but the resiliency displayed by the financial markets thus far suggests that it will be healthy.

Currently, many European trading firms are taking what could be described as a two-pronged approach.

The first part of this consists of planning for the possibility of an extension to phase two. Medical experts have suggested that there could be some seasonality to the virus, with the threat of a second wave of COVID-19 cases in the Autumn meaning that the risk of new restrictions remains. If this comes to fruition, there would be a need for organisations to fine-tune their current WFH strategies and measures, and for them to take greater advantage of the cloud so as to power communications apps.

The second component consists of firms starting to think about the long-term needs of their trading systems. Simply put, they are preparing themselves for the third phase.

It is in this last sense, that the idea of never letting ‘a good crisis go to waste’ resonates most clearly.

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