Regular readers will be well aware of our anti pound bias, we are currently short GBPJPY and making a little profit on the trade.  Today we had the release of the Serice secor PMI data and it ws not a good read, the UK economy is dominated by the service sector and if that area moves into contraction so will the entire UK economy.  The January figure came in at 50.1, thats 0.1 in positive territory its lowest since the brexit vote and only just out of contractionary readings (below 50 means contraction).  The figure, as with all figures, should not be taken in isolation but if we look at this data set since the Brexit referendum the trend is pretty clear.

If it was a price chart we could talk about a break below a descending channel with clear bearish possibilities.  Of course it could bounce back as it did in the aftermath of the brexit vote but that recovery was short lived and lead to a continuing decline.  It is our view that the brexit damage is done, the economy is wounded and regardless of ongoing political negotiations a recession is at hand.  There is much evidence for this view, recently Nissan announced an end to investment in its enormous Sunderland plant and it is just one in al ong line of large companies either holding back investment or choosing to go elsewhere.  It is interesting that Japan now has a trade deal with the EU and can import cars made in Japan without tarriffs into Europe bit not those made in the UK, how crazy is that!
The global economy appears to be in a slowing environnmet but the UK's individual situation means it will be the weakest of the tradable majors.

The January update to the UK surprise index adds yet more evidence to this view,  The Surprise index methodolgy captures all of the data published by the Uk and is charted on a rolling 12 month period.  The graph below shows a miserable performance for the UK.

The chart goes upto the end of Jan so does not include the poor data released today and seems to confirm the rest bite of the middle of last year has ended and we start to wonder how low can it go?  The surprise index graph captures previous data and the consensus view, so when it moves lower it means the economy is doing worse than previous months and worse than forecast, the actual level means very little it is just the direction that matters.

As you probably know we are trend traders and always look to trade in the direction of the trend, for the GBP there is a long term downtrend that seem sto be continuing, the price chart below is of our GBP index (the GBP v all the majors) it has clearly been in a downtrend for some time, more than 10 years, and looks like it may have just broken out of a bearish flag pattern.  The trend is pretty clear and we will continue to look for areas to trade it lower. If you are interested in trends this free ebook from forextrendy explains a lot of the key points.  We like the forex trendy service and helps to make any technical strategy profitable.  Trading with the trend really helps.

Norway and Canada are the two countries whose economies are heavily dependent on oil that we track and trade.  The effect of oil is pronounced on these two currencies and as it has been very volatile in recent months it has led to some really good trades, we were long USDNOK and USDCAD for most of the second half of 2018 and made some excellent money as a result.
The weekly oil chart is shown below (WTI)

The price of oil has been in a significant down trend since 2008, it made a high in one of our turning areas and turned lower mid 2018 (we didnt trade it sadly) and looks like it might have started the next leg lower.  It is our view that the price of oil is heading towards zero in coming decades, the world is moving away from oil at a rate that seems to grow exponentially and is likely to destroy the price of oil when electric cars become the norm.  So we are only really interested in selling oil but it is so volatlie we are likely to stay on the sidelines.  Of course those countries whose economies are dependent on oil will have a tough time dealing with this going forward.  We prefer to trade the currencies affected by oil rather than oil at the moment, second dimension trading as it is often called.

The canadian surprise index has turned lower during 2018, as might have been expected.  With no immediate sign of a reprieve we continue to look for opportunities to sell the CAD.  If you look at our previous post on the Australian surprise index you will see a good potenital trading area.  The USDCAD cghart below shows our 2018 trade and the pattern we are looking to trade again although we have no entry point at present we will be looking to buy.

Norway has performed really well considering the movements of oil and the troubles the Euro economy seems to be finding itself in.  If Norway can continue in this trend it might be able to escape the effects of oil meaning we probably will not be able to trade it in the near future.  Of course these things change quickly and if the surprise index truns lower again we will look to trade the currency, our trade from last year was closed early and missed its final target

Follw the link to read more about the surprise index methodolgy

We are updating the surprise index for the major currencies and posting wach chart when ready, US and UK charts were published in the previous post, here we have Europe, China and Australia (explanation and surprise index methodology)

The surprise index for the Eurozone continued its trend lower for the whole of 2018, that is in contrast to most other countries that saw a change over the summer.  The Index suggests that the Zone is heading towards a recession with monthly data points being consistently lower than previous months and forecasts.

Although we dont trade the Chinese currency we do track its Surprise index as it is so important to the global economy.  There are question marks about how reliable and trustworthy this data is due to the extent of influence the chinese government has over its releases.  As you can see from the chart the trend is clearly higher although we have seen a significant dip in November and December, we will watch this during the first quarter of 2019 to see if a new trend is developing or not.

Closely linked to the performance of China is that of Australia, the Aussie dollar moves to the chimes of the global economy and has been pretty beat up of late, the drop in the china data wil have something to do with that but we dont yet have a clear trend and as you can see from the Aussie Surprise index chart the Australian economy has had a pretty positive end to 2018 in fact since september it has been on a bit of a tear.  The first half of 2018 was pretty flat (remember flat indicates on target growth).  If this continues expect the AUD to reverse some of its recent losses and combining this with the Euro chart Short EURAUD would seem to be a trade with some justification

It is clear that the US Dollar has been under some pressure of late, its ongoing uptrend appears to be under threat as the markets take on a risk aversion mood and with the stock markets looking less than attractive the USDJPY is moving downward significantly, USDJPY has broken an important trendline and looks very bearish (recent trade post on USDJPY).  The chart below shows the dollar index (weekly FXCM Dow Jones), it shows that the Dollar is still in an uptrend with a series of higher highs and lows which counts pretty well as a Elliot wave impulse that target for this move is around 13200 continuing the series of higher highs.

The recent rise in the dollar has been fuelled by interest rate rises resulting from the excellent performance of the US economy, the surprise index is our method for quantifying the performance of each of the major economies. (surprise index methodology) The index rises when the economy is doing better than forecast and better than previous months and falls when the opposite is true, the data is collected from the excellent FXSTREET Economic Calendar.  The results for the US economy can be seen below.

​The surprise index for the UK economy is shown below, it pretty much kills off any ideas of buying the pound, the economy had a big downturn at the start of 2018 recovered a little but has ended 2018 back near its lows, the surprise index looks no more attractive than the US one.
The chart shows the performance of the US economy in 2018, it does not take much to see the pattern, in the first half of the year the economy was on fire and the dollar was on the front foot but since then the index has been moving steadily lower, this does not mean contraction but means the economy is performing less well than expected.  The surprise index crystallises the economic situation and shows why people are dialling back their expectations for future interest rate rises.  The markets negative sentimnet would appear to have some justification.
The problem is finding something to trade the USD against, it is still in an uptrend so we don’t like selling it across the board so we have to find a beaten up currency that has potential to move higher against a weaker USD.  The GBP is an obvious candidate, Brexit has moved the GBP significantly lower we were targeting 1.19 with last years trade taken at 1.32 and from a technical standpoint we can see no reason to change this view, the flash crash yesterday caused a new low suggesting the pair will continue lower.  There is much confusion around Brexit and it is possible the market has been too negative, it is still possible a deal is done and there is an outside chance of a new referendum and no Brexit at all.  Perhaps long GBPUSD is a trade?

​Conclusion
January often sets the tone for the rest of the year, trends starting now can last many months and we like trading on this longer term horizon but the market is not clear, technically we can not sell the US dollar, economically it is difficult to buy it.  So for the time being we are on the side-lines and will have to wait for the next opportunity.  Of course we have several other candidates, the JPY, the Euro and commodity currencies (AUD, NZD, CAD) all have potential in the coming days we will update the surprise index for each of theses and give our views for the future.

The UK statistics agency released incredible retail sales figures today, they suggest a booming retail industry and as this is a major part of the UK economy a booming UK.  We just don't believe it, major UK retail brands have announced significant sales figures of late, ASOS have suffered a near collapse and Mike Ashley is talking about a really poor November.  If you live in th eUK you only need to walk down your high street and have a look.  I can guarante that the shops are quiet, way too quiet.  The figures are wrong, they must have got the seasonality wrong or some other methodology but they are wrong.  Expect the next sales figures to show a collapse and the GBP to follow it.
We will continue to hold short from 1.3130  (green square at blue (B)) and still targetting 1.16 before Brexit day in March.

The Economic surprise index gives a complete view of how a countires economy is performing, if index is going higher then the country is perfoming above expectation providing a positive boost to its economy.  Read the methodolgy on how the index is calculated

This post contains the charts for the minor and exotic currencies we track and trade, you will see that their economies are correlated and so are their currencies, it pays to buy the strongest and sell the weakest.  The surprise index goes a long way to helpmake that decision.  Most of these currencies are only available v the US Dollar and often they are a good way to trade the dollar if its direction is clear as they are more volatile than the majors providing the potential for large gain.

The surprise index tracks the performance of the major forex countries as defined by their published data. The data is taken from the FXSTREET economic calendar and using the surprise index methodology gives us a graph that shows how the data is performing relative to previous results and predicted results.  The charts are updated each month and inform my trading activity as part of my trading plan.

As you can see from the graph above the Australian economy has stayed pretty close to the zero line throughout 2018 and had a good performance in July moving it into positive territory again.  Close to the zero line means on targetwhich is always good, few countries at the moment are in positive territory meaning we could expect the Aussie to do well in a number of crosses.  Much will depend on global trade as Australia is a trading country and its economy reflects the swings in global growth and sentiment

​The other country with a good July was Canada but the chart is quite different, after 6 months of relatively poor performance the Canadian economy has put in a very good month and may have turned a corner.  A similar improvement was seen in March but it quickly fizzled, if the data can continue to be strong then the CAD represents a good potential buy especially if the oil price continues to rise.

China had an essentially flat surprise index in July, this means that their economy was more or less on target and very similar to June.  Remember the Surprise index tracks the forecasted results as well as actual result so a flat line means essentially as expected.  China is often as expected and although it does not release that much data one does have to wonder how much influence the Chinese government has, it is amazing how many times the data is on message. The graph has been vitually flat all year only just touching negative in March and consistent the rest of the year.

A downward sloping surprise index suggests that the economy performed below expectation during July, this can imply a weaker currency going forward, the EU and the UK economies seem to have returned to their downward trend implying continued weakness for the Euro and the GBP.  The political concerns around the UK and the Brexit issues are likely to be involved here and add to the chance of further losses for the pound.  The two economies are closely linked and generally track each other with the UK showing more volatility but the same direction

The third weak economy was New Zealand, this was quite unexpected as the Canadian, Australian and New Zealand economies normally move together in a similar way to the EU and UK.  The NZD  hasbeen weak for some time and they have one of the most dovish central banks who appear to be no where near raising rates suggesting a cut is equally as likely.

The big surprise this month was the US whose surprise index turned lower for the first time in over a year. This is quite different to the UK and the EU, the US economy has been on fire all year repeatedly performing at a level above what had been expected, July is most likely merely a moderation ( a pretty steep one) rather than a change in direction but we will have to watch it going forward.  The Fed is very bullish about the economy and the market is pricing in all of the rate hikes the fed are proposing, any weakness in the economy could cause a significant change to that position and allow us to fade the dollar strength.

The surprise index brings together all of the economic data for each country as a result it provides a third of the information we need to take trades (the other parts being Technicals and sentiment).  The index alone suggests we want to buy the AUD and the CAD and sell the EUR, GBPand NZD.  No clear signal for the dollar

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A plan needs 3 things

• A technical element
• Fundamental Analysis
• Sentiment anaysis ff 

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The surprise index for the UK has taken a noticeable turn lower, the methodology for the surprise index tracks actual data against previous and expected figures.  Following the vote to leave the EU most economists expected a drop in the UK economy however that did not happen and the British economy, fueled by its consumers, fired ahead.  Since a high in Mid may the surprise index has turned lower and retraced much of the advance from earlier in the year.
This means that published data has been coming out below expectation and below previous levels. The one piece of data still registering as positive is inflation, the latest figure of 2.9% registered as positive but will start to register as negative should it get above 3%.  That high inflation is really quite negative, with public sector workers having their pay rise pegged at 1% a 2.9% inflation rate means a cut in real income which will inevitably lead to a drop in consumer spending.  

The UK appears to be heading for a worst case scenario of no trade deals post Brexit, the speed of negotiation is incredibly slow months of time was wasted because of the Uk general election and even more time wasted by the arrogance of the British politicians incorrectly thinking that Europe needs a deal more than the UK.  It is that type of arrogance that caused the leave vote in the first place.  It is worth noting that since the Brexit vote the EU has signed free trade deals with Canada and Japan, the UK on the other hand is still concerned with ripping up its only trade deal.  This headline from the Ft sums it up.

Are we approaching the end of the easing era?
The score card on monetary easing rhetoric has moved, it now reads
6 banks talk tightening 1 bank easing and 1 neutral. 
This is a huge change in the monetary policy landscape.  It has roiled the markets and may continue to do so in the months ahead
The annual summer lull in Forex trading has been put on hold as Central Banks line up to give Hawkish rate rising rhetoric.  Some increased volatility has resulted and with Bond prices beginning to price in far less accommodation than we have at present Stock markets may be under threat of a decent sized correction that will inevitably roll in to the FX space.
Lets review the latest view from each Central Bank:-
The Federal reserve is well ahead of the game, with four rate hikes in the last 18 months and more promised.  The USdollar is showing some weakness of late and that may be due to the markets waning belief in future FED action and growing belief in future action from everybody else.
The Bank of Canada looks like it might be approaching a rate rise, Governor Poloz said ‘the next move is likely to be a rate hike rather than a cut… interest rate cuts in 2015 have largely done their work’. Deputy governor Wilkins said ‘pace of growth has been ignited by an improving labor market and strong demand’. 
The Bank of England the unreliable girlfriend moniker continues to be well deserved as policy makers flip flop their guidance.  In the latest version Governor Carney and other mpc members have been publicly airing disagreements as they get ever more concerned about the UK’s economic and inflation growth.
The ECB Mr Draghi’s comments on policy normalization last week upset the markets, they were unexpected and hawkish.  It looks like we might get an announcement on tapering in September, that is much earlier than had been generally believed.
THE RBA gave an upbeat economic assessment on Tuesday but caused a fall in the Aussie dollar when they took a very cautious tone when discussing interest rates.
The RBNZ has good reason to consider raising rates, economic indicators are solid but the small island nation may be concerned about its already growing exchange rate, the RBNZ the first to raise rates after the financial crisis but have since reversed course.
Norges Bank removed its guidance on cutting rates at its last meeting and would appear to have limited downside risks
Swiss National Bank has used currency intervention to try and keep its currency low, the SNB will continue to follow the ECB as it tries to track the Euro having failed with its peg a couple of years ago so as the ECB tightens so does the SNB.
Bank of Japan the only significant central bank giving no sign of any tightening, it seems committed to bond buying and keeping a zero rate interest rate all the way to 10 years.
 
Adam Posen President of PIIE, my favorite place for economic news does not believe the rhetoric, he says we have seen it all before, a buzz in the air and a few positive meetings will get hit in the face by the reality of the situation.
If Posen is correct, he normally is, the Central Banks will not move on their words and we have more volatility ahead.