Minor Counries and exotic fx
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 Europe PeriphEry
Surprise Index Exotics
The economic surprise index
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.
Australia and canada
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.
Surprise Index losers
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 Surprise Index surprise
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
A profitable Forex Plan
Trading profitably means designing a plan that gives you an edge in the market, you do not have to be right everytime but you must not be wrong ost of the time.
A plan needs 3 things
UK Economic Data Falls
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.
The Brexit Mess
The UK has a government department for exiting the European union it is called Dexeu and it appears to be in turmoil. The FT ran an article this morning which paints a picture of chaos, David Jones a senior minister at Dexeu was sacked by Mrs May on Monday without David Davis the Brexit minister being informed. George Bridges, who was in charge of getting Brexit legislation through the houses of parliament resigned on Tuesday here is a quote from the FT
“Bridges is said to have quit on policy grounds, convinced Brexit couldn’t work,” said one Whitehall figure. “There is some disarray.”
David Davies the leader of Dexeu lost two more key aides when his parliamentary secretary lost his seat in the general election amd his special advisor quit suddenly without explanation.
Dominic Cummings who was the planner behind the leave campaign tweeted
‘Top Whitehall officials are screaming that DEXU is a total shambles and disaster is likely’
To add to this sense of chaos we have a wounded prime minister making a deal with the DUP to keep herself in power, it is worth noting that she called the election to give herself more power. We are getting an understanding of what motivates Mrs May and it is not the good of the UK.
It is almost impossible to see the UK being able to negotiate a deal, time is being wasted, remember she started the 2 year time frame before the election and appears to be completely changing her view of what type of Brexit she wants. The new people at Dexu are pro Europeans not the hard Brexiters who have left, anything to stay in power Mrs May?
The deal with the extreme politics of the DUP, going against the goodfriday agreement, makes it near impossible to get any sort of meaningful legislation passed and it reduces Mrs Mays authority even further with all living former Prime Ministers cautioning against the deal.
It is hard to escape the view that the UK is heading for a chaotic Exit from the EU.
The Economic Mess
What did it all mean.......
UK General Election
The decent into chaos continues; from the SNP asking for a second independence referendum despite the evidence that the people did not want it and loosing half their seats to the conservatives selling a hard Brexit that nobody wants. The UK has been left with a coalition of a “dead woman walking” and the political wing of the 17th Century to negotiate with Europe, it will not last. The Conservative party has proven it can turn on any leader that doesn’t win and it is a ruthless organization that will let the dust settle before removing the hapless Mrs May in an instant. The agreement with the DUP will fail, it contradicts the Good Friday agreement, which brought peace to Ireland and puts an anti-gay, anti-abortion, anti-just about everything party in power. The 1922 committee will rip it to shreds and the Uk will be back at the polls within a year. Uncertainty is the enemy of a strong currency, pressure is back on the pound. I fully expect it to break lower and substantially so.
Department of Labour in the US reverse Obama Contract legislation
This is why the Trump trade gained traction and business was Happy with the US election result. Unravelling this type of legislation (it meant that franchise chains were responsible for employment matters of each individual franchisee) reduces the risk to big businesses franchises like Mcdonalds and allows them to press on with growth plans.
Santander Bought Banco Popular Espanol
It’s a rescue not a purchase, Santander bought it for 1 Euro (after an auction!) The ECB arranged the deal and got away with it this time. The Italian banking system might be the next one to need help what will the bids in an auction be like there ? 10 cents, probably too high.
The other concern here was the toxic coco bonds, Popular did not pay its debts so the coco bonds convert to equity and get a share of the 1 euro. Coco’s might be the next crisis in waiting.
ECB Holds rates
A slight increase in forecasts for economic growth and a marginal change in language gave this a hawkish hold feel. It will not be long before they start to taper and become truly hawkish, the problem is that unlike the US and the UK the Europeans have not dealt with the fallout from the financial crisis, European banks still hold huge amounts of bad debt on their balance sheets.
Trading last week:
Before the election trading was slow with 5 wins out of 8 trades for a total of 148 pips. Election night itself was really good with short GBP trades delivering 349 pips in total. My signal service launches tomorrow, I will be sending trades before I take them and as I take them.
Conservative lead falls
The conservative lead in the election polls has dropped from more than 20% to less than 5%, this brought about the fall in the pound towards the end of last week. More of the same can be expected if polling data continues to favor labour, history suggests that these losses will reverse should Labour actually win.
UK GDP Below expectation 2.0% rather than 2.1%
A 0.1% miss is not the end of the world but it does come on the back of a series of weaker than expected UK data points. It is still too early for a Brexit effect so we are left looking at a slowdown in consumer spending as the likely cause. More fuel to the GBP bonfire.
FED Minutes released
They could not be clearer they are going to raise rates in June, it would take an enormous turn of events for them to hold now. The problem is that long term Bond rates are staying low flattening the yield curve which implies lower growth in the longer term
The Fed are also getting ready to cut the balance sheet, expect them to stop re investing this year that, in itself will cause rates to rise as it will be one less major buyer in the market.
Bitcoin priced at $2,700
The rise in usage in Asia after the Bank of Japan decided to allow bitcoin as payment caused a sudden spike in price. I have no idea what the real value of a Bitcoin is maybe $5,000 maybe $50 perhaps $50,000 or even $0.50. It looks like a classic bubble but when will pop and at what price?
Bank of Canada Hold Rates
As expected nobody except the fed are in any kind of rush to hike rates, if oil continues to rise in price along with the other hard commodities it won’t be that long before Canada, Australia and New Zealand join the fed on a slow hiking cycle
Forex Trade Results
A good week last week hit rate climbed back above 60% with 8 out of 13 trades being successful for a total of +297 pips which is quite a long way above target. The week was helped out by two big GBP short trades. I will be refining my trading plan again this week as I look to loose some of my loosig trdes and concentrate more on the successful 'pull back' strategy i use.
UK CPI rises to 2.7% from 2.35
The inflation trade continues with CPI data around the world pointing upwards in recent weeks. The BoE continue to say they will look through this temporary rise however their most recent forecast called for a peak of 2.8% and we are nearly there.
Japanese GDP rises to 2.2% from 1.4%
This is the fifth consecutive rise and the largest for more than 10 years, more fuel to the BoJ who remain the most dovish of central banks. The only negative point in the data was the rise came from exports, mostly to China, and not increased domestic spending. Japan needs its consumers in the shops if it is to fire the economy.
Aussie Unemployment Rate drops to 5.7% from 5.9%
The most unreliable of data points ticks lower, this will increase the chances of the RBA taking a more neutral tone in its next meeting but not by much, The falling price of metals will keep the Aussie down for the time being.
Canadian Inflation holds steady at 1.6%
The outlier in world inflation, an expected uptick did not materialize which surprised the market and continues to put pressure on the loonie. It makes the CAD look risky if oil starts to fall.
A senator calls for Trump to be impeached
A growing sense of chaos within the Trump administration makes the likelihood of tax reform and regulation cutbacks less likely. If the new administration continues to lurch from crisis to crisis without moving any policy forward the US equities will come under real pressure and risk sentiment will fall with them. Rate hikes from the FED will go on hold and the Yen will begin to rise.
US Industrial production rises 1%
An unexpected rise that comes on the back of last weeks rise in retail sales, the US economy continues to shows signs of life with modest growth becomming the trend. Perhaps the FED don't need the Trump effect.
Trading Results Last Week
Another rather poor week, hit rate remains stuck at less than 58% with 7 out of 12 trades making money. Total pips gained was 171 enough to make ends meet but no Ferrari on the shopping list!
New Zealand and UK Hold Rates
This really does not mean much for Forex traders, nobody expected a rise from either bank. The BoE reduced some of its forecasts and the RBNZ said GDP was a little less than expected. Interestingly both banks said recent increases in inflation would not last and they are prepared to look beyond short term inflation.
Chinese inflation data edges higher
Consumer prices moved to 1.2% from 0.9%, an increase in inflation in china is likely to spill over into the rest of the world at a later data but the odd 0.1% is not significant. The Bank of China does not respond in the way other banks do so no impact on interest rates. A growing chinese economy is however risk postive and generally benefits the AUD and the NZD
US inflation inched up
Consumer prices inched up 0.2%, a small number that will likely not help the USD. However it is becoming a pattern throughtout the world with most major economies reporting small increases in inflation. This will inevitably lead to higher yields on bonds and reduced stimulus, that will cause the VIX (fear gauge on wall street to rise) and lead to more volatile markets. For forex traders that usually means better trading conditions.
US Retail sales increase 0.4%
Below expectations of 0.6% and following a poor set of results last month these sales figures suggest a slow growing economy, thats a clear trend for the US as it begins to outpace the rest of the world (except the Brexit hampered UK). These figures might keep a lid on GDP and cause a pause in the FED rate hike cycle, that cycle is NOT going to end anytime soon.
Oil Stocks fall
A fith week in a row that US oil stocks have fallen but they still have a stock of 522 million barrels. OPEC production cuts are due to end this month but those cuts have only fired life back into the US shale industry which is now producing 850,000 barrels a day, up from 250,000. Another leg lower for oil is almost inevitable.
Last week we took 12 trades delivering 7 wins for a total of 261 pips. The win rate was a little lower than usual at only 58% (long term average is 68%) and a couple of times we managed to escape poor trades for small losses. Next week looks good with a few trading opportunities already identified in the planned trades section