After a week of the Chinese being on holiday, they return to the market with fundamental data that will effectively set the tone for much of next week. I refer to of course the trade balance information which will show their imports and exports as well as any surplus or deficit which will give the world an indication on the rate of growth of the world’s second largest economy. I feel it is worth noting that while the general consensus is for a decline on exports and imports, the decline is far less great than the decline shown in previous months. How the market will react to this solely depends on what the data will reveal. Should the numbers disappoint, then expect risk aversion to be merciless and thoroughly persistent following the small break and relief witnessed on Friday when US retail sales proved to be better-than-expected and post a respectable number. The currencies that will be most affected by this will be the Japanese yen which will benefit from a safe haven bid should the data disappoint and the Australian and New Zealand dollars which also be weighed down by any negative news due to the importance of their trading relationships with China. Should the opposite be true, we can expect a reverse of this reaction.
As many of you know while the Japanese economy is fundamentally weak with inflation flat and fourth-quarter GDP expected to show a decline on Monday, Japanese bonds are currently the haven of choice for institutions seeking to guard their liquid assets. In short although Japanese bonds have now become so expensive that they post negative yields (i.e. it actually causes one to lose money by holding them), it is seen as less risky than holding on to equities or other liquid assets (other currencies) in times when there is no risk appetite in the market. As a result of this speculation on Japanese bonds, the Yen gets stronger as people who wish to invest in these bonds have the first purchase Japanese currency. However, this too was a double-edged sword as when institutions choose to liquidate those bonds, they will quickly also sell the end that they get from the sale of these bonds as they will not choose to hold money that has a negative interest rate. Another thing I want you all to watch out for is that as we approach the end of the Japanese fiscal year, many of the multinationals will be repatriating funds back to their home country which will result in buying lots of yen so just make sure you aren’t too vulnerable to any of these.
On Tuesday we have the Germans ZEW surveys which are expected to show bleak conditions of business. I believe that this could well be the case as such a result would support the weaker than expected German GDP that we saw last week. Therefore should these results live up to expectations, it could be a good time to start selling the euro.
On Wednesday the highlight of the week remains the UK data. I believe that the consistent falls in unemployment and strong UK job market at the moment will post further improvement and we will actually see the unemployment rate fall to 5% from its current level of 5.1%. This should help put pressure on wages and we should also see earnings increase. Speculating on this, I would be tempted to take a position that would capitalise on this. However, given the fact that this job data appears to have been leaked for as many consecutive times as I can remember, it could be dangerous to do this as the major institutions who appear to be getting the data early are positioning themselves to exploit those who receive the data at the appropriate time. We are not going to keep making this mistake again. Until these data leaks from the National office of statistics stop I believe it is best to avoid trading on UK data. It could just be me getting paranoid but I don’t believe in coincidences happening 20 times in a row.
The last piece of data that I note this week which we should pay attention to is inflation data from the United States on Firday. I believe that this may be better than expected due to a number of reasons. Firstly the dollar has been substantially weaker in January compared to previous months and I expect this to have made the cost of imported goods more expensive and therefore to have had some effect on inflation. In addition despite the decline in oil prices, we have finally seen some upward pressures on wages due to the continued improving labour conditions in the United States and this too should have its positive effect on inflation. I would be very surprised if Friday’s figure fails to live up to expectations and I even personally expected to be better than the general consensus.
Of course there are two other key pieces of data (well three actually now that I think about it) from the central banks. Over the course of this week we will see minutes from the central bank meetings of the ECB, the Federal reserve and the reserve bank of Australia. All of these will give us a greater insight into the tones of each of the committees. I expect the ECB and Australia to show signs of dovishness and concerns over their growth potential, while I expect that the minutes released by the Fed will continue to defy the market expectations that there won’t be a single hike this year and while they will cite potential risks to growth from external developments outside the United States, they will still forecast a couple of increases in rates over the course of 2016.
Given the fact that the US economy is still showing strong growth in its housing market, its employment and its retail and services, I still refuse to believe (maybe I’m just hard headed and stubborn) that it is in danger of falling into recession so easily. Despite everyone claiming that the manufacturing sector is performing weakly, most of the PMI are still above 50 showing that there is still growth and if we look at the payrolls in the last two months there has been a net addition of 30,000 jobs in the manufacturing sector. Eventually these people are going to become productive and manufacturing will rise. I still do not believe that the US economy is going to completely flip on the drop of a coin and change from promising growth to a firm decline. Despite consistently posting positive data, it’s almost as if the market doesn’t want to hear it and is trying to convince itself that the fundamentals are not strong. They do this by having already written off the Fed from acting despite Fed officials, as recently as earlier last week, stating that they are still on course to raise rates. If the data between now and March does not disappoint, I believe that the Fed may choose to act again in March and indeed they may simply do so on the basis of reaffirming their authority and shown the market that they will do what they believe is best and not what the market tries to tell them is best.
Currently the account has an unrealised net loss of 3.75%. I was chatting to my account manager today, he called me to inform me they would be down for maintenance this morning to improve their services before the market opens (unlike another group, they do not waste the weekend and perform maintenance when the market opens) and he confirmed they would make an exception for us, and lower the minimum copy amount to $200, as requested by some of you. I have to say it actually feels helpful to have people that communicate with you when you need them and not just when they want to ask you for deposits.
This change will happen on the 1st of March at which point the account will also be password locked. Apparently, I can only make changes at the end of the trading cycle out of fairness for those who joined during that cycle. For all of you who read this blog, don’t worry. Even after the password is administered, I will let you join at any time. My only condition will be that it must be at a time when there are no trades open (to make it fair on the people already in).
Anyway, we currently hold positions there of:
USDJPY long $200,000 @ 115.883.
USDCHF long $100,000 @ 0.99322.
EURGBP sell 100,000 Euros @ 0.742.
GBPCHF long 100,000 pounds @ 1.421.
If the data from China turns out to disappoint, we will hedge our JPY exposure by selling NZDJPY and AUDJPY (for reasons explained above in the outlook).
Otherwise, we will hold our current ground and look for opportunities to sell the EURUSD and possibly add another USDCHF.
You can take advantage of the platform’s guaranteed stop loss which allows you to minimise your risk from maximum potential returns and capitalise on the economic data this week. In short if you know that there is an economic event that is forecasted to be positive and the data is of the nature that can move the market significantly, take a position that can take advantage of the data. If you are wrong, the guaranteed SL will make sure that you are only stopped after losing a few movements where as if you are right the profit will be astronomical. To take advantage of this though you really need to be in a position where you open your position just ahead of the data release.
Watch oil throughout this week. If oil performs well (on rumours of OPEC negotiating), it will give stocks a boost. In particular Japanese stocks which have been routed all of last week, be hungry. Look for opportunities. The experience will be good for you in identifying these relationships.
Also watch Natural Gas around the time that inventories reported. The price action here generally follows whether the inventories is greater or less than expected approximately 80% of the time.
IQ Option short term trade ideas (for options of a few minutes):
Monday: One minutes before the Japanese GDP Data, take a call on USDJPY. Make sure it will expire, after the data has been released.
Tuesday: One minute before the ZEW surveys, take a put on EURGBP or EURUSD.
Wednesday: UK data, highly likely to be leaked, stay away!
Thursday: Not sure about how the Aussie data will pan out, so best stay away from it.
Friday: Before the US inflation data, perform puts on any of the following:
Anyoption longer term trade ideas:
Over a one month period, given the ECB can be expected to do more: There is value in puts on the EURUSD and EURGBP.
I wish us all the best of luck next weekvand as always if you have any questions please comment,