A Key Yield Curve Inverted, But Should Investors Worry?


Bond Market Key Takeaways:

  • Yield curve inversion has investors wondering whether a recession is around the corner. However, inflation may show that their fears are unfounded.
  • A negative 3-month and 10-year treasury spread confirms the market is looking at a flat curve yield, the first since 2008.
  • A narrower high yield and investment grade bond spread may indicate that it is too soon for investors to panic as a key yield benchmark has shown a steady decline.

The inverted 3-month and 10-year US sovereign yield curve has many worried about whether a recession is close by since the last time this happened was in 2008.

The Economy Is Not in the Same Place as it was in 2008

A yield curve inversion tends to occur when there is an economic slowdown and lenders are willing to earn a lower interest rate due to the prediction that the Fed will cut short-term interest rates.

First Yield Curve Inversion on 3-Month and 10-Year Treasury Since 2008

Yield curve inverting

Source: Bloomberg

There have been many debates about the direction of the current economy by different analysts. However, it is important to note that the situation today is different than what it was due to enhanced central bank intervention in capital markets post 2008.

Inflation Remains Close to the Fed’s 2% Target

The current economy does not seem to be in the same position as it was before the 2008 recession. Inflation, for the most part, is not too high and currently rests at 1.7%, not far from the forecasted rate of 1.8% and the target rate of 2%.

Actual Inflation Is 1.7%, Close to the 2% Target

Inflation rate

Source: Bloomberg

When looking at the graph above during the 2008 recession, we notice that the inflation spiked at around 5.6%, a lot higher than the 2% target.

When evaluating whether a market is close to recession, the inflation rate is one of many factors to consider. One of the signals is uncontrollable inflation, which results from an excess supply of money circulating around. Given that the Fed has stated that they will refrain from reducing their balance sheet (i.e., allowing more bonds to remain in the market), this may indicate that a recession is not present in the near future.

High Yield and Investment Grade Bond Spread Seems to Show No Imminent Recession Threat

High yield bonds represent corporate bonds that carry higher risks due to their higher risk of default whereas investment grade bonds are lower risk investments, which tend to have a credit rating of BBB- or higher according to Standard & Poor.

Spreads Continue to Narrow

High yield and investment grade bond

Source: Bloomberg

In the graph above, we notice the spread between high yield bonds and investment grade bonds have been trending lower.

The lower trending spread indicates that these higher risk bonds have investors feeling as though there is a lower probability of default. Hence, why the spread narrowed since the beginning to the year.

If the economy were headed towards a recession, the spread between these two investments would widen out of fear that corporations would default on their debt obligations. However, this does not seem to be the case.Therefore, this is another one of many factors that could signal that it may be too soon for investors to fear the market.

— Written by Nancy Pakbaz, CFA, DailyFX Research

Follow Nancy on Twitter @NancyPakbazFX





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FX Week Ahead – Top 5 Events: RBNZ Meeting; Canada & US GDP; German CPI; Brexit Latest


Talking Points:

– The RBNZ will maintain a dovish tone this week, and rates markets aren’t looking for any change in policy through August 2019.

– The final Q4’18 US GDP reading is due this week, but traders may be more interested in the January Canadian GDP report to see how the oil rebound has filtered through into the global economy.

– UK Prime Minister Theresa May has one last chance to try and get her EU-UK Withdrawal Agreement passed through UK parliament.

Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

03/27 WEDNESDAY | 01:00 GMT | NZD RESERVE BANK OF NEW ZEALAND RATE DECISION

The Reserve Bank of New Zealand’s March meeting this week may come and go without anyone noticing much of anything along the policy front. The backdrop of the Q4’18 New Zealand GDP report that was released on March 20, which showed growth in at 2.3% y/y, slightly lower than the 2.6% y/y rate seen in Q3’18, suggests a slowing economy – much in line with what’s been seen across the developed world. At 1.9% y/y, headline inflation in New Zealand currently sits just below the mid-range of the medium-term 1-3% target.It should come as little surprise, then, that rates markets are pricing in a mere 0.5% chance of a move this week.

Read the full report: March RBNZ Meeting & NZDUSD Price Outlook

03/28 THURSDAY | 12:30 GMT | USD GROSS DOMESTIC PRODUCT (4Q T)

Growth expectations for the final Q4’18 US GDP have been tempered thanks to the shutdown. The US Congressional Budget Office estimated that the economy lost at least -0.1% of GDP last quarter and -0.2% in Q1’19 as a result of the shutdown. The NYFed Nowcasting estimate sees growth due in at a more modest 2.6% annualized. Meanwhile, the consensus forecast, according to Bloomberg News, calls for headline growth in at 2.4%.

Read the full report: Final Q4’18 US GDP & USDJPY Price Outlook

03/28 THURSDAY | 13:00 GMT | EUR GERMAN CONSUMER PRICE INDEX (MAR P)

The European Central Bank has recently announced that it will renew its TLTRO program later this year, and there may be the near-term conditions for the decline in inflation readings to level off. Energy prices have been stable for the past month (Brent Oil -0.1% past month), and the trade-weighted Euro (-4.2% since March 22, 2018) has proved soft. The upcoming preliminary German Consumer Price Index on Thursday may confirm this theory, where headline CPI is due in at 0.6% from 0.4% (m/m), and 1.5% (y/y) (unchanged from the final February reading).

Read the full report: March German CPI & EUR/JPY Price Outlook

03/24-29 MONDAY TO FRIDAY | EXACT DATE/TIME UNKNOWN | GBP THIRD BREXIT VOTE

UK PM May said in a letter to UK parliament on Friday night: “If it appears that there is not sufficient support to bring the deal back next week, or the House (of Commons) rejects it again, we can ask for another extension before 12 April – but that will involve holding European Parliament elections.” In other words, the third Brexit vote may not be held at all.

Read the full report: Third Brexit Vote & GBPJPY Price Outlook

03/29 FRIDAY | 12:30 GMT | CAD GROSS DOMESTIC PRODUCT (JAN)

The first batch of growth data for Canadian growth is due this week, and it should come as a relief to Bank of Canada policymakers. After all, December GDP came in at a mere 1.1% y/y and Q4’18 GDP came in at 0.4% annualized, largely due to the sharp decline in energy prices last quarter (oil directly impacts nearly 11% of the Canadian economy). With Crude Oil prices rising by 18.5% in January, there was likely a positive impact on Canadian growth.Looking at data trends during January, the Citi Economic Surprise Index for Canada gained from 11.1 to 43.7. Accordingly, Bloomberg News is looking for the yearly growth rate to pick back up to 1.5% in January from 1.1% in December.

Read the full report: January Canadian GDP & USDCAD Price Outlook

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX





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Gold Prices Ripe for a Dip While USD/JPY May Preparing to Rip


Gold and silver prices have retraced higher to a pivot level that may drive them lower. EURUSD, USDJPY, NZDUSD looking for support in bullish patterns.

The video above is a recording of a US Opening Bell webinar from March 25, 2019. We focused on the Elliott Wave patterns for key markets such as SP 500, gold, silver, DXY, EURUSD, NZDUSD, AUDUSD, and GBPUSD.

Gold prices are nearing an potential pivot point

The gold price chart is showing many symptoms of a near term bearish reversal. First, gold prices are currently parked on the 61.8% Fibonacci retracement level from the February 2019 high to March 2019 low. This is a common level where markets tend to reverse. Notice how this level near $1321 has produced previous swing low/highs (blue arrows)?

Secondly, driving into this resistance zone, we see evidence of the Relative Strength Index (RSI) diverging. This is also a common occurrence near the end of trends.

Lastly, when we analyze the gold chart through the lens of Elliott wave theory, it appears gold prices may soon reverse lower towards $1258 and possibly $1218. The labeling on the chart below shows the current Elliott wave count for gold as wave ‘b’ of zigzag ‘E’. This dip lower in gold, if it occurs, would be the last leg of the three year-long Elliott wave triangle which we are showing as wave (X). Therefore, once complete, would lead to a multi-month rally for gold. This view is valid so long as gold prices remain above $1160.

Therefore, our forecast from three weeks ago remains valid that gold and silver may continue to trade on their heels for a bit more.

Read more…

Top gold trading strategies and tips

gold price forecast using elliott wave theory.

Silver prices in a similar Elliott wave pattern as gold prices

Silver prices are similar to gold in that the current rally best counts as a ‘b’ wave of a zigzag pattern. This suggests a ‘c’ wave lower is on the horizon from levels not too far from current pricing to complete the bearish zigzag pattern. Once this zigzag pattern is completed, it is highly probable that correction from February 20 is also completed leading to a mutli-month rally.

Using Elliott wave relationships, we forecast this ‘c’ wave to fall towards 14.40-14.80. From there, we are anticipating a rally to above 16.20 and possibly to 17.00 while holding above 13.89.

Read more…

Top silver trading strategies

Trading the gold-silver ratio: strategies and tips

silver price chart with elliott wave labels forecasting a further dip.

EUR/USD broke key level of 1.1420

Last week, we wrote how a EUR/USD move above 1.1368 becomes an early warning signal for a break above 1.1420. A break above 1.1420 opens the door for further gains towards 1.17-1.20. Well, EURUSD did break 1.1420. The subsequent correction may simply be a wave (ii) of a larger advancing impulse wave. If so, then 1.17-1.20 remains in site.

The risk to this forecast is if EUR/USD falls below 1.1176. At this point, we will need to reconsider the Elliott wave count and elevate the probability the break of 1.1176 is a wave (iii) of a bearish motive wave.

Bottom line, 1.1176 is the key level for bulls. If the bearish count is to take hold, then EURUSD will struggle to rally.

EURUSD price chart with elliott wave labels forecasting bullish trend.

NZD/USD Builds on Bullish momentum

We wrote in an analyst pick two week’s ago how the Elliott wave triangle pattern may have finalized. This forecast has continued to hold up with NZDUSD advancing to its highest level in 7 weeks. We are anticipating further gains with .7090 and .7298 price zones where wave relationships exist.

If NZDUSD were to unexpectedly fall below .6814, then some other wave pattern is at play.

nzdusd price chart forecasting a bullish trend using elliott wave theory.

USDJPY falls but longer term bullish pattern remains

The multi-year bullish forecast yielded on January 3 remains in place despite the recent correct by USDJPY. The current Elliott wave count for USDJPY shows the dip as wave 2 of a bullish impulse wave. Therefore, we are anticipating a wave 3 higher to new highs above 112 that may work up towards 117-122.

USDJPY longer term forecast showing a bullish trend using elliott wave theory.

Elliott Wave Theory FAQ

How does Elliott Wave theory work?

Elliott Wave theory is a trading study that identifies the highs and lows of price movements on charts via wave patterns. Traders analyze the waves for 5-wave moves and 3-wave corrections to determine where the market is at within the larger pattern. Additionally, the theory maintains three rules and several guidelines on the depth of the waves related to one another. Therefore, it is common to use Fibonacci with Elliott Wave analysis. We cover these topics in our beginners and advanced Elliott Wave trading guides.

After reviewing the guides above, be sure to follow future Elliott Wave articles to see Elliott Wave Theory in action.

Not sure if Elliott wave is right for you? Believe it or not, when I first started trading I couldn’t understand why technical analysis worked. Now, I’m 100% technical through Elliott wave. Learn more about how Jeremy got started into Elliott wave from his podcast interview on Trading Global Markets Decoded with Tyler Yell.

—Written by Jeremy Wagner, CEWA-M

Jeremy Wagner is a Certified Elliott Wave Analyst with a Master’s designation. Jeremy provides Elliott Wave analysis on key markets as well as Elliott Wave educational resources. Read more of Jeremy’s Elliott Wave reports via his bio page.

Join Jeremy in his live US Opening Bell webinar where these markets and more are discussed through Elliott wave theory.

Follow Jeremy on Twitter at @JWagnerFXTrader .

Recent Elliott Wave analysis you might be interested in…

WTI Crude Oil Reaches a Decision Point on Price Chart

8 scenarios after an Elliott wave impulse pattern completes

USD/JPY Technical Analysis: 3 Year Pattern Complete?





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Why Does the US Yield Curve Inversion Matter?


Talking Points

– With US equity markets plunging this week, financial news media has been quick to point out movement in the bond market as the key catalyst.

– Portions of the US Treasury yield curve have inverted, sparking fears that the US economy is heading towards a recession within the next two years.

– Key spreads like the 3m5s and 3m10s have inverted.

See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Why Do Investors Look at the Yield Curve?

The yield curve, if it’s based on AA-rated corporate bonds, German Bunds, or US Treasuries, is a reflection of the relationship between risk and time for debt at various maturities. A “normal” yield curve is one in which shorter-term debt instruments have a lower yield than longer-term debt instruments. Why? Put simply, it’s more difficult to predict events the further out into the future you go; investors need to be compenstated for this additional risk with higher yields. This relationship produces a positive sloping yield curve.

When looking at a government bond yield curve (like Bunds or Treasuries), various assessments about the state of the economy can be made at any point in time. Are short-end rates rising rapidly? This could mean that the Fed is signaling a rate hike is coming soon. Or, that there are funding concerns for the federal government. Have long-end rates dropped sharply? This could mean that growth expectations are falling. Or, it could mean that sovereign credit risk is receding. Context obviously matters.

Does the US Treasury Yield Curve Inversion Matter?

It’s true that part of the US Treasury yield curve started to invert this week. We’ve seen both 2- and 3-year yields rise above 5-year yields. The “flattening” of the yield curve over the past year, predating this week’s inversion, is rather apparent when comparing the shape of the yield curve today relative to that from last December:

The knee-jerk reaction by many market participants, but mainly financial news media, has been to declare the inversion of the US Treasury yield curve as a harbinger of a forthcoming recession. The stats speak for themselves: yield curve inversions (particularly in the 3m5s and 3m10s spreads) predict recessions (more on this shortly).

While there are certainly good reasons for concern – the US-China trade war, the fading impulse of fiscal stimulus from the Trump tax plan, a housing market that is looking weaker amid higher interes rates – its best to take a step back.

Let’s Ask the Professor

Amid all of the talk about the US Treasury yield curve inverting this week, the Duke University finance professor who is the godfather of yield curve analysis (his 1986 dissertation explored the concept of using the yield curve to forecast recessions) gave an interview to NPR (which can be listened to here). Professor Campbell Harvey made a few key points regarding the yield curve inversion which traders should take to heart:

1) The model Harvey used initially looked at the 3-month, 5-year spread (3m5s), and conventional wisdom points to the 2-year, 10-year (2s10s) spread as the yield curve; all of the concern this week about the 2-year, 5-year (2s5s) and 3-year, 5-year (3s5s) spreads inverting did not interest him, given that they as shorter-maturity instruments didn’t qualify as “short-term” enough in his model;

US Treasury Yield Curves: 3m5s and 2s10 (1975 to 2018) (Chart 1)

Why Does the US Yield Curve Inversion Matter?

2) The yield curve inversions being discussed now are not significant. According to his research, the yield curve needs to invert for at least one full quarter (or three months) in order to give a true predictive signal (since the 1960s, a full quarter of inversion has predicted every recession correctly);

3) Regardless of the 3m5s and 2s10s curves not inverting this week, Harvey still believes the period of aggressive flattening is significant and it the yield curve is signaling slower economic growth for the US, but not yet a recession.

This note was originally published on December 6, 2018.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides





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EUR/USD Battle Lines Drawn into March Close


Euro is down more than 1.1% from the Pre-FOMC high against the US Dollar after turning precisely off yearly open resistance last week. While the risk remains for further losses near-term, the focus is on uptrend support just lower. These are the updated targets and invalidation levels that matter on the EUR/USD charts. Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.

New to Forex Trading? Get started with this Free Beginners Guide

EUR/USD Daily Price Chart

EUR/USD Price Chart - Euro vs US Dollar Daily

Technical Outlook: In my latest EUR/USD Weekly Technical Outlook, we noted that price was testing critical, “yearly open resistance at 1.1445 on the back of the FOMC interest rate decision. Note that a pair of trendlines extending off last year’s March & September highs also converges on this region and further highlights the technical significant of this resistance zone.” Euro reversed sharply off this threshold with price closing lower on the week as daily momentum failed at 60 (typically bearish).

That said, the focus is on support into the start of the week and IF this pullback is corrective, losses should be limited to the lower parallel / 2018 low at 1.1216. Confluence resistance stands at the 3/21 outside reversal close / monthly open at 1.1370/72 with critical resistance steady at 1.1419/45 – a breach / close above this region is needed to validate a larger breakout targeting the median-line.

Learn how to Trade with Confidence in our Free Trading Guide

EUR/USD 120min Price Chart

EUR/USD Price Chart - Euro vs US Dollar 120minute

Notes: A closer look at price action shows Euro trading within the confines of an ascending pitchfork formation extending off the yearly lows with last week’s decline rebounding off the 61.8% retracement of the March advance at 1.1280. Initial resistance now stands at 1.1340 backed by 1.1371/81 – a topside breach would put the focus back on 1.1419 and 1.1445– look for a bigger reaction there for guidance. Support rests at 1.1280 backed by the lower parallel, currently ~1.1240s – both levels of interest for possible downside exhaustion / entries IF reached.

Even the most seasoned traders need a reminder every now and then-Avoid these Mistakes in your trading

Bottom line: Euro pulled back from a BIG resistance-confluence last week at the yearly open and we’re looking for a low wile within the confines of this near-term formation. From a trading standpoint, the immediate risk remains for further losses while below the monthly open but we’re looking for a reaction / more favorable entries on a move towards the lower parallel. Ultimately a breach above 1.1445 would be needed to mark resumption.

For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

EUR/USD Trader Sentiment

Euro vs US Dollar Trader Sentiment - EUR/USD Positioning

  • A summary of IG Client Sentiment shows traders are net-long EUR/USD – the ratio stands at +1.01 (50.1% of traders are long) – neutral reading
  • Long positions are7.2% lower than yesterday and 8.3% higher from last week
  • Short positions are 25.5% higher than yesterday and 20.2% lower from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Euro prices may continue to fall. Yet traders are less net-long than yesterday but more net-long from last week and the combination of current positioning and recent changes gives us a further mixed EUR/USD trading bias from a sentiment standpoint.

See how shifts in EUR/USD retail positioning are impacting trend- Learn more about sentiment!

Relevant Euro / US Data Releases

Euro / US Economic Data Calendar

Economic Calendarlatest economic developments and upcoming event risk. Learn more about how we Trade the News in our Free Guide!

Active Trade Setups

– Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex





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Brexit Latest Pushes Overnight Implied Volatility to Extremes


GBPUSD IMPLIED VOLATILITY – TALKING POINTS

  • Prime Minister Theresa May stated that she will not put her Withdrawal Agreement to a vote tomorrow due to continued lack of majority support as the latest Brexit drama drags on
  • Currency markets still await clarity on the next direction of Brexit and its impact on the Sterling as the risk of UK departing the EU without a deal remains elevated
  • Want to sharpen your GBP knowledge? Read up on What Every Trader Needs to Know about the British Pound

GBPUSD overnight implied volatility has jumped to its highest level since November 15 as forex option traders price in the latest Brexit uncertainty. Increasing implied volatility reflects higher ‘insurance’ costs for GBPUSD currency traders who utilize options to hedge their positions and reflects the market’s view that spot prices could experience significant swings over the contract’s respective duration.

FOREX MARKET IMPLIED VOLATILITIES AND TRADING RANGES

GBPUSD: Brexit Latest Pushes Overnight Implied Volatility to ExtremesGBPUSD: Brexit Latest Pushes Overnight Implied Volatility to ExtremesGBPUSD: Brexit Latest Pushes Overnight Implied Volatility to Extremes

Prime Minister Theresa May still faces an uphill battle to get her Brexit deal passed through the House of Commons as British MPs remain opposed to supporting the Withdrawal Agreement negotiated with the EU. Parliament has previously rejected the Brexit deal twice and has led the UK government to request an extension to Article 50 in a last-minute attempt to save Brexit.

The European Council agreed to delay Brexit until April 12, but the new deadline is contingent on the UK approving the Brexit deal on the table – a deal that is not open for further negotiations according to EUCO President Donald Tusk. Moreover, the so-called Strasbourg Agreement offered by the EU to extend the March 29 Brexit deadline is not legally binding and is contingent on the UK to approving the Brexit deal. In other words, the UK is still largely at risk of a ‘hard’ no-deal Brexit departure from the EU this Friday.

Check out this Brexit Timeline for key events driving the UK’s departure from the EU

The struggle continues for Theresa May as she keeps fighting for enough Parliamentary support to secure a Brexit deal this week. Despite the PM’s efforts to get majority backing for her Brexit deal, she has just announced to Parliament that “there is not sufficient support in the Commons to bring back the Withdrawal Agreement for a third meaningful vote.”

PM May added to her statement that the government will oppose the Letwin Amendment but will still provide time for Parliament to vote on it tonight around 22:00 GMT. The motion could provide MPs with options over the direction of Brexit that has potential to pass with majority. Although, as things stand currently, it increasingly appears that only 2 choices remain for Brexit: revoke Article 50 and stop Brexit or depart the EU with no deal.

GBPUSD TRADER CLIENT SENTIMENT

GBPUSD: Brexit Latest Pushes Overnight Implied Volatility to Extremes

Check out IG’s Client Sentiment here for more detail on the bullish and bearish biases of EURUSD, GBPUSD, USDJPY, Gold, Bitcoin and S&P500.

Given the vast Brexit uncertainty, GBPUSD client positioning according to IG data indicates a mixed bias with 50.1 percent of traders holding net-long positions. The number of traders net-long is 1.7 percent higher than Friday but 3.7 percent lower than last week.

READ MORE:

CURRENCY VOLATILITY – FOREX PRICE ACTION SETUPS FOR THIS WEEK

US EQUITY OUTLOOK – CHARTS SHOW STOCKS AT CRUCIAL INFLECTION POINT AFTER FED

– Written by Rich Dvorak, Junior Analyst for DailyFX

– Follow @RichDvorakFX on Twitter

https://www.dailyfx.com/forex/technical/article/fx_technical_weekly/2019/03/24/dow-jones-sp500-equity-outlook-charts-show-stocks-at-inflection-point-after-fed.html





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Sentiment Mimics Conditions Prior to 2019 Flash-Crash


Japanese Yen Rate Talking Points

USD/JPY attempts the retrace the sharp decline following the Federal Reserve meeting, with the pickup in volatility spurring a more material shift in FX sentiment, but recent price action raises the risk for a further decline in the dollar-yen exchange rate as it extends the series of lower highs & lows from the previous week.

Image of daily change for major currencies

USDJPY Forecast: Sentiment Mimics Conditions Prior to 2019 Flash-Crash

Image of daily change for usdjpy rate

USD/JPY bounces back from a fresh monthly-low (109.71) as Chicago Fed President Charles Evans, a 2019-voting member on the Federal Open Market Committee (FOMC), talks down the risk for a recession and argues that the U.S. economy is merely ‘decelerating from stronger growth’ in 2018.

Like most of his colleagues, Mr. Evans largely endorsed a wait-and-see approach for monetary policy as ‘the risks from the downside scenarios loom larger than those from the upside ones,’ but went onto say that monetary policy could ‘perhaps even loosened — to provide the appropriate accommodation to obtain our objectives.’ Nevertheless, the 2019-FOMC voting member still anticipates ‘for almost 2 percent growth this year,’ and it remains to be seen if the FOMC will continue to change its tune over the coming months as the central bank prepares to wind down the $50B/month in quantitative tightening (QT) starting in May.

Image of fed fund futures

The comments could also infer that the FOMC has yet to abandon the hiking-cycle as Fed officials pledge to be ‘data dependent’ and forecast a longer-run interest rate of 2.50% to 2.75%, but market participants appear to be looking for a change in regime as Fed Fund Futures now reflect a greater than 60% probability for a rate-cut in December. With that said, the ongoing shift in the Fed’s forward-guidance may keep the dollar-yen exchange rate under pressure amid growing speculation for lower interest rates, but the recent pickup in USD/JPY volatility continues to shake up market participation as retail interest recovers from an extreme reading.

Image of IG client sentiment for usdjpy rate

The IG Client Sentiment Report shows 56.1%of traders are now net-long USD/JPY compared to 52.4% at the end of last week, with the ratio of traders long to short at 1.28 to 1.The number of traders net-long is 2.8% higher than yesterday and 13.9% higher from last week, while the number of traders net-short is 19.6% higher than yesterday and 13.3% lower from last week.

Keep in mind, traders were net-short since February 27, with the ratio slipping to an extreme reading earlier this month, but the IG Client Sentiment index has recovered since then amid the ongoing pickup in net-long interest. Moreover, the last time the sentiment index showed a similar dynamic was back in December, with the retail crowd turning heavily net-long ahead of the currency market flash-crash in January.

The flip in retail interest warns of a broader shift in USD/JPY behavior, with recent price action raising the risk for a further decline in the exchange rate as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Rate Daily Chart

Image of usdjpy rate daily chart

  • The USD/JPY correction following the currency market flash-crash appears to be unraveling as price and the RSI snap the bullish trends from earlier this year, with recent price action raises the risk for a further depreciation in the exchange rate as it extends the series of lower highs & lows from the previous week.
  • Still waiting for a break/close below the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) to open up the February-low (108.72), which sits just above the next downside hurdle around 108.30 (61.8% retracement) to 108.40 (100% expansion), with the next area of interest coming in around 106.70 (38.2% retracement) to 107.20 (61.8% retracement).

For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Yen

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019.

— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



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Weekly Trade Levels for DYX, EUR/USD, USD/CAD, Gold, Oil & More


New to Forex Trading? Get started with this Free Beginners Guide

US Dollar Majors and the Post-FOMC Drift

While last week’s FOMC interest rate decision did fuel a surge in volatility, prices largely remain range-bound with the USD majors broadly holding within the March opening-range. That said, the longer-term technical levels are clear and we’re looking to validate our near-term outlook on numerous setups early in the week. In this webinar we review updated technical setups on DXY, EUR/USD, NZD/USD, AUD/USD, USD/CAD, Crude Oil (WTI), Gold, and S&P 500 (SPX).

Why does the average trader lose? Avoid these Mistakes in your trading

Key Levels in Focus

DXY – Post-FOMC recovery vulnerable ahead of 97.10. Interim support / near-term bullish invalidation at the monthly open / 61.8% retracement at 96.15/22.

EUR/USD – Initial resistance at 1.1340 with bearish invalidation at 1.1370/80. Support at 1.1280 with critical slope support at ~1.1250s.

NZD/USD – Price remains vulnerable while below critical resistance at 6930/41. Interim support 6865 – a break there exposes 6818 and the monthly open / 100-day moving average at 6806/07 -look for a bigger reaction there IF reached.

Gold – Price targeting key near-term resistance range at 1321/23 – a breach / close above is needed to fuel the next leg higher targeting 1332. Interim support 1313 with near-term bullish invalidation at 1302.

For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

Key Event Risk This Week

Economic Calendar

Economic Calendar – latest economic developments and upcoming event risk

Active Trade Setups:

Learn how to Trade with Confidence in our Free Trading Guide

—Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex

https://www.dailyfx.com/nzd-usd?ref-author=Boutros





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The SNB: A Forex Trader’s Guide


The Swiss National Bank (SNB) is Switzerland’s Central bank. Their mission is to promote and maintain monetary and financial stability. It is important for traders to keep up to date with the SNB’s latest changes to monetary policy because it can have a large effect on the Swiss Franc (CHF).

Switzerland SNB Swiss National Bank

What is the SNB?

The Swiss National Bank was established in 1907. It is responsible for the monetary policy of Switzerland and issues Swiss Franc banknotes. As of 2015, the Swiss National Bank is privately owned with most shares belonging to the Swiss Cantons. Like other central banks, the SNB uses different monetary policy tools to bring about price stability and take account of economic developments.

The factor that holds the most importance to traders is monetary policy, which we will explain in depth in this article. Other factors, like the independence of the central bank are also important but are more prevalent issues in emerging market economies.

Key Economic Mandates of the Swiss National Bank

According to the Swiss National Bank, their primary goals are:

  1. Price stability – which is stability of the exchange rate and/or inflation
  1. Economic development – which is focus of development and stability of the economy

Price Stability

Monetary policy is extremely important for the entire economy. It prevents runaway inflation and attempts to ground inflation expectations so that the economy can grow at a regular pace. In order to maintain price stability, the Swiss National Bank and their monetary policy committee (MPC) have set an inflation target of less than 2% for CPI per annum.

If inflation goes above the target of 2%, the Swiss National Bank may have to increase interest rates. The increase in interest rates may cause an appreciation in the Swiss Franc (CHF) as investors increase capital flows into the higher yielding currency. It may also have a negative effect on the stock market, as businesses will have to pay higher rates to lend and equity valuations will be discounted at a higher interest rate. Monetary policy data can be found on our economic calendar.

However, it is not always the case that the Swiss National Bank will increase interest rates if inflation is above target. In some cases, like when GDP growth is still low or negative, the Swiss National Bank may keep interest rates low to stimulate the economy. It is important to understand that the Swiss National Bank will be looking for a balance between healthy inflation and economic growth.

Join our central bank webinar to watch our senior currency strategist discuss and analyze current central bank trends.

Economic Development

Economic developments are intertwined with monetary policy. Changes in economic outlook often cause central bankers to update their monetary policy plans in order to stabilize the economy.

How SNB interest rates affect the Swiss Franc (CHF)

The Swiss National Bank can affect the value of the Swiss Franc through changes in interest rate expectations. Traders should understand that currencies appreciate/depreciate when interest rate expectations increase/decrease, not just from increases in the nominal interest rate.

The Swiss Central Bank, like most central banks, use different monetary policy tools to control the interest rate. The forex market normally prices in current interest rate expectations, changes in these expectations can cause the Swiss Franc to depreciate or appreciate. The Swiss National Bank can do this by giving the market forward guidance (telling the market) that they expect further hikes or less hikes (or cuts) in the future.

The general principle for how interest rates affects the Swiss Franc and the stock market are given below:

  1. Higher interest rate expectations increase the strength of the Swiss Franc and negatively affect equity values.
  2. Lower interest rate expectations decrease the strength of the Swiss Franc and positively affect equity values.

Interest rate impact on the economy

The Swiss National Bank lowers interest rates when it is trying to stimulate the economy (GDP) and increases interest rates when it is trying to contain inflation caused by an economy operating above potential (overheating).

Lower interest rates stimulate an economy in a few ways:

  1. Businesses can borrow money and invest in projects that will receive more than the risk borrowing rate.
  2. When interest rates are lower the stock market is discounted at a lower rate, leading to an appreciation in stock market values which causes a wealth effect.
  3. People invest their money into the economy (stocks and other assets) because they can earn more in these assets than at currently low interest rates.

How to trade SNB interest rate decisions

The table below displays the possible scenarios that come from a change in interest rate expectations, traders can use this information to forecast if the currency is likely to appreciate or depreciate and how to trade it.

Market expectations

Actual Results

Resulting FX Impact

Rate Hike

Rate Hold

Depreciation of currency

Rate Cut

Rate Hold

Appreciation of currency

Rate Hold

Rate Hike

Appreciation of currency

Rate Hold

Rate Cut

Depreciation of currency

Let’s look at the example below on the EUR/CHF. In 2015 the Swiss National Bank took the market by surprise by abandoning an exchange rate cap on the Swiss Franc. The Swiss Franc, which was capped to the EUR at 1.2 francs per Euro appreciated around 20% initially, policy makers then began to cut interest rates leading to a depreciation of the Swiss Franc.

The SNB: A Forex Trader’s Guide

<alt image desc> Swiss National Bank removes currency peg

Top Takeaways of the SNB and Forex Trading

  • The Swiss National Bank is fundamental to the value of the Swiss Franc.
  • The Swiss Franc will appreciate or depreciate depending on changes in interest rate expectations, not on actual changes.
  • Quantitative easing has a similar effect to changes in interest rates. Changes in expectations of quantitative easing will have an effect on the Swiss Franc.
  • Rising inflation does not mean the Swiss National Bank will increase interest rates, it depends on the balance between economic growth and inflation.

Learn more about forex fundamentals

Use the DailyFX economic calendar to keep an eye on all the important economic data releases, including central bank speeches and interest rate data. Don’t forget to bookmark our Central Bank Rates Calendar so you can prepare for regular announcements.

We also recommend finding out more about the role of central banks in the forex market, and what central bank interventions involve.

If you are just getting started on your trading journey, get to grips with the basics of forex trading in our New to Forex trading guide.

Learn more about other central banks

Most central banks have similar mandates of controlling price stability and upholding financial stability, although there are some differences. Learn more about the different central banks:

  1. The European Central Bank
  2. The Bank of England
  3. The Swiss National Bank
  4. The Federal Reserve



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Brexit News and Risk-Off Sentiment Dominate


Market Themes and Movers – Brexit and a Risk-Off Theme

GBP: Sterling continues to trade sideways as Brexit news and rumours dominate proceedings. PM May’s position is said to be under increasing pressure as MPs look to take the Brexit debate forward. A series of indicative votes have been mooted for mid-week with Parliament looking for a consensus position to present to the EU. PM May is thinking about presenting her Withdrawal bill to the House again this week if she is confident that it will pass, although current thinking is that this is unlikely to happen.

USD: The dollar remains better-bid for choice after rallying off the six-week low made mid-last week. US-China trade talk has shifted to the background as we start the week but will remain a key driver in the weeks and months ahead. The greenback has lost ground against the Japanese Yen as risk-off sentiment takes hold of the market, pulling gold higher, while oil slips lower on global growth concerns. The USD is also shrugging off, for now, the inversion seen in the US Treasury market where 3-months T-Bills briefly offered more yield than 10-year USTs, an inversion that may signal an upcoming recession.

DAX 30: The German bourse, along with other European stock markets, is under downside pressure and further losses may be on the cards going forward. A brief rally took some markets back to flat on the session but moves look strained. Today’s slightly-better-than-expected German IFO data gave the Euro a nudge higher but taken in conjunction with last week’s weak PMI readings, expectations for German growth this year may be downgraded again.

Chart of the Day – Three-Month Treasury Yields Trending Higher.

Brexit News and Risk-Off Sentiment Dominate - US Market Open

DailyFX Economic Calendar: For updated and timely economic releases.

GBPUSD Daily Price Chart – Trend Holds for Now (March 25, 2019)

Brexit News and Risk-Off Sentiment Dominate - US Market Open

How to use IG Client Sentiment to Improve Your Trading

Retail sentiment is an important tool for any trader to help gauge market sentiment and positioning. We provide updated daily and weekly positional changes on a wide range of currencies and asset classes to help decision making.

Market Movers with Updated News and Analysis:

  1. GBPUSD Price Edgy, PM May Under Renewed Brexit Pressure.
  2. DAX 30 Technical Outlook: Another Major Decline May Have Just Begun.
  3. Top 5 FX Events: Canadian GDP (Jan) & USDCAD Price Outlook.
  4. US Dollar Charts: EURUSD, USDCAD, AUDUSD, NZDUSD Reversals to Follow Through.
  5. Gold Price Eyes a One-Month High on Risk-Off Bid.

— Written by Nick Cawley, Market Analyst

To contact Nick, email him at Nicholas.Cawley@ig.com

Follow Nick on Twitter @nickcawley1





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