FX and Fixed Income trading: July 2016

Monday 11 July 2016

EUR/USD analysis

I’m going to analize the EUR/USD from the 9th of July 2015. As we can see in the next chart, the USD was bearish vs the EUR, the main reason was the Chinese economy turmoil. During the 4th quarter the USD was stronger than the euro. We have seen a stronger Euro in 2016, but after the Brexit and the growing euro-skepticism the european currency has lost around 3,5% vs the dollar. I think it will keep going down in the next 3 months. Italy will hold a constitutional referendum in October. A negative outcome would bring a new phase of political uncertainty. Italy is one of the countries with the highest share of population that thinks they would be better off the EU.

EUR/USD, Daily, 10/07/2016

Considering the macroeconomic environment and how it can affect the different assets, it’s one of the most important skills in financial markets. Sadly, it’s not enough. Keynes said: “the market can remain irrational longer than you can remain solvent”. Let’s check how this pair has behaved this year.

EUR/USD statistics from 09/07/2015 to 08/07/2016

As you can see in the chart, the mínimum yield was -2.43% and the maximum yield was 3,04%. Mainly the positive mean (0.00256%) is one of the most important figures, it shows that the euro has been stronger than the dollar. The positive asymmetric coefficient shows that the yield’s distribution is skewed to the right. The mass of the distribution is concentrated on the left of the figure but there are more extreme values in the right side. The distribution is leptokurtic, which means that has fatter tails than the normal distribution.
The next two charts are part of the whole analysis, they help to understand the data in the table.

EUR/USD Daily change

EUR/USD probability of the different returns

Technical analysis
Once you have clear the fundamentals, you can support your trading idea with technical analysis. The color code of this chart is:
• Orange is a WMA (n=10) Since now I will refer to as WMA10
• Red is a SMA (n=20) Since now I will refer to as SMA20
• Blue is a SMA (n=50) Since now I will refer to as SMA50
• Green is a SMA (n=100) Since now I will refer to as SMA100
• Grey is a SMA (n=200) Since now I will refer to as SMA200

I’ve decided to show the RSI and the MACD below the main graph.

Own elaboration, EUR/USD technical analysis

I only analyze the last 262 days this is why some of the indicators don’t start from the last day. (Note, I analyze through R programming. I multiplied the rate for 10^4 in order to simplify some of my tasks.)
As I said before I think the value of the EUR will decrease. As you can see in the chart the WMA10 and the SMA20 crossed the SMA50 and SMA100. Aparently, it means that in the short term the EUR/USD will go down. The SMA50 is decreasing and it wil probably cross under the SMA100 in 1 or 2 weeks. The RSI is low (40.943), so we can see a small rebound but I’m bearish. The MACD is below the signal.
It’s really difficult to forecast the long term, the american elections will be held in November. As we have seen with the Brexit, a political decision can change the world.
This post is not an investment recommendation, it’s my own opinion.

Sunday 3 July 2016

Economic calendar, GBP/USD futures analysis

Maybe is the topic of the week but today I’m going to analize the GBP/USD future, before that I would like to show the most important macroeconomic releases we will see this week:

Economic Calendar

Monday Expected Last

GBP Construction PMI (Jun) 50.5 51.2

Tuesday

GBP Services PMI (Jun) 52.7 53.5

Wednesday

USD ADP Nonfarm Employment Change (Jun) 160K 173K

USD ISM Non-Manufacturing PMI (Jun) 53.3 52.9

Thursday

GBP Manufacturing Production (MoM) (May) -1.0% 2.3%

USD ADP Nonfarm Employment Change (Jun) 160K 173K

Friday

USD Nonfarm Payrolls (Jun) 175K 38K

USD Unemployment Rate (Jun) 4.8% 4.7%

GBP/USD

After the Brexit, all bankers are concern about the value of the sterling pound. The jittery fx markets are waiting for a clear response from the policy markers. If you remember Mark Carney’s speech, you can think that the monetary easing will devalue the sterling pound. Supply and demand law. Let’s compare EE.UU. with UK:

· The FED was the first central bank to apply monetary easing after the financial crisis, since then the american economy has improved significantly.

· UK has been performing really well during the last 2 years, the MPC could have risen interest rates before.

What has happened since the Black Friday?

All things we had in our agendas have blown up. Apparently the market participants speculate that the FED will delay the interest rates rise. The most part of the investors are convinced that the gold’s value will go up. Jim Rogers, famous investor, disagrees with betting on gold as a safe haven. He said that he prefers to buy the USD because the value of the gold is too high.

GBP/USD, daily, from 23/09/2015 to 1/07/2016

In my opinion, during the next three months, the GBP/USD pair can rebound to 1.35, but after that it will go under 1.30. This forecast is based in fundamental things like the monetary easing and the political uncertainty. After October I prefer to be cautious, and be aware about the UK election. It’s going to be a difficult year having in mind that EE.UU. will have elections on the 8th of November.

This post is not an investment recomendation, it’s my own forecast. I will keep updating this post with statistical analysis.

Saturday 2 July 2016

Sum up of the week, FX, Fixed Income futures

Let me start reviewing the macroeconomic figures we saw this week. We have seen very good data, I’d like to highligh the US GDP, US consumer confidence, EUR manufacturing PMI, GBP manufacturing PMI, US ISM PMI. All of them showed better figures than expected.

Current Expected Previous

US GDP (QoQ) (Q1) 1.1% 1.0% 0.8%

US CB Consumer Confidence (Jun) 98.0 93.3 92.4

US Pending Home Sales (MoM) (May) -3.7% -1.1% 3.9%

German Retail Sales (MoM) (May) 0.9% 0.7% -0.3%

German Unemployment Change (Jun) -6K -5K -10K

German Unemployment Rate (Jun) 6.1% 6.1% 6.1%

GBP GDP (YoY) (Q1) 2.0% 2.0% 2.0%

EUR CPI (YoY) (Jun) 0.1% 0.0% -0.1%

German Manufacturing PMI (Jun) 54.5 54.4 54.4

EUR Manufacturing PMI (Jun) 52.8 52.6 52.6

GBP Manufacturing PMI (Jun) 52.1 49.9 50.1

USD ISM Manufacturing PMI (Jun) 53.2 51.4 51.3

Obviously, the Brexit effect is not reflected in this indicators yet. I’m excited to see how it can affect the different economies.

The governor of the Bank of England has told markets to expect a cut in interest rates and the possibility to implement monetary easing. Having said that, he warned that the monetary policy cannot inmediately offset the implications of a large negative shock. This explains why all the indices closed up this week. In my opinion the most important markets can rise a little bit more, but having in my mind the doubts about China, the Brexit implications, the future of the EU, I think the markets will go down sooner or later. It’s an artificial growth, let me explain my perspective, all the monetary policy applied by the central banks let the stock market raise. There is a lot of complacency in the markets, and events like the brexit creates a lot of volatility and increases the fat tailed risk.

Today, I going to start with the fixed income futures (10Y T-Note and the Bund). As you can think the 10Y T-Note future raised this week.

10Y T-Note future, 1 day

The Bund’s future has tried to break the 167.27 but apparently there are a lot of traders willing to sell around this level. We should focus in how the situation evolves.

Bund future, 1 day

FX futures

The EUR raised vs the USD, maybe the main reason of this movement is that the FED won´t raise interest rates at least until August – September. In my opinion the EUR/USD should look for lows, because the US macroeconomic is strong and there is a lot of uncertainty in the eurozone after the decision taken by UK. George Soros warned the European Parliament that the Brexit has unleashed financial crisis and that Europe should be united.