Effects of the Bank of England rate hike

Introduction

The Bank of England raised the overnight rate from 0.25% to 0.50% yesterday. This is quite significant because it’s the first rate hike in a decade. The inflationary pressure was the key point in this decision. Some members were demanding a rate hike a long time ago. However, in the Bank’s policy statement, they cautioned that further increases in the overnight rate will be gradual and related to the performance of the economy.

My opinion

I understand that they raised the base rate in order to offset the growing inflation. Up to this point, everything is clear. But, considering that the Brexit negotiations haven’t progressed enough, I don’t think that is the best decision at this moment. According to Barnier, the European Chief Negotiator for Brexit, the Brexit talks could take months to progress. So, I think the BoE has taken the initiative to hike the rate as a temporary measure and the Bank’s policy statement confirms that it will be gradual. In the case of a hard Brexit, they can lower the overnight rate again or even support the economy in a different way until getting new trade agreements.

What was the market reaction?

I think the big credit traders and the institutionals thought the same as me. The British Pound plunged. The Long Gilt, the equivalent of the 10 T-Note and the Euro-Bund, rose. The UK interest rates, known as Short Sterling Futures, jumped showing the disappointment of this decision. Let’s see the movements more in detail.

GBPUSD December 2017 future

     Source: TradingView, GBPUSD Dec17 Future, daily

This is a daily chart that shows the scale of the movement yesterday. It opened at 1.3266 and it closed at 1.3071, big drop. Early in the morning was rising and it tested the resistance at 1.3318. After that and driven by the disappointment from the market participants it fell. In its way down, the support at 1.3157 was broken and fell to the next support (1.3063)

     Source: TradingView, GBPUSD Dec17 Future, 30 min

Here you can see in more detail the movement. It was falling in the morning, but when the interest rate hike was announced, the volatility came to play. Usually, if the economy is strong and performing well, an interest rate hike boosts the currency. In that case, the market participants thought that was not the best moment to hike rates.

EURGBP 

      Source: TradingView, EURGBP FXCM CFD, 30 min

This is the Euro vs the British Pound. The reaction was the same. The major movement happened in 30 min this is why I’ve chosen this time frame.

Long Gilt 

     Source: TradingView, Long Gilt OANDA CFD, Daily

The UK 10 Year Bond future made a very technical movement because it respected the resistance at 125.756. It’s true that at this point, and considering the importance of the level, the most part of the traders considered to sell or take profits. But let’s check this better in the following chart:

     Source: TradingView, Long Gilt OANDA CFD, 15 min

I’ve chosen 15 minutes because I can explain better each candle. We can see that was barely flat before the announcement. At 12:00 UK time, as soon as the BoE confirmed the rate hike, this bond rose driven by the buying pressure. I consider the next candle as a Doji pattern because the buyers and the sellers were conflicting. At this point, and due to the big movement, I believe that some firms were taking profits. The next candle broke higher but failed to close above the resistance at 125.75. This level was used to take profits and open short positions because the movement since the announcement was big. Around 14:00, the buyers came to the market helping to close at the highs of the day.

As a curiosity, I would like to share this article from Efinancialcareers:

https://news.efinancialcareers.com/uk-en/300035/bankers-london-mortgages/?utm_source=GLOBAL_ENG&utm_medium=SM_LI&utm_campaign=FANS

Conclusion

In normal conditions, an interest rate hike makes the value of the currency going up as well as the interest rate yields. The Brexit shadow appeared after the rate hike and this is why the British Pound and the bond yields plunged. I haven´t focused on the UK short-term interest rate futures, known as short sterling futures,  but they rose significantly showing the disappointment with the decision. I can understand that the Bank of England did it as a temporary measure to try to fight with the high inflation and the high level of personal debt. The future path of the rate hikes in the UK depends on the Brexit negotiations, and I don’t see any significant progress on them.  The market is pricing all of these facts. I like to follow the interest rate markets because you can see what´s going on without reading the news. As always, I hope you like this post.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#trading #InterestRateHike #macroeconomics #fx #GBP #InterestRates #BoE #RateHike #LongGilt #Brexit

Eurodollar futures, examples and strategies to trade the interest rate curve

Introduction 

As you know, the Eurodollar futures represent the 3 months interest rate futures. I like the interest rate derivatives because they don’t usually have big movements like indexes, currencies or commodities. Another advantage is that there are a lot of contracts listed on the exchange and you can apply different strategies. The liquidity is very high, unfortunately, it’s not a fast market and getting filled is not easy due to the exchange algo.

We will talk about trading but understanding macroeconomics helps a lot in this kind of products. Let me show you why:

Current Macro view

The U.S. is showing its strength every time they release its macroeconomic indicators. Last week we showed a better than expected GDP growth (3.0%). October has been really good: strong durable good orders (2.2%), better than expected ISM manufacturing PMI, strong services PMI, an increase in Existing Home Sales, 4.2% as an unemployment rate. On the other hand, the Non-Farm Payrolls were worse than the market forecasted due to the effect of the hurricanes. The consumer price index wasn’t as good as the Federal Reserve would like it. But in general terms, the macro data was very good.

Considering all of these facts and a hawkish FED that expects three rate hikes in 2018, the Eurodollar futures should be falling at the moment.

Quick look at the Outrights

 Eurodollar December 2017

     Source: TradingView, Eurodollar Dec17, daily

This is the December 17 contract. It was lower at the beginning of the year because everyone expected a hawkish FED. The USD was really strong at this time. The FED delivered the first rate hike in March and obviously, the interest rate futures fell. After that, this contract rose to set up the maximums of the year in June. This movement was driven by the doubts about how a quick normalization and interest rate hikes could affect the economy. The main concern was the high level of personal debt and how the people could resist and pay in an environment where the interest rates were going up but the salaries were stagnant.  The Fed raised the interest rate in June for the second time of the year, and this contract fell until July. It seemed that everything was going well but the shadow of some geopolitical problems appeared. The front contracts rose. The Fed September meeting was a turning point and the confidence came back to the market. Janet Yellen announced that the Fed will start cutting its balance sheet in October, and she said that the normalization process would be gradual and predictable. At this moment, the sell side was the correct one.

 Eurodollar June 2018

     Source: TradingView, Eurodollar Jun18, daily

The June contract movement has been similar than the December 2017. The main difference is that the Jun18 is trading at the same levels of the beginning of the year, which in my opinion indicates that the market expects that the economy will continue growing in 2018.

 Calendar Spreads

If you think that trading outrights involves a lot of risks maybe you should consider calendar spreads and bet in the yield curve. Basically, you are betting that the difference between two contracts will wide or narrow. You can use technical analysis, macro analysis, quantitative analysis.

Eurodollar December 2017 - March 2018

    Source: TradingView, Eurodollar spread Dec17-Mar18, daily

Looking at the chart, you can see a clear trend that started in September. Does it sound familiar to you? The reason why this spread is going up is that the March 2018 contract has fallen more than the December contract. The economy is performing well, the market expects a rate hike in the beginning of 2018 and 2 more alongside the same year. At the moment, it’s trading at 0.1450, which I consider an important resistance.

Eurodollar March 2018 -  December 2018

      Source: TradingView, Eurodollar spread Mar18-Dec18, daily

This is a 9-month spread. You can see how well the spreads trend. It follows the same pattern as the other outright or strategies mentioned above. It was trending very well in September but it’s moving sideways and showing some weakness at the current levels.

Eurodollar September 2018 – June 2019

     Source: TradingView, Eurodollar Spread Sep18-Jun19, daily

This spread is different. The traders are pricing several interest rate hikes the yield curve is flattening. It has just crossed the 200 EMA and I think this movement will continue.

Eurodollar March  2019 – December 2019

     Source: TradingView, Eurodollar spread Mar19-Dec19, daily

This spread has been falling almost the whole year. The 200 EMA is very significant, every time that the spread closed above it the movement was reversed in a few days. As well as the previous one, it shows weakness.

Butterflies

If you agree that the spreads in 2018 are trending up while the spreads in 2019 are trending down and you would like to trade both, the best thing you can do it´s making a butterfly. This strategy consists of buying one spread and selling another one in which the middle leg is the second leg of the first spread. 

                       Butterfly structure, Step 1 and 2 are the spreads that create the butterfly, own elaboration

You can sell a butterfly if you do with 2 different spreads, you should sell the first one and buy the second one.

Let’s see these butterflies:

     Source: TradingView, Eurodollar Butterfly Mar18-Dec18-Jun19, daily

This is a very volatile butterfly but it’s a good example of this strategy. It supports the theory of buying the 2018 spread (Mar18-Dec18) and selling the 2019 spread (Dec18-Jun19)

     Source: TradingView, Eurodollar Butterfly Jun18-Dec18-Jun19, daily

This is less volatile than the first one. The best aspect is that it ranges all the time.It can rise to the levels drawn on the chart, but there is only my opinion.

Conclusion

I hope that you like. This is only a brief article but I hope that it will help you to understand how this kind of product behaves and the different strategies you can apply. Knowing about macroeconomics helps. I will be promoting this articles on the following twitter account: @fxfincomtrading

Thanks.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#trading #eurodollar #macroeconomics #calendarspreads #butterflies #InterestRates #US #Fed

Most important moves of the week

Introduction

We have seen interesting moves this week in the financial markets. The most important was the ECB decision to cut the monthly asset purchases but extend them until September 2019. The market considered this decision very supportive and dovish by the ECB. The euro was hit by this decision and the problems in Spain. The UK released a better than expected product that helped the British Pound to hold its value versus other currencies. On the other hand, the energy markets have moved a lot. The Crude Oil Brent closed the week at 60.44, the 2 year high.

Crude Oil Brent

    Source: TradingView, Crude Oil Brent Dec17 future, daily

The Crude Oil Brent has broken key levels and has risen like a rocket in the last two days. I fell on Monday and I questioned my bullish idea as it could keep raising and break the 58.20 level. On Tuesday it closed at 58.33, above the key level formed the week before.  The selling pressure wasn’t strong enough on Wednesday at this contract closed flat at 58.45. The big movement was in Thursday and Friday. After Wednesday support, it tested the 59.54 on Thursday. It continued the bullish trend on Friday. It closed at 60.44, which represents the 2 year high.

US Dollar Index

      Source: TradingView, US Dollar Index futures, daily

As you can see it’s been a tough year for the USD. In June, and due to the interest rate hike by the Fed, seemed that the US Dollar Index could go up. But it didn’t. The weakness in the energy markets and the geopolitical problems didn’t allow the USD to rise. The market expected more hikes in 2017, unfortunately, with the hurricanes, the Fed officials were obliged to delay this decision. We have seen good economic data this week in the US:

Macroeconomic indicator	Reading	Expected
Core durable goods orders (MoM)	0.7%	0.5%
New home sales	667K	557K
GDP	3.0%	2.5%

The Fed is showing confidence and a hawkish approach because they have confirmed that the interest rate hikes will continue in the next year and they will reduce the asset purchases. 

     Likelihood of December Rate Hike, CNBC, https://www.cnbc.com/2017/09/18/traders-are-getting-ready-for-another-fed-hike.html

       December FED rate hike probability, Bloomberg, http://uk.businessinsider.com/markets-almost-certain-fed-hiking-interest-rates-in-december-2016-11?r=US&IR=T

These charts show how the likelihood of a rate hike in December is increasing, and the dollar has done the same movement since September. Is anyone building a big position?

All of these facts were the key to help the USD. Technically the most important thing is that the downtrend was broken 1 month ago. The most important levels for me are 92.63 (as a key support) and 96.585 (as a resistance)

Another interesting fact is that Janet Yellen won´t continue as a Fed president.

Euro

    Source: TradingView, EURUSD Dec17 future, daily

The Euro has fallen this week due to the dovish speech by the ECB this week and the USD strength. This is always the same if you don’t deliver what the market participants expect, the value of your assets decline. As I said in my last article, I understand that the ECB prefers to be cautious with the QE cuts. Having a weak currency in a growing environment can help the inflation to peak. It has broken 2 key levels this week as you can see in the chart. I think it can keep going down and test the 1.1530 level. In part, the last decrease was due to the issues in Spain.

British Pound

    Source: TradingView, GBPUSD Dec17 future, daily

Surprisingly for me, the GBP is holding its value vs the dollar. We have seen a better than expected GBP in the UK. It’s difficult to know what will happen in the Brexit negotiations. There are a lot of doubts and speculation about what will happen. The biggest investment banks confirmed that thousands of employees will be relocated to Europe. 

    Source: TradingView, GBPUSD Dec17 future, daily

We have seen the same down movement than in the EURUSD. We can see a double top that indicates that the GBP will rise vs the Euro. The 0.8733 level is a very important support that has been tested several times.

I hope you like it.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#Trading #fx #euro #gbp #USD #energy markets #brent #macroeconomics #UK #US #Europe #fundamentals, #Bloomberg #FED #interestRate #qe #Assetpurchases #ECB

Why is the European Central Bank dovish? Interest Rate strategies

The European Central Bank is very conservative at the time of taking decisions on economic policy. And this fact has been confirmed again today. As expected, the ECB will cut asset purchases to 30 billion euros from 60 billion euros. This will start in January and it will last for nine months to September. One of the reasons why the ECB remained cautious is the weak inflation.

What did the EURUSD?

After the decision, the Euro plunged. 

     Source: TradingView, EURUSD Dec17 Future, 30 min

The market didn’t expect a hawkish decision and it was reflected in the movement of the euro. I started the day falling. You can see how the volumes got bigger around the interest rate decision and the ECB conference. Draghi was optimistic about the eurozone growth but he signaled that is concern about the inflation. Technically, the EURUSD futures has broken 2 important levels (1.1793 and 1.1729)

What is the real reason behind this decision? My opinion

Economics is a social science and predicting the individuals' behaviour is really difficult. Let me make an example to show my thoughts about this dovish decision.

Let’s imagine an ideal world in which the most important economies keep performing like the last couple of years, China’s GDP growth meets the 7%, the commodities keep rising, the Federal Reserve raises rates and makes substantial cuts to the asset purchases and there isn´t any economic shock. In this context, the US dollar will rise vs the euro. The conservative ECB policy will support a weak euro, and with the conditions mentioned, it will help Europe to keep growing and the inflation will peak.

On the other hand, applying the economic policy in Europe is difficult due to the differences between the strong economies and the peripheric economies. So whatever is applied needs to be good in general terms without affecting in a negative way to certain economies.

As a theory, it’s valid but it’s very difficult that all of these will happen.

What can we see in the Euribor futures?

Euribor futures are the interest rate futures in Europe. You will see in the following charts that an improvement of the European economy is not discounted.

Euribor Jun18 future

     Source: Barchart, Euribor Jun18

As you can see it fell at the beginning of this year, showing an improvement of the economy. At this time the inflation was growing and it hit 2% in March. The euro was weak in this period, the EURUSD was trading around 1.06. Since then, the Euribor jun18 has been rising due to the low inflation, the Brexit, the lack of change in the economic policy. Considering the uptrend, the market participants don´t expect changes in the economic policy neither a big improvement of the European economy.

Euribor spreads

Euribor March 18 – June 18

    Source: Barchart, Euribor Mar18-Jun18

Euribor March 18 – December  18

     Source: Barchart, Euribor Mar18-Dec18

These spreads show the same as the outright explained before. A falling spread means that the difference between the two futures is decreasing. Talking about the interest rate curve, we can see that the yield curve is flattening. The main difference between both spreads is the volatility. Obviously, the 9-month spread moves more than the 3-month spread. They are in lows of the year, I would consider buying if I expected an economic improvement. At the moment, I wouldn’t buy because I don’t  see any sign of reversal.

Another strategy to consider is a Euribor butterfly. 

     Source: Barchart, Euribor butterfly Jun18-Sep18-Dec18

The butterfly is in a support and it´s trading at the lows of the year. I think it´s a better choice than the spreads at the moment.

Euribor spread June 18 – June 19

     Source: Barchart, Euribor Jun18-Jun19

The main difference with the other spreads is that the overall trend is bullish. This means that the traders expect that the economy and the inflation will be better in 2019 than 2018. The main problem is that the triangle is one of the most dangerous figures in technical analysis and I wouldn´t trade it until it breaks. If you like interest rate futures you should add to your watchlist. There is a strong support at 0.1550.

Conclusion

First of all, I hope you enjoy this article. The interest rates market is my favourite. You should consider the macroeconomic indicators and follow the central bank meetings. It’s a fundamental market and less volatile than other markets. There are strategies such as spreads and butterflies that are listed at the exchanges so you won’t have execution problems in the different legs. Thanks.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#Trading #ECB #Euribor #Euro #EURUSD #fundamentals #InterestRates #Macroeconomics #opinion #Spread #trading #TechnicalAnalysis  #butterfly #creatingValue

Why should we save money and invest it? First lesson for a new investor

Introduction

Even if you have a small salary you can become a wealthy individual over the time. In order to do it, or at least to try, you need to be disciplined and save a certain percentage every month. There is no rule to save a certain percentage of your income every month. It depends on your personal situation and the goals that you set up before starting this journey.  

Example

Let’s make a hypothetical example. A young person has a salary of 20000$ per year after taxes. This person knows that he/she can live with this salary but he/she can’t afford to pay certain hobbies. Let me call this person David to make it easier. One day, David decides to write in a paper his desired lifestyle for the future. He doesn’t want to change the job because he likes it and the workplace is nearby. He knows that saving money is not enough, so he starts looking for an extra income. He lives in a medium size town so there are limited opportunities. After thinking about it, he decides that is going to save 10% of his salary and invest it at the final of the year. In this case, he will be saving 2000$ every year and this amount will be added to the portfolio at the final of the year.

Let’s supposed 4 type of portfolios he can invest in and the returns that he can get if he is committed with one of them.

         Different portfolios, own elaboration

These calculations are made by the assumption of that 2000$ are saved and added every year, the interest rate is fixed (2%, 5%, 7% or variable in the case of S&P500), it’s calculated for 40 years and he doesn’t withdraw any money.

As you can see if he decides to invest in a portfolio that returns 2% per year, after 40 years, he will have 123220.05$. Considering that in his lifetime has saved 80000$, means that this portfolio has made 43220.05$. This is a very conservative portfolio that probably is not the best to meet your goals. Let me compare the last figure (accumulated savings + return generated) of the rest of the portfolios:

                5% per year = 253679.53$

                7% per year = 427219.14$

                SP500 annual return = 1212688.82$

The last portfolio is the riskiest, but what a great return.

What are the steps to start your own journey?

1. Set up your future goals
2. Evaluate your current situation, make a spreadsheet with your income and expenses and figure out how much money you save and how much money you will put in the investment portfolio
3. Choose an investment that suits your risk aversion and risk-reward ratio, make sure that you understand the chosen investment and the risk involved.
4. Ask for advice about the best way to set up your ideal investment account, with a risk and money management system (online, in your bank, with a financial advisor, in a brokerage)
5. Be disciplined, keep saving an investment as your plan dictates

Why is the Risk management important?

One of the most important things to succeed as an investor is the risk management. I can’t talk about this topic because I haven’t described a strategy to follow. It depends on the type of investment you choose. But probably, the first thing I would teach to a new investor is the Asymmetrical Leverage. It refers to the required gain to recoup from a loss increases geometrically. 

      Asymmetrical Leverage, own elaboration

This chart is a clear representation of the definition above. It means that if you lose 10% of your portfolio you need to gain 11.1%, which is more than the original 10% loss. Let’s imagine a 1000$ portfolio that loses 10%, so the portfolio is valued at 900$. The difference with the original portfolio is 100$ which is the same amount we need to gain to recoup the initial portfolio. If you divide 100$ by the new value of the portfolio, 900$, the result is 11.1%

As you can see in the chart the amount to recoup grows geometrically as soon as we incur in bigger loses. 

I think this is the first thing that an investor or a trader should learn. If you check, all the successful investors and traders have a sounding risk management and I guess that they have this chart on the wall.

Conclusion

Saving part of our income and investing it over the time is one of the best things we can do. Every time I say investing, it's in a responsible way. There are a lot of practices to avoid such as invest according to the media or the comments on the internet. You should generate your own ideas or reasons. If you are not ready or you don't have time, there are a lot of kind of investments and professional services that can help you. In that case, and depending on your resources, you can invest in Exchange Traded Funds, talk with your bank, open an account in an asset management or invest in hedge funds. If you want to try the joy of trading or investing on your own, there are a lot of resources to learn the basics. I would recommend spending several months with a paper trading account. This post shows only a hypothetical example of how lucrative can be. If you don't, believe me, Tony Robbins has a book with real examples of people that committed to saving part of their income and they became successful financially speaking. Please bear in mind that the past returns are not indicative of the future ones. As I said one of the most important things is the risk management. All the best of luck in your journey!

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#asymmetricalLeverage #investing #journey #loses #profits #returns #rRskManagement #savings #TonyRobbins, #Trading #wealthy #creating value # compounding_interest

USDCAD, fundamentals and technicals

Introduction

I’m going to compare the USD with the Canadian Dollar. These two economies are performing well. Each one has its own problems. Both central banks, Fed and BoC, are rising interest rates. 

Fundamentals

Let’s start with the fundamentals.  As you know I like to have a big picture where I can highlight the risks.

United States

Its economy is showing strength. The GDP has been growing since June 16. It´s not as high as someone would like but considering that it’s a developed economy is very good. The US CPI is surging as well and this with the strong labor market can lead to more interest rate hikes in the near future. The last unemployment rate reading was 4.2%. The ISM Manufacturing PMI is really high. Some fund managers and traders would prefer to sell some assets considering the high level in the ISM PMI, and statistically speaking I agree (always with a good risk management and considering the size of their portfolios).

    Source: Investing, ISM Manufacturing PMI historical

The Federal Reserve is ready to hike interest rates and stop the asset purchases to support the economy. The election of a new FED president can help to do it quicker. On other hand, if the tax proposal is successful, the stock market could continue the upside trend.

Canada

It’s been a busy year for the members of the Bank of Canada. The housing bubble and the high household debt made it even more difficult. All of these facts with the good macroeconomic data obliged the central bank to raise the overnight rate to 0.75% from 0.50%. This was very significant because it was the first hike after the financial crisis. This helped the Canadian Dollar. The BoC raised interest rates in early September for the second time this year. Canada’s economy is dependent on the heavily indebted household sector to support economic growth. According to some BoC employees, we can see more hikes in 2017, but I have my doubts about it. I understand that they need to hike interest rates to cold the housing market but the main problem is how to do it without affecting the economic growth. The property sales have decreased but the valuations are still high. It’s expected that the Canadian overnight rate will be around 1.75% by the end of 2018.

USDCAD

USDCAD year to date

     Source: TradingView, USDCAD FXCM CFD, daily

The most part of the year has been falling. It was bouncing from 1.3023 and 1.35169 in the first four months.  It broke the resistance at 1.3517, and it set up the highs of the year, but this movement finished around 1.3800. The BoC raised the overnight rate in July, it was the first time in seven years, this was a boost for the CAD. It fell until September, the last downside move was due to the second interest rate hike of the year in Canada. It´s been a tough year for the dollar. One of the reasons is that there is a high probability that the Federal Reserve will hike interest rates before the final the year.

The most important levels, in my opinion, are the following:

Resistance 4	1.3516
Resistance 3	1.3321
Resistance 2	1.3023
Resistance 1	1.2764
Support 1	1.2437
Support 2	1.2110

Relevant levels, own elaboration

I think that the USD will keep raising and test the resistance 1 (1.2764)

USDCAD daily from the middle of July

    Source: TradingView, USDCAD FXCM CFD, daily

Here, we can see how the dollar lost its strength in the middle of August. The probability of an interest rate hike in Canada increased. As a result of the speculation of a rate hike and the performance of the economy, the Bank of Canada rose the 0.25% the interest rate at the beginning of September. The CAD strength was temporarily boosted but it didn’t last for long. Since then, the USD has been rising. The reasons are: the high probability of another rate hike in the United States before 2018, the possibility of electing a hawkish Fed president and the tax proposal. As I said I think the USD will rise vs the CAD at least in the short term. It hasn’t crossed the support at 1.2437 and it´s above the 20 and 50 exponential moving average.

Conclusion

This is a good example of two economies in which their central banks are tightening for different reasons. We have seen one of the longest bullish markets, because it had the support from the central banks around the world. I think that the USD will be stronger than the CAD in the short to medium-term. I hope you like the article. 

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Crude Oil Brent, similarities between short term trading and the economic cycle phases

Brent futures week review

We have seen interesting movements in Brent this week. As I said in one of my last articles, I see a bullish trend in Brent. It crossed the resistance at 57.21 on Monday after being rejected on Friday the 9th October. Tuesday was a choppy market but it managed to close higher. All the daily highs were rejected from Monday to Wednesday, this was followed by a big fall on Thursday.  Yesterday It fell in the morning but quickly recover and closed at 57.75. You can think about the Friday recovery as a market optimism supported by the output cut policy by the OPEC.  Let’s check the market action on some charts:

    Source: TradingView, Brent Dec17 Future, daily

Here is the chart from the middle of August to yesterday’s close. It failed to rise above the 58.80 level, which I consider really important. I think it was due to profit taking from institutional trading firms. Yesterday upside move confirmed the bullish sentiment. The shadow was really big, which indicates that traders rejected the downside move and they rebalanced their portfolios increasing longs.

     Source: TradingView, Brent Dec17 CFD Oanda, 1 hour

I've used the Brent CFD from OANDA because I don’t have live market data on ICE futures Europe. It´s easier to see how the market rejected and took profits above 58s. The most relevant part of this chart is the price action on the 20th October. The shadows highlighted in yellow show an area where the buying pressure was bigger than the selling one.

Can we compare the financial markets with the economic cycle?

It seems that the economic cycle is reflected in some markets, the best example is the stock market. Some companies are not as affected by the economic cycles as in the past because globalization plays an important role in their PnL, they can struggle in some countries but they can compensate with the profits from other countries or economic areas. Obviously, there is the risk of contagion as we saw in the last financial crisis. Can we see the same phases in trading than in the economic cycle?

      Economic cycle, own elaboration

Let me briefly explain the economic cycle phases:

• Recession: the confidence drops and shows weakness, the inflation peaks, the inventories drop and the production falls.
• Recovery: the stimulative economic policy helps the confidence to rise again, the inflation falls
• Expansion: the confidence increases, the economy grows
• Late cycle: the inflation rises, everyone talks about the economy and investments, the economic policy becomes restrictive

How do the different assets behave in these phases?

• Recession: interest rate futures and bond futures rise (the yields drop), the stock market falls, commodities fall because there are uncertainty and low demand
• Recovery: interest rate futures curve start to change the direction at least in the back of the curve, bonds futures rise but less than before creating resistances, the stock market stars to rise at least in the stocks linked to the economic cycle, commodities go up.
• Expansion: interest rate futures and bond futures fall (the yields rise), the stock market rises, commodities trends up supported by a strong demand.
• Late cycle: short interest rate yields and bond yields rise, stock market tops up, commodities continue the upside move.

Now, I would like to change the following words:

• Recession: Weakness
• Recovery: Accumulation
• Expansion: Strong trend
• Late cycle: top

It seems a simple game but I want to let you understand that it’s all about order flow, I mean supply and demand, buyers vs sellers. Let me start with the accumulation phase. This is the phase in which the price of the asset is cheap but the market participants have doubts about buying the asset. The institutional investors take advantage of their big portfolios and they start buying and building a long position. Once it has gone up a bit, the economy has improved and shows signs to keep improving, the asset will be in the expansion phase. The main characteristic is that everyone tries to get into the asset and a strong trend is made. After this, there is a late cycle or a top. Everybody talks about how good the asset is performing and some people try to get into it. Sadly, it’s not the best decision as the movement is almost finished. The institutional investors usually take profits during the expansion phase.

Light Sweet Crude Oil example

     Source: TradingView, Light Sweet Crude Oil futures, 15 min

The purpose of this chart is showing what I explain above. It fell in the morning, weakness phase. After that, the accumulation phase started. Around 15:00, the buying pressure pushed the price up. This represents the expansion phase. Between 16:00 and 15:00, the market couldn’t break the 51.60 level, this confirmed the late cycle in which the market topped and failed to break highs. I do apologize because it’s not the best example to show the concept explained.

Conclusion

I hope you have enjoyed this article. It’s not as big as I would like. Please let me know if you would like me to explain each concept in more detail and I will try to do it in the future. As you can see, trading is not as simple as buy low and sell high. There are a lot of things you should consider. 

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved