How Do I Trade The FED Rate Hikes?

Ladies and Gentlemen,

After a surge in Bitcoin prices, more doubts grow about the stability & long-term value of the USD. Many Economists & Analysts believe the USD to be heavily over-valued & have been calling a reversal in the USD for over 2 years now, but the brute force that is QE has only but stood in the way of purists.

Figure : DXY over last 2 years







Let's first turn our eyes to the Euro and as it currently hovers around the 1.10 mark, as the FED breathes more clarity over the coming months (heading into early 2016) - many Traders are calling for 1.15-1.16 as the "Fair-Value Equilibrium". However, until then we could still stay on the weaker side of 1.10, as Draghi continues to seemingly over-deliver on expectations... But could we really go to parity or lower? - To be honest, there is nothing magic here! When you throw in lots of numbers, taking into account coherent Econometric studies (interest rate differentials, relative to the size of the Eurozone's balance sheets) - you can't really go near numbers close to parity.

What about the FED? The FED has a mandate which is not related to the FX Market whatsoever, and this is one of the main arguments from more sophisticated FX watchers (in the short-run at least). Since the first Quarter of this year, the rates market has remained completely flat but the USD has only but rocketed (more so since April)... The main question beckons.. Will the FED pull the trigger in December or not? If yes, it would only be by 25 basis points & would that really cause a huge impact?.. I don't think so.

Reality Check again! The USD is overvalued and what the FX Trader should be wary of is the Hiking Cycle that the FED will signal. In order to really justify the USD at current levels, they would need to plot an aggressive hiking path. We could actually see another 150-175 basis points over the next few years.... & that would really hurt! Again, this depends on a variety of Domestic/External factors.. (as well as the price of Oil).. A difficult one to predict now.
                                                                                       

So what do I trade? Well I would look at Cable. The Market expectations are that the BOE are maybe 9-12 months away for changing pricing, and if you compare this to the FED/ECB outlook, the "time-gap" is extremely stretched. If you look back in time, since the inception of the Bank Of England as n independent Central Bank, there has never been such a significantly wide time gap between movements in the FED to a change in the BOE. Two things to look at here, the Fundamentals & what the Market has already priced in. I do believe (as per the graph above) 1.70 to be fair value for £/$.

Looking at the Markets Carney has a responsibility for bringing the market back in and delivering on his mandate. He sees risk moving way too much against him and the Market seems to remain complacent.

End of the day! USD is over-valued and has been for many months. Look at Cable & it should be grinding higher and the main view on USD is that the over-evaluation will also slowly cause other Central Banks to ease of.

Best of luck

Anish8FX @ Atom8.Com

A new month, a new quarter and the first event risk is upon us - NFP!

Ladies and Gentlemen,

A new month, a new quarter and the first event risk is upon us.

Tomorrow at 13:30 BST we get the US Non-Farm Payrolls.

At the Philip Gamble Memorial Lecture at the University of Massachusetts on 24^th September Janet Yellen said “Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year”. There are only 2 meeting left, the next FOMC decision is 28th October and then the final meeting of year for the open markets committee takes place on 16^th December.

It is well known that the Federal Reserve do not like to surprise the market, Larry Summers former Secretary of Treasury, stated in his blog that in the last 20 years the Fed has never tightened without guiding the futures market to at least a 70 percent chance of a tightening, presently there is an 84% expectation of a December hike. Will tomorrows’ data change the market view?

Bloomberg have surveyed 93 economists and the estimates vary from a lowest approximation of 149,000 and a highest evaluation of 255,000

The average is 202,000 whilst the median is 200,000.

In August 173,000 jobs were added, down from 245,000 in July, whilst the unemployment rate fell to 5.1%

A strong number and I assume that we will see further confidence in the $ trade and whilst the commodity markets are under pressure, prefer to express this view against the commodity currencies.

Good Luck

Anish S. Lal @anish8fx

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

Risk Warning

Trading on margin (spread betting, CFDs and FX) carries a high level of risk and may not be suitable for all investors.  The high degree of leverage can work against you as well as for you.  Before deciding to trade your live account, you should carefully consider your investment objectives, level of experience and risk appetite.  You could lose more than your initial investment and should not trade with funds you cannot afford to lose.  You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Are we on the brink of a EURUSD rally?

The greatest fall in modern history 

The last 9 months have wiped away over 30% of the value in the Euro against the Dollar and with Goldman Sachs & many other analysts calling for further moves to the downside past parity and into 0.80 territory -  This post argues for a bottom above parity and for a potential move to the upside. 

The Turnaround call... (follow the banks)

HSBC currency analysts last week called time on the USD rally, after being one of the firsts to spot the Bull in 2013. As US inflation remains shy of its target - policymakers tolerance for this strength will not last for much longer. Furthermore, HSBC said that the USD is the most overvalued currency in the market ahead of the CHF. 

Fundamental pitfalls 
The thriving Dollar & huge outflows from the Eurozone (post tensions from Greece & other failing nations) have combined to fatigue the politically formed currency group. 

Forecasts of parity claim to be easily achievable as the recent momentum has pointed too - with the Euro continuing it's stage of decline. 

Is there any hope left? 

Short-term relief for this major has come from the recent economic data out of the US - seeing extremely disappointing Non-Farm Payroll figures & analysts pointing towards a more dovish stance from the FED later this evening. 

This lies key for future FOMC Interest Rate meetings and also discussions for low US inflation as the FED continue to stagnate their first interest rate rise in years. 

This week, retail sentiment for EURUSD and also GBPUSD has switched to a more "bullish" outlook as buyers eye 1.10 - technical outlook pictures further scope for near-term USD weakness. 

Are we ready to climb higher?

Near-term gains for the Euro should not come as a surprise - especially as commodity markets are turning green and the pressure from the CAD has been somewhat relieved ahead of today's BOC speech. 

A break of 1.10 or 1.095 would set the tone for this pair that is torn between ongoing ECN QE and a relentless run of US data on the other hand & A dovish FOMC may just be the catalyst to send this exchange into higher levels. 

Trading with Atom8 (for the marketing stuff)...

Atom8's unique liquidity allows you to trade EURUSD from 0.1 + commission on MT4, Java or by FIX. 

Enquire now at www.atom8.com

-Peace & Love guys

Anish

DEMOLISHING THE EURO CURRENCY

Dear Readers

Hope you all had an amazing weekend.

As talks progress with Brussels, Frankfurt & Athens... The Greek economy is presented with now 2 options :

- Leave the Euro, defaulting on it's debt & starting again with the Drachma;

OR

- Find a new "bailout" agreement from the ECB (heavily supported by German Euros) & continue operating with their high level of debts.

If Greece do leave the Euro, The markets will ask who is next?  As this event could create a cascade of defaults across the EU. Spain, Ireland, Portugal or even Italy... Causing mass scale crashes in the EU banking systems - possibly bankrupting Governments.

In reality... will the ECB let this happen?.... Maybe so....

Draghi reduced interest rates back in 2012 to prevent this very occurrence. However, Unemployment rates still remain at peaks greater than the recession.. Spain at 24%, Greece 26%, France 10.5%... To me this is not a Crisis but verging onto a depression..

Looking at the EU as a whole... many economic disparities are noticeable... For example, Ireland's main trading partners are the UK & the USA... Vs. Finland's main trading partner being Sweden. The formation of the Euro was based on a Political foundation rather than an Economic one.

This structural formation of the Eurozone has been the main creator of the issues faced within the EU. Outsourcing ones monetary policies to Brussels have left countries like Ireland, Portugal, Greece & Spain totally incapable of controlling their economies & promoting internal recoveries.... Then what happens? ... FDI drops... Foreign Investors start pulling out their money and start investing in developing nations, where yields over time are more promising.

Just today, Norway's biggest hedge fund announced a new tranche of investment into South Asian property.

Ladies & Gentlemen - we have now a Currency crisis.

For years now, Frankfurt & Brussels have been trying to counter-act this by currency devaluation in certain countries - so you have lower wages & internal devaluations - but the countries debt is still priced the same.

What happens now?

Theoretically, Greece can escape their debt burden... A possible sequence :
1. They default on all their debts;
2. Forces Greek banks to buy Greek bonds;
3. It has Greek banks sell their bonds back to the ECB - therefore putting the ECB in line for paying back Greek debt...

If the ECB agrees to this, it means the Greeks have escaped their debt burdens..

But why would the ECB buy Greek debt?

Would it not be economically cheaper for them to #Grexit?

More fiscal support is not supported by the Northern EU nations....

Keep it fresh guys

- Peace & Love
Anish