Will 2016 Mark The Fall Of The Emerging Markets?

Ladies & Gentlemen, 

Brace yourself for a complete change in dynamics for 2016 and of course, the FED hiking cycle will become the catalyst. 

So should I still stay long the USD in 2016? Well in theory - Yes! In practice however, as the FED raises interest rates the USD will strengthen but these persistent increases (during the proposed cycle) will worry investors - especially for companies with Overseas Investment & for Industrial corporates (with the continued decline of commodities). It could be very expensive! 

A stronger USD now becomes a touchy situation. Mainly because the majority of Emerging Market Countries hold USD debt and this puts a stranglehold on the USD rallies. The probabilities of larger outflows from Countries like China, India is likely and will be the epicentre of pressure. It will be interesting to see how these Push/Pull Economic factors react next year.. Will it help their continued debt? 

The stage for 2016 has been set. 

China is an almost perfect author to this story. With recent trade numbers declining (6.9% yoy) and a staggering 18.8% decline in imports - Other Asian nations who once so heavily relied on China could now look elsewhere.  As the commodity boom slows, the GDP growth required for China to maintain its growth pattern could also fall off the charts! Instead we see a Global Deflationary Threat.

How will the USD react to each FED Rate Hike? - Looking at the past 11 Rate Cycles and in particular more recently when the FED moved from neutral to tightening, the USD fell 7% and to tell the way the USD could react now - one would have to look at the yield curves. Whenever it has been steep (and right now it is steep) it falls over double digits! But again, that would also depend on the forecasted tightening cycle... but really how long could it be? 

What about the Equity Markets? You want to be really focusing on Industrial, Tech & Energy stocks, because they will benefit from the inflationary cycle of the US Economy. But really does the public trust equities anymore? There are currently huge disparities in the major US indexes as during the past 5 years the Public have not really put any money into the equities, it has all been primarily driven by the FED & a lot of these position builders could effectively price in the first hike. 

Next stop... December 17. 

Trade Smarter
Anish8FX @ Atom8.com 

The Exaggerated Importance Of Today's NFP

Ladies & Gentlemen, 

One piece of Data that the Markets have been hanging onto (for the last fortnight now) is today's US Jobs Report. But has the Data release been overblown? Will this Data release really decide if the FED will hike in December or not? 

I think it is bizzare that we come to this point, after such a long time of FED Rate Hike talk and in fairness, we should of really started hiking back in September. In fairness to the FED, they have been transparent and the bar has been pushed lower - if yesterday's ADP result was considerably weaker the Markets would of considered changing direction, but it remains firm.

In my view, anything above 142K will be enough. My call is for 230K plus, but Markets may be focused on revisions, as it is about the "Nirvana" of finding a "Full Employment" level & Yellen more recently has stated that the "Excess" employment number has been diminished. 

So how strong is the USD? Well if you look at the Labor Participation Rate, which points to the strength of an Economy it has not really been up to par. However, these could come down to more structural demographic issues, which the FED could not really be judged on... but more-so on the "Excess capacity" of the market. 

The fact is the USD is on a tear and investors are still building more positions.. Looking at the chart, don't really see any stop in the way? Especially as Consumer Spending (which makes up 70% of GDP) is on the rise & this is also translated into incomes. The problem may come from mixed data, especially on the Manufacturing side, but if you strip this out the USD is the most bullish I have ever seen.

Best of luck today

Anish8FX @ Atom8.com

The "Long $" Play Over The Medium Term

Ladies and Gentlemen,

Tomorrow at 13:30 GMT we get the October Non-Farm Payroll number, the September figure was a disappointing 142k. A bounce to 182k is the Bloomberg survey consensus.

The FOMC members believe the chance of ‘lift off’ in December is still ‘live’, needing a reason not to hike is the new sentiment.

Tomorrow will give us further insight into the decision making process on 16^th December.

The Fed has maintained that the appropriate time to raise rates is when the sustained improvement in the labour market is attained, combined with confidence that inflation will move back to its 2% target over the medium term. These are the exact words from the press on 28^th October ‘the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate’. The dual mandate of Fed has been talked about in previous Event Risk updates.

I see the divergence in Central Bank policy as an opportunity to express ‘Long $’ plays over the medium term.

$/Jpy sits above the 200 day moving average at 121.10 and just below the 100 day moving average at 121.70, a daily close above 122 will see momentum accounts add to existing long positions. The first Friday of the month is always interesting.

Good Luck

Anish8FX @Atom8.Com

Still Holding My Gold Shorts

Ladies and Gentlemen, 

The Gold Market has been subject to huge downward pressures amid the timing of the FED's rate hike decisions. Gold now again hovers at 1-month lows, coming of the back of the biggest 4-day losing streak since September 2013 - falling 5 consecutive quarters. 


But even with soaring demand from Asia, why are the Markets so reliant on the FED decision? Well if the FED do increase rates, nobody wants stock hold bonds, because they will pay lower coupons than newer bonds... and turning to Gold - that asset pays no Coupon at all! The more hawkish the FED remain, the worse the impact on the Gold price. Not forgetting that Gold is still priced against USD.  

This close relationship was marked again today by this mornings rally to $1120 and was completely sold off and there are even more headwinds/failures in recent breaks to the upside. $1075 was the recent bottom and this is not far our of reach. I don't think we will see a reversal anytime soon to the upside. 

Figure below from Atom8's MT4 Terminal (XAUUSD.v) - Gold Staying Down 

When will we see a reveral? Here's hoping Ms Yellen gives some more indication tonight about future direction of the Hiking Cycle. Perhaps all that is needed for the Metals is some clarity, then we can move on & up! Theoretically, the FED could continue to hike rates up to infinity and that would cause USD weakness. Given historical trends, Gold could remain the preferred safe-haven asset & may well return back to $1400-1500 in the next few years. 

Best of Luck
Anish8FX @ Atom8.com 

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

As Australia drops knights and dames from their honours system the other topical question is will the RBA drop interest rates?

The decision takes place tomorrow at 03.30 London time. Out of 30 economist polled by Bloomberg 40% of economists are looking for a 25 basis point cut from 2% to 1.75% Recently the CPI data has been weak and there have been concerns about Chinese demand for natural resources resulting in a sluggish domestic mining sector.

On the other hand local banks have recently hiked residential mortgage rates to cool an overheated housing market and to recoup the cost of increased capital requirements

I am adopting the ‘wait and see approach’ towards the RBA believing that any drop in the Aud/Nzd cross is a buying opportunity from the present 1.0550 level. Fundamental rate spreads between the two countries are arguing for this pairing to be trading closer to the 1.10 than parity level.  Last week the RBNZ was dovish with an explicit easing bias repeated, “Some further reduction in the OCR seems likely”.

There is a lot of data this week, the RBA tonight, the BOE on Thursday and then the NFP on Friday

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

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The Saudi Spending Phenomenon - Will It Ever Stop?

Ladies & Gentlemen,

All Market eyes have been eyeing up Oil Prices, some are calling a further slump in 2016 and others are a bit more optimistic (seeking the $50 mark). However, with these lower prices, how has the World's biggest Oil player reacted & will it really hurt the Saudi Economy?

You would of actually never of guessed there to be an Oil slump from the shine of the Saudi economy and that is no accident, it is Saudi (well-planned) policies in action. The wealth from the Oil revenues has been shared and the public have firmly supported the Al Saud family, even as turmoil beckons on the horizon.

The IMF predicts that within 5 years, the Kingdom will run out of Financial Assets... But is that really true (raised eyebrow)? In theory, if they continue to spend at the rate they are & Oil prices remain low, then yes! However, they currently stand at a (Positive) 100% net cash : GDP ratio & if you look at a Country like Japan, who's net:GDP is -200%, I begin to differ with the IMF. Saudi literally are operating with no debt.

figure : Bloomberg source

Can this be protected for the Future? What if Oil prices continue to fall? I think you will start to see Saudi Arabia slowly decrease their heavy military contracts & begin opening their Economy up to foreign investment, by way of issuing Government debt or opening investment into Saudi stocks. More recently, the Saudi government to pull in about $70bn from Equity markets to begin adding more liquidity within their own markets -  "Welcome world to the Tadawul".

We could also see (like Qatar) a higher increase in Western Property purchases... Again another indication for potentially more spending.

Saudi issuing Debt? Really? How friendly would that be? Honestly speaking (ok - be careful here Anish #whips...) The country has been caged about opening it's Markets to the World and if done, would be extremely gradual, as they drift away from traditions. Most Governments generally support their Economy, by way of tax receipts.
However, over the past 3-4 decades, Saudi has been funded with Oil receipts.

Reality Check.. Oil still costs $3 to get out of the ground and with current production levels, Saudi are still generating $300-400bn from Oil revenues alone (at least)!

It looks like the Saudi powerhouse is only going to get stronger, especially as Investors from around Asia flock in. The next 5-10 years will be critical for the Kingdom, to really impose its strength as the World's largest Economy, alongside China.

Trade Smarter & Best of Luck for the week ahead.

Best wishes
Anish @ Atom8FX