Sails Up

↓€/AUD

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↓€/AUD

Capital flows look good:

  • According to the COT report, swap dealers are short the AUD
  • Hedge funds are short the AUD

Technicals are lining up:

  • Head & shoulders forming on the weekly chart
  • expecting CCI divergence on the weekly & daily charts

Downside:  DXY is expected to fall which will strengthen the €uro.

Also, China’s PPI is up, strengthening the AUD.  So, with all that, I entered an order at 1.585 with a normal stop.  Risking a full bell.

If the weekly chart plays out as expected I intend to hold this trade longer than my usual 1 week holding period.  Keeping a weather-eye on the DXY.

Update:  closed 2/3 of the position before the weekend then bulletproofed the chart.  Stop hunted on Monday; gain on trade was +25.6% of margin.

US: Federal Reserve FOMC Meeting Minutes

Economic Calendar: FOMC

The Federal Reserve’s Meeting Minutes

The Federal Open Market Committee (FOMC) always delays the issue of its meeting minutes. The minutes of the previous meeting are reported three weeks after the meeting.

Why The FOMC Meeting Minutes Are Important

The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors and traders guessing about policy changes and Fed officials did not appear on the speaking circuit to set the tone of expectations as frequently as they currently do.

Since the Fed moved up the release of the minutes to three weeks after a meeting from six (in January, 2005), the minutes have become a market mover as analysts parse each word looking for clues to policy.

However, the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have dissented with the rest of The Committee.  These dissentions can be important in forming future expectations.

Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement.

Fed officials make numerous speeches, which freely give their views to the public at large.  When they do this, watch out for extreme short-term volatility in the market

Generally,  I shore up trades when I see the economic calendar filling up with pirate meetings and wait for the storm to settle.

↓€/PLN

Weekly eur/pln market structure looks good, so I put in a foundation trade at 4.23 with a wide stop. After the weekly candle finished, I checked for CCI divergence & positioning on the COT report.

Today, CCI divergence is confirmed on the weekly & daily.  The CFTC reports that dealers increased their euro shorts & non-commercials are taking profit on euro long positions this week.

Initial foundation trade (4.23) is a 1/3 bell, but looking at the DXY, not sure when I will add to it.  So keeping a weather-eye on the DXY for now.

Update:  added a bit of outside leverage to the trade, held for a couple weeks and eventually scaled out on the 4-hour chart; closed at a total of +18% of margin.  this is an extremely volatile pair and my risk management model was definitely put to the test.

Risk Off Event Volatility

Looks like the market has now been prepped for incoming volatility.  To profit in times like this, it is important to remember your risk threshold and your market correlations

With a 2-year wedge breakout on the VIX, equity markets declining, and risk-sensitive currencies finding temporary highs; we have to be ready for extreme volatility.

The market has followed through to the downside with the DOW sliding over 900 points, risk currencies declining, and the JPY powering up reflecting a true risk-off sentiment.  Risk off means movement in JPY and CHF.

Additionally it’s important to note that crypto-currencies did not receive a bid during the latest, big risk-off event; confirming that these speculative assets are sold in times of uncertainty to raise cash out of fear or greed.

The winners of the day will be those who don’t get emotional about the big market swings and stick to their money management model….always.

To be successful, think dynamically and understand the correlations among financial markets.  Tunnel vision on one specific asset class no matter the market cycle is not true objective analysis.

For me, this month I am closely watching correlations, commodities and balancing my portfolio out with metals while I search for an auditor to update the gains to my track record for 2017.

Great Britain: Consumer Price Index

Economic Calendar

The British Consumer Price Index (CPI)

A consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for consumption by most households.  For the British Consumer Price Index, the entire UK is taken into account.  It is calculated using the same methodology (HICP) developed by the European Union’s statistical agency (Eurostat). The British CPI is the Bank of England’s target inflation measure.

Why Is The British CPI Important?

Out of all inflation indicators, The consumer price index (CPI) is the most widely followed. An investor or trader who understands how inflation influences the markets will have a tremendous advantage over other investors and traders.

In countries that make up the UK (England, Scotland, Wales, Northern Ireland), where monetary policy decisions rely upon the central bank’s inflation target, the rate of inflation directly affects all interest rates charged to businesses and consumers.

Old Map (35)

Remember, inflation is an increase in the overall level of prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence markets.

Inflation (along with risk premiums) basically explain how interest rates are set on everything from mortgages, auto loans and Treasury Instruments (bills, notes and bonds). As the expectations on inflation change, the markets adjust interest rates. The effect ripples across all asset classes:

  • stocks (equities),
  • bonds (fixed income),
  • and commodities.

Everyone pays close attention to inflation trends.  By tracking the change in inflation investors can anticipate how different types of investments will perform.

Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits leading to more tax revenue for government expenditure.

For monetary policy, the Bank of England (BoE) generally follows the annual change in the consumer price index which is calculated using the European Union’s Eurostat methodology so that inflation numbers are comparable across the EU.

UK Office For National Statistics

The Federal Open Market Committee

FOMC Interest Rate Announcements

What Is The Federal Open Market Committee (FOMC)

The FOMC is the policy-making arm of the U.S. Federal Reserve. The FOMC determines short-term interest rates in the U.S. by manipulating the overnight interest rate that banks pay each other for borrowing reserves.  Banks borrow reserves when a bank has a shortfall in required reserves. This overnight rate is the fed funds rate.

The Federal Open Market Committee also determines whether the Fed should manipulate liquidity in credit markets by other means. The Fed announces its policy decision (whether to change the fed funds target rate or not) at the end of each FOMC meeting. This is the FOMC announcement.  It also includes brief comments on the FOMC’s views on the economy and how many FOMC members voted for and against the policy decision.

Since the last recession, the statement also includes information on Fed purchases of assets, aka “quantitative easing”, which affects long-term interest rates.

Why Is The FOMC announcement important?

The Fed determines interest rate policy at FOMC meetings.  A FOMC meeting happens approximately every six weeks.  The FOMC meetings are the single most influential event in the markets.  For weeks in advance, market participants speculate about the outcome of each meeting. If the outcome is different from expectations, the impact on the markets can be significant.

FOMC The Fed Funds Rate
Effects Of FOMC Announcements Reach Far And Wide.

Why Is The Federal Funds Rate Important?

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates….All. Other. Rates.

A change in the fed funds rate (the lending rate banks charge each other for the use of overnight funds) affects all other interest rates from Treasury bonds to mortgage loans. It also changes the flow of  investment dollars. When bonds yield 5 percent, they will take more investment away from equities than when they only yield 3 percent.

Interest rates impact the economy in various ways. Higher interest rates tend to slow economic activity; lower interest rates tend to stimulate economic activity while at the same time erode pension fund returns and consumer savings. Either way, interest rates influence consumer sales. In the consumer sector, fewer homes or cars will be purchased when interest rates rise.

Furthermore, interest expense is a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits.  When interest expenses increase, net profit decreases which lowers corporate profit. The bottom line is that higher interest rates are bearish for equities.  While a low interest rate environment is bullish for equities AND juices up government tax revenue.  Get the picture?

 

U.S. Energy Information Administration Petroleum Status Report

Economic Calendar

What is the EIA Petroleum Status Report?

The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad.  Inventory levels help us forecast the direction of prices for petroleum products.

Boisseauc 1646
Crude oil is an important global commodity. World map, Boisseau circa 1646

Why is the EIA Petroleum Status Report Important?

The prices of petrol products are determined by supply and quantity demanded – just like most other goods and services.

During periods of strong economic growth, we expect demand to be robust. If inventory supply is low, this will eventually lead to an increase in crude oil pricing.  Or, price increases for a wide variety of petroleum products such as gasoline or heating oil.

  • If inventories are high and rising in an environment of strong demand, prices may remain in equilibrium.
  • In a slow economic environment, demand for crude oil may fall.  And, If inventories are rising, this may push down oil prices.

Crude oil, priced in USD, is an important commodity in the global market. Prices fluctuate depending on global supply and demand conditions. Since oil is such an important part of national economies, it contributes to the direction of inflation.  In the U.S., consumer prices have stabilized whenever oil prices have fallen, but have accelerated when oil prices have risen.

The EIA report will become even more relevant if the Shanghai Futures Exchange (SHFE) subsidiary Shanghai International Energy Exchange (INE), initiates a new oil futures contract denominated in Yuan.