When big moves occur it is easy for the human psyche (aka the trader’s achilles heel!) to think trends are off and running or reversing to the opposite direction and jump on the hay wagon. Its a common error among beginner traders and controlling emotions is probably base camp for the pro trader.
Identifying current sentiment trends is an ongoing process as is taking in the bigger picture to see for real how the market is behaving.
These are the two major environments and they are of course, intricately intertwined. One is sentiment, the risk appetite and the other is trend v. range. Understanding them offers the keys to increasing probabilities of being on the right side of the trade and as the volatility in the forex in particular increases, so does the importance of defining them.
The Risk of Risk
Looking at the sentiment indicators this week reveals further warnings of shifts to more risk aversion in the broader market. There is not enough to signal that risk appetite has been replaced by fear but there is a much more cautious footprint appearing if you are prepared to take a closer look.
Equities
This week in the S&P had its toughest week of the year. Reacting to the FOMC it had touched a high at the end of last week. Every day brought more losses with the exception of Friday. Bloomberg data shows 28 days without a two day rally. Of course data can prove any position but the chart shows where the index is now critically placed. If we see a break of the trend then that’ll be yet another risk aversion warning shot.
Other US equities saw similar down moves, whilst in the Eurozone bourses the week saw lower levels and pullbacks from the recent QE inspired equity purchases. The FTSE also paired down gains from the previous week;
Volatilitiy
In the S & P ‘fear index’ known as the the vix, we saw a significant midweek advance falling back to 15.07. The is not a high level in absolute terms but the up move this week should be noted and monitored for any upward confirmation. A technician will no doubt have also noticed the weekly close settle on the 200 day MA; chart courtesy of stockcharts.com
Volatility should not only be monitored in the S&P. The forex itself has seen a change of character in volatility measures.
Geopolitical
Always on alert for political unrest in Russia and the Middle East, the geopolitical focus remains on the political ramifications of the Greek Government position in the context of the Eurozone. PM Tsipras has made expressed the desire for a solution with Europe and reform proposals have been submitted to the Eurozone who are reviewing them this weekend.
The alternative to compromise and agreement is not wanted on either side but there still remains the potential for a rift. The pressure is growing on the Greek side as money is reported to run out by 20th April and the bailout program is their only solution. However the Greek government has re-iterated its stance to not shift from its anti austerity policies. Monday will bring a response from Europe.
The AUDJPY
The Japanese Yen is recognised as a barometer of the level of risk appetite in the market, most commonly in the AUDJPY pairing. A gain in the value of the Yen is yet another indicator of fear percolating into the trader sentiment. The chart tells its own story. A range now testing its lower bounds is yet another sentiment assessment focus.
If the gains seen in the JPY in the last three days of the last week, continue to break to the downside of the range there is a larger weekly range beneath it.
Yellen’s Each Way Bet
The FOMC statement on the 18th has taken time to be digested. With less forward guidance the responsibility for prediction and the careful observation of data has fallen more heavily on the individual trader. On Friday evening, Fed Chairwoman Yellen spoke at the Fed Reserve Bank Conference ‘The New Normal for Monetary Policy’.
In it, as at the policy meeting itself were shades of dove and hawk. Something for every angle of interpretation leaving us an uncertain future as the market attempts to price in updated forecasts for the USD recovery and the launch and ongoing increment stages of tightening policy.
There were some interesting comments among the repetition of the reasoning which for the most part was a braking exercise on hawkish developments at the root of the meteoric rise of the USD index, an issue which has clearly been noted by Yellen as she commented specifically on the fact that the ‘dollar appreciation appears to restraining net exports’.
Her speech once again captured both tones; for the hawks, `… we need to keep in mind the well-established fact that the full effects of monetary policy are felt only after long lags. This means that policymakers cannot wait until they have achieved their objectives to begin adjusting policy. I would not consider it prudent to postpone the onset of normalization until we have reached, or are on the verge of reaching, our inflation objective…`
And for the doves `Interest rates have been, and remain, very low, and if underlying conditions had truly returned to normal, the economy should be booming`
These are the key two pieces of data she has re-iterated; core consumer prices (which beat expectations last Tuesday) and wage growth. On that, at least, she was specific and clear. She added the slightly grey area to include ‘other indicators of underlying inflation’ Well we got the picture.
The USD index predictably pulled back but still within a context of a strong up trend it is nothing to derail the US dollar but does fundamentally change its environment.
It still is the first anticipated rate hike as liquidation elsewhere continues apace.
Range Markets
The bottom line of all the recent rhetoric and the drama in the markets is this….uncertainty. Add to that the emergence and potential for more range bound trading. The evidence for that is is already there. and here are a few examples of our range bound pairs;
The AUDUSD
and the USDCAD
There are many more. Almost every major pair.
The ‘Other’ Hopeful
The UK has been seen for some time as the second major economy likely to raise interest rates as part of its policy. This outlook has been dampened down both by BOE statements and by recent data, including a disappointing CPI last Tuesday, but buoyed up again by the BOE chairman Mr. Carney last Friday. There are some who believe that the rate hike forecasts for the GBP are in fact way too far out and thus too dovish. With an election fast approaching the GBP implies a volatile and risky position from a fundamental viewpoint.
Commodities and their Dependants
Yes…another range...Oil. Continues to trade between 44 and 54. Its not an insignificant range and the up-days have brought some optimism in the commodity currencies. Friday, however brought a very bearish candle in the higher part of the range. Inventories continue to build in the US and whilst middle eastern unrest can bring a rally it is still hard to see how it can be sustained unless inventories begin to reflect changes caused by lower prices. At present, they are not. If any agreements are reached in Iran talks another rout is a possibility as the market glut extends again. Fundamentally the bias is still down. Here is the daily chart for crude
Iron ore also hit lows this week. More nerves for the Aussie dollar to encompass. Here is the CRB chart showing improvement this week but a down day on Friday; chart courtesy of stockcharts.com
The Week Ahead
Next week of course holds the joys of NFP falling as it does on Good Friday. The wage element will be on Yellen’s radar as well as the overall number . The Euro also remains within the FOMC spike range . For now the rally it enjoyed could not be sustained and it remains to be seen if data going forward can evidence a sustainable recovery.
German CPI numbers are due on Monday and Euro flash estimate on Tuesday. Their importance goes without saying.
In Conclusion
Range bound markets and volatility present a demanding combination.
Volatility requires smaller positions, shorter time exposure and an understanding of the range the pair may be operating within. A shifting or potentially transitioning risk environment calls for a much more careful yield search and an clear idea of US pairs that may benefit from the scenario where the USD may be sort as a safe haven. Transitions always have their integral issues. We are currently in a grey choppy and unpredictable market and that requires more knowledge more focus and heightened awareness of risk control.
Judith Waker
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