LiteFinance
- Forex Broker em LiteFinance Global LLC
- São Vicente e Granadinas
- 933
Desde ano 2005, a corretora ECN online LiteFinance (ex. LiteForex) oferece aos clientes uma oportunidade de acessar à liquidez profundíssima nos mercados cambiais e de valores mobiliários. Para operar através de LiteFinance (ex. LiteForex), são disponíveis todos os principais pares de moedas e cotações cruzadas, petróleo, metais nobres, índices bolsistas, ações das companhias e maior conjunto de pares de criptomoedas entre as corretoras.
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Forex in June: the impossible is possible
The growth of global risk appetite, which looked incredible in April and unnatural in May, can continue in June
In Forex, like in a casino, the most important is to stop at the right time. Based on the statistical analysis with fundamental components, I recommended exiting the EUR/USD and GBP/USD shorts at the end of May. Just these two operations could have increased the deposit by 6%. Alas, but the strong euro rally at the end of May has a little spoiled the whole situation. The shorts on the EUR/USD and EUR/JPY yielded losses of about 3.3%, and shorts on the GBP/USD and GBP/CHF resulted in a loss of about 3.9%. Greed may lead to losses. However, I have many times stressed that seasonal regularities should be used in addition to the fundamental and technical analysis.
June is a good time for commodity currencies. Since 1975, the AUD and CAD strengthened versus the US dollar in 27 cases against 18. The NZD performed a little worse, however, it also rose against the greenback. The idea to buy the AUD/USD and sell the USD/CAD is not new, I have recently written about this based on the lockdown stringency.
The pound is usually weak in May amid the dividend payments to foreigners, which has been again proven in May. However, history proves that the situation radically changes in June. The sterling, as a rule, is among the best-performing currencies in June. The GBP median performance is behind only the AUD and the NZD. The median value was lower due to the GBP/USD sale-offs in 1975 (-6.1%), 1981 (-6.8%), 1988 (-7.9%), and 2016 (-8.4%). In the latter case, the sales resulted from the referendum on the UK membership in the EU, whose fallout is still present. For example, Boris Johnson should participate in the EU summit in June. If the UK Prime Minister makes a step towards the agreement with Brussels or extends the Brexit deadline, this will be a positive factor for the pound.
I should note that the greenback was usually rather weak in June, which under the current conditions means the S&P 500 rally should continue. According to James Bullard, the president Federal Reserve Bank of St. Louis, if the US GDP features the worst drop in the second quarter, it should feature the best performance in the third quarter. There is still some hope for the V-shaped recovery of the US economy. Besides, the growth of the US stocks, usually followed by an increase in the global risk appetite, is a good reason to use the excellent trading conditions offered by LiteForex and buy income-earning assets. However, do remember the rule that, in Forex, like in a casino, the most important is to stop on time. Even in the best times, the AUD and the CAD rose by just 1.55% and 1.12%.
Supported by the unity and generosity of the EU, the euro is rising. However, taking into account the seasonal strength of the Swiss franc, I would hedge the EUR/USD longs by the EUR/CHF shorts, betting on the high volatility of the world’s major currencies, which suggest moderate targets.
Periods of rise and fall
The growth of global risk appetite, which looked incredible in April and unnatural in May, can continue in June
In Forex, like in a casino, the most important is to stop at the right time. Based on the statistical analysis with fundamental components, I recommended exiting the EUR/USD and GBP/USD shorts at the end of May. Just these two operations could have increased the deposit by 6%. Alas, but the strong euro rally at the end of May has a little spoiled the whole situation. The shorts on the EUR/USD and EUR/JPY yielded losses of about 3.3%, and shorts on the GBP/USD and GBP/CHF resulted in a loss of about 3.9%. Greed may lead to losses. However, I have many times stressed that seasonal regularities should be used in addition to the fundamental and technical analysis.
June is a good time for commodity currencies. Since 1975, the AUD and CAD strengthened versus the US dollar in 27 cases against 18. The NZD performed a little worse, however, it also rose against the greenback. The idea to buy the AUD/USD and sell the USD/CAD is not new, I have recently written about this based on the lockdown stringency.
The pound is usually weak in May amid the dividend payments to foreigners, which has been again proven in May. However, history proves that the situation radically changes in June. The sterling, as a rule, is among the best-performing currencies in June. The GBP median performance is behind only the AUD and the NZD. The median value was lower due to the GBP/USD sale-offs in 1975 (-6.1%), 1981 (-6.8%), 1988 (-7.9%), and 2016 (-8.4%). In the latter case, the sales resulted from the referendum on the UK membership in the EU, whose fallout is still present. For example, Boris Johnson should participate in the EU summit in June. If the UK Prime Minister makes a step towards the agreement with Brussels or extends the Brexit deadline, this will be a positive factor for the pound.
I should note that the greenback was usually rather weak in June, which under the current conditions means the S&P 500 rally should continue. According to James Bullard, the president Federal Reserve Bank of St. Louis, if the US GDP features the worst drop in the second quarter, it should feature the best performance in the third quarter. There is still some hope for the V-shaped recovery of the US economy. Besides, the growth of the US stocks, usually followed by an increase in the global risk appetite, is a good reason to use the excellent trading conditions offered by LiteForex and buy income-earning assets. However, do remember the rule that, in Forex, like in a casino, the most important is to stop on time. Even in the best times, the AUD and the CAD rose by just 1.55% and 1.12%.
Supported by the unity and generosity of the EU, the euro is rising. However, taking into account the seasonal strength of the Swiss franc, I would hedge the EUR/USD longs by the EUR/CHF shorts, betting on the high volatility of the world’s major currencies, which suggest moderate targets.
Periods of rise and fall
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Gold market
Gold market: peculiarities of pricing and structure
When trading commodities, it’s important to be aware of their demand&supply’s structure and dynamics. A typical example is oil, which is recovering lost positions by leaps and bounds amid expectations of growing demand and surplus reduction, as main global economies have started to reopen. Unlike Brent and WTI, gold is less sensitive to the physical asset market’s state. However, it can punish any time a trader who ignores fundamental analysis.
Jewellery production and investment prevail in the gold global demand structure. In 2019, they accounted for 48.5% and 29.2% of demand, respectively. Central banks’ share in gold purchases was 14.8% while industrial use accounted for 7.5% of gold consumption. The latter indicator is important. The thing is it is much higher for silver. The shutdown of industrial enterprises led therefore to a faster slump of XAG/USD if compared with XAU/USD. As a result, the gold-silver ratio soared to historical peaks. Against the backdrop of the recovering global economy, the ratio may be expected to drop. It means, we’d better bet on silver’s faster growth against gold.
The relative share of investment in the structure of the gold global demand grew up to 49.8% while the share of jewellery production dropped to 30.1%. Consumption of gold reduced almost in all sectors, except for ETFs and coins, as compared with October-December and January-March 2019.
A change in a demand structure is an important pricing factor. When it happens, we may say a current trend is stable. The shift from jewellery to investment is a clear sign of bulls’ market dominance. Jewellery is too expensive and its consumption is falling. On the contrary, the faster ETFs’ reserves grow, the higher their quotes are and the bigger their buying army is. They sometimes say, gold flows from east to west in an uptrend. True, in 2019 the relative share of China and India in the jewellery’s gold consumption structure was 67%, while the main ETFs are located in the USA, including the biggest fund SPDR Gold Shares, and Europe.
The main producers of gold are China (404.1 t), Australia (314.9 t), Russia (297.3 t), USA (221.7 t) and other countries. Supply’s influence on the price is limited. The year 2013 is a bright example. Many said then XAU/USD quotes couldn’t drop below $1,300-1,350 per ounce as it was gold producing companies’ break-even. They said production would be cut to provoke a deficit and a price growth. But in fact, existing hedging technologies allowed companies to fix the price and continue producing the same volumes of gold. So, gold fell even below the expected levels and buyers were punished for their extreme self-confidence.
At the same time, supply shouldn’t be fully ignored. In 2020, investors felt a critical shortage of the physical asset when trading forwards amidst the pandemic and shutdowns. As a result, gold premiums grew in the USA and Europe and XAU/USD quotes rose as well.
So, investment demand is an important factor in gold pricing. Its volume is mostly affected by central banks’ monetary policies. Massive monetary expansion contributes to weakening major currencies, dropping bond yield and raising XAU/USD quotes.
Dynamics of global demand for gold
Gold market: peculiarities of pricing and structure
When trading commodities, it’s important to be aware of their demand&supply’s structure and dynamics. A typical example is oil, which is recovering lost positions by leaps and bounds amid expectations of growing demand and surplus reduction, as main global economies have started to reopen. Unlike Brent and WTI, gold is less sensitive to the physical asset market’s state. However, it can punish any time a trader who ignores fundamental analysis.
Jewellery production and investment prevail in the gold global demand structure. In 2019, they accounted for 48.5% and 29.2% of demand, respectively. Central banks’ share in gold purchases was 14.8% while industrial use accounted for 7.5% of gold consumption. The latter indicator is important. The thing is it is much higher for silver. The shutdown of industrial enterprises led therefore to a faster slump of XAG/USD if compared with XAU/USD. As a result, the gold-silver ratio soared to historical peaks. Against the backdrop of the recovering global economy, the ratio may be expected to drop. It means, we’d better bet on silver’s faster growth against gold.
The relative share of investment in the structure of the gold global demand grew up to 49.8% while the share of jewellery production dropped to 30.1%. Consumption of gold reduced almost in all sectors, except for ETFs and coins, as compared with October-December and January-March 2019.
A change in a demand structure is an important pricing factor. When it happens, we may say a current trend is stable. The shift from jewellery to investment is a clear sign of bulls’ market dominance. Jewellery is too expensive and its consumption is falling. On the contrary, the faster ETFs’ reserves grow, the higher their quotes are and the bigger their buying army is. They sometimes say, gold flows from east to west in an uptrend. True, in 2019 the relative share of China and India in the jewellery’s gold consumption structure was 67%, while the main ETFs are located in the USA, including the biggest fund SPDR Gold Shares, and Europe.
The main producers of gold are China (404.1 t), Australia (314.9 t), Russia (297.3 t), USA (221.7 t) and other countries. Supply’s influence on the price is limited. The year 2013 is a bright example. Many said then XAU/USD quotes couldn’t drop below $1,300-1,350 per ounce as it was gold producing companies’ break-even. They said production would be cut to provoke a deficit and a price growth. But in fact, existing hedging technologies allowed companies to fix the price and continue producing the same volumes of gold. So, gold fell even below the expected levels and buyers were punished for their extreme self-confidence.
At the same time, supply shouldn’t be fully ignored. In 2020, investors felt a critical shortage of the physical asset when trading forwards amidst the pandemic and shutdowns. As a result, gold premiums grew in the USA and Europe and XAU/USD quotes rose as well.
So, investment demand is an important factor in gold pricing. Its volume is mostly affected by central banks’ monetary policies. Massive monetary expansion contributes to weakening major currencies, dropping bond yield and raising XAU/USD quotes.
Dynamics of global demand for gold
LiteFinance
All roads lead the euro to Rome
EUR/USD will rally up if the EU adopts the offer made by Emmanuel Macron and Angela Merkel
The ECB is willing to save Italy, but will the EU agree? According to the Bank of France Governor Francois Villeroy de Galhau, using the capital key, when the QE size is associated with the size of the economy, is not necessary for the emergency program. Germany, whose GDP should drop by 6.5% in 2020, is likely to receive the most benefits, while Italy’s, Spain’s and Greece’s GDPs will lose more than 9%. The European central bank is willing to not only boost the QE volume but also break its own rules, which is a positive factor for the euro. However, little depends on Frankfurt, the key decisions will be taken in Brussels.
The EUR/USD rise to 1.1 amid the news about the French-German plan for a €500-billion recovery fund is natural. European governments support unity. However, not all member-states support this idea. Austria, Sweden, Denmark, and the Netherlands stated their opposition to grants, calling for a loans-based approach instead. Only 32% of the investors polled by ExanteData believe that the EU will fully accept the proposal of Paris and Berlin. 38.2% of respondents suggest that the plan should be corrected. This is a bear factor for the euro, allowing selling the EUR/USD on the rise.
The major problem is in Italy, whose economy stopped expanding after the introduction of the single European currency, and the US stocks started to outperform the euro-area peers.
Unless Rome receives enough support, it makes no sense to be an EU member. The risks of the euro-area breakup will press the EUR/USD down. However, the French-German plan could still be adopted at the EU summit, which will allow the euro to rise.
In the meanwhile, the euro-dollar trend mostly depends on the US stock indexes, as investors are weighing which is a more important factor, the reopening of the global economies or the escalation of the US-China trade war. According to the Netherlands Bureau of Economic Policy, international trade in March contracted by 1.4 M-o-M and 4.3 Y-o-Y, which is the worst drop since 2009. This is a negative factor for the export-led euro-area economy. However, the indicator should rebound in the May-June period, also because of the active fulfillment of China’s obligations to the US.
US-China trade relations seem to have aggravated. However, Donald Trump wants to be re-elected as the US President, so he needs to put pressure on China. Besides, the escalation of the situation forces China to stimulate its economy to increase the purchases of US goods. Since the pandemic started, PBoC has injected about 5.9 trillion yuan ($ 827.6 billion) in the economy, and it is willing to continue in the same way. This suggests a V-shaped rebound of China’s economy, which in the medium term will support the EUR/USD, currently stuck in the trading range of 1.077-1.099.
Dynamics of international trade
EUR/USD will rally up if the EU adopts the offer made by Emmanuel Macron and Angela Merkel
The ECB is willing to save Italy, but will the EU agree? According to the Bank of France Governor Francois Villeroy de Galhau, using the capital key, when the QE size is associated with the size of the economy, is not necessary for the emergency program. Germany, whose GDP should drop by 6.5% in 2020, is likely to receive the most benefits, while Italy’s, Spain’s and Greece’s GDPs will lose more than 9%. The European central bank is willing to not only boost the QE volume but also break its own rules, which is a positive factor for the euro. However, little depends on Frankfurt, the key decisions will be taken in Brussels.
The EUR/USD rise to 1.1 amid the news about the French-German plan for a €500-billion recovery fund is natural. European governments support unity. However, not all member-states support this idea. Austria, Sweden, Denmark, and the Netherlands stated their opposition to grants, calling for a loans-based approach instead. Only 32% of the investors polled by ExanteData believe that the EU will fully accept the proposal of Paris and Berlin. 38.2% of respondents suggest that the plan should be corrected. This is a bear factor for the euro, allowing selling the EUR/USD on the rise.
The major problem is in Italy, whose economy stopped expanding after the introduction of the single European currency, and the US stocks started to outperform the euro-area peers.
Unless Rome receives enough support, it makes no sense to be an EU member. The risks of the euro-area breakup will press the EUR/USD down. However, the French-German plan could still be adopted at the EU summit, which will allow the euro to rise.
In the meanwhile, the euro-dollar trend mostly depends on the US stock indexes, as investors are weighing which is a more important factor, the reopening of the global economies or the escalation of the US-China trade war. According to the Netherlands Bureau of Economic Policy, international trade in March contracted by 1.4 M-o-M and 4.3 Y-o-Y, which is the worst drop since 2009. This is a negative factor for the export-led euro-area economy. However, the indicator should rebound in the May-June period, also because of the active fulfillment of China’s obligations to the US.
US-China trade relations seem to have aggravated. However, Donald Trump wants to be re-elected as the US President, so he needs to put pressure on China. Besides, the escalation of the situation forces China to stimulate its economy to increase the purchases of US goods. Since the pandemic started, PBoC has injected about 5.9 trillion yuan ($ 827.6 billion) in the economy, and it is willing to continue in the same way. This suggests a V-shaped rebound of China’s economy, which in the medium term will support the EUR/USD, currently stuck in the trading range of 1.077-1.099.
Dynamics of international trade
LiteFinance
Dollar creates obstacles
EUR/USD bulls are going ahead, but there are no gains without losses
The risk of the euro-area breakup was reduced as Germany and France offered a €500-billion European recovery fund to support the EU countries worst affected by the pandemic. This news encouraged EUR/USD. At the same time, the dispute between Democrats and Republicans in the USA about the terms and size of the fiscal stimulus may support ….the US dollar. The greenback and the euro react to the growing uncertainty in different ways. The dollar has benefits as a safe-haven asset. In this respect, different approaches of the Fed and the US administration to the US GDP recovery have set the EUR/USD buyers back.
Speaking before the US Senate Banking Committee, the Treasury Secretary Steven Mnuchin and the Federal Reserve Chair Jerome Powell offered contrasting views of the US economic prospects. According to Steven Mnuchin, the third quarter could be quite good, and the GDP can well follow a V-shaped rebound. Jerome Powell, by contrast, says the fear of the coronavirus will set the economic growth back. It will take a long time until the US GDP completely rebounds. The same opinion, by the way, is shared by the Congressional Budget Office, which expects the US GDP in the fourth quarter of 2020 will be 5.6% lower than a year ago.
Different views of the Treasury and the Fed are not a new driver. The US central bank has many times emphasized the necessity of an additional fiscal stimulus. Democrats are willing to provide a total package of $3 trillion. However, Donald Trump is yet rejecting this bill. The US President says that extra money given to the unemployed will discourage them from the search for new jobs, which will hold the US GDP recovery back. The US stock market is not confident in additional support, which strengthens the US dollar.
The uncertainty of the S&P 500 is likely to be the major factor weighing on the EUR/USD. The euro is stabilizing due to the offer by Angela Merkel and Emmanuel Macron, the growth of the German indicator of economic sentiment to its 5-year high, the ECB willingness to support the euro-area economy, and the lower risks of the US-China trade war escalation. As a result, the spread between the euro put and call premiums has narrowed to the minimum value since March 17, and the euro-dollar three-month risk reversals have entered the positive area.
According to the U.S. Department of Agriculture, in the 10 weeks ended May 7, gross sales of U.S. corn and pork to China were up by eight times, cotton exports were three times higher than they were in the same period in 2017 before the trade war started, soybeans exports increased by about 30%. China has significantly stepped up purchases of U.S. agriculture products to avert the trade war escalation. This is a positive factor for the export-led euro-area economy, and so, for the euro. The EUR/USD bulls are willing to continue the rally up to 1.1055-1.107. However, the euro has many problems, which are likely to create obstacles for the buyers.
Dynamic of German’s economic sentiment
EUR/USD bulls are going ahead, but there are no gains without losses
The risk of the euro-area breakup was reduced as Germany and France offered a €500-billion European recovery fund to support the EU countries worst affected by the pandemic. This news encouraged EUR/USD. At the same time, the dispute between Democrats and Republicans in the USA about the terms and size of the fiscal stimulus may support ….the US dollar. The greenback and the euro react to the growing uncertainty in different ways. The dollar has benefits as a safe-haven asset. In this respect, different approaches of the Fed and the US administration to the US GDP recovery have set the EUR/USD buyers back.
Speaking before the US Senate Banking Committee, the Treasury Secretary Steven Mnuchin and the Federal Reserve Chair Jerome Powell offered contrasting views of the US economic prospects. According to Steven Mnuchin, the third quarter could be quite good, and the GDP can well follow a V-shaped rebound. Jerome Powell, by contrast, says the fear of the coronavirus will set the economic growth back. It will take a long time until the US GDP completely rebounds. The same opinion, by the way, is shared by the Congressional Budget Office, which expects the US GDP in the fourth quarter of 2020 will be 5.6% lower than a year ago.
Different views of the Treasury and the Fed are not a new driver. The US central bank has many times emphasized the necessity of an additional fiscal stimulus. Democrats are willing to provide a total package of $3 trillion. However, Donald Trump is yet rejecting this bill. The US President says that extra money given to the unemployed will discourage them from the search for new jobs, which will hold the US GDP recovery back. The US stock market is not confident in additional support, which strengthens the US dollar.
The uncertainty of the S&P 500 is likely to be the major factor weighing on the EUR/USD. The euro is stabilizing due to the offer by Angela Merkel and Emmanuel Macron, the growth of the German indicator of economic sentiment to its 5-year high, the ECB willingness to support the euro-area economy, and the lower risks of the US-China trade war escalation. As a result, the spread between the euro put and call premiums has narrowed to the minimum value since March 17, and the euro-dollar three-month risk reversals have entered the positive area.
According to the U.S. Department of Agriculture, in the 10 weeks ended May 7, gross sales of U.S. corn and pork to China were up by eight times, cotton exports were three times higher than they were in the same period in 2017 before the trade war started, soybeans exports increased by about 30%. China has significantly stepped up purchases of U.S. agriculture products to avert the trade war escalation. This is a positive factor for the export-led euro-area economy, and so, for the euro. The EUR/USD bulls are willing to continue the rally up to 1.1055-1.107. However, the euro has many problems, which are likely to create obstacles for the buyers.
Dynamic of German’s economic sentiment
LiteFinance
Aussie is going to be the winner
AUD/USD could break through the two-month highs
After it became clear that China would be the first to win the struggle with the coronavirus, the Australian dollar has become my favorite. The idea to buy the Aussie seemed strange amid the first recession in Australia since the 1990s, the AUD/USD drop to the lowest low since 2002, and the QE launched by the RBA. However, as early as in late March, I saw that, if the global recession had resulted from the pandemic, one should bet on the currencies of the countries that should be the first to manage the pandemic. My basic strategy has been buying the AUD from the zone of $0.59-$0.62 with the targets at $0.675 and $0.69, it perfectly worked out due to the excellent LiteForex trading conditions.
The AUD/USD has been up by 19% from the March lows, and the Australian dollar is now seen as an example to follow by the currencies of the countries hit by COVID-19. Due to China and the growth in commodity prices, Australia’s GDP could recover quicker than the U.S. and euro-area GDPs, which is an important reason to buy the Aussie versus the greenback and the euro. Remember, Jerome Powell says that the US economy will hardly recover until 2021; the ECB says the euro-area GDP will reach the pre-crisis levels only in 2022. Against such a background, it is natural that the speculators, who used to be bearish on the Australian dollar, are now exiting shorts.
Canberra has done a lot to help Australia’s economy recover. The $AU130-billion fiscal stimulus, taking into account the GDP pace, looks one of the most aggressive among the G10 countries. Besides, the RBA, unlike the Fed, didn’t have to boost the balance sheet. Following the Bank of Japan, Australia’s central bank adopted the yield curve control policy, setting the target for the yield on 3-year Australia government bonds at 0.25%, which has proven its effectiveness. The volume of bond purchases is contracting, the market has stabilized, and they may not need to expand the monetary stimulus.
Yes, bears could point to the drop in Australia’s employment by 594,300 in April and the RBA gloomy forecasts that suggest the GDP be down by 10% in the first quarter and by 6% in the entire year 2020, however, all countries are suffering from a downturn now. I would be surprised if any country reported positive statistics.
However, not everything is that bright. China supports the AUD/USD rally, but it can also send the Aussie it down. A typical example is the suspension of the Australian pork imports and the start of an anti-dumping barley import audit by China, which could increase import tariffs to 80%, as China’s retaliation to Australia for its support of the USA in the investigation of the laboratory origins of COVID-19. This idea hasn’t been further developed, so, I expect and improvement in the China-Australia trade relations. Unless there is a new round of trade wars, we can continue to buy the AUD/USD with the targets at 0.675 and 0.69.
AUD speculative positions
AUD/USD could break through the two-month highs
After it became clear that China would be the first to win the struggle with the coronavirus, the Australian dollar has become my favorite. The idea to buy the Aussie seemed strange amid the first recession in Australia since the 1990s, the AUD/USD drop to the lowest low since 2002, and the QE launched by the RBA. However, as early as in late March, I saw that, if the global recession had resulted from the pandemic, one should bet on the currencies of the countries that should be the first to manage the pandemic. My basic strategy has been buying the AUD from the zone of $0.59-$0.62 with the targets at $0.675 and $0.69, it perfectly worked out due to the excellent LiteForex trading conditions.
The AUD/USD has been up by 19% from the March lows, and the Australian dollar is now seen as an example to follow by the currencies of the countries hit by COVID-19. Due to China and the growth in commodity prices, Australia’s GDP could recover quicker than the U.S. and euro-area GDPs, which is an important reason to buy the Aussie versus the greenback and the euro. Remember, Jerome Powell says that the US economy will hardly recover until 2021; the ECB says the euro-area GDP will reach the pre-crisis levels only in 2022. Against such a background, it is natural that the speculators, who used to be bearish on the Australian dollar, are now exiting shorts.
Canberra has done a lot to help Australia’s economy recover. The $AU130-billion fiscal stimulus, taking into account the GDP pace, looks one of the most aggressive among the G10 countries. Besides, the RBA, unlike the Fed, didn’t have to boost the balance sheet. Following the Bank of Japan, Australia’s central bank adopted the yield curve control policy, setting the target for the yield on 3-year Australia government bonds at 0.25%, which has proven its effectiveness. The volume of bond purchases is contracting, the market has stabilized, and they may not need to expand the monetary stimulus.
Yes, bears could point to the drop in Australia’s employment by 594,300 in April and the RBA gloomy forecasts that suggest the GDP be down by 10% in the first quarter and by 6% in the entire year 2020, however, all countries are suffering from a downturn now. I would be surprised if any country reported positive statistics.
However, not everything is that bright. China supports the AUD/USD rally, but it can also send the Aussie it down. A typical example is the suspension of the Australian pork imports and the start of an anti-dumping barley import audit by China, which could increase import tariffs to 80%, as China’s retaliation to Australia for its support of the USA in the investigation of the laboratory origins of COVID-19. This idea hasn’t been further developed, so, I expect and improvement in the China-Australia trade relations. Unless there is a new round of trade wars, we can continue to buy the AUD/USD with the targets at 0.675 and 0.69.
AUD speculative positions
LiteFinance
Dollar changed the shoes
The White House changed its attitude to the U.S. currency
You could do anything to win the presidential elections! You could also abruptly reverse your own point of view. For most of his presidential term, Donald Trump was a fan of a weak dollar. In May, however, he supports the position of the former U.S. administrations that the strong currency is necessary. And the current US President has his reasons. Amid the huge fiscal stimulus, the focus is switched from foreign trade and competitiveness to the sources of managing the growing budget deficit. Besides, the strong greenback currently seems to be an advantage, as the strong currency indicates the US strong economy.
Donald Trump needs to find the subtle balance line between the US stock indexes and the US dollar, which are moving in opposite directions as investors are very responsive to the risk. Trump always saw the S&P 500 be an indicator of his success as the President. Also, the US stock market crash in March substantially lowered Trump’s chance to win the upcoming presidential election.
Therefore, it is not surprising that the worst drop in the US industrial production (-11.2%) and retail sales (-16.4%) since the government began tracking in 1911 and 1992 respectively, is presented as a bottom of indicators’ fall. They say it can’t be worse than in April. Yes, retail sales account for about 42% of the US consumer spending or 70% of the GDP, and the indicator’s drop by 23% over two months has subtracted, according to the ING, more than 6 basis points from the nominal gross domestic product. But the worst is already over, isn’t it?
One should understand Jerome Powell’s words that it doesn’t make sense to bet against the US economy, and the Fed hasn’t yet run out of the monetary tools. According to the FOMC president, the current recession is not that deep as the Great Depression, though the pre-crisis conditions will hardly be restored until 2021. Such a tone of the Fed’s president and the interpretation of the US domestic data support the S&P 500.
The major growth driver for the US dollar is the talks about the escalation of the US-China trade war. I must admit that the White House successfully fuels the conflict that seemed to be easing. Another portion of the gas in the fire of the trade dispute was poured by the tougher licensing requirements for the companies working with Huawei.
The euro, on the contrary, has many problems pressing it down. After the report on Germany’s GDP for the first quarter, the split among the euro-area members continues growing.
Germany’s GDP is better than that of most European states, also because Germany introduced the measure limiting the economic activity later (on March 23) than other European countries, and the production sector was hit by the crisis less than the services and tourism sectors. Under the current conditions, the EUR/USD pair is more likely to break through the bottom of the trading range 1.077-1.09 than the top.
Dynamics of the S&P 500 and the popularity of Democrats and Republicans
The White House changed its attitude to the U.S. currency
You could do anything to win the presidential elections! You could also abruptly reverse your own point of view. For most of his presidential term, Donald Trump was a fan of a weak dollar. In May, however, he supports the position of the former U.S. administrations that the strong currency is necessary. And the current US President has his reasons. Amid the huge fiscal stimulus, the focus is switched from foreign trade and competitiveness to the sources of managing the growing budget deficit. Besides, the strong greenback currently seems to be an advantage, as the strong currency indicates the US strong economy.
Donald Trump needs to find the subtle balance line between the US stock indexes and the US dollar, which are moving in opposite directions as investors are very responsive to the risk. Trump always saw the S&P 500 be an indicator of his success as the President. Also, the US stock market crash in March substantially lowered Trump’s chance to win the upcoming presidential election.
Therefore, it is not surprising that the worst drop in the US industrial production (-11.2%) and retail sales (-16.4%) since the government began tracking in 1911 and 1992 respectively, is presented as a bottom of indicators’ fall. They say it can’t be worse than in April. Yes, retail sales account for about 42% of the US consumer spending or 70% of the GDP, and the indicator’s drop by 23% over two months has subtracted, according to the ING, more than 6 basis points from the nominal gross domestic product. But the worst is already over, isn’t it?
One should understand Jerome Powell’s words that it doesn’t make sense to bet against the US economy, and the Fed hasn’t yet run out of the monetary tools. According to the FOMC president, the current recession is not that deep as the Great Depression, though the pre-crisis conditions will hardly be restored until 2021. Such a tone of the Fed’s president and the interpretation of the US domestic data support the S&P 500.
The major growth driver for the US dollar is the talks about the escalation of the US-China trade war. I must admit that the White House successfully fuels the conflict that seemed to be easing. Another portion of the gas in the fire of the trade dispute was poured by the tougher licensing requirements for the companies working with Huawei.
The euro, on the contrary, has many problems pressing it down. After the report on Germany’s GDP for the first quarter, the split among the euro-area members continues growing.
Germany’s GDP is better than that of most European states, also because Germany introduced the measure limiting the economic activity later (on March 23) than other European countries, and the production sector was hit by the crisis less than the services and tourism sectors. Under the current conditions, the EUR/USD pair is more likely to break through the bottom of the trading range 1.077-1.09 than the top.
Dynamics of the S&P 500 and the popularity of Democrats and Republicans
LiteFinance
Trade war: to be or not to be?
Donald Trump provokes China but China is different now
When I look at some people there’s only one thing I can think about: how do I get an arms licence? A renewal of the US-China trade war is the last thing the global economy needs now when the pandemic is here. Still, Trump won’t calm down and continues blowing the whistle on Beijing. One day he threatens to introduce import taxes in reaction to the alleged origin of coronavirus from a laboratory and failure to fulfil the obligations to buy American products. Another day, he forbids the US largest federal pension fund to invest in Chinese shares. Another say, he speaks aloud of a total breakup with China, which will allow the States to save $500 billion. Can’t Trump just put his mask on and keep his mouth shut?
China understands the benefits of being the first country that has made coronavirus kneel down. It’s not the same country it was at the beginning of 2020. China has made everyone understand no one can twist it around their little finger. Otherwise they will be given the finger. And if the Americans want to tell the Chinese to go to hell, they will have to see them off until the final destination. Beijing swaps diplomacy for threats more and more often. It stops buying Australian pork in response to Canberra’s intention to start a global investigation into the origins of coronavirus; it blows up rumours of the US plot against China; it encourages the states that are loyal to China.
Beijing has started to think again it can outrun the West like it did after the crisis of 2007-2009 when the growth of Chinese GDP helped global economy to recover.
As for Trump, Beijing’s chosen the same tactics as Fed chair Jerome Powell did. It pays no attention to US president's angry talks. All know that ignoring is the oldest method of emotional violence. These 2 countries’ relationship looks more and more often like a family idyll when a husband pretends to be the head of family and makes orders while a wife agrees with him and still does things her way.
Trump’s talks of a total breakup with China look like a man’s desire to divorce:
- Why did you divorce?
- My wife and I didn’t have any common interests except 9 children...
The US-China relations are too tight to be easily broken up. It’s almost impossible to remove Chinese businesses from supply chains which involve the USA. Globalisation rules the world. The US stock indexes’ rally says there won’t be any trade wars. How does S&P 500 know everything? People’s wisdom...Still, people aren’t always wise. Sometimes they aren’t sober.
Donald Trump provokes China but China is different now
When I look at some people there’s only one thing I can think about: how do I get an arms licence? A renewal of the US-China trade war is the last thing the global economy needs now when the pandemic is here. Still, Trump won’t calm down and continues blowing the whistle on Beijing. One day he threatens to introduce import taxes in reaction to the alleged origin of coronavirus from a laboratory and failure to fulfil the obligations to buy American products. Another day, he forbids the US largest federal pension fund to invest in Chinese shares. Another say, he speaks aloud of a total breakup with China, which will allow the States to save $500 billion. Can’t Trump just put his mask on and keep his mouth shut?
China understands the benefits of being the first country that has made coronavirus kneel down. It’s not the same country it was at the beginning of 2020. China has made everyone understand no one can twist it around their little finger. Otherwise they will be given the finger. And if the Americans want to tell the Chinese to go to hell, they will have to see them off until the final destination. Beijing swaps diplomacy for threats more and more often. It stops buying Australian pork in response to Canberra’s intention to start a global investigation into the origins of coronavirus; it blows up rumours of the US plot against China; it encourages the states that are loyal to China.
Beijing has started to think again it can outrun the West like it did after the crisis of 2007-2009 when the growth of Chinese GDP helped global economy to recover.
As for Trump, Beijing’s chosen the same tactics as Fed chair Jerome Powell did. It pays no attention to US president's angry talks. All know that ignoring is the oldest method of emotional violence. These 2 countries’ relationship looks more and more often like a family idyll when a husband pretends to be the head of family and makes orders while a wife agrees with him and still does things her way.
Trump’s talks of a total breakup with China look like a man’s desire to divorce:
- Why did you divorce?
- My wife and I didn’t have any common interests except 9 children...
The US-China relations are too tight to be easily broken up. It’s almost impossible to remove Chinese businesses from supply chains which involve the USA. Globalisation rules the world. The US stock indexes’ rally says there won’t be any trade wars. How does S&P 500 know everything? People’s wisdom...Still, people aren’t always wise. Sometimes they aren’t sober.
LiteFinance
Pound was hit by a train
The medicine may be more dangerous than the illness. This is not the only problem of the GBP/USD
While the US continues boosting its fiscal stimulus, the UK weighs the risks that the medicine could do more harm than the illness. The UK took second place in the number of deaths from coronavirus. Therefore, the Treasury extended the UK scheme to pay wages of workers on leave because of coronavirus will be extended to late October. According to MUFG, this scheme already costs £49 billion, and its extension will increase the spending by another £30 billion. Taking into account the entire financial stimulus package, the budget deficit, according to the UK government, will increase from £55 billion to £337 billion. At best. At worst, it will be as much as £516 billion. The UK will need to raise taxes, which suggests the GDP recovery will be L-shaped. And this is not the only problem of the pound.
In the first quarter, the UK economy contracted by 5.8%, in the second quarter, according to the BoE forecast, it will drop by another 25%, which will be the worst drop over the past 300 years. The British Retail Consortium reported a 19.1% drop Y-o-Y in total sales in April. This is the biggest fall since it began its monthly index in 1995. According to Financial Times source familiar with the issue, Boris Johnson’s government (likely, under Donald Trump’s pressure) is going to lower tariffs on the imports of the US farm products, which will widen the UK’s current account deficit.
The problems of foreign trade, growth of the UK public debt, UK weak economy discourage the foreign investors from buying the UK securities, which increases the differential in the premiums for put and call options on the sterling to 220 basis points (the average value in 2020 is 150 basis points). This sets the GBP/USD bulls back.
In addition to the problems of the economy, the political environment in the UK is also unfavorable amid the Brexit issues, which haven’t yet been settled. So, the pound’s drop looks natural. Until recently, the sterling was supported by the US stocks, however, the little chance of the V-shaped economic recovery in the USA resulted in the S&P 500 sell-offs, drawing investors’ focus back to the UK domestic problems.
Even the GBP/USD surge after the BoE meeting in May hasn’t increased the number of pound’s buyers. It was more like a” dead cat bounce”, a popular Forex pattern when bulls, being too weak, try to break the downtrend but fail. Yes, only two MPC members out of nine voted for the extension of the UK’s QE by £100 billion, however, Andrew Bailey and Ben Broadbent suggested that the BoE could implement additional easing measures.
Therefore, it will always catch up with you in the end, as the proverb says. In early May, the sterling looked too strong, which allowed the traders, who followed the recommendations to sell the GBP/USD from the levels of 1.235 and 1.229, to make profits. You can join successful Forex traders and boost up your deposit by going short on the pound using the LiteForex convenient services.
Dynamics of the UK GDP
The medicine may be more dangerous than the illness. This is not the only problem of the GBP/USD
While the US continues boosting its fiscal stimulus, the UK weighs the risks that the medicine could do more harm than the illness. The UK took second place in the number of deaths from coronavirus. Therefore, the Treasury extended the UK scheme to pay wages of workers on leave because of coronavirus will be extended to late October. According to MUFG, this scheme already costs £49 billion, and its extension will increase the spending by another £30 billion. Taking into account the entire financial stimulus package, the budget deficit, according to the UK government, will increase from £55 billion to £337 billion. At best. At worst, it will be as much as £516 billion. The UK will need to raise taxes, which suggests the GDP recovery will be L-shaped. And this is not the only problem of the pound.
In the first quarter, the UK economy contracted by 5.8%, in the second quarter, according to the BoE forecast, it will drop by another 25%, which will be the worst drop over the past 300 years. The British Retail Consortium reported a 19.1% drop Y-o-Y in total sales in April. This is the biggest fall since it began its monthly index in 1995. According to Financial Times source familiar with the issue, Boris Johnson’s government (likely, under Donald Trump’s pressure) is going to lower tariffs on the imports of the US farm products, which will widen the UK’s current account deficit.
The problems of foreign trade, growth of the UK public debt, UK weak economy discourage the foreign investors from buying the UK securities, which increases the differential in the premiums for put and call options on the sterling to 220 basis points (the average value in 2020 is 150 basis points). This sets the GBP/USD bulls back.
In addition to the problems of the economy, the political environment in the UK is also unfavorable amid the Brexit issues, which haven’t yet been settled. So, the pound’s drop looks natural. Until recently, the sterling was supported by the US stocks, however, the little chance of the V-shaped economic recovery in the USA resulted in the S&P 500 sell-offs, drawing investors’ focus back to the UK domestic problems.
Even the GBP/USD surge after the BoE meeting in May hasn’t increased the number of pound’s buyers. It was more like a” dead cat bounce”, a popular Forex pattern when bulls, being too weak, try to break the downtrend but fail. Yes, only two MPC members out of nine voted for the extension of the UK’s QE by £100 billion, however, Andrew Bailey and Ben Broadbent suggested that the BoE could implement additional easing measures.
Therefore, it will always catch up with you in the end, as the proverb says. In early May, the sterling looked too strong, which allowed the traders, who followed the recommendations to sell the GBP/USD from the levels of 1.235 and 1.229, to make profits. You can join successful Forex traders and boost up your deposit by going short on the pound using the LiteForex convenient services.
Dynamics of the UK GDP
LiteFinance
Dollar demands a gift
The Fed’s rate cut below zero could be a real gift for the US economy
Everything has a price to pay. If the Fed claims there are necessary extra tax deductions to decrease the unemployment rate from its potential peak at 20% to 9%-10%, then it could give a gift to the US economy and lower the federal funds rate below zero. President Donald Trump said the US economy deserves such a gift, and the market is more responsive to his comments than to the announcement of the FOMC officials about the harm of negative interest rates.
The cure can really be more harmful than the illness. If the federal funds rate drops below zero, not only investors and banks will suffer, but the entire huge industry of the US money market funds. Nonetheless, not everybody shares this opinion. For example, JP Morgan citing the ECB’s experience believes that a moderate cut of the interest rates into the negative area will yield more positive than harm. The positive resulted from the easing of the financial conditions and lower fragmentation risks in Europe outweighs the negative from the drop in the interbank market activity.
Besides, the U.S. has to fund the costs of the huge volume of Treasuries issuance. The U.S. budget deficit soared to a record of $1.935 trillion in the 12 months through April, and the Treasury is planning to issue $3 trillion in Treasuries in the second quarter and $4.5 trillion in 2019/2020 fiscal year. If buyers pay those debts, it will be a real gift for the U.S. economy. Also, the U.S. dollar will go weaker, as it should be pressed down over the long-term prospect by both the huge debt and the excessively boosted the Fed’s balance sheet.
If Congress is willing to meet the Fed’s claims on the expansion of the fiscal stimulus (House Democrats prepared the plan on an additional $3-trillion aid package), will the central bank be so amendable in response? The strangest thing, to my mind, is Donald Trump’s behavior in this situation. Earlier, he spared no money to draw the US GDP to 3%, without thinking about the consequences, but now he says the states, which do not manage their budgets effectively, should not receive the federal assistance, he also holds back the negotiations. Could it result from the fact that the bill was proposed by the Democrats, not the Republicans?
After all, the talks about potential Fed’s negative interest rates have not been enough to send the US dollar down. The EUR/USD bears have quickly gained back control after Trump ordered the main federal government pension fund, managing about $600 billion, not to invest in the Chinese stocks, based on national security concerns. The US-China trade war hasn’t yet ended, which, together with the concerns about the second wave of the pandemic, weighs on the S&P 500. The crash of the US stock market on May 12 sent the euro down. If the euro goes below the zone of $1.084-1.0845, bulls will have serious problems.
Dynamics of central banks’ balance sheets
The Fed’s rate cut below zero could be a real gift for the US economy
Everything has a price to pay. If the Fed claims there are necessary extra tax deductions to decrease the unemployment rate from its potential peak at 20% to 9%-10%, then it could give a gift to the US economy and lower the federal funds rate below zero. President Donald Trump said the US economy deserves such a gift, and the market is more responsive to his comments than to the announcement of the FOMC officials about the harm of negative interest rates.
The cure can really be more harmful than the illness. If the federal funds rate drops below zero, not only investors and banks will suffer, but the entire huge industry of the US money market funds. Nonetheless, not everybody shares this opinion. For example, JP Morgan citing the ECB’s experience believes that a moderate cut of the interest rates into the negative area will yield more positive than harm. The positive resulted from the easing of the financial conditions and lower fragmentation risks in Europe outweighs the negative from the drop in the interbank market activity.
Besides, the U.S. has to fund the costs of the huge volume of Treasuries issuance. The U.S. budget deficit soared to a record of $1.935 trillion in the 12 months through April, and the Treasury is planning to issue $3 trillion in Treasuries in the second quarter and $4.5 trillion in 2019/2020 fiscal year. If buyers pay those debts, it will be a real gift for the U.S. economy. Also, the U.S. dollar will go weaker, as it should be pressed down over the long-term prospect by both the huge debt and the excessively boosted the Fed’s balance sheet.
If Congress is willing to meet the Fed’s claims on the expansion of the fiscal stimulus (House Democrats prepared the plan on an additional $3-trillion aid package), will the central bank be so amendable in response? The strangest thing, to my mind, is Donald Trump’s behavior in this situation. Earlier, he spared no money to draw the US GDP to 3%, without thinking about the consequences, but now he says the states, which do not manage their budgets effectively, should not receive the federal assistance, he also holds back the negotiations. Could it result from the fact that the bill was proposed by the Democrats, not the Republicans?
After all, the talks about potential Fed’s negative interest rates have not been enough to send the US dollar down. The EUR/USD bears have quickly gained back control after Trump ordered the main federal government pension fund, managing about $600 billion, not to invest in the Chinese stocks, based on national security concerns. The US-China trade war hasn’t yet ended, which, together with the concerns about the second wave of the pandemic, weighs on the S&P 500. The crash of the US stock market on May 12 sent the euro down. If the euro goes below the zone of $1.084-1.0845, bulls will have serious problems.
Dynamics of central banks’ balance sheets
LiteFinance
Euro is dangerously close to the line
Geopolitics and growing risks of a constitutional crisis weigh on the EUR/USD
If the greenback is strengthening amid the rally of the US stock indexes, how deep could the EUR/USD drop if the S&P 500 trend turns down? The buyers of stocks are not discouraged by the bad news from Germany about s surge in the new cases of coronavirus as the economy was partially reopened, growing pessimism about the recovery of the US GDP, or by a potential escalation of the US-China trade war. Besides, the euro is pressed down by the turmoil in the EU judicial system that might result in a constitutional crisis.
The major growth driver for the S&P 500 is the unwillingness of investors to go against the Fed that is actively stimulating the US economy. They hope that corporate profits will be 13% up in the first quarter of 2021. Besides, analysts suggest a chance that the US stock indexes could rise to all-time highs (JP Morgan, for example, says it will occur in the first half of 2021). Investors are bullish on the sector leaders that, unlike other companies’ stocks, are growing steadily. In fact, the US economic rebound to the pre-crisis pace may be U-, W-, Z- or L-shaped. Investors more often support the idea that the US GDP won’t quickly rebound. It could take months or even years.
One of the drivers of the US stocks sell-off and the growth of the demand for safe-havens, including the US dollar, can be the escalation of the US-China trade war. Washington and Beijing seem to have agreed on the fulfilling obligations under the trade deal signed in January, and China is starting to increase purchases of US soy and pork, reducing Brazilian and Australian imports of these products, but there are distressing talks among investors. Allegedly, China has ended with diplomacy and is switching to the policy of bullying. In response to the charges of the alleged laboratory origin of COVID-19, the Chinese officials point to the elderly coronavirus patients abandoned in France's nursing homes. Also, China’s media spread conspiracy theories suggesting that the USA created the virus to destroy China. China also threatens to block the imports of Australia’s goods as Canberra is going to investigate the virus origins; it also encourages Wellington and Prague for public praise by donating masks and equipment.
Beijing behaves as it did after the 2007-2009 crisis when China was going to outperform the U.S. and Europe. Donald Trump doesn’t like it. He says he is going to halt the further talks with China and should revise the provisions of the phase-one trade deal signed in January.
In addition to the potential sell-offs in the stock market and geopolitical issues, there are disputes between the EU members. Therefore, the EUR/USD is getting more likely to drop below the important support at 1.077-1.0775. After a tough response of the European Court to the German constitutional court, the European Commission could open a legal case against Germany over the violating EU legislation. The situation is alarming. Will the euro stay on the edge of the abyss?
Shapes of the GDP recovery
Geopolitics and growing risks of a constitutional crisis weigh on the EUR/USD
If the greenback is strengthening amid the rally of the US stock indexes, how deep could the EUR/USD drop if the S&P 500 trend turns down? The buyers of stocks are not discouraged by the bad news from Germany about s surge in the new cases of coronavirus as the economy was partially reopened, growing pessimism about the recovery of the US GDP, or by a potential escalation of the US-China trade war. Besides, the euro is pressed down by the turmoil in the EU judicial system that might result in a constitutional crisis.
The major growth driver for the S&P 500 is the unwillingness of investors to go against the Fed that is actively stimulating the US economy. They hope that corporate profits will be 13% up in the first quarter of 2021. Besides, analysts suggest a chance that the US stock indexes could rise to all-time highs (JP Morgan, for example, says it will occur in the first half of 2021). Investors are bullish on the sector leaders that, unlike other companies’ stocks, are growing steadily. In fact, the US economic rebound to the pre-crisis pace may be U-, W-, Z- or L-shaped. Investors more often support the idea that the US GDP won’t quickly rebound. It could take months or even years.
One of the drivers of the US stocks sell-off and the growth of the demand for safe-havens, including the US dollar, can be the escalation of the US-China trade war. Washington and Beijing seem to have agreed on the fulfilling obligations under the trade deal signed in January, and China is starting to increase purchases of US soy and pork, reducing Brazilian and Australian imports of these products, but there are distressing talks among investors. Allegedly, China has ended with diplomacy and is switching to the policy of bullying. In response to the charges of the alleged laboratory origin of COVID-19, the Chinese officials point to the elderly coronavirus patients abandoned in France's nursing homes. Also, China’s media spread conspiracy theories suggesting that the USA created the virus to destroy China. China also threatens to block the imports of Australia’s goods as Canberra is going to investigate the virus origins; it also encourages Wellington and Prague for public praise by donating masks and equipment.
Beijing behaves as it did after the 2007-2009 crisis when China was going to outperform the U.S. and Europe. Donald Trump doesn’t like it. He says he is going to halt the further talks with China and should revise the provisions of the phase-one trade deal signed in January.
In addition to the potential sell-offs in the stock market and geopolitical issues, there are disputes between the EU members. Therefore, the EUR/USD is getting more likely to drop below the important support at 1.077-1.0775. After a tough response of the European Court to the German constitutional court, the European Commission could open a legal case against Germany over the violating EU legislation. The situation is alarming. Will the euro stay on the edge of the abyss?
Shapes of the GDP recovery
LiteFinance
Will the euro make a fortune at the expense of others?
EUR/USD is above 1.08 being supported by the US stocks
The EUR/USD response to the US jobs report represents the market sentiment. The U.S. stock market rally despite the US horrible domestic data weighs on the US dollar. However, as soon as the euro-area problem becomes acute, the EUR/USD is sliding down. The US unemployment rate rose to 14.7% and employment fell by 20.5 million in April. However, the S&P 500 bull trend didn’t break. The forecasts of the Wall Street Journal suggested a weaker report (16.1% and the loss of 22 million jobs). Many analysts believe that April is the worst month based on the loss of jobs amid the pandemic, and, if the worst time is over, it makes sense to buy the US stocks now.
The US stock market rally supported the growth of most G10 currencies versus the US dollar, but the euro has quickly weakened amid the euro-area problems. A split among the euro-area countries that has started after the governments failed to agree on the corona bonds and increased after the ruling of the German constitutional court is a strong point of the Euroskeptics, which increases the risk of the euro-area breakup. Italy is not like Greece or other small countries within the EU that used to cause trouble in the Eurozone earlier.
The size of the euro-area fiscal and monetary stimulus is much less than that in the USA, which suggests the European GDP will be recovering slower than the US economy, so the EUR/USD uptrend will hardly continue. Yes, the EU finance ministers manage to agree on emergency support of 2% of GDP for each stressed country in the week ended May 10. ESM will provide loans at a negative rate, which, taking into account the fees charged, will be about 0.1%. This means that Italy and the euro area, in general, received the support of about €36 billion and €240 billion, which is far less than the US fiscal stimulus of $3 trillion that could be boosted in late May or early June. The negotiations between the White House and Congress are going on, but the US Treasury Secretary Steven Mnuchin says the states that poorly managed the budgets before the pandemic should not be rescued by the federal government.
Remarkably, the derivatives market doesn’t suggest the EUR/USD will break through the low at 1.063 hit in March. Options traders see that the euro is supported by the US stocks and the factors of the dollar weakness in the long-term prospect, including the excessive growth of the Fed’s balance sheet and the increase in the US budget deficit.
In the meanwhile, the European court has retaliated to the German judges that declared its decision on the legacy of the ECB QE is invalid. The EU court noted that its task is to ensure that the EU legislation is properly applied in all the 27 countries within the currency bloc. It alone has the jurisdiction to determine the legacy of acts taken by the EU institutions. On the one hand, this gave the ECB freedom to act, on the other hand, it encourages the Euroskeptics. The EUR/USD bulls are not strong but they still believe the S&P 500 should allow them to hold the pair above 1.08.
Volumes of option contracts
EUR/USD is above 1.08 being supported by the US stocks
The EUR/USD response to the US jobs report represents the market sentiment. The U.S. stock market rally despite the US horrible domestic data weighs on the US dollar. However, as soon as the euro-area problem becomes acute, the EUR/USD is sliding down. The US unemployment rate rose to 14.7% and employment fell by 20.5 million in April. However, the S&P 500 bull trend didn’t break. The forecasts of the Wall Street Journal suggested a weaker report (16.1% and the loss of 22 million jobs). Many analysts believe that April is the worst month based on the loss of jobs amid the pandemic, and, if the worst time is over, it makes sense to buy the US stocks now.
The US stock market rally supported the growth of most G10 currencies versus the US dollar, but the euro has quickly weakened amid the euro-area problems. A split among the euro-area countries that has started after the governments failed to agree on the corona bonds and increased after the ruling of the German constitutional court is a strong point of the Euroskeptics, which increases the risk of the euro-area breakup. Italy is not like Greece or other small countries within the EU that used to cause trouble in the Eurozone earlier.
The size of the euro-area fiscal and monetary stimulus is much less than that in the USA, which suggests the European GDP will be recovering slower than the US economy, so the EUR/USD uptrend will hardly continue. Yes, the EU finance ministers manage to agree on emergency support of 2% of GDP for each stressed country in the week ended May 10. ESM will provide loans at a negative rate, which, taking into account the fees charged, will be about 0.1%. This means that Italy and the euro area, in general, received the support of about €36 billion and €240 billion, which is far less than the US fiscal stimulus of $3 trillion that could be boosted in late May or early June. The negotiations between the White House and Congress are going on, but the US Treasury Secretary Steven Mnuchin says the states that poorly managed the budgets before the pandemic should not be rescued by the federal government.
Remarkably, the derivatives market doesn’t suggest the EUR/USD will break through the low at 1.063 hit in March. Options traders see that the euro is supported by the US stocks and the factors of the dollar weakness in the long-term prospect, including the excessive growth of the Fed’s balance sheet and the increase in the US budget deficit.
In the meanwhile, the European court has retaliated to the German judges that declared its decision on the legacy of the ECB QE is invalid. The EU court noted that its task is to ensure that the EU legislation is properly applied in all the 27 countries within the currency bloc. It alone has the jurisdiction to determine the legacy of acts taken by the EU institutions. On the one hand, this gave the ECB freedom to act, on the other hand, it encourages the Euroskeptics. The EUR/USD bulls are not strong but they still believe the S&P 500 should allow them to hold the pair above 1.08.
Volumes of option contracts
LiteFinance
ECB: who let the judges out?
German Constitutional court’s verdict on QE program looks strange
After Donald Trump afforded to criticize the Fed and speculate about the pros and cons of a weak and a strong dollar, many dream of following his example. Germany’s Supreme Court made another attempt to hog the blanket: it demanded that ECB should justify the appropriateness of its €2.7 trillion QE program launched in 2015. If the ECB fails to do that, the Bundesbank will no longer participate in it. Following Trump, Karlsruhe’s lawyers might have understood life is a dog sled: the landscape is always the same unless you’re the leader.
Dance like no one’s watching, sing like no one’s listening and express your opinion as if you’ve been asked to. The verdict of Germany’s Constitutional Court shocked both ECB investors and plaintiffs themselves. The latter didn’t really believe in the success of their affair after the ECB said the QE program was legitimate. But German judges not only played a dirty trick on the ECB, but also opposed EU principles and norms by overruling the decision of the European Court.
the Executive Board isn’t planning to reply. First, it would undermine the ECB’s independence: they would have to justify every step they make in future if a regional court asked them to. Second, everything has been explained on the ECB’s site already. And can’t they really understand that QE is meant for fighting with the pandemic?
- I can’t be that dumb.
- You underestimate yourself.
According to Christine Lagarde, the current terms are exceptional and they allow the ECB to go beyond the scope of usual instruments. The ECB is an independent establishment accountable to the European Parliament. It will go on doing what it has to do based on its own mandate. The Frenchwoman made the judges in Karlsruhe understand the ECB wasn’t going to react.
Germany’s High Court did recognize that QE wasn’t a direct government financing program. That weakened the euro, but didn’t allow it to collapse. It would have been strange if German judges had spoken of a union between monetary and fiscal policies while the ECB was doing all the dirty work and the German Ministry of Finance was being cheapskate. Money doesn’t disappear into thin air. It just changes its owner.
Anyway, the German verdict stirred up financial markets, as Donald Trump’s verbal interventions did in 2017-2020. The ECB has three months for explaining why its QE program has more benefits than shortcomings. There are so many people eager for ruling. But few are those who strive for work. The Executive Board will keep silent, the European Court is bewildered and the euro got hit in the jaw. How will we work that shit out, dear Europeans? Perhaps, like Donald Trump who declared the USA was about to create a vaccine against Democrats’ electoral victory?
German Constitutional court’s verdict on QE program looks strange
After Donald Trump afforded to criticize the Fed and speculate about the pros and cons of a weak and a strong dollar, many dream of following his example. Germany’s Supreme Court made another attempt to hog the blanket: it demanded that ECB should justify the appropriateness of its €2.7 trillion QE program launched in 2015. If the ECB fails to do that, the Bundesbank will no longer participate in it. Following Trump, Karlsruhe’s lawyers might have understood life is a dog sled: the landscape is always the same unless you’re the leader.
Dance like no one’s watching, sing like no one’s listening and express your opinion as if you’ve been asked to. The verdict of Germany’s Constitutional Court shocked both ECB investors and plaintiffs themselves. The latter didn’t really believe in the success of their affair after the ECB said the QE program was legitimate. But German judges not only played a dirty trick on the ECB, but also opposed EU principles and norms by overruling the decision of the European Court.
the Executive Board isn’t planning to reply. First, it would undermine the ECB’s independence: they would have to justify every step they make in future if a regional court asked them to. Second, everything has been explained on the ECB’s site already. And can’t they really understand that QE is meant for fighting with the pandemic?
- I can’t be that dumb.
- You underestimate yourself.
According to Christine Lagarde, the current terms are exceptional and they allow the ECB to go beyond the scope of usual instruments. The ECB is an independent establishment accountable to the European Parliament. It will go on doing what it has to do based on its own mandate. The Frenchwoman made the judges in Karlsruhe understand the ECB wasn’t going to react.
Germany’s High Court did recognize that QE wasn’t a direct government financing program. That weakened the euro, but didn’t allow it to collapse. It would have been strange if German judges had spoken of a union between monetary and fiscal policies while the ECB was doing all the dirty work and the German Ministry of Finance was being cheapskate. Money doesn’t disappear into thin air. It just changes its owner.
Anyway, the German verdict stirred up financial markets, as Donald Trump’s verbal interventions did in 2017-2020. The ECB has three months for explaining why its QE program has more benefits than shortcomings. There are so many people eager for ruling. But few are those who strive for work. The Executive Board will keep silent, the European Court is bewildered and the euro got hit in the jaw. How will we work that shit out, dear Europeans? Perhaps, like Donald Trump who declared the USA was about to create a vaccine against Democrats’ electoral victory?
LiteFinance
Euro feels dirty
ECB is doing its best to save the euro-area economy, but Germany creates obstacles
How fast the Forex situation is changing! Just a week ago, the balance of power in the EUR/USD was clear. After the drop in the safe-haven demand amid the gradual reopening of the economies and the recovery of the global GDP, the euro should have started rising versus the US dollar. The dollar would be pressed down by the over-expanded Fed’s balance sheet and the U.S. increasing public debt. However, after there was announced the ruling of Germany’s constitutional court and geopolitical risks increased, everything has turned upside down.
BofA Merill Lynch sees the EUR/USD at 1.02 in late 2020 amid weak global economic outlook and limited power of the ECB in managing the monetary stimulus. Société Générale notes that the dispute between the two European supreme courts during the pandemic results in the market uncertainty, which is a rather negative factor. Citi warns about higher risks of the euro-area breakup, coming from not the peripheral countries but the nucleus, as the ECB may ignore the ruling of the Constitutional court, challenging Germany’s government.
According to the Financial Times source familiar with the inside information, the Governing council won’t directly respond to the German court. One of the ECB council members said that it would justify the QE in five minutes, but the ECB didn’t have to do it. It looks as if the ECB should report to any court at the first request when it decides to hike the rates, for example. Another official said that the German government and parliament should be the defendants, and the Governing Council would continue doing everything necessary.
The decision of the German court looks ridiculous. What could justify bond purchases better than the assistance to the countries suffered from the pandemic? The ECB might blur the line between the monetary and the fiscal policies, but this is because the euro-area governments, first of all, Germany, wouldn’t spend money. The ECB is doing a hard job and is criticized at the same time.
The currency bloc may break up, and the situation is worsened by the EC forecasts. The European Commission says the euro-area GDP will contract by 7.7% in 2020, it should recover by just 6.3% in 2021. Italy’s public debt will increase from 135% to 159% of GDP, Greece’s debt will exceed 200% of GDP. However, German and the Netherlands will perform quite well.
The EUR/USD is also pressed down by Donald Trump. The U.S. President gave Beijing two weeks to make sure whether China would meet its commitments to increase U.S. goods purchases by $200 billion over two years, including $77 billion in 2020. Taking into account the problems of the Chinese economy amid the pandemic, and a decline in the imports from the U.S. in the January-March period, the U.S. could well impose new tariffs soon. The pair’s drop below the support at 1.077-1.0775 could become critical.
Dynamics of public debts of GDP
ECB is doing its best to save the euro-area economy, but Germany creates obstacles
How fast the Forex situation is changing! Just a week ago, the balance of power in the EUR/USD was clear. After the drop in the safe-haven demand amid the gradual reopening of the economies and the recovery of the global GDP, the euro should have started rising versus the US dollar. The dollar would be pressed down by the over-expanded Fed’s balance sheet and the U.S. increasing public debt. However, after there was announced the ruling of Germany’s constitutional court and geopolitical risks increased, everything has turned upside down.
BofA Merill Lynch sees the EUR/USD at 1.02 in late 2020 amid weak global economic outlook and limited power of the ECB in managing the monetary stimulus. Société Générale notes that the dispute between the two European supreme courts during the pandemic results in the market uncertainty, which is a rather negative factor. Citi warns about higher risks of the euro-area breakup, coming from not the peripheral countries but the nucleus, as the ECB may ignore the ruling of the Constitutional court, challenging Germany’s government.
According to the Financial Times source familiar with the inside information, the Governing council won’t directly respond to the German court. One of the ECB council members said that it would justify the QE in five minutes, but the ECB didn’t have to do it. It looks as if the ECB should report to any court at the first request when it decides to hike the rates, for example. Another official said that the German government and parliament should be the defendants, and the Governing Council would continue doing everything necessary.
The decision of the German court looks ridiculous. What could justify bond purchases better than the assistance to the countries suffered from the pandemic? The ECB might blur the line between the monetary and the fiscal policies, but this is because the euro-area governments, first of all, Germany, wouldn’t spend money. The ECB is doing a hard job and is criticized at the same time.
The currency bloc may break up, and the situation is worsened by the EC forecasts. The European Commission says the euro-area GDP will contract by 7.7% in 2020, it should recover by just 6.3% in 2021. Italy’s public debt will increase from 135% to 159% of GDP, Greece’s debt will exceed 200% of GDP. However, German and the Netherlands will perform quite well.
The EUR/USD is also pressed down by Donald Trump. The U.S. President gave Beijing two weeks to make sure whether China would meet its commitments to increase U.S. goods purchases by $200 billion over two years, including $77 billion in 2020. Taking into account the problems of the Chinese economy amid the pandemic, and a decline in the imports from the U.S. in the January-March period, the U.S. could well impose new tariffs soon. The pair’s drop below the support at 1.077-1.0775 could become critical.
Dynamics of public debts of GDP
LiteFinance
Euro holds the ECB back
The decision of the German top court sends the EUR/USD down
You can’t break a broom if do not damage its rods first. The long-awaited decision of Germany’s constitutional court on the legacy of the European QE has become a shock for financial markets. It has undermined the ECB independence and increased the EU break-up. The first broken rod has become Italy. Italy’s bond yield jumped as much as 17 basis points, widening the gap with their German counterparts to 250 basis points. Italian Finance Minister Roberto Gualtieri had to calm down the markets saying that the German court’s decision won’t stop ECB asset purchases.
The German constitutional court says that the ECB €2.7-trillion QE program, which started in 2015, is not direct financial assistance to the governments. However, it warns that the Bundesbank will stop buying government bonds if the ECB doesn’t fix the flaws in the QE program within three months. It seems that, when the ECB starts normalizing its monetary policy, it will also have to explain to the judges all negative effects of the interest rate hikes for the borrowers, the unemployed, and the governments, whose borrowing costs are to increase. Is it independence?
Another shock for the markets has been the news that the German top court has ruled that the decision of the European court on the QE legacy taken two years ago is beyond its legal powers. The German constitutional court, for the first time, has declared the ruling of the European court to be illegal. This undermines the EU uniform legal order, one of the most important achievements of the entire currency bloc. While the ECB is taking every measure to avert the euro-area fragmentation, Germany seems to be indulging the euro-area break-up.
The decision of the German Constitutional Court came at a difficult time, especially for the countries most affected by the pandemic. Being deep into the recession, Italy has already passed an initial set of stimulus measures for its economy worth €25 billion and is willing to acquire another package worth at least €55 billion. To fund the stimulus package, there will be used the resources raised in the debt market, and, if the ECB doesn’t buy the local bonds, borrowing costs will be increasing, which will set back the process of the GDP recovery.
While the Fed, the US administration and the Congress are taking every measure to support the U.S. economy, Germany’s judges limit the ECB power, threaten its independence and increase the risks of the euro-area fragmentation. In addition, the leaders of the euro-area governments fail to find a compromise on the fiscal stimulus. So, the EUR/USD drop looks natural. Especially since the drop in the ISM services PMI to the lowest level since 2009 and the contraction of the US foreign trade in April increase the demand for the US dollar as a safe-haven asset.
Limiting the ECB power, the German constitutional court sets a new barrier to the recovery of the euro-area GDP. The European economy will be weak for a long time. So, it is relevant to hold down the EUR/USD shorts entered at level 1.0965.
The decision of the German top court sends the EUR/USD down
You can’t break a broom if do not damage its rods first. The long-awaited decision of Germany’s constitutional court on the legacy of the European QE has become a shock for financial markets. It has undermined the ECB independence and increased the EU break-up. The first broken rod has become Italy. Italy’s bond yield jumped as much as 17 basis points, widening the gap with their German counterparts to 250 basis points. Italian Finance Minister Roberto Gualtieri had to calm down the markets saying that the German court’s decision won’t stop ECB asset purchases.
The German constitutional court says that the ECB €2.7-trillion QE program, which started in 2015, is not direct financial assistance to the governments. However, it warns that the Bundesbank will stop buying government bonds if the ECB doesn’t fix the flaws in the QE program within three months. It seems that, when the ECB starts normalizing its monetary policy, it will also have to explain to the judges all negative effects of the interest rate hikes for the borrowers, the unemployed, and the governments, whose borrowing costs are to increase. Is it independence?
Another shock for the markets has been the news that the German top court has ruled that the decision of the European court on the QE legacy taken two years ago is beyond its legal powers. The German constitutional court, for the first time, has declared the ruling of the European court to be illegal. This undermines the EU uniform legal order, one of the most important achievements of the entire currency bloc. While the ECB is taking every measure to avert the euro-area fragmentation, Germany seems to be indulging the euro-area break-up.
The decision of the German Constitutional Court came at a difficult time, especially for the countries most affected by the pandemic. Being deep into the recession, Italy has already passed an initial set of stimulus measures for its economy worth €25 billion and is willing to acquire another package worth at least €55 billion. To fund the stimulus package, there will be used the resources raised in the debt market, and, if the ECB doesn’t buy the local bonds, borrowing costs will be increasing, which will set back the process of the GDP recovery.
While the Fed, the US administration and the Congress are taking every measure to support the U.S. economy, Germany’s judges limit the ECB power, threaten its independence and increase the risks of the euro-area fragmentation. In addition, the leaders of the euro-area governments fail to find a compromise on the fiscal stimulus. So, the EUR/USD drop looks natural. Especially since the drop in the ISM services PMI to the lowest level since 2009 and the contraction of the US foreign trade in April increase the demand for the US dollar as a safe-haven asset.
Limiting the ECB power, the German constitutional court sets a new barrier to the recovery of the euro-area GDP. The European economy will be weak for a long time. So, it is relevant to hold down the EUR/USD shorts entered at level 1.0965.
LiteFinance
Aussie smells the problems
A new round of trade wars may break the plans of the AUD/USD bulls
Has the idea of a faster recovery of China’s economy than that of the USA and Europe, suggesting one should bet on the currencies of the counties having close trade links with China, failed? In late March-early April, I strongly recommended buying the Australian dollar despite the opinion of the majority that suggested a gloomy outlook for the Australian economy and a further easing of the RBA’s ultra-easy monetary policy. Since then, the AUD/USD pair has risen by more than 6 figures. However, Trump’s attacks against China have broken the plans of the AUD buyers.
The US president obviously wants to win the upcoming presidential election in November, however, the recession and the crash in the stock market create strong barriers. If the S&P 500 trend has reversed up amid joint efforts of the Fed and the US administration, the V-shaped recovery of the US GDP could hardly be expected. Trump urgently needed to find someone to put the blame on, and he targeted China. The escalation of the US-China trade war will not only weigh on the global trade that is already rather weak, but it will also press down China’s economy and the yuan, which China’s government is struggling to stabilize now. The yuan’s drop amid the possibility of new import tariffs imposed by the USA send the AUD/USD down.
Yes, the Aussie looks vulnerable form the fundamental point of view. According to Bloomberg, there should be three consecutive quarters of declining gross domestic product, with Australia’s economy contracting by 9% from the fourth quarter of 2019, before a gradual recovery begins in the fourth quarter of 2020 (6% in 2020). It shouldn’t reach pre-outbreak levels of activity until the second half of 2022. Since December 2019, the number of unemployed Australians increased by 800,000 to 1.3 million-1.6 million. This is likely to result in the unemployment rate increase from 5.2% to 11% in the next few months. Such a level of unemployment was recorded during the last economic recession in the early 1990s.
However, the same situation is in most countries fighting with the coronavirus outbreak, and Australia’s fiscal stimulus (about 16% of GDP) is one of the biggest in the world, which suggests the economy’s rebound. The RBA didn’t take such aggressive measures as the Fed, which had launched the unlimited QE. It targeted the yield curve, like the Bank of Japan, which allowed it to stop buying out assets in the sixth week (the total purchase volume is just about AU$50 billion).
To sum up all the above, the hopes for the V-shaped recovery of China's economy, a huge fiscal stimulus, and a modest expansion of the RBA’s balance sheet pushed the AUD/USD up to its seven-week highs. However, the potential escalation of the US-China trade war changed the balance of power in the currency pair. If Donald Trump follows through the threats and starts actions, the AUD/USD should be falling deeper if the support at 0.635 is broken out. Otherwise, if the threat is not fulfilled, my forecast suggesting the Aussie’s growth to $0.675 and $0.69 should come true.
A new round of trade wars may break the plans of the AUD/USD bulls
Has the idea of a faster recovery of China’s economy than that of the USA and Europe, suggesting one should bet on the currencies of the counties having close trade links with China, failed? In late March-early April, I strongly recommended buying the Australian dollar despite the opinion of the majority that suggested a gloomy outlook for the Australian economy and a further easing of the RBA’s ultra-easy monetary policy. Since then, the AUD/USD pair has risen by more than 6 figures. However, Trump’s attacks against China have broken the plans of the AUD buyers.
The US president obviously wants to win the upcoming presidential election in November, however, the recession and the crash in the stock market create strong barriers. If the S&P 500 trend has reversed up amid joint efforts of the Fed and the US administration, the V-shaped recovery of the US GDP could hardly be expected. Trump urgently needed to find someone to put the blame on, and he targeted China. The escalation of the US-China trade war will not only weigh on the global trade that is already rather weak, but it will also press down China’s economy and the yuan, which China’s government is struggling to stabilize now. The yuan’s drop amid the possibility of new import tariffs imposed by the USA send the AUD/USD down.
Yes, the Aussie looks vulnerable form the fundamental point of view. According to Bloomberg, there should be three consecutive quarters of declining gross domestic product, with Australia’s economy contracting by 9% from the fourth quarter of 2019, before a gradual recovery begins in the fourth quarter of 2020 (6% in 2020). It shouldn’t reach pre-outbreak levels of activity until the second half of 2022. Since December 2019, the number of unemployed Australians increased by 800,000 to 1.3 million-1.6 million. This is likely to result in the unemployment rate increase from 5.2% to 11% in the next few months. Such a level of unemployment was recorded during the last economic recession in the early 1990s.
However, the same situation is in most countries fighting with the coronavirus outbreak, and Australia’s fiscal stimulus (about 16% of GDP) is one of the biggest in the world, which suggests the economy’s rebound. The RBA didn’t take such aggressive measures as the Fed, which had launched the unlimited QE. It targeted the yield curve, like the Bank of Japan, which allowed it to stop buying out assets in the sixth week (the total purchase volume is just about AU$50 billion).
To sum up all the above, the hopes for the V-shaped recovery of China's economy, a huge fiscal stimulus, and a modest expansion of the RBA’s balance sheet pushed the AUD/USD up to its seven-week highs. However, the potential escalation of the US-China trade war changed the balance of power in the currency pair. If Donald Trump follows through the threats and starts actions, the AUD/USD should be falling deeper if the support at 0.635 is broken out. Otherwise, if the threat is not fulfilled, my forecast suggesting the Aussie’s growth to $0.675 and $0.69 should come true.
LiteFinance
Dollar fooled the markets
The Fed managed to hide its pessimism behind the willingness to take active, aggressive measures
Try, try, and try again. Jerome Powell, at the press conference following the April FOMC meeting, did his best to keep the illusion of stability he had created. Federal Reserve Chairman noted that the central bank will take active, aggressive measures to shield the U.S. economy from the coronavirus, and patiently hold the interest rates around zero until the regulator is sure that the U.S. economy is heading for the high targets in the employment and price stability. In order to hold the S&P 500 bears back, the central bank has abandoned its principle of being independent of politics. The Fed’s didn’t use to call on the Congress for an increase in the fiscal stimulus, now it does, suggesting that the central bank needs help.
As the stock indexes have been up, the Fed seems to have reassured the markets, despite the change in its tone. In March, Jerome Powell spoke about a V-shaped rebound of the US economy. In April, he emphasized several times that there is hardly any hope for a quick rebound of the US GDP in the second half of 2020. The Fed is getting ready for a long struggle with the pandemic. During the next year or so, there will continue the uncertainty about the victory over the pandemic, the depth, and length of the economic downturn, the scale of the global shocks, and the recovery of the consumption and the domestic demand. In fact, even China, which has almost brought the COVID-19 under control, is giving away shopping vouchers to get people to go out and spend money again.
The downturn is deep. The US GDP lost 4.8% Q-o-Q, consumer expenditures featured the worst drop since 1980, the business investments were the lowest over 11 years. This looks incredible. In early March, the US economy was operating normally, and there were no signs that the longest economic expansion would end.
The worst is yet to come in the second quarter. According to Markit’s economic activity data, the US GDP should decline at a 37% annual rate, which will be the biggest drop since 1947.
In my opinion, Jerome Powell managed to clam down the markets and distract them form the change in the Fed’s stance. The US economy is likely to be U-shaped, so the 30% rally of the S&P 500 up form the March lows looks too strong.
Investors now switch their attention from the Fed to the ECB. After Fitch downgraded Italy’s credit rating, investors expect the Governing Council to take aggressive measures. When the euro-area governments fail to find a compromise on the fiscal stimulus, the ECB is likely to take the responsibility. If the European Central Bank doesn’t boost the QE pace in April, it may at least give a clue on such a step in the future.
The euro options market doesn’t expect any strong moves, and it seems to be right. The EUR/USD is stuck in the trading range of 1.08-1.09. Will Christine Lagarde make it be trending?
P.S. Did you like my article? Share it in social networks: it will be the best “thank you" :)
Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.
The Fed managed to hide its pessimism behind the willingness to take active, aggressive measures
Try, try, and try again. Jerome Powell, at the press conference following the April FOMC meeting, did his best to keep the illusion of stability he had created. Federal Reserve Chairman noted that the central bank will take active, aggressive measures to shield the U.S. economy from the coronavirus, and patiently hold the interest rates around zero until the regulator is sure that the U.S. economy is heading for the high targets in the employment and price stability. In order to hold the S&P 500 bears back, the central bank has abandoned its principle of being independent of politics. The Fed’s didn’t use to call on the Congress for an increase in the fiscal stimulus, now it does, suggesting that the central bank needs help.
As the stock indexes have been up, the Fed seems to have reassured the markets, despite the change in its tone. In March, Jerome Powell spoke about a V-shaped rebound of the US economy. In April, he emphasized several times that there is hardly any hope for a quick rebound of the US GDP in the second half of 2020. The Fed is getting ready for a long struggle with the pandemic. During the next year or so, there will continue the uncertainty about the victory over the pandemic, the depth, and length of the economic downturn, the scale of the global shocks, and the recovery of the consumption and the domestic demand. In fact, even China, which has almost brought the COVID-19 under control, is giving away shopping vouchers to get people to go out and spend money again.
The downturn is deep. The US GDP lost 4.8% Q-o-Q, consumer expenditures featured the worst drop since 1980, the business investments were the lowest over 11 years. This looks incredible. In early March, the US economy was operating normally, and there were no signs that the longest economic expansion would end.
The worst is yet to come in the second quarter. According to Markit’s economic activity data, the US GDP should decline at a 37% annual rate, which will be the biggest drop since 1947.
In my opinion, Jerome Powell managed to clam down the markets and distract them form the change in the Fed’s stance. The US economy is likely to be U-shaped, so the 30% rally of the S&P 500 up form the March lows looks too strong.
Investors now switch their attention from the Fed to the ECB. After Fitch downgraded Italy’s credit rating, investors expect the Governing Council to take aggressive measures. When the euro-area governments fail to find a compromise on the fiscal stimulus, the ECB is likely to take the responsibility. If the European Central Bank doesn’t boost the QE pace in April, it may at least give a clue on such a step in the future.
The euro options market doesn’t expect any strong moves, and it seems to be right. The EUR/USD is stuck in the trading range of 1.08-1.09. Will Christine Lagarde make it be trending?
P.S. Did you like my article? Share it in social networks: it will be the best “thank you" :)
Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.
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Fed and hall of mirrors
Investment ideas based on interaction between Fed and markets
According to economic theory, monetary policy is the key driver of asset price changes. Monetary expansion results in a decrease of the bond market’s rates. Capital raising costs drop, profitability grows. Positive corporate reports raise stock quotes. On the contrary, monetary restriction worsens companies’ financial results because of higher borrowing costs. In the real world, it often happens that it’s Fed that follows stock indexes and not the contrary. In 2004, former Fed Chair Ben Bernanke called the interaction between S&P 500 and the Central bank “hall of mirrors”.
Should prisoners be allowed to take control over a prison? The stock market must follow the Fed. Otherwise, the “don’t play against the Fed” principle would make no sense. Still, the markets work the best when market participants are under healthy fear of loss. People’s wisdom remains something to consider while FOMC officials are ordinary people who make mistakes. It is believed that stock indexes reflect the state of national economies. If so, the Fed’s officials tend to observe their signals and compare them with their own views.
If their views are different from the market’s opinion, the Committee has two ways to go, each of which implies problems. Adjusting monetary policy to S&P 500’s signals increases a risk of macroeconomic instability in future. Playing against the market increases economic turbulence.
The Fed has tried both ways. Jerome Powell and his colleagues dropped the federal funds rate by 150 base points in March 2020 in response to the fastest ever stock market decline. Also, they declared that treasuries and mortgage-backed securities would be bought in unlimited amounts.
In December 2018, the Fed chairman said the current rate was far from being neutral. It resulted in a large stock market sell-off. The right communication saved the situation at the beginning of 2019: Powell corrected himself and emphasized the FOMC’s intention to take a pause. That allowed S&P 500 to claw back losses.
Ben Bernanke would mention the need to communicate with markets too. It was his way of solving disagreements between market signals and FOMC views. Communication is fundamental to the concept of “hall of mirrors” and allows for drawing a parallel with a psychological pathology, when a patient feels a vigorous desire to talk to his/her own reflection.
The Fed’s and financial markets’ views often coincided as well. Jerome Powell gave up the idea of further normalization of monetary policy in 2019, because the yield curve pointed to an upcoming recession. Back then, it was hard to imagine something that could harm the USA’s solid economy. The answer is now obvious: coronavirus.
What is the best way of profiting from the hall of mirrors? Finding mistakes in the Fed’s statements. For example, Powell asserted in early spring that the States would see a V-shape recovery. Together with a large monetary stimulus, that assertion allowed S&P 500 to grow 28% from the levels of March’s trough. Today, this assertion looks questionable while a change in the Fed’s views could lead to taking profits on US stocks.
Investment ideas based on interaction between Fed and markets
According to economic theory, monetary policy is the key driver of asset price changes. Monetary expansion results in a decrease of the bond market’s rates. Capital raising costs drop, profitability grows. Positive corporate reports raise stock quotes. On the contrary, monetary restriction worsens companies’ financial results because of higher borrowing costs. In the real world, it often happens that it’s Fed that follows stock indexes and not the contrary. In 2004, former Fed Chair Ben Bernanke called the interaction between S&P 500 and the Central bank “hall of mirrors”.
Should prisoners be allowed to take control over a prison? The stock market must follow the Fed. Otherwise, the “don’t play against the Fed” principle would make no sense. Still, the markets work the best when market participants are under healthy fear of loss. People’s wisdom remains something to consider while FOMC officials are ordinary people who make mistakes. It is believed that stock indexes reflect the state of national economies. If so, the Fed’s officials tend to observe their signals and compare them with their own views.
If their views are different from the market’s opinion, the Committee has two ways to go, each of which implies problems. Adjusting monetary policy to S&P 500’s signals increases a risk of macroeconomic instability in future. Playing against the market increases economic turbulence.
The Fed has tried both ways. Jerome Powell and his colleagues dropped the federal funds rate by 150 base points in March 2020 in response to the fastest ever stock market decline. Also, they declared that treasuries and mortgage-backed securities would be bought in unlimited amounts.
In December 2018, the Fed chairman said the current rate was far from being neutral. It resulted in a large stock market sell-off. The right communication saved the situation at the beginning of 2019: Powell corrected himself and emphasized the FOMC’s intention to take a pause. That allowed S&P 500 to claw back losses.
Ben Bernanke would mention the need to communicate with markets too. It was his way of solving disagreements between market signals and FOMC views. Communication is fundamental to the concept of “hall of mirrors” and allows for drawing a parallel with a psychological pathology, when a patient feels a vigorous desire to talk to his/her own reflection.
The Fed’s and financial markets’ views often coincided as well. Jerome Powell gave up the idea of further normalization of monetary policy in 2019, because the yield curve pointed to an upcoming recession. Back then, it was hard to imagine something that could harm the USA’s solid economy. The answer is now obvious: coronavirus.
What is the best way of profiting from the hall of mirrors? Finding mistakes in the Fed’s statements. For example, Powell asserted in early spring that the States would see a V-shape recovery. Together with a large monetary stimulus, that assertion allowed S&P 500 to grow 28% from the levels of March’s trough. Today, this assertion looks questionable while a change in the Fed’s views could lead to taking profits on US stocks.
LiteFinance
Pound set fire to fleet
When all the major currencies are exposed to the risks, the market is dwelling on the global risk appetite
The pound’s strength looks surprising. The domestic data are extremely poor, the Brexit matter hasn’t been settled down, Boris Johnson’s government is not willing to extend the transitions period, and the coronavirus fallout can damage the UK economy more than the previous global financial crisis. The BoE forecasts the UK GDP should drop by 35% in the second quarter. Nonetheless, despite all the negative factors, the GBP/USD rose up from the bottom of the consolidation range 1.22-1.26 and is now driving up to its top.
Bad news for the sterling started form the inflation report, the UK inflation rate was down from 1.7% to 1.5% amid a substantial decline in the domestic demand due to the pandemic, and it is likely to be moving down from its 2% target. The far, the worse. The UK composite PMI was down to a record low (12.6) in March, the retail sales featured the worst crash ever (-5.1% M-o-M). The GFK’s UK consumer confidence held at its lowest since 2009 this month after tumbling in late March. As a result, the UK economic surprise index is falling, however, the GBP/USD bulls are going ahead.
Earlier, the pound’s buyers hoped that the UK and the EU will reach a compromise on Brexit, or the transitions period will be at least extended. In April, there are hardly any hopes for the better. According to, Michael Gove, Cabinet Office minister, “whenever a deadline was extended, the light at the end of the tunnel was replaced by more tunnel”. The longer is the transition period, the more money will the UK contribute to the EU’s budget, and it will need to follow the EU rules, which are likely to be rejected in sovereignty.
Therefore, despite the horrible domestic data and swampy political environment in the UK, the sterling continues rising. The pound’s strength seems even more surprising if you look at the speculative positions on the pound. Over six consecutive weeks, hedge funds were exiting longs on the GBP, the market turned bearish on the British currency for the first time since December 2019.
What's the matter? Could the GBP/USD crash in March be so deep, that the bad news has been priced? I think it makes some sense. However, this is not the only reason for the pound’s resilience. When the economic situation is almost equally grim across the globe, markets are more fixated on swings in sentiment and risk appetite. Many investors think that the Brexit is a tiny reason compared to the coronavirus and recession, so they buy the sterling expecting the economies to reopen soon in the USA and UK, which should support the S&P 500 and press down the U.S. dollar.
Nonetheless, weak domestic data and continuous political uncertainty are the factors that limit the GBP/USD rally. Therefore, I still stick to my previous forecast suggesting the pair’s middle-term consolidation in the range of 1.22-1.26.
When all the major currencies are exposed to the risks, the market is dwelling on the global risk appetite
The pound’s strength looks surprising. The domestic data are extremely poor, the Brexit matter hasn’t been settled down, Boris Johnson’s government is not willing to extend the transitions period, and the coronavirus fallout can damage the UK economy more than the previous global financial crisis. The BoE forecasts the UK GDP should drop by 35% in the second quarter. Nonetheless, despite all the negative factors, the GBP/USD rose up from the bottom of the consolidation range 1.22-1.26 and is now driving up to its top.
Bad news for the sterling started form the inflation report, the UK inflation rate was down from 1.7% to 1.5% amid a substantial decline in the domestic demand due to the pandemic, and it is likely to be moving down from its 2% target. The far, the worse. The UK composite PMI was down to a record low (12.6) in March, the retail sales featured the worst crash ever (-5.1% M-o-M). The GFK’s UK consumer confidence held at its lowest since 2009 this month after tumbling in late March. As a result, the UK economic surprise index is falling, however, the GBP/USD bulls are going ahead.
Earlier, the pound’s buyers hoped that the UK and the EU will reach a compromise on Brexit, or the transitions period will be at least extended. In April, there are hardly any hopes for the better. According to, Michael Gove, Cabinet Office minister, “whenever a deadline was extended, the light at the end of the tunnel was replaced by more tunnel”. The longer is the transition period, the more money will the UK contribute to the EU’s budget, and it will need to follow the EU rules, which are likely to be rejected in sovereignty.
Therefore, despite the horrible domestic data and swampy political environment in the UK, the sterling continues rising. The pound’s strength seems even more surprising if you look at the speculative positions on the pound. Over six consecutive weeks, hedge funds were exiting longs on the GBP, the market turned bearish on the British currency for the first time since December 2019.
What's the matter? Could the GBP/USD crash in March be so deep, that the bad news has been priced? I think it makes some sense. However, this is not the only reason for the pound’s resilience. When the economic situation is almost equally grim across the globe, markets are more fixated on swings in sentiment and risk appetite. Many investors think that the Brexit is a tiny reason compared to the coronavirus and recession, so they buy the sterling expecting the economies to reopen soon in the USA and UK, which should support the S&P 500 and press down the U.S. dollar.
Nonetheless, weak domestic data and continuous political uncertainty are the factors that limit the GBP/USD rally. Therefore, I still stick to my previous forecast suggesting the pair’s middle-term consolidation in the range of 1.22-1.26.
LiteFinance
Forex on M2 highway
Peculiarities of M2 pattern’s formation and use
It is believed that Forex quotes move within price channels. The price channels are plotted through extremums. If the formation of extremums is accompanied with MACD divergence, traders may get prepared for an upcoming trend reversal. A series of conditions must be observed for buying what is cheap or selling what is expensive. One of the patterns that use a combination of price channels, extremums and divergence is M2.
The pattern works best on the H1 time frame. The obligatory conditions for M2’s formation in a bearish market are:
1. Two decreasing minimums, with the second one located below the previous one;
2. The minimums must form on different trading days;
3. The previous trend must be at least 2 times bigger that the pattern itself.
If the conditions are observed, we can plot a price channel using the two minimums and a corrective maximum. MACD divergence and the channel’s width serve as confirming signals. It is desirable that the channel should be larger than the previous trend.
M2 pattern in EUR/JPY chart
LiteForex: M2: efficient Forex pattern
To buy EUR/JPY, pay attention to the bars closed above the upper limit of the key trading channel and to the retest of diagonal support with subsequent growth of quotes. A stop order should be placed at the level of the lower second minimum with a few points in reserve.
Opening a position based on M2 pattern
LiteForex: M2: efficient Forex pattern
To exit a long position, the authors suggest using Fibonacci channels and a position management method, according to which a trader should fix a part of profits upon reaching a new target level. It’s usually 20-40% of a trade’s volume, that’s why the M2 pattern is often called “20-40”. In fact, new extremums and reversal patterns constantly appear in the market. They help determine correctly the moment when a target is reached.
Setting targets based on M2 pattern
LiteForex: M2: efficient Forex pattern
As for our EUR/JPY example, on the H1 time frame there appeared signals to sell. They point to the end of the corrective movement and to the upcoming recovery of a downtrend. Is it possible to neglect the third obligatory condition that says the volume of a short-term trend should be at least 2 times bigger than the value of M2 pattern? It’s a trader who needs to make such a decision. And I think we may neglect that condition considering the sellers’ mass comeback.
When it comes to short positions, a stop loss is placed at the level of the last extremum too. In this case, I mean the level of the highest maximum with a few points in reserve. Price targets are set according to Fib channels. As the quotes of EUR/JPY move south, a trader fixes a part of profits.
Selling EUR/JPY based on M2 pattern
LiteForex: M2: efficient Forex pattern
In my opinion, the M2 pattern is efficient, but it’s rather a variety of the Anti-Turtles pattern. It was used by Larry Williams, Linda Raschke (Turtle soup, “Turtle soup+1”), Victor Sperandeo (2B trading system “Bottom/top”) and other successful traders.
Let’s pay tribute to the authors of M2 pattern: working with price channels is good for swing trading. What’s more, the more entry points we have the higher chance that the pattern will be efficient for us. We are all different and finding a strategy that suits us is sometimes harder than learning to profit from it.
Peculiarities of M2 pattern’s formation and use
It is believed that Forex quotes move within price channels. The price channels are plotted through extremums. If the formation of extremums is accompanied with MACD divergence, traders may get prepared for an upcoming trend reversal. A series of conditions must be observed for buying what is cheap or selling what is expensive. One of the patterns that use a combination of price channels, extremums and divergence is M2.
The pattern works best on the H1 time frame. The obligatory conditions for M2’s formation in a bearish market are:
1. Two decreasing minimums, with the second one located below the previous one;
2. The minimums must form on different trading days;
3. The previous trend must be at least 2 times bigger that the pattern itself.
If the conditions are observed, we can plot a price channel using the two minimums and a corrective maximum. MACD divergence and the channel’s width serve as confirming signals. It is desirable that the channel should be larger than the previous trend.
M2 pattern in EUR/JPY chart
LiteForex: M2: efficient Forex pattern
To buy EUR/JPY, pay attention to the bars closed above the upper limit of the key trading channel and to the retest of diagonal support with subsequent growth of quotes. A stop order should be placed at the level of the lower second minimum with a few points in reserve.
Opening a position based on M2 pattern
LiteForex: M2: efficient Forex pattern
To exit a long position, the authors suggest using Fibonacci channels and a position management method, according to which a trader should fix a part of profits upon reaching a new target level. It’s usually 20-40% of a trade’s volume, that’s why the M2 pattern is often called “20-40”. In fact, new extremums and reversal patterns constantly appear in the market. They help determine correctly the moment when a target is reached.
Setting targets based on M2 pattern
LiteForex: M2: efficient Forex pattern
As for our EUR/JPY example, on the H1 time frame there appeared signals to sell. They point to the end of the corrective movement and to the upcoming recovery of a downtrend. Is it possible to neglect the third obligatory condition that says the volume of a short-term trend should be at least 2 times bigger than the value of M2 pattern? It’s a trader who needs to make such a decision. And I think we may neglect that condition considering the sellers’ mass comeback.
When it comes to short positions, a stop loss is placed at the level of the last extremum too. In this case, I mean the level of the highest maximum with a few points in reserve. Price targets are set according to Fib channels. As the quotes of EUR/JPY move south, a trader fixes a part of profits.
Selling EUR/JPY based on M2 pattern
LiteForex: M2: efficient Forex pattern
In my opinion, the M2 pattern is efficient, but it’s rather a variety of the Anti-Turtles pattern. It was used by Larry Williams, Linda Raschke (Turtle soup, “Turtle soup+1”), Victor Sperandeo (2B trading system “Bottom/top”) and other successful traders.
Let’s pay tribute to the authors of M2 pattern: working with price channels is good for swing trading. What’s more, the more entry points we have the higher chance that the pattern will be efficient for us. We are all different and finding a strategy that suits us is sometimes harder than learning to profit from it.
LiteFinance
Oil got into trouble
One can get into history or trouble. Oil is in trouble
These are extraordinary times we live in! If in the 20th century, someone had said that the central banks’ interest rates and oil prices could fall into the negative area, he or she would have been laughed at. At the end of the second decade of the 21st century, financial markets are used to negative borrowing costs, and now the WTI spot rate is negative, - $37 per barrel! Of course, technical factors have played a part, but the drop in the USCrude into the negative is natural form a fundamental point of view either. There is so much oil, and nobody wants it anymore.
Trade session on April 20 will get into history. The oil crash has never been so sharp. The WTI price is below zero for the first time in history. Traders, who hold the oil futures at the time of their expiration, have two ways out. They can either physically deliver the asset or fulfill the contract obligations through a reverse transaction. Having no storage to hoard oil, most holders of contracts for May have selected the second way, which resulted in mass sales.
Daily changes in WTI rates
Source: Financial Times.
Oil negative prices revealed the state of the modern oil market in the era of the pandemic, the most important commodity in the world is losing its value, as excess supply results in the filling of reservoirs, pipelines, and tankers. There is less and less storage for oil, which should result in the oil production cut. According to the US Energy Information Administration. Crude stockpiles at Cushing have jumped 48% to almost 55 million barrels since the end of February. The hub has a working storage capacity of 76 million barrels, and it will be completely full by May if the current production pace is kept.
UnlikeWTI, Brent is a seaborne crude allowing traders to easily ship it to areas of higher demand. However, the fact that there are fewer and fewer places to store it, increases the number of floating tankers full of oil and presses oil prices down.
Obviously, the OPEC + agreement to cut global crude output by 9.7 barrels per day hasn’t satisfied the market. If the USA, Russia, and Saudi Arabia can’t stabilize the oil market, the market will force to do it. First of all, through a cut of the US crude oil production. In the week through April 17, according to Baker Hughes data, the number of active oil rigs in the US has dropped the most since 2015, the value has decreased by more than a third over the past month. It must be followed by curtailed US supply. Besides, following the price drop, Saudi Arabia is willing to immediately fulfill the obligations under the OPEC + agreement to cut global oil production. Saudi Arabian Oil Co. has said it will cut output from 12.3 million barrels per day to 8.5 million barrels a day. Donald Trump will consider reducing oil imports from Saudi Arabia, as “We certainly have plenty of oil,” said the US president.
Crude oil rigs and crude oil production in the USA
LiteForex: USCrude forecast for 21.04.2020
Source: Trading Economics
The super-contango existing in the oil market signals that, in the medium-term and long-term outlook, both Brent and WTI will tend toward a V-shaped recovery. On the one hand, along with the global economic rebound, the demand for oil will also be rising. On the other hand, crude oil production will be cut in the USA and other G20 countries. This gives a good chance to sell the USD/CAD, USD/NOK, and USD/RUB on the rise. We only need to live through a short-term shock.
One can get into history or trouble. Oil is in trouble
These are extraordinary times we live in! If in the 20th century, someone had said that the central banks’ interest rates and oil prices could fall into the negative area, he or she would have been laughed at. At the end of the second decade of the 21st century, financial markets are used to negative borrowing costs, and now the WTI spot rate is negative, - $37 per barrel! Of course, technical factors have played a part, but the drop in the USCrude into the negative is natural form a fundamental point of view either. There is so much oil, and nobody wants it anymore.
Trade session on April 20 will get into history. The oil crash has never been so sharp. The WTI price is below zero for the first time in history. Traders, who hold the oil futures at the time of their expiration, have two ways out. They can either physically deliver the asset or fulfill the contract obligations through a reverse transaction. Having no storage to hoard oil, most holders of contracts for May have selected the second way, which resulted in mass sales.
Daily changes in WTI rates
Source: Financial Times.
Oil negative prices revealed the state of the modern oil market in the era of the pandemic, the most important commodity in the world is losing its value, as excess supply results in the filling of reservoirs, pipelines, and tankers. There is less and less storage for oil, which should result in the oil production cut. According to the US Energy Information Administration. Crude stockpiles at Cushing have jumped 48% to almost 55 million barrels since the end of February. The hub has a working storage capacity of 76 million barrels, and it will be completely full by May if the current production pace is kept.
UnlikeWTI, Brent is a seaborne crude allowing traders to easily ship it to areas of higher demand. However, the fact that there are fewer and fewer places to store it, increases the number of floating tankers full of oil and presses oil prices down.
Obviously, the OPEC + agreement to cut global crude output by 9.7 barrels per day hasn’t satisfied the market. If the USA, Russia, and Saudi Arabia can’t stabilize the oil market, the market will force to do it. First of all, through a cut of the US crude oil production. In the week through April 17, according to Baker Hughes data, the number of active oil rigs in the US has dropped the most since 2015, the value has decreased by more than a third over the past month. It must be followed by curtailed US supply. Besides, following the price drop, Saudi Arabia is willing to immediately fulfill the obligations under the OPEC + agreement to cut global oil production. Saudi Arabian Oil Co. has said it will cut output from 12.3 million barrels per day to 8.5 million barrels a day. Donald Trump will consider reducing oil imports from Saudi Arabia, as “We certainly have plenty of oil,” said the US president.
Crude oil rigs and crude oil production in the USA
LiteForex: USCrude forecast for 21.04.2020
Source: Trading Economics
The super-contango existing in the oil market signals that, in the medium-term and long-term outlook, both Brent and WTI will tend toward a V-shaped recovery. On the one hand, along with the global economic rebound, the demand for oil will also be rising. On the other hand, crude oil production will be cut in the USA and other G20 countries. This gives a good chance to sell the USD/CAD, USD/NOK, and USD/RUB on the rise. We only need to live through a short-term shock.