Weekly Digest – Will the USA-China trade deal propel equity markets to fresh highs, taking USD with them?

The phrase; “the markets can stay irrational longer than you can stay solvent” is attributed to the economist John Maynard Keynes, who was also the pioneer of various Keynesian market theories, including his stimulus theory, often misquoted and misunderstood by many financial, market-commentators. Keynes’ infamous phrase is likely to be quoted over the coming weeks, if the irrational, market, exuberance we’ve recently witnessed continues.

 The phrase “Irrational exuberance” is a phrase originally used by the Fed chairman at the time, Alan Greenspan, in a speech given at the American Enterprise Institute during the dot-com bubble of the 1990s. The phrase was interpreted as a warning that stock markets might be overvalued. During the recent melt-up of global equity markets, ZuluTrade Investors and Traders have occupied an enviable position as the exuberance gripped Investors; the increase of confidence leads to increased trading volume, which causes volatility in our forex markets to rise, offering up clear FX trading opportunities. If equity markets rise or fall, the community can still profit.

 Unlike traditional stock-market Investors, who buy and hold equities hoping for continuous rises in price, ZuluTrade’s community is comfortable either buying or selling: FX, equity and commodity markets. Because leading ZuluTrade Traders have developed skills whereby they’re comfortable being long or short when they spot trading opportunities, they’re in the ideal position of being able to thrive in all trading conditions.

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 A text book example of how to profit from increased activity and volatility, was illustrated during last week’s trading sessions, when the U.S. dollar rose due to confidence increasing in both the USA economy and markets. Risk-on sentiment increased as a direct consequence of the USA and Chinese government administrations agreeing to part 1 of a trading pact. GBP/USD, EUR/USD and AUS/USD sold off sharply, whilst USD/JPY registered gains of circa 0.60%. Meanwhile, chatter has begun in investment circles that the Dow 30 index, DJIA, could finally breach the 30,000 level, after breaking the 29,000 level during the week.

 The Chinese-USA trading pact was given a recent boost due to USD falling versus China’s YuanUSD/CNH has fallen by circa -2% monthly, a perfect situation after China agreed to buy an extra $200b of USA goods annually as part of the trading pact. The U.S. dollar becoming significantly weaker versus Yuan is beneficial for USA manufacturers and exporters, because the goods become cheaper to export directly to China.

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In theory, this bias should improve the USA
 balance of payments deficit versus China, which has reached an alarming level over recent years. A situation which President Trump has objected to since his appointment.

 As can be clearly observed on the above daily time-frame, the USD/CNH sell-off has been significant and perfectly timed with USA-China trade relations beginning to thaw while combining with the construction of the initial trading arrangement. As the globe’s reserve currency, USD has the most to gain from increased global trade and economic certainty, based on historical precedents. If USD is rising versus many peers, but experiencing a secular fall versus its main trading partner, China, then USA economic planners in the Trump administration will call it a win.

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 Equity Traders begin to voice concerns

 Any market-analysts calling a market high may be acting prematurely as Traders and analysts cannot predict with any degree of certainty, what impact the China-USA pact will have on global market sentiment over the short-term. What can’t be denied is that certain analysts and “irrationally bullish Investors”, who’d like to witness equity indices continue to take out record highs, are becoming increasingly nervous regarding the justification for higher highs. A recent and fascinating article points out that over 87% of stocks trading on the SPX are now above their 200 DMA. The last time such a phenomenon occurred was in 2014 and the level only lasted a day.

  What forex Traders and Investors can learn from the Tesla price surge

 Timing is essential when we’re looking to extract profit from the financial markets, an excellent example of poor timing, by what’s termed a “short-squeeze”, is illustrated by Traders who’ve attempted to short Tesla shares over recent months.  After slumping below $180 a share in mid 2019, the company turned a corner after declaring a profit in Q3 2019. Since which time the positive news regarding the electric carmaker has continued unabated; a giga-factory to open in Germany, orders of the Model 3 rolling off assembly lines in China and positive cash flow, has caused the stock to rise to a recorded high over $530.

 The Tesla situation offers up an interesting comparison to forex market Traders; how many FX Traders would stay short beyond the irrational period and risk harming their solvency and ability to trade? Competent and profitable Traders would have stops in place to prevent incurring significant losses. They’d also ensure they only risk a small percent of their account per trade, they wouldn’t risk their account on one trade, or encourage any followers or copy-trade investors, to copy any reckless, trading, behaviour.

 To refer back to the earlier Keynes and Greenspan quotes; it’s advisable to remain solvent, when markets exhibit signs of irrational exuberance. Not only can you remain solvent, you can then take advantage of the conditions to profit. Using the ZuluTrade proprietary tool ZuluGuard can help Investors avoid unnecessary risk during volatile trading periods.

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Sterling faces a major test over the coming days and weeks

 GBP/USD will rise and fall in direct correlation to the impending January 31st exit of the U.K. from the European Union. According to several sources the Bank of England is already primed to lower the interest rate in the last policy committee meeting of the month. The central bank may also use forward-guidance to announce the level of quantitative easing they’re prepared to indulge in during 2020, if the U.K. fails to complete a trade agreement before the transition period ends in December 2020.

 The initial general election euphoria, which saw sterling rise versus its major peers has petered out. GBP/USD is trading at levels last seen at the end of December 2019, down -0.60% monthly. The major pair is trading close to the 1.300 handle and close to the 200 DMA, also sited close to the 1.300 critical round number. Sterling’s price was hit last week by the U.K.’s most recent retail sales figures falling by -0.6%, annual inflation falling to 1.3% and monthly GDP falling to -0.4%. These results came in below economists’ forecasts and have added more credence to the theory that the BoE will have to get ahead of the curve and lower the U.K. base rate, in order to avoid a Brexit induced recession.

 Calendar events likely to impact on forex markets this week

 Monday 20 January might begin with positive U.K. news as the latest U.K. house prices (selling) are published by Rightmove. The world economic forum begins in the afternoon, an annual week long event, which can impact on safe haven currency values, such as the Swiss franc. In late evening the president of the ECB, Christine Lagarde, will deliver a speech.

 Tuesday 21 January events begins with the latest BOJ report published at 3:00am U.K. time, which could impact on the value of Yen versus its peers. Sterling may come under pressure from 9:30am onwards, if the unemployment claimant count number has increased and earnings growth has fallen. At 10:00am a raft of ZEW readings for Germany and the wider E.Z. could affect the value of the euro, if the metrics miss or beat the optimistic forecasts.

 Wednesday 22nd January focuses in the morning session on the U.K. retail figures, government borrowing and CBI industrial trends orders. The New York session could witness Canada’s dollar experiencing change depending on the latest inflation figures for the Canadian economy. CAD will also come under intense scrutiny as the Bank of Canada (BOC) announces its rate setting decision, at 15:00pm. Currently at 1.75% there is no expectation for a rate change. However, the preceding inflation data could effect analysts’ longer term CAD projections. Yen could be impacted by the latest Japanese export and import data published at 23:50am.

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 Thursday 23rd January begins with Australian unemployment data published at 00:30am, a result which could impact on the value of AUD versus its main peers. At 12:45pm the ECB announces its interest rate decision. As always, it’s not necessarily the actual forecast decision to keep the rate at 0.00%, which can alter the value of the currency in question. It’s the accompanying narrative, outlined by the central bank at 13:30pm, which could alter the direction of price.

 The price of USD might be affected by the jobless claims report, the price of WTI oil might be affected by the crude inventories level announced at 16:00pm. Shortly before the Sydney session, the latest New Zealand CPI figure may impact on the value of NZD.

 Friday 24th January initially focuses on various IHS Markit PMIs for the Japanese economy, results which could alter the price of JPY versus its main peers. The subject of PMI results extends throughout the London-European session as various sector metrics for: France, Germany, Italy and the U.K. are published from 9:00-9:30am. The values of both EUR and GPB will be tested and analysts will focus primarily on the U.K. manufacturing and services PMIs, due to the Brexit date coming into sharp focus. Various USA PMIs are published during the New York trading session, as are the latest retail figures for Canada.

Disclaimer

The views expressed do not constitute investment or any other advice /recommendation /suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Copy Trading Platform and do not constitute an offer or invitation to anyone to invest or trade.