Normal functioning markets are no longer a reality, as the most recent weeks have shown. Markets no longer care about fundamentals or technical patterns all that much – instead, they trade on central bankers’ words, and they are largely influenced by OPEC ministers’ headlines. These are times in which the world’s most experienced investors and hedge fund managers are trying to preserve capital, more than growing it, in a time where not losing money is seen as a great result. Technical traders are being hammered by flip-flopping central bankers’ statements, and fundamental investors can only place strong bets considering long-terms scenarios.
So how can one trade despite the flip-flopping activist central bankers of our days, and the damage that they do with each contradictory statement? That’s a question that Ridge Capital Markets tries to answer here, taking as an example the economic calendar of today.
The EUR: Today we will learn about several economic indicators coming from Europe. It should be said that Europe, even with a weak EUR, cheap oil, cheap commodities and a hyper-dovish central banker, cannot get its economy going. Over-regulation, over-taxation, over-bureaucracy, over-aging, over-leveraging, over-Brexiting and over-immigration-accepting are simply making Europe an impossible continent for prosperity to ever return to.
While we do not know which economic data from Europe we will see today, Ridge Capital Markets is bearish on the EUR. We simply do not see how Draghi can stay put while seeing it as relatively strong against the USD as it has been in the recent weeks, and we believe that, even if not on a very short-term timeline, Draghi and Europe’s problems will take care of bringing the EUR far lower. So shorting EUR/USD seems a fundamentally-backed sound trade that will pay off, even if not tomorrow.
The USD: Our recent bullish calls about the USD have aggressively bumped against Yellen’s statements. As we have mentioned before, Janet Yellen came out recently as a dovish Federal Reserve President, talking the USD lower and suggesting that the world faces too many risks for the Fed to go as fast in hiking rates as she originally promised. At Ridge Capital Markets, while we see the market interpreting this as bearish tone for the USD, we actually see that the trouble ahead is so heavy, that the Fed is openly speaking about it, expressing its concerns. While not hiking rates as of yet, the Fed is nevertheless keeping interest rates in positive territory, and has not backed away from a rate-hike scenario. This should support the USD, instead of bringing it down.
Furthermore, there is a lot of news about dollar shortage in terms of funding in emerging markets. The dollar-denominated debt in emerging markets is, in our opinion, something that is yet to produce its impact. Plus, as the trouble ahead unfolds, the USD is likely to be seen as a safe haven. So we take the recent USD weakness as a contrarian opportunity to go long the USD, including against the EUR, and also against several commodity and oil currencies (there is no economy or demand to support the recent rally in commodity and oil currencies, so we expect a reversion of this rally that will benefit the USD).
The GBP: As voices for Brexit grow, as the mismanagement in Europe grows in support of a pro-Brexit sentiment, and as the migration crisis in Europe sparks even more fears about where Europe is heading and what that can mean for the UK, we believe that the GBP will reverse its recent upside against the USD. Regardless of how the GBP may be affected in the long-term by a Brexit, if it indeed happens, we believe that the current uncertainties about what will happen and the general very bad news coming from Europe, namely from the Eurozone, will drive the GBP lower. Based on this view, we remain bullish on the USD/GBP currency pair.
In short, oil and commodity markets, as well as the forex market, are currently being deeply impacted by central bankers’ words, more than anything else. Still, while these words may drive some assets up and others down, at the end of the day when reality sets in, the market sees a rush to the exits in the overbought assets – such as oil, EUR and emerging currencies right now – and a rush to the entrances in the oversold assets – such as the USD right now.
So, if we can no longer determine what the central bankers will say next, Ridge Capital Markets believes that traders will do better to focus on what will ultimately bring fair prices back – fundamentals and also technical patterns, and not just words.