AUD/USD gains momentum on Tuesday as new USD selling materializes. The Dollar is affected by bets on less aggressive Fed rate rises and a rebound in risk sentiment. The COVID-19 problems in China should stop the positive developments and hinder Australian efforts.
On Tuesday, there is some dip buying in the AUD/USD pair at the 0.6640 level, which stays in a purchasing mood into the early European session. Spot prices are back above the 0.6700 level thanks to the upward intraday movement, aided by the resurgence of new US Dollar selling.
The AUD/USD pair is given some support due to several variables hindering Greenback’s ability to profit from the goodish overnight recovery from the crucial 200-day Simple Moving Average (SMA). Market expectations for a modest 50 basis point rate increase in December were reinforced by a dovish evaluation of the November FOMC meeting minutes published last week. This weakens the safe-haven USD and helps the risk-averse Aussie, combined with a minor improvement in the global risk mood.
However, the deteriorating COVID-19 scenario in China should temper any bullish market movement and act as a drag on the Australian Dollar, which serves as a proxy for China. In reality, China recorded a record-breaking number of COVID-19 infections on Monday, and the enactment of additional restrictions sparked a wave of unrest in several places. This intensifies concerns about a further downturn in economic activity and might affect market sentiment in the future.
Furthermore, the overnight hawkish remarks from significant FOMC members should restrict the Dollar’s fall and further limit the AUD/USD pair’s gain. It is important to remember that James Bullard, the president of the St. Louis Federal Reserve, John Williams, and Lael Brainard, the vice chair of the Fed, all reaffirmed that there would be more rate increases. Thus, bold bullish traders should be cautious and take positions for future profits.
However, the AUD/USD pair seems to have ended a two-day losing trend and is still at the whim of USD price movements. The publication of the US Consumer Confidence Index by the Conference Board is currently anticipated by market players as a potential catalyst later in the early North American session. However, attention will continue to be on Wednesday’s speech by Fed Chair Jerome Powell and this week’s important US economic data, such as the NFP report on Friday.
For all beginning traders, it is essential to comprehend the fundamentals of going long or short forex. Whether a trader believes a currency will appreciate (go up) or depreciate (go down) in relation to another currency determines whether they take a long or short position. Defined, a trader will “Go Long” the underlying currency when they believe it will increase, and they will “Go Short” the underlying currency when they believe it will decrease.
Learn more about long and short positions in forex trading, as well as when to employ them, by reading on.
WHAT DOES A POSITION IN FOREX TRADING MEAN?
A person or business that owns a certain quantity of a currency and is exposed to that currency’s swings versus other currencies is said to be in a forex position. It may be a short or lengthy posture. Three qualities define a forex position:
The base currency pair
The path (long or short)
The size
Trades may be made in several currency pairings. They might go long if they believe the currency’s value will increase. Their account equity and the necessary margin would determine the magnitude of the stake they would take. Traders must use the proper level of leverage.
WHAT DOES IT MEAN TO HAVE A LONG OR SHORT FOREX POSITION?
In forex, taking a long or short position is betting on the value of a currency pair to rise or fall. The most fundamental part of dealing with the markets is deciding whether to go long or short. A trader who goes long will have a positive investment balance in an asset with the expectation that it will increase in value. When short, they will have a negative investment balance with the belief that the asset will lose value and be resold at a later date for a lower price.
WHAT IS A LONG POSITION, AND WHEN SHOULD IT BE TRADED?
A transaction that has been conducted with the expectation that the underlying instrument would increase is known as a long position. For example, a trader who executes a purchase order holds a long position in the USD/JPY underlying asset. Here, they anticipate an increase in the US dollar value relative to the Japanese Yen.
For instance, a trader who purchased two lots of USD/JPY has a long position in USD/JPY of two lots. The size is two lots, the underlying is USD/JPY, and the direction is long.
To enter long positions, traders search for purchase indications. Traders employ indicators to search for buy and sell signals so they may join the market.
The descent of a currency to a level of support is an illustration of a buy signal. In the graph below, the USD/JPY declines below 110.274 but repeatedly finds support. When the price falls to this level, 110.274, it acts as a support level and gives traders a buy signal.
The FX market has the benefit of trading almost 24/7. Because there is higher liquidity during extensive trading sessions like New York, London, and sometimes Sydney and Tokyo, some traders choose to trade during those periods.
WHAT IS A SHORT POSITION, AND WHEN SHOULD IT BE TRADED?
In many ways, a short position is the polar opposite of a long position. Trading participants anticipate that the price of the underlying currency will decline when they take a short position (go down). Shorting a currency refers to selling the underlying asset with the anticipation that its value will decline over time, enabling the trader to repurchase it later at a lower price. Profit is what separates the greater selling price from the lower purchase price. As a concrete example, a trader who shorts USD/JPY is selling USD to purchase JPY.
To enter short positions, traders search for sell indications. When the price of the underlying currency hits a level of resistance, this is a popular sell signal. A price level the underlying has had difficulty breaking above is referred to as a level of resistance. In the graph below, the USD/JPY rises to 114.486 and then struggles to increase. When the price hits 114.486, this level turns into a resistance level and provides traders with a sell signal.
Although if an opportunity arises, traders may execute their transaction essentially whenever the forex market is open, some traders choose to trade just during the big trading sessions.
Nobody enjoys losing, but success requires the ability to accept a loss. Just speak with a few of the most successful hedge fund managers in history. It isn’t about being correct, George Soros once remarked; it’s about how much money you earn when you’re right against how much money you lose when you’re wrong.
Stanley Druckenmiller, a very successful student of Soros, once said in an interview that he believes he is correct about 60% of the time. He is thus mistaken 40% of the time. Another billionaire macro icon, Paul Tudor Jones, has said that he is wrong approximately as frequently as he is correct, but he agrees with Soros that the sum of one’s wins is more important than the sum of one’s losses.
This implies that many of the world’s most successful hedge fund managers are often mistaken. And they don’t care since it is just crucial in terms of the game and not what is most important. What matters to them is risk management for their concepts and the asymmetry between their winning and failed ideas.
Accepting loss is, of course, easier said than done since it is human nature to loathe loss; thus, absorbing losses regularly may be difficult to swallow for many. However, it would help if you embraced it since it is a necessary component of the game and what will ultimately keep you playing. Additionally, you may move on to the next possible winner more quickly the quicker a concept reaches its breaking point.
Losses are not all made equal. When you consistently suffer losses or suffer losses that are too large in comparison to your victories, this should raise warning signs. A loss may result from market circumstances unfavorable to your trading strategy or style, or it may be a sign that you are not regularly adhering to your trading guidelines.
Take a critical look at what you are doing while going through a losing streak (drawdown). Check your transaction record and diary to evaluate whether you are trading according to plan or veering off course. Determine what you need to do to go back on track if you see that you are veering off course. Losing in this situation is unacceptable since it was your fault.
Although you should be adaptable to changing market circumstances, if you are following a sound, time-tested approach across many cycles, you should still be successful. This is especially true if you are following your plan and the market is not supportive of your strategy. Here, consistency is crucial, as is sticking with the plan despite setbacks.
Summary:
The company’s most delicate don’t emphasize being correct all the time and recognize that accepting losses is part of the game.
The most critical factors are asymmetrical win/loss ratios and minimizing the risk of winning versus losing ideas.
But not all losses are the same; you need to know when losing is due to changes in the market and when it results from straying from your trading strategy.
In this article, we have covered the highlights of global market news about the USD/CNH, AUD/USD, GBP/USD and USD/JPY.
USD/CNH Price Analysis: Fades off weekly support at 7.2000.
Early on Thursday morning in Europe, USD/CNH reverses the day’s loss from the record high despite recent inactivity around 7.1880.
As a result, the offshore Chinese yuan (CNH) pair bounces off a horizontal region made up of many lows noted since Monday while RSI remains stable (14). The pair’s upward momentum is hampered by negative MACD indications and the buyer’s failure to control the price above the psychological level of 7.2000.
However, it should be noted that any retreat movements below the indicated immediate support around 7.1460-50 are expected to be met with resistance from an upward-sloping support line from September 13 that is, as of the time of the press, near 7.1280.
The vicinity of 7.1125 on the 50-SMA level also functions as a downward filter.
The swing high at 7.1060 on September 22 and the psychological magnet at 7.1000 may serve as the final line of defence for the USD/CNH buyers even if the quote falls below 7.1125.
As an alternative, recovery advances must continue above the 1.2000 level in order to persuade buyers to go for the several obstacles close to 1.2500.
After that, attention will turn to the recently flashed record high at 7.2600 and the 7.3000 psychological magnet.
AUD/USD: Risk-aversion, weaker be fore the US GDP, Australian inflation sends bears to the sub-0.6500 zone.
As traders wait for new information to support recent retracement movements, the AUD/USD currency pair narrows intraday losses around 0.6490 after recently rebounding from daily lows.
Nevertheless, the Australian dollar was under pressure early on Thursday due to disappointing readings of Australia’s monthly Consumer Price Index (CPI) and the risk-off atmosphere. In order to support the previous day’s recovery from the two-year low, the same joined stronger US Treasury rates.
According to the Australian Bureau of Statistics’ (ABS) first monthly CPI statistics, headline price pressure decreased from 7.0% in July to 6.8% in August. The Reserve Bank of Australia (RBA) recently made some cautionary words in an effort to chastise AUD/USD purchasers after the publication of the data.
The risk-on sentiment of Wednesday and China’s measures to boost domestic markets in an effort to allay concerns about a recession seem to support the recent recovery in US Treasury rates as well as the US currency. The People’s Bank of China (PBOC) intends to issue 2.5 trillion yuan in government bonds in Q4 and may raise the onshore yuan fix for the first time in nine days along these lines.
GBP/USD trades sideways around 1.0800, with attention shifting to US/UK GDP figures.
In the Tokyo session, the GBP/USD pair is performing mediocrely. After falling from the important threshold of 1.0900, the asset has since turned sideways in a constrained range of 1.0782-1.0800. A failed effort to breach the barriers at 1.0900 caused the cable to correct, although a bullish impulsive advance after the end of a pullback cannot be ruled out.
The unexpected decision by the Bank of England (BOE) to implement a bond-purchase programme in an effort to stabilize the financial markets has begun to manifest its effects. It is important to note that risk-sensitive currencies are doing well right now since the US dollar index (DXY) has reached an erratic high of around 115. Sterling’s gains, nevertheless, remain modest when compared to those of other currencies.
To protect the economy from the financial instability, the BOJ would buy long-dated bonds totaling GBP 5 billion in a series of purchases over a 13-day period. Simply increasing liquidity might have a huge positive impact when people in the UK are already feeling the effects of greater price pressures and BOE officials are already working tirelessly to contain inflation.
USD/JPY Price Analysis: Inventory adjustment is underway, with the 50-EMA serving as a major support.
After falling to a level close to 144.00, the USD/JPY pair has now begun to recover. The asset is broadly probing the downward breach of the charted area, which is displayed in a constrained range between 144.40 and 144.90. The upward trend is showing clear and obvious signs of weariness, and the dollar bulls may soon relinquish control.
The major is auctioning in an inventory adjustment procedure on a four-hour scale, indicating a somewhat lengthier consolidation time. It is crucial to note that institutional investors are accumulating or distributing funds as part of the adjustment process. Given that the asset is showing symptoms of momentum loss, the odds are in favor of an inventory distribution.
The 50-period Exponential Moving Average (EMA), which is now around 113.80 at the time of writing, has served as a significant safety net for the supporters of the dollar. A volatile occurrence once interrupted the peace, but fortunately it was overstepped again. The dollar will decline if the 50-EMA continues to capitulate.
The long-term trend is still strong, as seen by the 200-EMA scaling higher at 141.20.
Please click herefor the Market News Updates from 28 September, 2022.
The duo slips and once again violates parity. On Monday, the dollar seems bought with rising US rates. Next up in ECB-speak is EMU Construction Output. At the start of the week, sellers take back control of the European currency and push EUR/USD down below the zone of psychological parity.
The EUR/USD will next find support near the 2022 low.
The weak performance in the risk complex and renewed purchasing activity around the dollar ahead of the Fed’s interest rate decision on Wednesday have caused the EUR/USD to reverse three straight daily advances so far and concentrate on the downside.
According to CME Group’s Fed Watch Tool, the likelihood of the latter is now hovering around 80%, while the likelihood of a 100 bps rate increase has recently lost steam.
The 10-year Bund rates on the German debt market are continuing their slow, multi-week uptrend and have so far flirted with the 1.80% range.
Construction Output in the Greater Euroland will be the sole release on the euro docket to be backed by statements by ECB officials E. Fernandez-Bollo, L. De Guindos, and A. Enria. The NAHB index due date is followed by the 3-month and 6-month Bill auctions in the US.
What should I look for in the EUR?
Following increased caution and dollar purchasing ahead of the FOMC meeting, the EUR/USD stays under pressure and falls below the parity level (Wednesday).
The Fed-ECB difference, geopolitical concerns, fragmentation issues, and market activity surrounding the euro are now anticipated to closely follow dollar dynamics.
Concerns about a possible regional recession are now on the rise, and these concerns for the single currency are exacerbated by indicators of confidence that are declining and a probable slowdown in certain fundamentals.
The ECB’s ongoing cycle of rate hikes is one of the pressing concerns on the back burner. late September elections in Italy. Risks of fragmentation exist when the ECB normalizes its monetary policies. Impact of the conflict in Ukraine and the ongoing energy shortage on the prognosis for inflation and growth in the area.
EUR/USD Levels To Monitor
The pair is now down 0.32 percent at 0.9979, and a break of 0.9944 (the week’s low on September 16) would lead to 0.9863 (2022 low on September 6) and eventually 0.9859. (December 2002 low). On the other side, the first resistance level appears at 1.0197 (monthly high September 12), then 1.0202 (high August 17), and finally 1.0310. (100-day SMA).
Human error is widespread in the forex market and often results in well-known trading blunders. These trading errors often occur, especially with new traders. Having an awareness of these mistakes might make traders more effective in their forex trading. Despite the fact that all traders, regardless of experience level, make trading errors, being aware of the reasoning behind them may help to stop trading obstacles from becoming out of control. The top 10 trading errors and solutions are listed in this article. These errors are a part of the ongoing learning process, and traders should get used to them to prevent repeating blunders.
Consider these 10 common trading blunders you must avoid before starting a forex trading strategy since they account for a large share of losing transactions.
MISTAKE 1: NO TRADE PLAN
Without a trading plan, traders’ approaches are often haphazard since their strategies are inconsistent. Trading strategies have established rules and methods for each deal. This stops traders from acting irrationally in response to unfavorable fluctuations. Sticking to a trading strategy is important since straying from it might result in traders entering uncharted waters in terms of trading style. This ultimately leads to trading errors brought on by unfamiliarity. Testing trading methods on a practice account is recommended. This may be used to a real account if traders are confident and comprehend the technique.
MISTAKE 2: EXCESSIVE LEVERAGING
The use of borrowed funds to establish forex trades is referred to as leverage or margin. This function reduces the amount of personal cash needed for each transaction, but there is a genuine risk of increased loss. Leverage amplifies earnings and losses, therefore controlling the amount used is essential. Find out more about forex market leverage.
Brokers are crucial to their clients’ protection. Many brokers provide excessively high leverage ratios, such 1000:1, which greatly increase the risk to both inexperienced and seasoned traders. Regulated brokers will restrict leverage to reasonable levels under the direction of reputable financial authorities. When choosing the right broker, this should be taken into account.
MISTAKE 3: INSUFFICIENT TIME HORIZON
The trading method being used and time invested go hand in hand. Understanding the strategy will enable you to determine the estimated time frame utilized for each transaction since every trading method adapts to different time horizons. For instance, whereas positional traders prefer the longer time periods, scalpers focus on the shorter time frames. Investigate the forex trading methods for various time frames.
MISTAKE 4: Insufficient Research
In order to implement and carry out a certain trading strategy, forex traders must make the necessary research investments. When markets are studied properly, fundamental effects, market patterns, and entry/exit timing may all be revealed. The more one understands the product itself, the more time is spent on the market. There are minute differences in how the various pairings operate inside the forex market. To thrive in the target market, these variations need to be carefully examined.
Avoid reacting to media coverage and unfounded advise without first checking the information with the approach and analysis you’ve used. This often happens to traders. This is not to say that these suggestions and press releases shouldn’t be taken into account; rather, it means that they should be thoroughly researched before being put into practise.
MISTAKE 5: BAD RISK-TO-REWARD RATIOS
Traders often ignore favorable risk-to-reward ratios, which may lead to poor risk management. A good risk-to-reward ratio, such as 1:2, means that the trade’s potential profit is twice as great as its possible loss. A long EUR/USD trade with a 1:2 risk-to-reward ratio is seen in the chart below. With a stop at 1.12598 (10 pip) and a limit of 1.12898, the trade was initiated at a level of 1.12698. (20 pips). The Average True Range (ATR), which bases entry and exit points on market volatility, is a useful indicator for identifying stop and limit levels in forex trading.
A ratio in mind may help traders moderate their expectations, which is crucial since, according to extensive research by DailyFX, poor risk management has emerged as the most common error traders make.
Risk-to-reward ratio for EUR/USD is 1:2.
MISTAKE 6: TRADING BASED ON EMOTION
Trading decisions made out of emotion are often illogical and ineffective. After losing transactions, traders typically start new positions to make up for the loss. These trades often lack any technical or fundamental educational support. Since trading strategies are designed to prevent this kind of trade, they must be strictly adhered to.
MISTAKE 7: INACCURATE TRADING SIZE
Every trading strategy must take trade size into account. Many traders trade in sizes that are inappropriate for their account sizes. Thereafter, risk grows and account balances may be lost. DailyFX advises putting no more than 2% of the entire value of the account at risk. For instance, if the account has $10,000 in it, a maximum risk of $200 per transaction is advised. The strain of overexposing the account would be relieved if traders follow this basic guideline. Overexposing the account to one single market carries a very high risk.
MISTAKE 8: TRADING ON MULTIPLE MARKETS
Trading on a small number of marketplaces allows traders to amass the required expertise to master these markets without even touching the surface of a small number of markets. Due to a lack of knowledge, many newbie forex traders attempt to trade on various markets without success. If necessary, this should be carried out using a demo account. Trades without the required fundamental or technical reason are often made by traders as a result of noise trading (irrational trading) on a variety of marketplaces.
For instance, the 2018 Bitcoin mania attracted many noisy traders at the wrong moment. Sadly, a lot of traders joined the market at the “FOMO or Euphoria” period of the market cycle, which led to huge losses.
MISTAKE 9: FAILURE TO REVIEW TRADES
The regular usage of a trading log will enable traders to recognize both successful and potential strategy weaknesses. The trader’s general comprehension of the market and future strategy will improve as a result. Reviewing transactions reveals both mistakes and positive elements that need to be continually emphasized.
MISTAKE 10: CHOOSING AN UNSUITABLE BROKER
Choosing the best CFD broker might be challenging since there are so many of them available worldwide. Before creating an account with a broker, financial security and legal compliance are required. The broker’s website should make this information easily accessible. To avoid laws in more stringent nations like the US (Commodity Exchange Act) and the UK, many brokers are licensed in nations with lax rules (FCA).
Safety is the first priority, but selecting a broker also involves considering the broker’s platform’s comfort level and simplicity of use. Prior to trade with actual money, you should allow yourself enough time to get familiar with the platform and costs.
MISTAKES IN FOREX TRADING: A SUMMARY
Before engaging in any kind of live trading, it’s essential to have the appropriate theoretical framework for forex trading. Future traders will profit from taking the time to comprehend the dos and don’ts of FX trading. All traders will ultimately make mistakes, but it’s important to train and develop anticipated behavior in order to reduce errors and prevent repeat crimes. This article’s main emphasis is on maintaining a trading strategy with appropriate risk management and a workable reviewing mechanism.
In this article, we have covered the highlights of global market news about the Gold Prices, AUD/USD, USD/JPY and the Canadian Dollar.
Gold prices are in danger as FOMC wagers increase. U.S. retail sales could cause a crash.
During Wednesday’s New York trading, gold prices dropped under the 1,700 level, putting the yellow metal in danger of a potentially jarring decline. The US dollar and short-term Treasury yields were helped by the US inflation data, which also sent Federal Reserve rate hike bets soaring. The week will be concluded by the US retail sales report for August, which is due at 12:30 GMT on Thursday, and the September consumer sentiment report from the University of Michigan, which is due on Friday.
Those occurrences could be crucial for bullion prices because they will probably affect FOMC market pricing. A 100 basis point rate increase is one in four likely, according to Fed funds futures. If those odds rise, gold’s value as a financial asset will decrease. The Fed wants to achieve a soft landing, but it is more concerned with controlling inflation. However, a robust overall economy would mitigate the effects of higher interest rates. The FOMC would have more flexibility as a result.
However, a report on retail sales that was stronger than anticipated would probably be bad news for gold prices. Analysts predict that the headline figure will show a 0.1% decline from July, but that is only because gas prices are declining. The figure to pay attention to is one that does not include gasoline or vehicles. According to the Bloomberg consensus prediction, the price will rise by 0.5% from July. The initial Michigan consumer sentiment index is anticipated to increase to 60.0 on Friday from 58.2 in August. Inflation expectations are also covered in the survey, with estimates for the next year and the next five to ten years tracking at 4.6% and 2.9%, respectively.
Even if those economic prints come in below expectations, the most likely outcome after the CPI is a 75-bps Fed hike, which puts gold in a difficult position. Treasury yields will remain supported as a result, limiting the potential for price increases. Lower skew means that the path of least resistance. As the likelihood of a 100-bps rate hike rises, it is likely that XAU will decline. A bearish catalyst may be set off once Fed funds futures reach a 50% probability for the large price hike.
On the back of the jobs report, the AUD rose as investors anticipated RBA action. AUD/USD: Will it Rise?
After today’s jobs report, the Australian Dollar initially fell before surging, and the likelihood that the RBA will raise interest rates by 50 basis points at their next meeting in October slightly increased.
In August, the unemployment rate increased slightly from the previously reported 3.4% to 3.5%.
Instead of the 35k expected, the overall change in employment for the month was 33.5k. While there was a 58.8k increase in full-time employment, there were 25.3k part-time job losses in August.
As anticipated, the participation rate came in at 66.6%, up from the previous reading of 66.4%.
The incorrect reporting of the statistics by Bloomberg was the cause of the unusual price movement right after the number. Someone there could have a difficult day. The initial flash had zero jobs added but the unemployment rate was correct at 3.5%.
Japanese Yen Gained After BoJ Hinted Intervention, What Could this Mean for USD/JPY?
The Japanese Yen gained 1.08% against the US Dollar on Wednesday, which is a notable achievement given JPY’s persistent depreciation since 2021. What was the cause of this move? Reports crossed the wires that the Bank of Japan conducted a rate check, opening the door to market intervention for the first time since 1998. Traders were spooked. Should they be?
Prior to this event, various Japanese government and monetary policy officials have been offering verbal jabs against the currency for some time. There was no physical activity. The BoJ continues to be in a very different position from its major peers at the end of the day. The central bank keeps up its ultra-loose monetary policy, which includes negative interest rates, ongoing quantitative easing, and yield curve control.
Nearly every other significant central bank has tightened policy in the interim. The Japanese Yen is probably under pressure due to this widening gap between them and Japan. To understand the story, all you need to do is look at the yield spreads on government bonds. The action on Wednesday might have been viewed as the next step by officials in their efforts to control the Yen.
Funny enough, a push for intervention could also be interpreted as a sign that the Bank of Japan might keep policy loose. Former board member Goushi Kataoka mentioned that at the earliest, a BoJ policy shift might come by the middle of next year. It seems that in the interim, the government may have to use other measures to help hold up the Yen.
Canadian Dollar Technical Analysis: CAD/JPY, USD/CAD Rates Outlook
The Canadian Dollar has turned lower over the past few days, in line with risk appetite more broadly. Rapidly rising Fed rate hike odds have pushed up the US Dollar (via the DXY Index) and US Treasury yields, while proliferating global recession concerns have weighed on energy prices. The net-result has been that USD/CAD rates are pushing their yearly highs, while CAD/JPY rates have dropped to their lowest level in over a week.
In the prior note at the end of August, it was observed that “continued deterioration in US equity markets, noted by rising US 2-year yields and an elevated VIX, could help pave the path for USD/CAD rates to retest their yearly high above 1.3200 in short order.” Since then, including today, the pair has traded above 1.3200 on occasions, but has not yet reached the yearly high at 1.3224. Having broken above ascending triangle resistance that’s been forming since April, the near-term bias appears to be to the topside.
Please click herefor the Market News Updates from 13 September 2022.
Because it can accurately anticipate output growth, inflation, and interest rates – three crucial factors for the overall economy and financial assets – the bond market is sometimes referred to as the “smart money” on Wall Street by traders. Based on this belief, investors sometimes pay close attention to bonds and the peaks and valleys of the yield curve to learn more about future economic performance and developing trends. Given how interconnected the financial system is, signals from one market might sometimes serve as an indication, even a leading one, and a forecasting tool for another that is slower or less effective at integrating new data.
This article will examine the Treasury market to see how the yield curve’s shape and slope might provide hints about anticipated future equity returns and sector leadership by revealing information about the economic cycle. Before starting, it is vital to familiarise yourself with critical ideas.
CURVE FOR TREASURY YIELD
The Treasury yield curve is a graphical depiction that shows the interest rates on government bonds for all maturities, from overnight to 30 years, across several tenors. It illustrates an investor’s return by lending money to the U.S. government for a certain time. The asset yield is shown on the graph’s vertical axis, and the borrowing term is shown on the graph’s horizontal axis.
Longer-term debt instruments often provide better yields than short-dated ones to offset additional risks like inflation and length. Therefore the curve may assume various forms in healthy settings (see figure below). For instance, the yield on a 30-year government bond is often more significant than that of a 10-year note, which should be higher than that of a 2-year Treasury note.
The U.S. Yield Curve
Even though it’s uncommon, there are situations when long-term security may provide a lower return than a short-term investment, resulting in a term structure of interest rates that slopes downward. When this happens, the yield curve is said to have inverted.
The yield curve often inverts when the central bank raises short-term rates to avoid overheating to the point where it restricts activity and clouds the outlook for the economy. Investors wager that interest rates will need to decrease in the future to handle a potential downturn and disinflation when monetary policy becomes too restrictive. These presumptions lead to a decline in longer-dated bond rates and an increase in short-term bond rates, which inverts the Treasury curve.
Inversions have historically often predicted approaching recessions. An economic downturn has followed each 3-month to 10-year or 3m10y yield curve inversion since the end of World War II.
U.S. Yield Curve inverted
Traders often compare two rates at two different maturities and refer to their spread, defined in basis points, as “the yield curve” instead of concentrating on the Treasury market’s overall interest rate term structure. The following curves are the ones that are most commonly discussed and examined in financial media:
The 2-year/10-year curve sometimes referred to as the twos-tens or 2y10y: is the spread between the yield on 10-year Treasury bonds and the yield on 2-year Treasury notes.
The 3-month/10-year curve sometimes referred to as the 3m10y or three-month-tens curve: The yield differential between the 10-year Treasury bond and the 3-month Treasury bill is shown by this curve.
CURVES FOR 2S10S AND 3M10S SINCE 2020
Modifications to the yield curve
The difference between long-term and short-term Treasury rates will fluctuate with changes in economic activity, inflation expectations, monetary policy outlook, and liquidity circumstances. The curve is considered to steepen when the spread widens, and the gap between long- and short-dated rates grows. On the other hand, the yield curve is considered to flatten when the term spreads contract.
The term spread may shift for various causes, such as the long-term yield curve flattening or the short-term rate curve increasing (or a combination of both). The Treasury curve’s erratic movements may be used to create engaging cross-market trading strategies since they are a reliable real-time business cycle predictor. For instance, savvy stock investors often assess the yield curve’s form and slope when constructing an equity portfolio that aims to capitalize on a developing economic trend.
THE FOUR DIFFERENT CURVES TO UNDERSTAND
The four basic yield curve regimes and how they may be used to forecast sector leadership in the equities market are summarised below.
Bear steepening: The yield curve becomes steeper when long-term rates rise faster than short-term rates. This risk-on atmosphere often develops during a recession in the early stages of the economic cycle after the central bank has lowered the benchmark rate and indicated it would do so indefinitely to promote recovery. A reflationary environment is created by accommodating monetary policy, which raises long-term rates set by the market as future inflation and economic activity forecasts improve. Because of the more robust profits growth, smart money views this environment as positive for most equities, particularly those in cyclical industries. Materials, industrials, and consumer discretionary equities often see substantial rallies during bear steepening. Due to expanding net interest margins, banks (financials), which depend on short-term and long-term lending, also fare well during these times.
Bear flattener: Short maturity rates increase faster than their long-term equivalent, compressing term spreads and flattening the curve. Before the Fed hiked the federal funds rate to tame inflationary pressures, this regime operated throughout the expansion period (the front end of the turn is primarily influenced by monetary policy expectations determined by the central bank). While there may be spikes in volatility, the atmosphere for equities is still one of risk-taking amid solid results. It promotes a favorable environment for technology, energy, and real estate.
Bull steepening: The curve becomes steeper when short-term rates decline more quickly than long-term yields. This regime often manifests early in a recession when the outlook is very hazy, and the central bank is lowering short-term rates to boost the economy. It is risk-averse. Overall, equities suffer during bullish times; however, defensive industries like utilities and staples often outperform the market while technology and materials struggle.
Bull flattener: The Treasury curve flattens when long-term yields decline more quickly than short-dated rates. Moves on the back end, primarily driven by market factors in the face of declining long-term inflation forecasts and a worsening GDP outlook, are what is causing the gap to decrease. Late in the economic cycle, when investors start pricing in a potential recession and disinflation, this regime, which heralds volatility in the financial markets, bursts into action. Equity investors start to skew their portfolios toward better quality investments as a buffer against growing volatility while the bull market is in full swing. While the cyclical struggle with declining corporate results for economically sensitive industries, staples and utilities take the lead.
Note: The bond price movement is meant by the “bull” and “bear” signifiers that characterize each regime. For instance, short-dated Treasuries are sold in a bear flattener, causing their values to decline since short-term rates are rising more quickly than long-term ones (bearish for price in this example). Remember that bond yields and prices fluctuate in opposite directions.
The outlook for monetary policy, output growth projections, and inflation expectations significantly impact how the U.S. Treasury curve will appear. The yield curve is an excellent leading predictor of the economic cycle because it captures key elements of the economy’s present and future. Based on this assumption, equity investors often use the curve’s form as a forecasting tool to estimate the stock market’s direction. However, this technique shouldn’t be used in isolation since bonds may sometimes provide erroneous signals, just like any instrument. To that end, combining top-down and bottom-up analyses is often better when building a balanced, diversified, and less volatile portfolio.
In this article, we have covered the highlights of global market news about the US Dollar Index, EUR/GBP,USD/JPY and Australia’s trade surplus.
The US Dollar Index seems cautious at about 106.30.
As measured by the US Dollar Index (DXY), the dollar continues to trade cautiously at 106.30 against a background of rising US yields and shifting risk appetite trends.
The dollar’s recovery has slowed down in reaction to recent hawkish remarks from FOMC members Daly, Bullard, and Mester, who justified more tightening in the coming months. This development is also consistent with the rise in US rates throughout the curve, notably in the short end.
EUR/GBP Price Analysis: Below 0.8440, bears are in control and the BOE is watching
As buyers make another effort to overcome the prior support level from March on early Thursday morning in Europe, bids on the EUR/GBP increase to 0.8310. Nevertheless, on Tuesday, the cross-currency pair fell to its lowest levels since April 22 before rebounding off 0.8340.
However, the pair’s most recent rebound draws insights from the RSI circumstances that were almost oversold. The quotation is still below the support line that later turned into resistance around 0.8380. The weekly resistance line, located at 0.8385, presents another obstacle for short-term EUR/GBP investors.
Even if the pair moves beyond 0.8385, the EUR/GBP bulls may face resistance from the 200-DMA level and the 61.8 percent Fibonacci retracement of the March-June upswing, which are located respectively at 0.8400 and 0.8440.
The onus then shifts to the buyer, and prices may increase in the direction of the swing high from late July, which was about 0.8585.
On the other hand, the recent bottom at 0.8340 limits the EUR/GBP prices’ immediate downside during the recent decline. The next move seems to go southward toward the low of 0.8295 on March 23.
The possibility of seeing a further decline toward the annual low set in March, at 0.8200, cannot be ruled out if EUR/GBP continues bearish above 0.8295.
USD/JPY is likely to remain range-bound in the short future – UOB
The resistance around 134.60 is unlikely to be threatened by the overbought circumstances, according to the 24-hour view: “We anticipated USD to ‘move further’ yesterday. Our prediction came true, as USD increased to 134.54 before abruptly falling again. The upward trend has paused, and the USD is not expected to continue. For now, it’s more probable that the USD will fluctuate between 133.10 and 134.50.
Within the next three weeks: “Our position has not changed from yesterday (03 Aug, spot at 133.50). The current USD weakness is over, as was indicated. The USD is anticipated to trade in the range of 131.30 and 135.60 for the time being as the recent price movements are likely the beginning of a wide consolidation period.
Australia’s trade surplus has reached a new high, according to Westpac.
“The jump in exports helped the surplus rise to $17.7 billion in June.”
The $14.6 billion result for Westpac and the $14.0 billion market median in June was beyond forecasts.
Note that the May results were reduced from $16.0 billion to $15.0 billion, nevertheless setting a new record high before the June result.
Off a very low basis, “export profits rose during the June quarter, indicating a mix of stronger prices and a welcome increase in volumes.”
“In April, exports increased by 5.4 percent. In May, they increased by 8.9 percent. In June, they increased by 5.1 percent. We had predicted that the export market would stabilise in June.
The growth of 0.7 percent on the import side “fell short of our expectations, an anticipated 3.2 percent,” according to the report.
Weakness was mostly caused by a decrease in civil aircraft as well as a softening in automotive imports, which are still being hampered by supply chain problems.
Please click here for the Market News Updates from 3 Aug, 2022.
In this article, we have covered the highlights of global market news about the Crude Oil Price, GBP/USD,USD/CAD and EUR/USD.
Crude Oil Futures: More consolidation is on the way
According to CME Group advanced prints, open interest in crude oil futures markets fell by roughly 8.2K on Tuesday after three consecutive daily gains. Following two daily increases in a row, volume fell by roughly 108.7K contracts.
On Tuesday, the WTI recorded an indecisive session amid declining open interest and volume, indicating the persistence of the range-bound theme in the very near term. So far, the commodity has been supported by a price of $90.00 per barrel.
GBP/USD is now consolidating – UOB
“We said yesterday that ‘the quick climb looks to be continuing, although there is headroom for GBP to get above 1.2300 before the possibility of a retreat increases.’ We were not expecting such a steep and quick decrease to 1.2158. (high has been 1.2279). The pound is losing ground and might fall below 1.2100. For the time being, the next support level at 1.2040 is not likely to be challenged. The resistance level is 1.2195, followed by 1.2225.”
“The pound fell rapidly to a low of 1.2158 yesterday.” While our strong support’ at 1.2135 remains in place, the upward impetus has faded. In other words, the GBP surge that began late last week has abruptly ended. GBP looks to have entered a consolidation phase and is expected to trade around the 1.2040/1.2255 area for the time being.”
USD/CAD bears test 1.2850 as oil prices surge ahead of the OPEC meeting, with attention focused on US data and Taiwan.
USD/CAD accepts offers to repeat the intraday low around 1.2850 ahead of the European session on Wednesday. The Loonie pair gained ground over the past two days before backtracking from its weekly high of 1.2891. On the other hand, the retreat movements are influenced by the lately higher prices of Canada’s principal export commodity, WTI crude oil. The US dollar’s fall amid cautious optimism ahead of crucial US data also keeps USD/CAD prices high.
Nonetheless, WTI crude oil prices broke a two-day downtrend, rising 0.63 percent intraday near $93.75, amid growing expectations of no significant change in oil producers’ policy during today’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, including Russia, known as OPEC+.
EUR/USD maintains its consolidative tone – UOB
“We underlined yesterday that ‘upward momentum is starting to develop, but it remains to be seen whether EUR can breach the significant barrier above 1.0300.” As the EUR dropped quickly from 1.0293, the key barrier of 1.0300 remained intact (the low was 1.0162). The quick decline may continue, although it is unlikely to breach the key support around 1.0100. (there is another support at 1.0130). A break of 1.0210 (minor resistance is at 1.0195) on the upside would signal that the present bearish pressure has decreased.”
“We emphasized yesterday that the risk for the EUR is turning to the upside, but EUR must first cross 1.0300 before a prolonged increase is conceivable.” EUR failed to break beyond 1.0300, falling quickly from 1.0293. The surge in upward momentum faded shortly. The price activity suggests that the EUR is consolidating and will likely trade between 1.0100 and 1.0260. The EUR must break through the main support level of 1.0100 before conceiving a significant drop.”
Please click here for the Market News Updates from 2 Aug, 2022.
