If you´re wondering why we are late on our review, it’s because we wanted to include the last trading day of the month in order to have a complete picture for October.
As the title implies, the world seems a brighter, better place as the global economy moved into a much better position by the end of this month. The market sentiment has improved immensely in the last two months. Looks like all that panic which engulfed the financial markets by the beginning of this year is a distant history now. There´s still a lot of slack in many large economies, but investors feel more confident as most of the pieces of this big puzzle have fallen into place.
How do you realize the sentiment has reversed? It is pretty simple… watch the Yen pairs. USD/JPY has been plunging in a 25 cent decline since January despite intervention and threats from the BOJ. This month, though, this forex pair moved about 400 pips higher even though the BOJ was quite disappointing in their last meeting.
When there is panic, forex traders jump on the JPY pairs in search for safehaven, which obviously weighs on them. When the economy improves and the risk appetite returns, the Yen is the biggest loser. Even a newbie can work that out just by looking at the USD/JPY chart.
The Brexit hullabaloo continued this month as well, with all parties (UK leavers, UK remain, UK government, EU officials, major international banks etc.) fought to get the best of it. But in the end, the bluff from the UK government was called by the market and other players, and the British PM May returned to her senses.
As for our forex signals, we can say that we had another successful month. We had another winning month and made a good 388 pip profit, all from short-term signals. Why short-term signals only? That´s because of the price action which we will explain further below in the signals sections, together with the rest of the events this month.
Everyone is happy when the economy is doing well
It´s clear that the market sentiment improved in October amid better economic conditions. In such a market environment, the Japanese Yen and the Swiss Franc lost the ground beneath their feet, while the other major currencies enjoyed some affection.
So, the Yen did lose ground this month, but it was difficult to pick another currency to buy besides the Buck. Normally, the Euro and the ComDolls (commodity dollars) would be the primary beneficiaries of the risk-on sentiment, but the current situation in the respective economies made the picture a bit blurry, which left us with the USD only.
So, as you might have noticed in case you followed our forex signals, we concentrated on buying the USD against the Euro, the AUD and the NZD in particular. We also had a go at GBP/USD, trying to pick a few pips here and there, but the volatility in this forex pair was immense and we got away from it with only a small profit.
So we can say that most of our monthly profit came from short-term forex signals in NZD/USD, AUD/USD and EUR/USD. I would have loved to open a few long-term signals this month because they usually offer the best risk/reward ratio, but with the price being in the middle of nowhere, away from long-term support and resistance levels in most pairs, we were left with little choice.
No pair offered good risk/reward ratio, apart from EUR/USD. If you were to buy this forex pair at around 1.0850s you could risk 200 pips with a stop loss at 1.0650, for a possible 250-300 pip winning potential. But, the FED will likely hike the interest rates in more than a month and the ECB changed its rhetoric, so the fundamental picture is not that clear; we might as well see this pair reach 1.05 in no time if there is even a minor shock in the market.
Anyway, short-term signals made us work a bit harder but at the end of the month, we are enjoying the benefits of hard work. We made 388 pips in total this month from 59 signals, 44 of which were closed in profit and 15 hit stop loss. That gives us a 75:25 win/loss ratio.
The market this month
So, where did we leave it last month? Oh yes, the BOJ meeting and their decision to target the yield curve instead of expanding their monetary policy further. The market was disappointed since it was expecting a lot more. This would normally send the JPY pairs tumbling and we have seen plenty of that all this year despite firmer action by the BOJ. But, USD/JPY is 4 cents higher now.
Q: What does that tell us?
A: It shows that the panic in the financial markets is over and the market sentiment is turning around.
The economic data from most parts of the globe has been mainly positive. The Eurozone, in particular stood out, since it has been in the doldrums the longest if we ignore the situation Japan. These last few months we have seen a decent pickup in the EU manufacturing and service sectors, an improvement in the labour market portrayed by falling unemployment (although it still remains very high), and higher inflation.
Being the biggest importer of Chinese products and their biggest trading partner, this improvement in the EU economy has helped China too. As the FED pointed out in their September’s meeting, the US economy is hitting up as well, so that makes strike three when it comes to the largest economies of the globe. This, together with higher oil prices is the main reason for the shift in the market sentiment as of late.
For the sake of the humanity, I hope that this recent trend carries on and so does the ECB (European Central Bank). They clearly took note of the improving economic conditions because they went from dovish in their early September meeting to neutral on October 20th. There were also rumours about a tapering process (end of QE) from an unnamed ECB official, but Draghi denied them. Nonetheless, the market received a first signal of what´s to come in the next year or so and I have this feeling that the ECB deliberately did that in order to get the market expectations higher step-by-step, rather than in a surprise blow which would shock the forex market.
Sailing over the English Channel, for some reason, the UK government tried to take charge in the EU in relation to the Brexit process by the end of September/beginning of October. Probably the far right UKIP party which started all this nonsense, aided by some Tories who hate the EU lured the UK PM May into thinking that Britain could embrace a hard Brexit and still reap all the benefits from the EU.
It’s very irrational and, until a couple of weeks ago, May sounded as arrogant as it gets, like a child on a power trip. But, it didn´t take long for the market to force her to sit down on her behind. The German chancellor Merkel, the president of France Hollande and other EU official made it clear once again that hard Brexit comes with all the disadvantages attached to it for Britain.
We already heard some major banks planning to freeze staff hiring in the City. It didn´t take long before the GBP pairs suffered another flash crash, dropping several cents in a matter of minutes. This is not the time to become arrogant, common sense and humility are the two most precious virtues in such times, for the sake of the British people.
Ah, just one last thing. The EU-CANADA trade agreement came to a halt when a region of Belgium refused to sign it. All the Brexiters in the world jumped happily in joy hailing Brexit and pointing the finger at the EU for being unable to close a trade deal even with Canada. That deal is done now but that displayed one thing about Brexiters… detailing how irrational the Brexit vote was.
Different analysts might focus on different aspects of the global economy but, in my opinion, the economic data from the Eurozone deserves most of the attention this month. But, let’s have a look at the rest of the world before delving into the EU numbers.
The Chinese economy seems to be benefiting from the pickup in the global business activity, as the manufacturing, non-manufacturing, and service sectors move further away from contraction. The inflation made a substantial move higher this month but the trade balance declined by nearly $100 million. That´s not necessary a bad thing because the Chinese consumer might have stepped up demand for foreign goods and services. In this case, this would be seen as a positive signal.
In the US, the economic recovery continued the trend we saw in September but there are still obstacles here and there. Manufacturing is not out of the woods yet and the data from this sector remains quite volatile. The US Q3 GDP numbers though offered a pretty sight for sore eyes (Yellen`s eyes) when it jumped to 2.9% from 1.4% in the previous quarter. Still, I took the Q3 GDP numbers with a pinch of salt because there were some deviations from the trend, particularly in the shipment orders as I explained in one of our updates.
In Japan, the situation remains the same, so no point in looking at it again. The UK, on the other hand, offered some positive economic numbers. Construction, services, and even manufacturing showed some nice progress. That said, the pace has slowed from September.
As we said above, Europe is not exactly flourishing but it´s moving away from the flat level which most sectors were in until a few months ago. What´s more promising is that all the sectors in almost all European countries are moving together in the same direction, despite few differences. Inflation and retail sales might be affected by higher oil prices, but manufacturing and services surely put things in perspective.
There´s always a good time to analyze the GBP charts and there is only one chart to analyze right now, the GBP/USD daily chart. The trend is obvious in this forex pair and the fundamentals only point to one direction, down, unless the Brexit process reverses, which is out of the question for the time being.
There´s also only one indicator to look at this chart, the 20 simple moving average (20 SMA). As you can see, the 20 SMA is catching up with the price and right now it is below the last swing high from last week. In strong trends, the smaller period moving averages are the first to catch up with the price, thus turning into support/resistance before the bigger period MAs catch up, too. So the level around 1.2300-50 seems attractive for a long-term signal, but we will evaluate this pair again when we get up there, and base it on price action.
Will the 20 SMA turn into resistance?
AUD/USD has been in an uptrend in the last six months or so. Did you notice the perfect triangle this pair has formed in the daily forex chart? The top line comes at around 0.7730 which has been providing solid resistance for ages apart from a few fake outs. The support is provided by the ascending trend line on the bottom and the 100 moving average in green. Technically, the upside seems very limited, especially if we look at the monthly chart; the 200 smooth moving average in purple looks like an iron gate, but if the price is to move down, we must first break the 20 monthly moving average in grey, which has been holding the price up in the last several weeks.
Which side of the triangle will let go first?
The 200 MA on the top and the 20 MA at the bottom have confined the price in the last 4 months
The first month of the fourth quarter is now over and we can say that it was a good start because we made 388 pips in October. I feel a little more confident about the world economy a month later because the economic data has improved consistently across the globe.
The first week of October is filled with central bankers but none of them are expected to change their monetary policy. Perhaps the BOE might think differently, but the economic data doesn´t point that way. The US presidential elections are next Tuesday, but we still have plenty of time to analyze their impact on the forex market.