An Update for US Dollar ,Euro ,GBP ,CAD ,AUD ,CRUDE 4 June 2017

An Update for US Dollar ,Euro ,GBP ,CAD ,AUD ,CRUDE

The technical indicators warn that the US dollar is stretched, but the combination of disappointing auto sales and jobs report may deny it the interest rate support needed to facilitate a resumption of the bull market. While there are many observers talking about the abdication of the US from its global leadership role given the decision to pull out of the Paris Accord and the TPP, we think the dollar’s performance can be explained by changing perceptions about the pace of US economic activity, the direction of inflation, and prospects for significant tax reform and infrastructure spending. 

There is a light US economic calendar in the week ahead, and the quiet period ahead of the June 13-14 FOMC meeting means that investors are unlikely to get much guidance from officials.  The focus will be squarely on Europe with the ECB meeting and the UK election. 

The Dollar Index finished the week at new lows for the year, and just above the 61.8% retracement objective of the rally from the lows seen in May last year (96.45).  A convincing break brings two technical levels into view.  The first is around 95.20.  It is a measuring objective of the old head and shoulder pattern that had been formed between December 2016 and March 2017.  The second is near 94.20.  It is the 38.2% retracement objective of the Dollar Index’s 2012-2014 lows near 78.60. 

The euro appreciated for the sixth week of the past eight.  Nearly three-quarters of the 0.7% gain on the week were scored on the back of the disappointing US jobs report.  Before the weekend, it posted its highest close since last September, as works its way closer to the spike high last November ($1.13).  The strength of the close warns of risk of a gap higher opening in Asia on June 5.  Given the proximity of $1.1300, current volatility, and momentum, an upside break cannot be ruled out.  A break of $1.1300 could signal a move to $1.1400-$1.1425. 

The dollar has fallen against the yen for five of the last six sessions.  Before the weekend, it was trading on either side of the previous day’s range (outside day) and closed below the previous day’s low. Indeed, the early in the session it made a new high for the week.  Then in response to the jobs’ disappointment, it made a new low for the week.   Support is expected in front of JPY110, and a break could see JPY109.40-JPY109.60.  However, if US yields do not find better traction, a return to the JPY108 area seen in mid-April is possible. 

Sterling was range-bound last week (~$1.2770 to $1.2920).  The outside up day posted in the middle of the week did not see follow-through buying, but rather back-to-back inside days.  The technical indicators look constructive, but that may be a reflection of a heavy dollar.  Sterling continues to trade heavily against the euro.  It fell on the cross for the sixth consecutive week.  The euro look to be headed into the GBP0.8800-GBP0.8850 area that marked the highs in mid-January and mid-March.  Against the dollar, the $1.3000-$1.3055 needs to be overcome to be anything technically significant. 

The US dollar snapped a two-week decline against the Canadian dollar and rose 0.4% on the week. The Slow Stochastics have turned higher, and the MACDs are about to, but the price action itself is more worrisome.  After reaching its best level since May 19, which corresponded with a 38.2% retracement of the US dollar’s fall since the May 5 key reversal, the greenback sold off before the weekend and settled on its lows.  Initial support is seen in the CAD1.3450-CAD1.3480 area, but the potential is to re-test the May 25 low below CAD1.3400.

A good part of the technical damage inflicted on the Australian dollar as it declined in five of six sessions was repaired on before the weekend with its nearly 1% advance.   It recovered off the $0.7375 area on the back of the poor US jobs report, recouped half of what it lost over those five sessions (~$0.7445). A weaker US dollar environment and soft US rates can help lift the Aussie back into the $0.7500-$0.7700 area.   Near-term potential extends toward $0.7525 and then $0.7600. 

The US 10-year yield fell nine basis points.  It was the second time in three weeks that a decline of that magnitude was recorded.  A new low yield print was recorded (~2.14%) since last November. With falling core PCE deflator, disappointing jobs and auto sales, and doubts over the legislation of the economic agenda, there does not seem much in the way of a further decline toward 2.0%. Though stretched, the technical indicators for the 10-year Treasury note futures do not suggest a top is imminent.  The 127-04 area corresponds to a 50% retracement of the sell-off since last November. The 61.8% retracement is 128-03. 

From the May 25 high through the pre-weekend low, the July light sweet crude oil futures contract fell more than 10%.  The contract briefly dipped below $47 before recovering, leaving a possible bullish hammer candlestick in its wake.  A move above $52 is needed to be of technical significance.  The technical indicators point to continued risk on the downside.  There is little support below $46 until $44, where prices had spiked on May 5.  The price of oil has fallen for four of the five months this year.  After falling 9.4% in Q1, it is off another 6%  in the first two months of Q2.

 Neither weak macro data nor valuation concerns have held back the S&P 500.  It is participating in what is a global rally.  Although conventional wisdom was that European equities would rally more than US shares, so far this year, the S&P 500 has held its own.  It is up 8.8%, just nosing ahead of the Dow Jones Stoxx 600 (~8.6%).   The Nikkei 400, which the BOJ buys ETFs on, is up almost 5.7% year-to-date. The technical indicators are not particularly stretched. The note of caution comes from bumping against the upper Bollinger Band.   Last week began by breaking a seven-day advance, but the week finished on a firmer note with new record highs.  

Positive Negative Effect of Currency Rupee Ban Of 500, 1000 Rupee Notes India

Positive Negative Effect of Currency Rupee Ban Of 500, 1000 Rupee Notes India

·         Money supply will get reduced for the short to medium term which will have impact in terms of lower growth rate of money supply.

·         Approximately 15 lakh crore Rupees 500 and 1000 rupee notes are in circulation and almost half of them are expected to be unaccounted or black money which is expected to be vanished from the system. The real figures will be known only in next 6 months. The government has collected in excess of 2 lakh crore so far in 4 days since currency ban.

·         Currency ban’s Long term impact sector specific than economy specific.

·         This is only transitory shock but no medium or long term negative impact.

·         Very good move for the medium to long term for the entire economy.

·         Businesses in the micro finance sector like bharat finance, ujjivan finance will be affected badly for the short to medium term. They will revive only when the new currency notes come back to circulation in full fledged manner.

·         Real estate sector and jewellery sector are two sectors which will be hit hard. These sectors were booming due to black money and most black money were parked and circulated as well as stored in investment in or through these two sectors. However the long term impact cant be assesses right now in practical terms. In theory all sectors are going to benefit from this move as more and more money comes into main accounted stream and hoarding of money gets reduced in terms of cash stashes and unproductive uses like jewellery and real estate and other such sources.

·         Companies which are in sectors like automobiles batteries which are dominated by unorganized sector will gain on the back of business becoming sluggish in unorganized segment.

·         Number of people filing income tax return will increase and in turn tax collection will increase. Which in turn increase the revenue of government and it can spend more for the growth of the economy and welfare schemes and also reduce its fiscal and budgetary deficit and balance of payment situation can also be helped.

·         It will take time for the stock markets to digest this event and its consequences fully before it starts reacting. But over the mid to long term this event will help the market rise as the stock market has been long fortified from the circuits of unaccounted money and it will have close to zero impact save and except sector specific and stock specific impact on real estate and jewellery etc.

·         The most important take away is that one doesn’t need to think that the cash economy will die. The government is going to issue new notes in place of the old notes in different small and big denominations. Yes, a big chunk of cash will become useless, thus slackening the cash economy to that extent.

·         This move will bring 100 fold rise in online or digital transaction in various segment of the economy, and thus will increase businesses for those segments and companies giving services to such companies.

·         All corporate businesses will benefit who are facing competition from unorganized business in their sector.

·         Use of black money in elections will be reduced, especially in upcoming elections in Uttar Pradesh and other 3 states.

Impact of demonetization

Pros and cons (short term and long term)

What is the effect of Currency Ban/500, 1000 Rupee Note Ban On Economy/Stock Market

1. Immediate impact: is expected to be negative all round:

a. In the short term it will be a logistical nightmare to manage the cash replacement in banks and smooth functioning of the banking system

b. slowdown in consumer spending due to limited cash availability

c. severe liquidity issues in cash based sectors like Real Estate and Jewellery

 d. GDP will decline in the next 2 quarters due to reduction in overall spending

2. Over the next 4-5 months:Those having legitimate income will deposit it in banks and apart from the initial hassles associated with the banking system, they will have nothing to worry about. 

However those having unaccounted money will face several problems as follows:

a. Those who choose to do nothing with the money, their notes will expire worthless. Every note is a liability of the Government (RBI), and thus notes becoming worthless will benefit the Government by extinguishing its liability.

b. Those who declare their unaccounted money, approx 60- 70% of the money will go to the Govt in the form of taxes and penalties.

c. There will be a third category who will try to launder their money, but which will entail severe risks including penalties and prosecution. However, the money sought to be laundered will anyway enter into circulation and remain therein.

It is expected that even if 50% of the around 14 lakh crores of old notes are legitimate, the remaining 50% or around Rs 7 lakh crores of unaccounted money will see around 60 to 80 % thereof or approx Rs 5 lakh crores coming to the government in the form of extinguished RBI liability (point a above) and taxes and penalties. This Rs 5 lakh crores is enough to take care of India's entire fiscal deficit for one year or more.

3. Overall Economic Impact:

a. GDP growth is expected to be negative for around 6 months. However subsequent 2 years will see sharp "hockey stick" revival in growth.

b. Inflation is expected to fall sharply with fall in Real Estate prices and transaction costs thereof.

c. Government Deficit will see a huge windfall in the next 2 years.

 d. Currency is expected to strengthen as inflation drops and economy gets a boost.

e. Banking System will get a boost, as around Rs 7-8 lakh crores base money (new legal money) will enter the system, which will further create around 3-4 times more money due to re-circulation.

f. Real Estate and Jewellery sectors, though battered initially will stabilize in the next 6 months.

4. Effect on various Asset classes:

a. Bond prices will rise as interest rates drop.

b. Real Estate is expected to fall by around 20 -25 % and stabilize thereafter.

c. Effect on Gold is a bit uncertain, and may be neutral/ negative. Lower black money will depress demand, but at the same time Gold is a hedge against uncertainty and those still wanting to park black money may prefer to put it into Gold instead of cash.

d. Equity is expected to benefit the most due to three reasons. One, there will be a gradual shift from physical assets (real estate/ Gold) to financial assets. Two, the organised sector (corporates, expecially listed ones) will benefit due to less cash transactions. Lastly, lower inflation and interest rates will benefit listed corporates through lower borrowing costs, thereby increasing their profitability and valuations.

Thus Asset Allocation and re balancing thereof will now play an even more important role, making proper financial planning imperative.

Lastly, the question may arise as to whether the new Rs 2000 Rupee notes will create more black money or not. While that is always a possibility, it should be noted that this demonetization would have created a psychological impact especially on large scale evaders who will definitely think twice before taking such action.

The Future Of Currency Trading I Interesting Figures In World Forex Markets I What You Must Know About Global Currency Markets

The Future Of Currency Trading I Interesting Figures In World Forex Markets I What You Must Know About Global Currency Markets

The foreign exchange market of the future is likely to be bigger, more tightly regulated and more diverse—in terms of currencies traded, the range of market participants, and the technology and strategies applied.

Larger volumes will reflect not only continuing economic growth and greater interconnectedness, but also forex's increasing importance as an asset class. The big banks and hedge funds will become less dominant, as new entrants with different aims and trading strategies enter the market.

Indeed, there are many reasons to believe that the era of the big, high-risk position trader will end. One is the relentless rise of algorithmic, or automated, trading: in 2004, these accounted for just 2% of all trades; this year, for the first time, they surpassed 50%.

Then there are the new types of trader. "The globalization of investment, with insurance and pension funds now major investors in international capital markets, has led to the diversification of entities that regularly turn to the forex market," says Professor Mark Taylor, dean of Warwick Business School in the U.K

"The market is becoming more fragmented with new players coming in, sometimes from unexpected sectors," says Michael Kitson, an economist at the University of Cambridge Judge Business School in the U.K. These include forex-focused mutuals and exchange-traded funds, which may be the vanguard of a host of alternative mass-market investment products. There is also a growing army of independent retail investors, especially in Asia and the Far East. Mr. Kitson believes that greater competition and market fragmentation will help create a more level playing field.

However, the greatest impact on forex markets may be new legislation, such as Dodd-Frank, EMIR and Basel III. Dodd-Frank's so-called Volker Clause, for example, aims to separate high-risk activities, such as derivatives trading, from retail and commercial banking, effectively restricting proprietary trading by banks (i.e. banks trading with their own money). "A fundamental reason for the volatility is the diminished role of the banks as 'market makers' due to the ban on proprietary trading," comments Patrick Teng, founder and chief dealer of Six Capital. He notes that "banks have started to play broker and the role of proprietary trading is now being taken over by independent entrepreneurial firms (such as Six Capital), banks spinning off independent units or even by hedge funds."

"Clearly, dealers are cutting down on proprietary trading," says Chiara Banti, lecturer in finance at the University of Essex in the U.K., although this may also be because Basel III exacerbates banks' funding constraints. And while dire predictions of disruptive new regulations have not yet materialized, the most likely impact of greater transparency will be narrower spreads. "Restrictions on proprietary trading must have reduced liquidity, so the banks are offloading their orders elsewhere in the market," Prof. Taylor says.

Tighter regulation to prevent rate rigging—for which more than $9 billion of fines have so far been imposed—will make it easier to press charges against individual traders and their managers. However, some regulators are moving faster than others. "The plethora of new financial regulations are not being internationally coordinated," says Mr. Kitson.

Another major effect of new regulation is that banks will execute client orders at the daily fix electronically, eliminating the human element and reinforcing the trend towards algorithmic or automated trading.  

Dr. Banti notes that "regulation makes trading more expensive, while low bid-ask spreads renders market-making less profitable. As a result, there is less proprietary trading and a decline in the liquidity provided by dealers."

As to what will be traded, Mr. Kitson expects, "a more diverse pool of currencies, including the yuan and the rupee, to eventually join the main currency pairs traded, as these economies are large and growing faster than the U.S. or Europe."

The very structure of the market is changing. Prof. Taylor foresees a shift from the present "oligopoly" of banks, whose market makers and trading platforms are widely used by other players, towards a multilateral forex market. "The emergence of new players will depend very much on developments in technology and trading platforms," he says.

"Thinking small and looking for ways to aggregate success consistently is the way to create substantial profits and regenerate liquidity," Mr. Teng says.