Important Macro Themes to Watch for Big Profits – The next trading catalysts in coming weeks
At the Fotis Trading Academy we use our own proprietary 3-step process to identify high probability trades in the FX markets.
Trading relying exclusively on technical strategies is not enough, as you are missing out a potential big edge, in your favor.
The very first step is to understand the current macro narrative, so we identify the catalysts that drive prices and affect prices.
Right now, as we approach the end of 2018, at the Fotis Trading Academy, we focus on 2 big macro themes that can seriously impact asset prices.
The first one is the ongoing dispute and trade wars between US and China. This coming weekend at the G20 summit, the two leaders, President Trump and Premier Xi, have the last chance to reach some sort of a deal before things get ugly!
Some analysts estimate that there won’t be any kind of deal, as already Vice President Pence met with Xi, at the most recent APEC meeting and there were such serious disagreements between them that there was not a release of a joint statement for the first time in 24 years!
On the other hand, the US has shown signs that they are open to an agreement, as the President’s advisor Navarro, who has orchestrated the tariffs against China, will not attend the Trump-Xi dinner.
So, what is going to be?
More aggressive rhetoric and more tariffs against China that is trying hard to soft-land its economy? And what would be the impact in the US that is facing a massive debt problem and slowing growth, now that the previous fiscal measures start to dissipate?
At the beginning of this week, equities globally attempted to move higher on expectations that there will be a positive outcome between US and China, at the G20 meeting but that was quickly faded.
As you can see on the chart below, the S&P500 moved higher but, met resistance at the Value Area High from last week. Our strategy moving forward would be to sell any rally to the upside, into the right areas, as we feel that the overall conditions and the economic cycle favors more defensive and safe-haven assets.
However, seasonality is against us and in case we get an up-move into December, we are interested to “do business” into the 2716 or 2780 level and fade any strength.
We will be using equities and intermarket relationships to also time our next FX trades according to our themes.
For example, any potential weakness in equities, will have an impact in commodity currencies and especially the AUD. An escalation of the crisis between US and China and a slowdown of the Chinese economy will seriously impact Australia.
Therefore, we are looking to trade the Aussie Dollar versus the US.
One of the catalysts, we know is going to happen this coming weekend, and we will be looking for a break below the 0.7200 level.
The second major theme we are watching is the US FED itself and the monetary policy they will follow.
So far, the FED was pretty hawkish, in their communication, as they were hiking interest rates higher. But most recently Chairman Powell and other FOMC members have acknowledged the “tough” international conditions and the negative impact in the US economy. We have seen future expectations regarding FED activity turning around, from hawkish to more dovish, as we see reports in the financial media questioning how far the FED can go with the deteriorating conditions in the US. The probability for a December hike stands roughly at 70% but, for 2019 the expectations are for just one or even no hikes!
We strongly believe that we are at the very late stage of the late stage phase in the current economic cycle and although we cannot speak yet about a recession, Housing data, automobile sector, credit conditions, consumer behavior indicate we are heading there. So, definitely expect higher volatility into 2019.
Based on this theme, we will be looking to fade any USD strength higher against the JPY.
We will be patient and wait for Powell to give his speech this week and also let the FED minutes be released but, we are looking to sell USD rallies up to 114, provided that we also experience weakness in equities. Since it is the end of the year, we cannot rule out a move towards 114.22.
Our main emphasis is on the process we use.
Understand the narrative and what is driving prices, what is the catalyst. In this way, we don’t have to scan 20-30 different charts, trying to decide which one represents the best opportunity.
What we actually trade this week, till the end of the year is US-China and Fed-Powell. Hence, we know exactly what we are looking for on the charts and in the news.
Afterwards, we move to the structure of prices and identify which are the best levels to pull the trigger, so we can get the best possible Reward-risk.
This can lead to longer term trading success.