RBA Rate Cut – Not a Done Deal

Australian Dollar forex blog Forex News Kathy Lien US Dollar

The Reserve Bank of Australia also has a monetary policy announcement and the majority of economists surveyed expect the RBA to cut interest rates by 25bp but we feel that a rate cut is not a done deal.  The last time we heard from the RBA they sounded open to the idea of easing if data supports it but since the last meeting in July, manufacturing activity accelerated, consumer prices increased, full time job growth rebounded, business confidence improved and the participation rate is up as shown in the table below. Granted consumer confidence is down and the unemployment rate ticked up, we’re not sure if this is enough for the RBA to pull the trigger on easing in August. The AiG Performance of Manufacturing Index rose to 56.4 vs. 51.8 previous.  Chinese PMI numbers were mixed. The official manufacturing PMI showed a decline from 50 to 49.9. The Caixin Manufacturing PMI reading registered an increase in activity, coming in at 50.6 vs. 48.9 expected. Australia’s trade balance and building approvals report will be released pre-RBA but the rate decision will be key. If the RBA cuts, AUD/USD will drop below 0.75 cents quickly but if they hold rates steady, we should see Monday’s high of 0.7615 recaptured.

AUD

July FOMC – Reason for Fed Optimism

Fed Rate Cut Federal Reserve forex blog Forex News Kathy Lien US Dollar US Economy

Taking a look at the day to day change in the U.S. dollar, it may seem that there was very little consistency in the performance of the greenback ahead of Wednesday’s monetary policy announcement. However if we isolate the price action to the U.S. session, the dollar moved higher against most of the major currencies. This morning’s U.S. economic reports were mostly better than expected with consumer confidence beating expectations and new home sales rising sharply. Service sector activity slowed according to Markit Economics and house prices dropped slightly but that was not enough to deter investors from buying dollars pre-FOMC. During a time when central banks around the world are actively talking about and planning for easing, the Federal Reserve’s hawkish bias will shine a bright light on the dollar. Many feared that the Fed would give up on the idea of tightening after Brexit but as we have seen U.S. markets and the U.S. economy have proven to be fairly resilient.

The following table shows more improvements than deterioration in the U.S. economy since the June Fed meeting. Retail sales increased, non-farm payrolls rebounded strongly with job growth rising 287k in June, the housing market is chugging along, manufacturing and service sector activity are on the rise. U.S. stocks also hit record highs while plunging U.S. yields provide support to the economy. The currency has strengthened across the board but the strongest gains were against the British pound. We’ve also heard from a number of FOMC voters since Brexit and they still seemed to support the idea of tightening. The FOMC statement generally reflects the views of the Fed leadership (Yellen, Fischer and Dudley) and it is likely to recognize the improvements in the economy since June. Of course, there will still be notes of caution and everything will be “data dependent” but we expect the main takeaway to be that a 2016 rate hike remains on the table. The Fed needs to move forward with policy normalization and they can’t wait around for the U.K. to invoke Article 50 which could take up to 2 years. So we expect the dollar to trade higher into and after FOMC. There won’t be fireworks but there could still be some quick trading opportunities.

FOMC_July2016

The Easy Way to Trade Like Soros

Boris Schlossberg

In Alchemy of Finance, the legendary trader George Soros recalls his short of the home builders in the 1970s. He notes that he profited handsomely from the trade, but then did something interesting – he looked at his own notes for the original thesis for the trade which discussed how the sector would dive then rebound and then collapse once again. Revisiting his own words Soros decided to re-short the builders and once again walked off with a handsome profit.

Out of that little story Soros ultimately developed his theory of reflexivity of the markets which has allowed him to make billions over the years.

So what’s the most important thing that we can learn from one of the greatest traders of all time?

Take half an hour this weekend and write out your trading setup.

Soros, who is steeped in European tradition writes because he fancies himself a Renaissance man and craves the intellectual approbation almost as much as material wealth.

But for us as day traders writing has a decidedly more practical application. It will literally make you trade better. Forget indicators, forget EAs, forget systems, forget gurus. Mark my words the single most important improvement you can do right now is to write out your trading plan on paper.

In fact, the best exercise for the trader is simply write out all the times that he will NOT trade during the day. One of the best traders in my room – a guy who hit 50 winners over the past three week while taking only 1 stop – did just that yesterday sending me a text of his thoughts.

It was an amazing document, showing crystal clear reasons for why he would and would not engage with the market and made me understand why he has been so successful using my Boomerang system.

Writing forces discipline. Discipline creates structure. Structure leads to efficiency and efficiency leads to profits.

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Want stop flailing in your trading? Write your thoughts out this weekend – it will be the best trading hack you can do.

The Soros Way

Boris Schlossberg

George Soros is back.

I was reminded of that fact the moment I sat down in the chair at 30 Rock and the CNBC anchor started peppering me with questions about his trades. Frankly, I have no idea if Soros is right or wrong. Those of you who know me know that I never make trades longer than 24 hours forward.

But I know one thing. Soros likes to make asymmetrical bets. Whether it’s Brexit or the Chinese economy the odds are highly skewed one way. After all if UK stays in the EU cable isn’t going to jump ten big figures in celebration, but it may fall that much if the Brits actually pull the trigger on exit. Same with the Chinese economy which is not going back to growing at 10% per year – ever but may, due to the massive built up of non performing debt, see some unexpected event sent it into waves of paroxysm that could rattle global markets in a very nasty way.

Walking back to the office in the early morning light through deserted streets of Manhattan, I realized it really doesn’t matter what Soros trades but rather how he trades it. George Soros has been at it for a very long time. He has been trading markets as a hedge funds manager since the 1970’s and is in fact the second most profitable hedge fund manager of all time.

Most people believe that he is a classic “have-a-hunch-bet-a-bunch” trader, walking away with billions when he is right. If that was the case, Soros would have blown up a long time ago. What make Soros so special is that he only bets big with house money.

Given that we are now in the midst of the Brexit trade it may be instructive to review the last time pound sterling was under such pressure – a time when Soros walked away with a cool 1 Billion in profits on the trade that “broke the Bank of England”. The mythology around that trade has given Soros almost super human qualities but the reality holds some very valuable lessons for all traders.

At the time of the GBP exit from the ERM, Soros Quantum fund had built up a nice profitable cushion on a series of small trades throughout the year. The fund was up about a billion dollars in profit and it was those profits that Soros was willing to gamble on the GBP trade. If he was right he stood to double his yearly earnings in matter of days. If he was wrong he would lose his winnings for the year but not his capital.

This is a key distinction that most traders miss. Sometimes, if the opportunity strikes, it can be very profitable to “bet a bunch”, but most retail traders take such risk with their capital not their build up profits and that’s why most of them get blown out of the market.

Over the years Soros has been as wrong as he was right, but what has set him apart from the crowd is that he always managed to walk away from his losses with his capital in tact. He learned survival during WWII and that the lesson of live to fight another day has been forever etched into his psyche.

Boris’s Top Ten FREE Resources Every FX Trader Should Have

For us a retail traders who want to trade “The Soros Way”- that is the most important lesson of all.