The ForexFlow guide to trading in 2018
As we seen in the New Year, the traders at ForexFlow look at the themes and events that will guide their trading in 2018. What you’ll notice is that none of the traders give any price forecasts, and that’s because it’s a pointless exercise. Real traders don’t pick numbers out of thin air as a guess for where the price might go. What we do is look for trends and plan stratergies, then we monitor to see what the price does vs those strategies and we decide whether we’re right or wrong. That’s the pure essence of trading. Some of these thoughts and ideas may not survive the first week of 2018. We may be right or horribly wrong but that won’t matter as long as we identify, adapt and adjust accordingly if we are. We never marry our trades and ideas and it’s the years of experience in trading that helps us plan what too look for.
For the New year, just a few thoughts.
EURGBP longs look good
Euro-area growth looks sustainably strong while UK lags. EZ area companies upbeat against UK companies with worries on the trade pact which has many obstacles to come. EZ inflation should improve 1st half into 2nd half 2018. We have been selling the highs more than expected through 2017 and I believe that is about to change to buy the dips with more gusto.
The other one for me is the Kiwi.
The short-covering rallies seem to have abated now and Kiwi looks quite vulnerable especially against the Aussie dollar going forward, so I will be looking to buying the dips AUDNZD into 2018. Aussie central bank will not be able to resist a hike 1st half 2018 with the economy clearly outperforming the Kiwi economy and is supported by what should be increasing Aussie commodities prices. The RBNZ need to stand pat and that is well signalled.
I will be looking at Scandies for the 1st time in a long time.
NORSEK is the one. Definitive CB divergence between Norges and Riksbank stands out. The dominant up-trend since 2016 can resume on buy the dips.
The BoJ will not be able to resist the improvements in the economy.
I reckon the rhetoric will change during 1st half 2018 IF the improvements continue. What I like about that is once the rhetoric changes, it is one stand-out that can be quite explosive considering the constant downbeat- cautionary approach seen for so many years. It is likely to creep up on everyone and so if we pick the right moment, right race, right horse, right levels, it could turn out to be the trade of the year.
So long Euro, short Pound, long Aussie, short Kiwi, long Norwegian, short Swedish, long Yen for me in 2018 mindset. Anyone got their own thoughts for 2018?
USD: I expect a yo-yo year
Rate hike expectations and the Tax overhaul implementation. If the corporates like it and repatriate USD we should see bouts of USD demand. Risks are a further US isolation over international trade deals and political stress mainly with Russia, China and South America, which will ultimately weigh on growth. The new Fed team may react swifter to downward pressure as closer to Trump.
EUR: Expected to rise
Steady growth and rising inflation expectations, even at lower pace (that’s global) will see the end of this QE round, maybe faster than anticipated. The ECB will need to give in sooner rather than later.
JPY: Expected to rise but timing will be crucial
BOJ and Abe’s govt will try to hold the ball off before April. My view is Spring time will be the right time to load up JPY. After the wage talks, implementation of the government stimulus and investment plans and a new BOJ governor term, likely for Kuroda. The aim will be for it to be as smooth and gradual as Fed and ECB and there are a lot of moving parts in the policy for it to be announced in steps (rates, YCC,JGB buying, ETF, REIT’s. They will be trying to keep it controlled but the market will dive into it like hungry wolves .
CHF: Lower first part of the year at least
SNB will be the last CB standing with heavy guidance and negative rates. It’ll be viewed as the last carry currency, especially when BOJ will start to turn around their ship.
There will be no better trade deals than present and I fear each of them will represent endless political fights inside the UK.Induced bad inflation could lead to another rate hike to fight it but it’ll be for the wrong reasons. Investors are at risk to get scared and de-invest from UK, weighing on the economy, tax receipts etc.
CAD, MXN : Similar patterns to be expected on oil and Nafta
I reckon the latter will be a victory for these countries and expect both of them to rise over the course of the year. Oil could put a brake on the rise at times .
Scandies: Expecting both to find a bottom in Q1
Riskbank and Norges bank bring forward their interest rate hike expectations further. More so SEK than NOK but both to benefit from a positive EU environment .
Remains the weak link, mainly due to internal and international politics, further isolation from the EU block
AUD: mildly positive
Depending on how China copes, but a US isolation is expected to keep a bid under this relationship.
NZD: neutral with a risk bias to the downside
Due to the Governmental approach on the public finances and bearish currency approach
I’m calling USD lower. Here’s why:
Trumplation could still unwind
The biggest story for me in 2017 was Trumpflation and the 17 big fig low to high on USDJPY. Now the US is set to pass tax reform but reality is not matching the promise made post victory speech. I saw it along with the moves. I got on it and stayed for 2 of them. Trading that was not for kids, but that’s life.
I’m worried about The US curve. Greenspan called it The US Bond Conundrum and i’m calling a semi-inversion. Either way you’ve got higher short end and a flat long end. This means the market does not believe in Inflation despite The FED raising rates. This type of curve was the precursor to GFC in 2008. Now I’m not saying we’re looking over a cliff but things need to change. Don’t rule out unwinding of QT and please try and get your head around direct selling of 30 year bonds to stabilise long end yields. A gentle way of saying it is the FED is in front of the curve. A better way is saying the market does not believe the FED. Not good for a positive USD outlook in my book.
At some point Draghi will stand aside of the pain barrier at 1.2040 because everyone has a breaking point – including Central Banks. Interest rate differentials aren’t telling me it’s a straight buy but if, and when, CORE CPI picks up nothing will stop it. Also, everyone is talking about tapering – which actually hasn’t found an end date yet. But let’s not forget the little extra called NEG DEPO. Reversing this will batter USD and lift EUR to the stars.
An inexperienced FOMC line up in February
Jerome Powell. He’s a lawyer and a good one by all accounts. He’s not an economist but I’ve heard worse. My worry is the line up (unknown at present) and how they will deal with a wobble if it goes pear shaped. If China/NK start a new narrative what will happen?
The good thing about going last is that I can see what everyone else has written and copy the best bits 😀 But in all seriousness, we’re pretty much all looking for the same themes.
EUR and the ECB
You know my trading history here. I’ve still got a long from Dec 2016, if only 4/6th’s of the original position. We’ve had the big expectation trade in 2017 and the market has come around to the idea that the ECB will end QE in 2018. I still see some potential upside for EURUSD but it won’t be the ride we saw in 2017, unless the USD side of the trade helps. If all goes to plan, the Eurozone economy will continue to stabilise at better levels (still no boom times coming), leading to inflation stabilising (Draghi may have to “spin” their “under but close to 2%” line). The next possible kicker for the euro will be rate hike talk which should start to pick up nearer to the QE end date but again, I don’t expect massive EUR fireworks. Use the dollar as a template for what happened when QE finally came to an end and rates first went up. We saw big tops form. I’ll be looking to buy the big dips and offloading above 1.20.
USD, Trump and the Fed
Every time Trump gets a win on the tax plan the buck rises then falls. The tax trade is done. Again, it was all about the expectation, and as expected, it’s been dumbed down and adjusted. Yes, it might be great for the long-run but until it goes into action, we won’t know the real winners or losers (and there’s always those) for a long while. No trader is going to blindly buy USD just because the US may do better over the next 5 years due to the tax plan. USDJPY is not going to go to 130 the first time they cut taxes. The reality is that we’ll have to spend months and years watching the data for signs of improvement. We may get some short-term positivity as firms and the consumer go spending and investing their tax savings but that’s the same as unexpectedly finding £20 in your pocket and blowing it in the pub rather than sticking it in the bank. You’ll have some short-term fun but it won’t affect you in the long-run.
The Fed trade is done, welcome to normality. US interest rates are returning to more normal levels and now we should be entering a period where rates are adjusted to keep the economy in check. The Fed would like them higher for more margin but the economy isn’t quite playing ball. Unless we see a marked improvement in the economy, I can’t see the Fed getting 2 or 3 more hikes in. I can just about see them getting one. The dollar won’t be rising massively on Fed hikes. See the price action over the Dec hike as an example. The risk for the dollar is that they do struggle to get another hike in. That will upset USD bulls. I agree with Patrick about the curve. This year, short end yields have risen while the long end has fallen. That’s as clear a signal as you can get about the market’s view on the path of rates, and it will be a weight around the dollar’s neck.
I see a flat to lower USD over 2018 while the US economy is on the current path. That will mean USD will be driven by the other sides of the pair.
JPY and the last big QE show in town
I’m joining my colleagues in looking for a stronger yen in 2018. The Fed is back to normal, the ECB are on their way but the BOJ is still going gung-ho down the QE rabbit hole. Something has to give this year and like it or not, the attention is going to swing right on to Captain Charisma at the BOJ. I talk a lot about expectations and that the market needs to have a theme to trade, just like they did the Fed, the ECB, Trump’s tax etc. This could be a huge event in 2018 if the market starts sniffing for a new bone to chew. If the dollar isn’t going to perform and the yen does, we could be seeing USDJPY heading towards 100. I also agree with K-Man that we could be in for some hairy rides.
Keep trading the BOC show
I’ve been loving trading the CAD in the second half of 2017. The whole team and the readers have been milking the trades surrounding the BOC. It’s giving some good ‘bang for your buck’ if you catch it right. With Poloz talking about going old school on central bank guidance (i.e. giving none) before policy moves, the CAD is going to continue to be a wild ride where the data will make the difference. Gauging the data will potentially be far more important than it has been for many years. We often see the euro do nothing on the same data points the CAD moves 100-150 pips. That’s old school and I welcome it with open arms.
Another ride on the Brexit rollercoaster
Use 2017 as the template until we get to the final hours of phase two when a deal will need to be done. In that, we traded the headlines, good or bad, statements, retractions and denials. Expect the same through the first half of 2018 but pencil in March for the first real deadline over what the shape of any trade deal will look like. That’s the date the EU has said it wants a blueprint to work on. While things still don’t look good for the UK getting a decent deal in the wider picture, the pound has held up relatively well. Unless we get big news, playing the 1.3000-1.3700/1.3800 range looks good, perhaps with extensions to 1.2750/00 & 1.3900/1.4000.
The best of the rest and the warning
Ranges will still dominate 2018 but as my colleagues note, it will be down to the central banks to bring the breaks. The easiest way to look at it is that every central bank wants to get back to normality, and as they do, we’ll see prices move on that expectation, until the market is fully bought in to what any particular central bank is doing. If you want to gauge possible moves and trends, take a flat dollar, work out what a central bank needs to do to get back to normal, and then you have a trading strategy to watch. The SNB is another bank still to change course, while the RBA and RBNZ are acting more normal in policy moves. When we see good strong trading ranges the key is having some patience to wait to trade the edges. We can also watch for ranges within ranges to give us quicker opportunities, and of course, trade the tech in between.
Now for the warning. Probably the biggest thing that affects our trading is volatility. If there’s been one thing that’s been prevalent in 2017, it was low volatility. That’s another big sign of normality. It may be the calm before the next big storm but unfortunately, it’s no help to our trading. Low volatility means we see smaller trading ranges. It can mean trendless markets and shorter trends. As traders we want to be one step ahead of the game so if we know that markets are going to be less volatile, we can adjust our trading styles to suit. In the latter part of 2017 I spend most of my time on short term trades, or ‘jobbing’ as we used to call it. If I liked a level or trade, I’d get in but my expectations we’re very low. If I went 10-20 pips in profit quickly, I’d take half off and lock in the rest. My advice in 2018 is to watch the daily ranges and trade them accordingly. There’s no point having a 100-pip profit target if the market range has been 40 pips for days on end. Trade what you can get, lock in some profit as early as possible before trying to bag those extra pips. If you manage to grab 20 pips in a day’s 60 pip trading range, you’ve just captured 33% of the day’s move. That’s no mean feat and it shouldn’t be ignored or dismissed. There’s good money in that.
As always, it’s not just about us but the readership too so please feel free to give us your thoughts for 2018.
All that’s left is for the whole team at ForexFlow to wish you a happy, healthy, safe and prosperous 2018.