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Notebook: Don't Catch the Knife. Fed Clues. Trump-Xi Date. AUD Nervous

11/27/2018 1:30 pm EST

Focus: FOREX

Amelia Bourdeau

CEO & Founder, Market Compass LLC

It was great to speak at the TradersExpo Las Vegas earlier this month and to meet traders. There were many knowledgeable presenters and I received questions from participants on what to do with the wealth of information, writes Amelia Bourdeau Tuesday. Video here.

Take-aways that won’t stay in Vegas

My take-aways: find the trading style that most interests and best suits you; concentrate on that style; educate yourself and build your skill set in that trading style. There are experts and mentors to assist you. 

Don’t catch the knife

The saying “don’t catch a falling knife” in trading refers to attempting to pick a bottom for a falling asset/asset class.  With the large draw downs in U.S. equity indexes recently, this concept relates to the question:  how do you know when to “buy the dip”? 

One factor to consider is volatility. The VIX Index, the measure of volatility for the S&P 500 (VIX), is still elevated currently. If you buy equities on a dip when volatility is elevated, you risk catching the falling knife.

Chart: VIX Index

chart 1
Source: Bloomberg

Fed clues

There are important Fed events this week. On Wednesday, Fed Chairman Powell speaks at The Economics Club of New York. On Thursday, FOMC Minutes for the November meeting are released. 

Currently, a 25bp rate hike is priced in for the December 19 FOMC meeting. Market participants will be watching for comments regarding whether equity market swings have dampened the Fed’s resolve to deliver rate hikes in accordance to the Fed’s current projections.

There is still a 77% chance that the FOMC delivers a 25 bp hike in December priced into the market.  If that backs off or the market thinks that the FOMC will curtail rate hikes further out on the calendar, the U.S. dollar (USD) could lose a leg of support. Watch the US 10-year yield post both releases to gauge movements in USD.

Chart: Current Implied Probability of 25bp rate hike at December FOMC Meeting

chart 2
Source: Bloomberg

A date in Buenos Aires

The G20 Leaders meet in BA November 30 and December 1. All eyes will be awaiting headlines from Trump-Xi discussions about trade. In what is presumably a negotiating tactic, President Trump on Monday reiterated that he expected to move ahead with a 10% to 25% tariff rate on an additional $267 billion of Chinese goods, as reported by the Wall Street Journal.

A no-deal outcome will see certain equity sectors fall further, perhaps precipitously.  Forex will be impacted as well – discussed below. A positive outcome will likely see a relief rally in equities. 

AUD Nervous

Ahead of the G20 Leaders Meeting, the Australian dollar/U.S. dollar (AUD/USD) volatility has spiked (chart below).  AUD is nervous about the outcome of the Trump-Xi talks. The rise in volatility means AUD/USD will be a “mover” on Trump-Xi trade headlines. 

Negative headlines or outcome will see AUD/USD fall given Australia’s economic ties to China. A negative outcome could also cause the Chinese yuan (CNY) weakening. It is worth noting again the correlation between AUD/USD and USD/CNY.  As CNY weakens against USD, AUD weakens against USD as well.  

Of course, positive headlines or outcome would see the opposite, AUD/USD would rally in relief.

Chart: AUD/USD 1 Week volatility is rising ahead of G20 meeting

chart 3
Source: Bloomberg

Chart: AUD/USD and USD/CNY trading closely together.

Note: USD/CNY axis, right side, is inverted.  Line moving lower = CNY weakening vs. USD

chart 4
Source: Bloomberg

Amelia Bourdeau on what moves markets and how to trade volatility in a short video here.
Recorded: TradersExpo Las Vegas, Nov. 13, 2018.
Duration: 4:32

You can find out more about Market Compass and sign up for free content at www.marketcompassllc.com.
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