Unrealized potential and plans for the future

4 nov 2019

Japan, Canada and the USA central banks' decisions, U.S. and Eurozone GDP latest statistics, as well as data on the US labour market 7 days latest news. In principle, each event from this list would be enough to fill the average week. As for the political aspect: a signal about possible problems in trade negotiations between the United States and China, the next parliamentary elections in the UK and ongoing impeachment process against Trump.

The absence of significant movements in the foreign exchange market last week surprised us. The change of more than 100 points +/- was observed in most pairs. However, we consider this rather as an opportunity for trading, since unrealized potential has accumulated in prices. Accordingly, we plan to take up its implementation in the current week.

Perhaps the greatest potential has accumulated in the US dollar. The Fed rate cut (the third in 2019) was unnoticed by the markets. Statistics on the US, which came out last week, although was better than forecasts (GDP and NFP), still made it clear that the general state of the US economy is deteriorating.

The USA non-farm payroll (NFP) for instance. + 128K was 50% higher than analysts' forecasts, who expected growth at 85K. It would seem that the dollar should have just soared based on such data. But on the other hand, + 128K is 20-30% worse than the average value for the last couple of years.

Also, the ISM index in the US manufacturing sector in October, published on Friday, was 48.3 points only (a value below 50 indicates a decrease in manufacturing activity).

In our opinion, the dollar fell following the results of the week should have been much stronger. And since it did not happen last week, it will happen on this one. Therefore, we will continue to look for opportunities for dollar sales in the foreign exchange market.

The Canadian dollar is a nice candidate for that. The Bank of Canada left the rate unchanged, that is, the percentage differential between the US dollars and Canada declined.

The main Canadian dollar issue was news that the Chinese do not believe in the possibility of a long-term trade deal with the United States, while Trump stays in power. That is concerns about the ongoing trade war. Accordingly, commodity currencies were under pressure.

But the value of the safe-haven assets grew: gold and the Japanese yen. We recommended buying them last week and will continue to do so in the current week. Note that under the current conditions, the formation of a trading portfolio, that is, when buying a Canadian dollar, it is advisable to have yen and gold in the list of positions.

On Friday The Russian ruble paired with the dollar strengthened quite well and as a result, even closed below 63.50. Formally, it opens the way to further decline to 62.50 area. Despite this, we continue to recommend the USDRUB purchases. Everything goes according to the plan announced by us earlier: the first time of purchases from 63.60, the second one we start at about 62.60. So if someone has not bought a pair, you can do it now purchase at 63.60, and who is already in position should wait for an attempt to hit the 62.50.