Forecast 12/13/21: The Countdown Begins

Pre-Week Assessment

Welcome back to the 2nd week of free content.

Please refer to the Backdrop Post and trade with mindfulness.

Please fell free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.

All times given in this update are in US Central time (UTC-6 clock)

Song of the Week - Scam/Lean Back - Southside Hoodlum

Table of Contents

1. Economic Calendar

2. Central Bank Relevance

3. High Impact Global Events

   1. Bank of Canada Speech

   2. Swiss National Bank Interest Rate Decision

   3. Royal Bank of Australia Governors Speech

   4. Bank of England Interest Rate Decision

   5. European Central Bank Interest Rate Decision

   6. Bank of Japan Interest Rate Decision

4. The US FOMC Interest Rate Decision

5. US Bond Auctions

6. Conclusion

1. Economic Calendar

Refer to Economic Calendar Settings Post for filter settings used.

This is a big week for news with a LOT of events going, we’re not going to cover them all here and will instead focus on the most relevant events for the market, which all happen to be interest rate decisions, and speeches from the heads of central banks. No matter what you are trading we will likely see some significant moves mid-week and end of week.

Also of note, since the Crypto markets are open 24/7 and we are heading into the holiday season, the echoes of this week can possibly be felt for the next several weeks while the conventional markets are closed. Crypto is a big weekend and holiday mover, so it is important for us to understand how the year might close out in relation to this weeks events.

Of note, these are the decisions we will be watching.

Wednesday

1. Bank of Canada Governor Speech

2. US FOMC Interest Rate decision and speech

3. Royal Bank of Australia Governors Speech

Thursday

1. Swiss National Bank Interest Rate decision and press conference

2. Bank of England Interest Rate Decision

3. European Central Bank Interest Rate Decision

Friday

1. Bank of Japan Interest Rate Decision

When I traded Forex more often, these are the kind of weeks that I eventually learned to just avoid completely and instead just watch and chart for entries to make the following sunday. As events this week can possibly set trends into place that can be traded much more easily. While instead any attempts to trade with significant leverage during this week could likely lead to getting BTFO.

Some of these events are easier to follow live than others. For instance, The US FOMC decision and press conference will always start promptly on time and is livestreamed by Bloomberg online. While on the other hand the Bank of Japan’s release time is more of a suggestion. They give us a time, but the release may come anytime within about 6 or so hours of their release time. It’s not an event to even try to trade, especially since the preliminary release is in Japanese and its usually even longer before you can get it in English. Meaning you don’t know when the release is coming out, and if you’re able to find it on release, you are just listening to a Japanese broadcast with no translation until later.

2. Central Bank Relevance

You may be asking, Why do I need to know central bank policy if I am not directly trading the forex markets? Good question. The central banks are in control of the price of money. Again, this is not a free market. When central banks set the price of money, they are setting the price of everything else at the same time. And when they tell you what the price of money will be in the future, they are sending signals to traders about what, and when to buy or sell. So if they all are telling us that the price of their money will be going down in the future, then its obviously sensible to buy things with the money you have now, or to take on debt now, rather than saving money for the future.

Some Central Banks are more relevant than others. As stated previously, the US currently enjoys reserve currency status, and there are several countries using the US dollar as their main unit of exchange. So the price of our money affects a lot of different markets. While New Zealand and Australia are much less relevant except to their own citizens and a few of the commodity markets they participate in (Iron, coal, grain, and cereal in the Pacific). The Swiss are relevant because their currency, despite having a negative interest rate is considered a risk-off asset due to the Swiss National Bank having significant assets held from many different countries stock markets as well as precious metals. The Japanese Yen has also historically been considered a risk-off asset, but I suspect it will lose this status within the next few years. Explaining the why would take too much space right now.

One thing you may also notice is that of the 5 central banks having interest rate decisions this week, 3 of them already have negative rates. Meaning that their central banks are lending money in the overnight markets at a negative rate. Mechanically, this means that they are letting people take loans from them for a total future value that is lower than the amount on the loan.

As an example. Say you are a bank in Denmark and you want to borrow 10,000 Krone in the short term to turn around and loan it out to customers. The central bank will loan it to you, and the following day you will need to pay them back 9,940 Krone because they have a negative 0.6% overnight lending rate.

This policy of decreasing interest rates, as discussed before is done to keep the cost of money cheap. Due to the overnight rate being -0.6% in Denmark, you can get a mortgage for a house for around 1% APR. This same phenomenon in countries that use the Euro has pushed some variable interest rate mortgages in Europe to turn negative from time to time. Essentially every country on the Euro is having their economy and savings rate absolutely strangled so that they can pretend anything meaningful is happening in their countries, and several other central banks in Europe are also negative as well with a few bucking the trend (Sweden, the UK, Norway, and a few others). This is one of the reasons why no Euro news is meaningful except for the central bank policies, and sometimes their inflation rates. Most of Europe exists in vassalage to the remnants of US influence from the Cold War.

This chart (3 month European Interbank interest rates) is weak and depicts a mostly irrelevant continent. The money is worth so little to the people that have it that they will pay you to take it away from them. There is no wealth to protect, at least not in the paper anyways.

It might seem like I am picking on Europeans here, I am; but aside from the perceived relevance of the United States and reserve status of the dollar, there is not much backing that up on this side of the pond either.

3. High Impact Global Events

Bank of Canada Speech

We will be listening to hear if the BoC Governor makes any mentions about an imminent rate hike. If he does, then I suspect the USD/CAD short at 1.3 will come into play for the mid-term. If not, the holding pattern continues. The below chart we have a monthly descending trend line in purple, and a significant supply zone in light blue. The last few entries into this zone have been aggressively sold as there are a lot of shorts on the order book at this level. The general long term trend for this pair is bearish, and I am expecting an entry to present itself within this zone over the next few weeks or months before the macro trend of USD going down continues.

USDCAD 1 Week Chart

Swiss National Bank Interest Rate Decision

We are simply listening for any change of tone or assessment of their current Negative Interest Rate Policy that implies they wish to move away from negative rates. We also will be listening to hear if there is going to be any mention of increasing their reserves of foreign stock as this typically puts a bid under the S&P500. I am expecting no major change or surprises from the Swiss.

Royal Bank of Australia Governors Speech

Ignore.

Bank of England Interest Rate Decision

Historically, you need to understand that the BoE cut interest rates down to zero as a response to Brexit. They were worried that Brexit would spook the markets, so they slashed interest rates down to zero, which then spooked the markets and caused the pound to tumble significantly. They later admitted this mistake and the current market expectations have been for the BoE to raise rates and get inflationary pressures under control because they were already at 0 for several years before CovID. The Central Bank has been speaking for some time about raising rates and the markets have fully expected this and priced it in.

Which is why during the last meeting when no rate hike occurred, the Pound fell significantly. I suspect this is another market through which the long term bearish trend of USD can be exploited. Once the BoE commits to their first rate hike, that should open the gates for GBPUSD to make its way all the way back up to the 1.6 range. From my chart below you can see that we are currently priced at 1.32. Some nice buy entries may present themselves around 1.314-1.316 during or around the interest rate decision for a long position for the next swing. The dark green trend line is a Daily trend, purple is monthly, and there is a significant demand zone in green with lots of buying occurring in these areas.

GBPUSD 1 Week chart

European Central Bank Interest Rate Decision

As stated earlier, Europe is mostly irrelevant, and has been continuing quantitative easing for longer than I have been paying attention. The only real question is about when or if they will ever stop. Negative rates in Europe are probably permanent, and the expectation is for this decision to continue to affirm that. If they do ever decide to signal that they will stop, then we can re-assess, but they are honestly in a worse position than the Federal Reserve is in the US, as they are holding many government bonds that have no agreed upon resale value. How can the ECB ever sell Greek or Portuguese bonds back into the retail market? Most everyone agrees they are worthless, but as long as the ECB never tries to sell them, then they will never find out how worthless they are and can keep them on the books as an asset. Long term, the Euro’s only trend is down, and it would not surprise me to hear of other countries having their own Brexit over this next decade. If France or Germany are the ones to do so, it could very well be the end of the Euro as a currency as we know it. So of course, the ECB will keep rates negative.

Bank of Japan Interest Rate Decision

I’ll admit that I don’t pay enough attention to Japan to give good insight here. Part of this is due to how unreliable the release times are for Bank of Japan news, I gave up on researching since these events are largely not tradeable from the US.

4. The US FOMC Rate Decision

This is the big one for the week and if you are available, I highly suggest tuning in to Bloomberg Live at 1pm CST on Wednesday to listen to the rate decision, and then the press conference that follows at 1:30pm CST. The decision itself is not important as we already know that there will be no change to interest rates. What is important is the press conference.

The Head of the Federal Reserve, Jerome Powell will be speaking and asked a bunch of softball questions by reporters, but one or two good ones might sneak in. What we will be listening for is if Powell gives any indication about how the current Tapering process is going, and if the Federal Reserve will accelerate this taper process at all. I suspect that as we are still early within the current schedule (Nov 2021-Jun 2022), Powell will probably speak positively about the possibility of accelerating the taper, but won’t give any specifics about when or how that will happen. He will also be probably asked about if they are considering accelerating interest rate increases into 2022 due to rising inflation. His comments about inflation and its affect on Fed interest rate policy will also instruct the market. Since it is early, he can certainly talk about how they are looking at inflation and are considering a potential rate hike in 2022, but he probably won’t get into specifics as those dates are still far off into the future.

Did you notice how many weasel words I used in the last paragraph? This is how the Fed speaks. When things are far away, they use weasel words to imply positivity around them without speaking about any of the current realities. This allows them to let the markets get extended on the wrong trade for a longer period of time. So long as Powell keeps the narrative on this track, he can avoid any significant market disruptions which will allow for them to kick the can down the road a few months. This will mean that the buying opportunity for crypto, stocks, forex, will probably extend for a few months before the continued exit from USD starts up again in earnest. The only potential curveball will be if he is forced to answer a real question from someone with a moderate understanding of the mathematical externalities involved with funding a government deficit of this size and the impact that has on the treasury bond markets. But the news media usually does a great job at keeping people like that far away from press conferences, so the chance of that happening is low, which gives us more time to buy. If you want to add to your crypto portfolio, understand that this means prices will either be flat, or trending down for the next few months until the narrative breaks. We all want more time, this dishonesty in media gives us more time, and should not be looked at in a completely negative light.

5. US Bond Auctions

There will be 3 US bond auctions this week, all will be shorter term notes. I will continue to update the spreadsheets and graphs as results come in so that the trends in these auctions can be contextualized.

6. Conclusion

As you can see from this post and last weeks post I am beginning to paint an overall macro picture for you to use when considering how to apportion your investments if you are a more active trader. Right now its a decent time to be in cash-equivalents as the narrative in the US will slowly drive prices down for most counter-inflationary assets over the next few months, or until the narrative breaks.

This will be the 2nd time the US FOMC is trying this same narrative. Each time the FOMC tries to repeat something, the markets get a lot smarter and a lot faster at reacting to it. As an example, the first QE cycle in 2010 was done over 2 years until they hit the final level of QE. The 2nd QE cycle in 2020 was done over a few months from the crisis in September 2019 to the actual bottom put in back in March 2020. The first taper cycle was dragged out and didn’t begin until 4 years later (Dec 2015), and it didn’t fail for another 3 years when the Trump administration tried (poorly) to make it work. This will be the second taper cycle, and I suspect that its failure will only take a few months as the markets will be a lot less swayed by the words of the FOMC.

My assessment is not rare and many others will also be trading this the same way. Which means that when the narrative breaks, we will have to be aggressive about turning those cash equivalents we are holding back into counter-inflationarys as quick as we can. Its also why there is no point in selling any counter-inflationarys for cash equivalents that we already have positions on. I don’t sell crypto, except to buy more crypto. You should avoid doing so unless you are very experienced and very active as a trader. What we will be watching for is when old man Powell collapses, at which point, we step on the fucking gas.