Today’s Key Market Drivers: 14th May 2019
Safe haven currencies rally and stocks dive after China retaliates with trade tariffs of their own.
It was no surprise that China announced on Monday their own trade tariff increases on US imports following Trump’s announcement a week ago that tariffs on Chinese imports would go from 10% to 25%. The Chinese will increase tariffs on $60 Billion worth of US imports beginning on June 1st. What got traders nervous was not just the increase in tariffs but also an official statement from the Chinese government that said, “the U.S. decision jeopardized the interests of both countries and does not meet the general expectations of the international community”.
The Japanese Yen and Swiss Franc rallied strongly as investors poured their money into safe-haven assets and out of the S&P 500 which fell by 2.4% the biggest one-day decline in 4 months.
Why I like the current price action.
I like the current price action on some of the base currencies that trade against the Yen. I enjoy seeing price spike sharply lower or sharply higher at the end of a 5 Wave move on the 4-hour chart. This is where price and the fundamentals of the market enter my sweet spot and come into my circle of competence. I am a contrarian trader and I am looking for an opportunity to trade back the other way. I am not a trend trader and anyone who tries to trade FX and apply the stock market theory “the trend is your friend” is likely to get burnt. Price action in the FX market is very different to stocks and other asset classes and they should not be traded the same way.
How will traders deal with such negativity?
Sell. Red is what I expect to see across the board today through the Asian trading session with the safe haven currencies continuing to be the stand out performers with no high impacting data to take traders attention away from what is obvious. The Chinese currency will likely come under selling pressure and the flow on effect to any company exposed to China will likely mean its share price falls. Stock markets have been rising all year and recently hit all-time highs in the USA and frankly, traders have been looking for an opportunity to short stocks and pull this freight train back after rallying nonstop since Xmas.
The next point of resistance for the S&P 500 is the daily 200 EMA. I do think this level will be tested but I don’t believe the trade tariffs China and the USA are currently placing on one another will drag stocks back to their pre-Xmas lows. The reason why stocks fell so sharply in December was for a very different reason to why they are falling now. The pre-Xmas sell-off was on fears the US Fed was going to continue to raise interest rates and I don’t believe the trade war between China and the USA at this stage will have the same impact.
As it always does, time will tell but this is not the first-time countries such as the USA and China have used trade tariffs and it certainly won’t be the last. This trade dispute has now taken on a new meaning and it’s going to take months of new negotiations to sort it out, but I don’t think it will derail global financial markets as we saw in December.
China has more to lose so expect selling pressure on the AUD and NZD.
The Aussie Dollar is already now trading well below the key level of 0.70c against the Greenback and with the RBA set to drop rates in coming months and a trade war between the US and China now officially underway, history shows the local currency will likely continue to come under mounting pressure.
Long term I do think the AUD v USD will reach 0.65c before Xmas but there will be pullbacks along the way and you should not immediately fall in love with the AUD or NZD tanking just because we see some increased volatility on financial markets. Yes, there will likely be more sellers than buyers over time when we see such selling pressure it creates an overcrowded market and can often lead to a short squeeze.
Trade like a sniper.
There is no better time for a market-making broker than now. Traders get all wound up in the financial entertainment that is flashing up on websites, they read sensationalised headlines and see price moving quickly on their screen and get sucked into riding what they think is a sure-fire winner.
Volatility is a trader’s best friend when used appropriately but if you get sucked into just chasing the price because it’s moving (which 90% or more of retail traders do) then volatility will be your worst nightmare. Profitable traders have laser-like focus, they sit like a sniper in the bush and they are prepared to wait and wait and wait for the right moment to pull the trigger. Sure, they miss from time to time but the vast majority of the time they don’t. They hit their target, pack up and move on and they don’t get all emotional about the noise and commotion that is going on around them.
Whenever I get up and see such a down day on Wall Street and the safe havens rallying, I just quietly say to myself “sniper AB, sniper”. Think like a sniper, trade like a sniper.
The big money is not in the buying and selling but in the waiting. Charlie Munger Vice Chairman Berkshire Hathaway.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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