Today’s Key Market Drivers: 5th December 2018
“The S&P 500 fell over 3% on Tuesday.”
Before I explain what is specifically happening in financial markets, I want to give you the broad overall snapshot of what’s going on. The notes directly below are notes I create for myself and put into my personal trading diary so I keep things in perspective and keep things simple. A copy of my personal trading diary is within the Trading Mastery Workbook.
Here is what is causing the volatility on financial markets. 5th December 2018.
- Traders are now concerned that the increased volatility in financial markets may mean the US Fed does not raise rates in December as they indicated they would. This is putting downward pressure on the US Dollar as the current Fed interest rate may now be at or close to its high.
- Financial market history is spooking traders because each time the 2 Year US Treasury Yield has risen above the 10 Year US Treasury Yield in the past 30 years the US economy has had a recession within 18 months. This is the reason why US stock indexes fell sharply on Tuesday.
- When we see such sharp declines on US stock markets the immediate reaction on currency markets will be a rally on the Yen and Swiss Franc. The US Dollar will also rise sharply against the Aussie, Kiwi and emerging market currencies.
Whilst the AUD v USD and NZD v USD has pulled back from their weekly highs, once the gaps from Monday close my expectation is, we will continue to see a rally higher against the US Dollar and this also goes for the EUR v USD and ultimately the GBP v USD once Brexit is sorted. The 10 Year US Treasury Yield is a very good guide to “big money” expectation and the US Dollar was roaring higher earlier this year as the 10 Year Yield touched 3.25% and the US Fed continued to indicate that the US economy was doing so well it would need to raise rates in December and each quarter throughout 2019. What we are now seeing is the exact opposite with the US 10 Year Treasury Yield falling to 2.9%, the US Fed recently indicating it is close to finishing its interest rate cycle of tightening rates and traders are now concerned the US economy may have a recession in the next 18 months. The shine is quickly coming off the US Dollar.
The RBA yesterday released their last policy statement for 2018 with the next statement not due until February 2019. The Central Bank struck a more hawkish tone suggesting inflation, GDP and wages growth would steadily continue to rise over time which gave traders no reason to short the AUD post the statement release. 3rd Quarter GDP data is due at 11.30am AEDT today so expect to see increased volatility on the AUD when this number is read by traders.
The Bank of Canada will release their December policy statement today with traders expecting the BOC to keep rates on hold at 1.75%. My expectation is the BOC wants to continue to normalise rates, however, with Oil prices recently falling sharply and the current volatility on financial markets it may mean the BOC strikes a more dovish tone today than they would have a month or so ago.
The winners are not rewarded because they take the most trades, the winners are rewarded for being the most patient and disciplined with their approach. Those traders who chose to chase the price of the AUD, NZD and other currencies higher on Monday and Tuesday will likely be licking their wounds this morning. Please ensure whatever strategy you settle on you remain clear, calm and decisive with the approach and you are not shooting from the hip thinking you know where price is going next.
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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