It seems hardly necessary these days to remind ourselves of the importance to Forex traders of using stops, but reminded we were in the early hours of Friday morning when the the GBP came crashing down. The precipitous fall took precisely two minutes and many traders, from the US and the European side of the pond, were either asleep or on their way home. We can consider the culprits, which include algorithms and even fat fingers, but the lesson is clear … protect your overnight open positions and never trade without a stop.

What is now more interesting is beyond the question of blame, but the necessity of considering the implications of this dramatic story not just in the UK and not just as Forex traders, but in the larger market-place and that includes the sentiment environment and the vulnerable looking equities. The other issue we need to pay attention to is the spectre of inflation without growth and the growing awareness of the need to do battle with the bubbles.

The Week in Review
The week got off to an unexpected start with rumours of tapering from the ECB, which is not a u-turn in monetary policy. They were always intending to or at least planning, to stop the process in March 2017, but talk of this when the rhetoric has been leaning towards doing what was required for as long as required, that is more easing to stimulate growth, came as an initial surprise.

There has been talk of a scarcity of bonds available for purchase by the ECB and this may have been a factor. There is also an issue with the effectiveness of the QE program which is still not showing any signs of real or prospective growth and that in turn is creating further distrust of central bank policy on a global scale. This is the scale of the program so far,

We have already looked at the flash crash in the UK, but earlier in the week the underlying weakness was already apparent, as solid data for manufacturing PMI did nothing to support the UK currency. It blew past the expected number whilst services also edged up and normally both would indicate the possibility of future growth. Both were in fact ignored by the market.

In the US ISM services PMI also came strongly at 57.1 beating the expectation of 53.1. However and as usual the US gave us a mixed bag of data. The big news of the week was due to be the NFP but it got swallowed up by the drama in the UK. It was,however, a miss and a dreary uninspiring 156K which didn’t even match the month before. It leaves the speculation door wide open. There is little doubt that against the rest of the field,the USD looks strong.

The S&P continues to consolidate and looks bearish when you consider the reaction to Friday’s NFP
During the week we also saw a turn down in dairy prices in New Zealand, which may give some opportunities in the NZD in the week ahead.

 

The Week Ahead
Theory Into Practice: The Flash Crash Warning!

We have a quiet week as far as the calendar is concerned.
Monday, Columbus Day in the US the stock market is open but volume is likely to be thin and the Bond market is closed

Tuesday, German economic sentiment…that could be interesting!Wednesday, Jolts data and some more Fed Speak.

More importantly, we get to see the FOMC minutes.

Thursday, Chinese trade balance , US weekly unemployment and crude oil inventories

Friday, The busiest day for the market to watch: AUD RBA financial stability report, Chinese CPI and PPI and UK credit conditions. Also the US retail numbers and PPI . Also, consumer sentiment in the US and Fed chairwoman Yellen will speak in the evening.

The Opportunities:
We will be looking for the best of the USD long trades, USDSGD,

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NZDUSD

This will require a pullback or a break of the weekly low:

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and the USDCAD are all candidates. Interestingly the USDCAD, which looks bullish ,certainly reflects more USD strength than Oil strength.

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S&P500 is also still on the short list when the time is right and it may need a breach of the monthly low.

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The DAX similarly is a watch of the weekly low and the 200 EMA. It is also a lot to do with the Deutsche Bank issue.
Gold is still a long but just not now. With the possibility of stagflation and political unease around Brexit and the US presidential elections and a host of other global hot spots, we are prepared to wait patiently for the right conditions.
Also on the list EURJPY longs and AUDJPY shorts, the latter dependent on the risk environment.

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We will be back on Thursday to show what positions we took and why and the specific strategies with each pair. Please note these are our trading ideas and not recommendations.

I will close with a very big ‘by the by’ in the US on Friday. Rather quietly the US DOJ failed to reach an agreement with Deutsche Bank. That means there is huge uncertainty over the crisis which has been somewhat sidelined by talks of Brexit among other things.

These ‘other’ things include another Trump/Clinton debate Sunday evening, early Monday for many of us. It is a dangerous mix, with more potential fall out. The flash crash may be the harbinger of more of the same to come. It will pay to be protected as well as opportunistic.

Judith Waker
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