Trends are breaking when nobody expects
Watching how the large banks switch their forecasts from bullish to bearish extremely often, I remember a joke about two market analysts:
- Do you understand what's going on?
- Yes, let me explain you…
- No! I can explain myself, but as for understanding...
Everybody remembers early 2017, when dollar fans were picking their opponents into pieces by the arguments about the fiscal stimulus’s effect on the USD rate. About the U.S. inflation potential increase and the Fed’s response by means of aggressive rate hiking…Alas, but the wind of change started coming from France, where political risks eased, after Emmanuel Macron had become the president; the euro-area economy surged the highest for the last decade and Mario Draghi started talking about the ECB monetary normalization at the summit in Sintra. Analysts have been fooled. Anyway, can it be different if people usually feel like bald-headed dandelions after a gust of wind of change?
In early 2018, there were quite many euro bulls in the market. Everybody expected the European economy to grow at the same pace and the ECB to quite QE and hike the rate. Almost every large European bank suggested EUR/USD should hit 1.3, being different only in dates of reaching the target. Everybody just forgot about the tax reform and the U.S. inflation rate’s potential increase. The market was like the Doctor Sleep’s family, where the wife realized that her husband had been beating her a year later. Wrong it was! In April, investors remembered about the U.S. fiscal stimulus and aggressive hiking of the federal funds rate. Poor analysts, their bad memory became the last straw that broke their employers’ backs. I, of course, know who is guilty; but I wonder what I should do with the corpse...
The market is as confusing as it has been so far. For example, why, despite all the rules of fundamental analysis, the yen is not climbing up? The U.S. is just about to boost the import tariffs, targeting China; the U.S.-EU trade war truce is about to end, Donald Trump threatens to pull out of WTO. Well, even though dollar has taken away the yen’s status of the main safe-heaven asset, but what about the status of the funding currency? Could the yen have lost it? But the turmoil in emerging markets should result in closing the positions by carry traders...Some experts can do nothing but shrug their shoulders in confusion and tear their hair out:
- Barrymore, who was howling upon the moors tonight?
- Excuse me, Sir, I just had a nervous breakdown.
Of course, one may try to explain the USD/JPY increase by the divergence in the monetary policies, or that foreign investors are selling off Japan’s stocks at the fastest pace since 1987. But it is far easier to just give up on it and announce the yen to be a woman! When you start understanding women, you stop understanding yourself.
Where will the wind of change come from this autumn? From the Eurozone? From Asia? Nobody knows; it is only known that summer is going to leave again. It seems to be a maternity leave. In autumn, investors will be looking forward to news about Italy’s budget, the U.S. new sanctions and the US mid-term elections; they’ll be carefully following Donald Trump’s tweets, trying to guess the Fed’s next decisions. The Forex life is going on, and so, the terrorists, watch your bombs when you exit the train.
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