HYCM Market Insights & Trading Tips

Market Mood USOIL 03.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the USOIL on Youtube.


Oil was able to stage quite a recovery yesterday putting in a Bullish Outside Bar on the daily chart from key support. What was the reason for this? It was all about the coming OPEC+ production cuts which are scheduled to be withdrawn at the start of 2021. The significant news that haloed with the recover was that the Russian energy minister met with domestic oil companies and they discussed the potential for rolling over current production cuts for an additional 3 months until the end of Q1 2021.

This means that pullbacks in oil should find buyers ahead of the US election today. However, remember that a Biden victory is still expected to be a negative for US oil and could put some pressure on prices in the near term.

Trade Risks: The main risk to this trade is any negative news from OPEC+ that scheduled production cuts will be lifted at the start of 2021.

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The bullish and bearish case for oil
by Giles Coghlan, Chief Currency Analyst, HYCM

Oil is in an interesting place at the moment as near term pressures weigh on the commodity. However, there are also near term expectations that OPEC+ will intervene this month to help support failing prices. This article lays out the bullish and bearish case for oil.

The case for the bears

 

1. The rising COVID-19 cases across the globe means that there are growing return to national lockdowns. In Europe there has been national lockdown news for Germany, France, Belgium and the UK.
2. Hedge fund traders had been increasing their longs expecting OPEC+’s production cuts to be scrapped for the New Year. However, in the latest CFTC report money managers cut their net long US crude futures positions.
3. The nation if Libya is now returning back to full production. The country is expected to return to 1 mbpd in the next month or so. Current production levels are up to 850K bpd+. This extra supply weakens oil price.
4. Last week the EIA report did not help lift oil prices. Instead US crude oil inventories increased by 4.32mbpd over that week. This was much more than 1mbpd the market was expecting.
5. A Biden victory is seen as oil negative Biden is keen on banning fracking on federal land and willing to cut subsidies for fossil fuels.
6. US drillers add most oil and gas rigs in a month since May 2018. This means that the chances of over supply are there in the market.

The case for the bulls

 

1. The main near term case for the bulls is that that OPEC+ will abandon proposed production cuts due to come at the start of the year. That should come this month either before the JMMC on November 17 or the end of the month/early December for the OPEC+ meeting. The strong November 02’s recovery in oil was due to the Russian energy minister meeting with domestic oil companies. At that meeting they discussed the potential for rolling over current production cuts for an extra 3 months until the end of Q1 2021.
2. Possible vaccine news that helps the market recover.

In the near term the bias remains to the downside for bears so the recent strength should find sellers. However, production cuts from OPEC+ could give oil prices a boost, so watch out for that headline.

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Market Mood AUDNZD 04.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the AUDNZD pair on Youtube.



Strong AUD, Weak NZD

The RBA met this week and they acted as the market expected by cutting interest rates to 0.10% from 0.25%, increasing bond purchases by $AUD100 billion, and also dropping the 3yr yield target to 0.10% from 0.25%. All of this was expected buy the market and the AUD had been sold into the event. It was a sell the rumour, by the fact scenario. So, the AUD was able to rally out of the RBA meeting on the news that Governor Lowe considered the RBA moving to negative interest rates as highly unlikely.

The RBNZ by contrast is open to negative interest rates for the coming year and is still to extend it bond purchases.

This opens up a AUDNZD long bias from market.

Trade Risks: The main risk to this trade is if the RBNZ meet on November 11 and walk back from negative rates.

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What did we learn from the RBA yesterday?
by Giles Coghlan, Chief Currency Analyst, HYCM

The Reserve Bank of Australia met this week and lowered interest rates to 0.10% from 0.25%. This was an expected move. It was also a widely flagged move leading up to the event by the RBA’s governor. In addition to the rate cut there was an extra $AUD 100bln of bond purchases of 5-10yr maturities for 6 months. Again, all of this was expected.

Furthermore, the RBA said that the cash rate will not be raised for the next 3 years. The RBA Board also said that it is willing to do more if necessary and is prepared to buy bonds in any quantity to keep the 3yr yield target which was lowered to 0.10%. Other key highlights of the meeting include:

1. Conditions for raising cash rate are: higher inflation, rising employment and higher wages.
2. RBA said recent economic data has been encouraging and near term outlook better than it was three years ago.
3. Unemployment is expected to remain high but peak below 8% and sees end 2022 unemployment at around 6%. This is better than the previous forecast of unemployment peaking at 10%.

You can read the full statement here.

In the press conference after the rate statement Governor Lowe said that negative rates were extraordinarily unlikely, but that the RBA was still able to act to support the economy. However, Governor Lowe said that all that can be done on rates has been done now and that the focus now is on quantitative easing. This decision opens up a potential medium term divergence between the RBA and the RBNZ. The RBNZ is preparing to turn rates negative which should now support the AUDNZD pair higher. The next RBNZ meeting is on November 11, so watch that decision for any indication of the RBNX shifting away from a negative rates bias. If they do, that will invalidate the outlook.

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Market Mood XAUUSD 05.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the XAUUSD on Youtube.


The fundamental picture for gold remains strong. Interest rates around the world are projected to remain weak for the next few years. The Fed is on hold until 2023. The BoE meets today and rates are rock bottom and expected to remain so. The RBA cut rates this week to 0.10% from 0.25% and some central banks actually have negative interest rates. This is a great environment for gold to prosper in. The huge levels of expected US fiscal stimulus are also supportive of a weak USD alongside the large levels of QE.

As US election risks subside, this should support gold buyers.

Trade Risks:

1. The main risk to this trade is if central banks start raising interest rates.
2. Heavy selling in equity markets.

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Reasons to buy gold regardless of the US election
by Giles Coghlan, Chief Currency Analyst, HYCM

Gold: The right time to buy?

Now the US election risk is fading and volatility is returning to normal levels this may be the perfect time to buy gold.

Global low interest rates

Interest rates around the world are projected to remain weak for the next few years across multiple countries. The Federal Reserve have said that they will remain on hold until 2023. The Bank of England met this week on Thursday and rates are rock bottom and expected to remain so for the foreseeable future. The Reserve Bank of Australia cut rates this week to 0.10% from 0.25% and expect to remain at these low levels for the next three years. Some central banks actually have negative interest rates like the Swiss National Bank and the Bank of Japan.

The inflation factor boosts gold’s appeal

Inflation is a help to gold’s appeal. When you factor in inflation real interest rates are negative across many countries. Put simply this means that cash loses value over time. Therefore, investors are incentivised to put their cash to work. Also, with quantitative easing rising across the world this further weakens currencies, so a commodity like gold can gain even further.

On top of all this the current COVID-19 recessionary environment lays a solid foundation for further gold gains. In the last three recessions gold has gained in value.



Where to enter

One obvious place for traders to enter was on the break of this, and pullbacks towards, daily trend line. Stay above and bulls are in control. Get below and bears are in control again. The targets are 1950, 2000, and then 2050.

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Market Mood XAUUSD 06.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the XAUUSD on Youtube.


Yesterday’s post flagged a great time and place to buy gold as the daily trend line broke out. The weak dollar on an expected Biden win was the catalyst for the move. The fundamental picture for gold remains strong. Interest rates around the world are projected to remain weak for the next few years and the Fed is on hold until 2023. See here for yesterday’s post.

As long as Biden is still ahead in the election race we should expect gold buyers on pullbacks. Biden is currently on 264 electoral votes and only needs 6 more which should come from his present lead in Nevada.

Therefore, as long as this mood remains, expect gold buyers today on pullbacks .

Trade Risks: The main risk to this trade is if President Trump wins the US election as this should strengthen the dollar and weaken gold in the near term.

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Week Ahead 09.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

The US election took centre stage this week as world markets awaited the outcome. Once again the polls were unhelpful in their projections. A clear Biden victory had been anticipated, however President Trump gained far more voters than virtually any-one predicted. In the end the states of Wisconsin and Michigan turned in Biden’s favour and this has almost certainly given Biden the victory. At the time of writing there are only a few key swing states left to finalise their counts. US stocks rose, the dollar fell, and gold launched higher anticipating a Biden win.

Other key events from the past week

1. AUD: Interest rate decision, November 03. The RBA cut interest rates to 0.10% from 0.25%, increased bond purchases by $AUD100 billion, and dropped the 3yr yield target to 0.10% from 0.25%. All of this was expected, so it was a sell the rumour, buy the fact scenario event with AUD rallying higher this week.
2. UK: Interest rate decision, November 05. The BoE kept rates unchanged, in-crease asset purchase to £875 billion, and committed to do whatever it takes. The GBP rallied higher post the meeting because the BoE was pretty low key about moving to negative interest rates.
3. US: Interest rate decision, November 05. The Fed made virtually no changes to their statement and rates were kept unchanged at 0.00-0.25%. The lack of changes was likely due to not creating unnecessary distractions during the US election.

Key events for the coming week

1. Oil: OPEC+ to extend cuts? November 07. If we get confirmation that OPEC+ will extend production cuts into Q1 2021 that will be even more supportive for near term oil prices. This is the one key headline oil traders need to watch for next week ahead of the JMMC meeting on November 17.
2. NZD: Interest rate decision, November 11. The RBNZ is expected to cut interest rates to negative next year. Expectations are that they will cut rates next week, but will they keep signaling negative rates for 2021? If they do many investors will expect AUDNZD buyers on pull backs after the RBA decision.
3. EUR: COVID-19: Shutdowns in Europe, November 09-13. France, Germany, UK, Italy and Spain have all announced new lockdown measures. How can that impact European markets?

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What did we learn from the Bank of England meeting last week?
by Giles Coghlan, Chief Currency Analyst, HYCM

Taking place amid the US election drama it was easy to miss this meeting. The Bank of England met last week on November 05. They kept interest rates unchanged at 0.10% at their last meeting as expected. However, the surprise was that they increased their asset purchases by a greater level than expected.

Expanded asset purchases

The asset purchase levels were increased by £150 bln vs the £100bln expected. The normal reaction to rising QE levels would be a weakening of the GBP. However, out of the meeting the pound rose. Why? This was due to a sentence from the Bank of England on negative interest rates. The sentence referring to negative interest rates was that the Bank of England said that ‘participants attach some weight to the possibility of a negative bank rate’. Investors had been hoping for a more definite move towards negative rates. This showed that the BoE was not committing to them. However, given the fact that the BoE has asked commercial banks to report back to them on the profitability on negative rates they would most likely wait to hear back from them before deciding on negative rates one way or the other. The deadline for hearing back was after the last meeting, so it does make sense why the BoE was pretty neutral at their last meeting.

Chief Economist neutral on rates

Furthermore, the Chief Economist, Andy Haldane is not overly keen on negative rates and this makes sense as their value is far from clear. Other central banks that have used them have not reported back great gains. It also creates administrative difficulties as certain accounts will be liable for negative rates, while other accounts won’t. It is a very hard sell to start charging domestic savings for negative interest rates. Many people would simply stop depositing money in the bank.

The main point

It was the Indifference on negative interest rates last week that caused the GBP to rise. The trigger for a sentiment shift on the GBP in terms of monetary policy will factor around the willingness for the BoE to use negative rates:

1. If the path to negative interest rates is opened up, expect GBP weakness.
2. If the path to negative interest rates is blocked, expect GBP strength.

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Market Mood XAGUSD 09.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the XAGUSD on Youtube.



The fundamental picture for gold to find buyers is well reported amongst market participants. However, alongside gold gains, silver is also expected to increase. Expectations of a low USD, low-interest rates, high levels of QE, and a Biden Presidency are all anticipated to be positive for both gold and silver.

This means that silver is also a potential medium-term buy with buyers expected on pullbacks to key support.

Trade Risks:

1. The main risk to this trade is if President Trump finds a way to contest the US election as this should strengthen the dollar and weaken silver in the near term.
2. If the Federal Reserve signals a surprise shift in rising rates this will invalidate this outlook.
3. Any serious reason for USD strength will invalidate this outlook.

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What to expect from the Reserve Bank of New Zealand meeting tomorrow
by Giles Coghlan, Chief Currency Analyst, HYCM

The RBNZ meeting is tomorrow and their last known direction was for negative interest rates for New Zealand in 2021. So, what else can we expect from the RBNZ tomorrow?

Funding for Lending Programme (FLP)

Governor Orr should release details of a new tool, called the Funding for Lending Programme (FLP) tomorrow. The programme is designed to provide cheap loans to banks so they, in turn, can further reduce lending rates for customers. Some economists see this being entirely focused on business lending so it boosts economic activity rather than house prices.

Why this tool now?

This funding tool itself is seen as an important precursor to negative interest rates. The thinking behind this is that if the RBNZ do decide to take the official cash rate negative next year the FLP rate would also fall with it. This would mean that banks can directly pass the cut on to customers.

Will interest rates still go negative?

The consensus amongst New Zealand economists is that the RBNZ is to cut -0.50% in 2021. At this stage, negative rates are still expected. However, several economists think the bank will hold back from rate projections tomorrow in order to avoid being pinned down. The situation could easily have changed sufficiently for the RBNZ to walk back from using Negative Interest Rates. On Monday the RBNZ shadow board met. This board is put together by the New Zealand Institute of Economic Research. The shadow board sees less need for further stimulus. The need to go negative was seen as now reduced. See here for more info.

What’s the trade outlook?

This depends on the direction that the RBNZ take out of their meeting.

If the RBNZ still look like using negative rates

Well, last week the RBA kept rates on hold and said that the current 0.10% level was pretty much the bottom rates will go in Australia. So, if a divergence opens up and the RBNZ is still moving towards negative rates then an AUDNZD buy from pullbacks would be one obvious outlook. However, if the RBNZ are more optimistic and walk back from negative rates, then that changes the AUDNZD outlook to neutral.



If the RBNZ walk back from using negative interest rates

However, a neutral RBNZ potentially opens up an NZDUSD buy on pullbacks as the NZD dollar should boost higher on an optimistic RBNZ against a weakened dollar post-Biden victory.

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Market Mood CAC40 10.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the CAC40 on Youtube.



Yesterday’s positive vaccine news on the Pfizer headlines caused investors to buy everything in a snap move higher across global stocks. Bond markets were also sold off and yields raced higher across major bond markets. When the European stock markets closed yesterday US stocks were still near their record highs. However, now there has been a strong reversal in US stocks. S&P500 E-mini futures are over 3.5% off their highs and Europe still faces a winter of a health crisis that can’t be avoided by a vaccine.

This means that there should be a retracement lower in the CAC40 after yesterday’s euphoria. Expect sellers on the CAC40 today.

Trade Risks: The main risk to this trade is if more positive vaccine news boosts stocks higher.

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Has the S&P500 put in a top?
by Giles Coghlan, Chief Currency Analyst, HYCM



Bloomberg is making a case for the response to the vaccine euphorias being overdone. The heart of the thinking from Bloomberg was as follows:

1. Traders are not trained immunologists and have not driven down into the detail of what the vaccine will mean in terms of how it is delivered. Initial results show that protection is achieved 7 days after the second dose. This second dose is needed to come three weeks after the first dose. In total the whole process takes 4 weeks. So, in the case of needing to be effectively vaccinated by year-end you need to start the process by December 03.
2. On a positive note, a 90% base effectiveness rate is a very good sign for other vaccines which suggests there may be a range of other vaccine options in 2021.
3. One tricky element is that the vaccine needs to be stored and transported at -70C. Pfizer hopes to apply to the FDA to start distributing later in November. They have around 50 million doses prepared this year (this is enough to treat 25 million because remember that you need two dos11-11-20es per person ). This means that the best-case scenario is for 25 million people vaccinated by year-end.
4. Now consider that about 3.9 million people got the virus last week. if you then assume that this number of people gets the virus each week it will mean that by year-end there will be 29 million new cases. However, only 25 million people will be vaccinated. This means there will be a net growth of 4 million cases.

It is important to remember that the vaccine process will take time and that therefore a correction lower in US stocks would make sense heading into the end of the year.

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Market Mood XAUUSD 11.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the XAUUSD on Youtube.



This week’s positive vaccine news on the Pfizer headlines has caused 10Y US bond yields to spike higher. This helped the USD higher too which resulted in XAUUSD seeing its worst single day in a month as investors begin to look through the crisis and into a post-COVID-19 world where central banks start raising interest rates. This would be a negative environment for gold.

However, despite these recent falls in XAUUSD the medium-term picture still favours further gold buyers. Interest rates are low, QE purchases are still high around the world, and there are questions over how quickly a vaccine can be distributed and used.

This means that deeper pullbacks back down towards $1820 and the 200EMA on the daily chart should find dip buyers.

Trade Risks: The main risk to this trade is if the positive vaccine news causes US10 year bond yields to keep rising. This will strengthen the USD and put further selling pressure on gold.

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This week’s RBNZ rate meeting in focus
by Giles Coghlan, Chief Currency Analyst, HYCM

The RBNZ kept the asset purchase programme maintained at $NZD100 billion and introduced the new Funding for Lending Programme as planned. Furthermore, the RBNZ maintained projections that the Official Cash Rate would remain at 0.25% until March 2021. At first glance, all appears to be as expected. However, the detail shows revisions for inflation and employment. Inflation is now expected to rise to 0.9% in Dec 2021 vs the previous forecast of 0.3%. Employment was projected to still weaken further in the near term, but then pick up into next year.

A more optimistic outlook

Most committee members agreed that the risks to their baseline scenarios were less skewed to the downside than they had appeared earlier in the year. This is hardly surprising with the positive vaccine news this week that the RBNZ is feeling more upbeat.

The market buys NZD on the statement, why?

However, it is not just a more optimistic outlook that caused the market to buy NZD. It is also the fact that the last RBNZ meeting was really designed to launch the Funding for Lending Programme. The whole principle of these programmes is that if rates do go negative banks can easily pass those savings onto customers. Here is an extract from the RBNZ’s statement:

Members noted that the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor pass-through to lending rates closely. Members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus and that it was the best tool to deploy at this time given the Committee’s principles for alternative monetary policy instruments.

So, the RBNZ has needed to keep up some sense of why this is an important move at the meeting. In theory, they can still cut rates to negative and have deliberately kept that option open. However, the message given by Governor Orr speaks clearly as he resisted the calls to cut rates earlier in that the rate is to remain at 0.25% until March 2021. There were no earlier calls for negative interest rates before then. The investment banks ANZ reduced their calls and see a cut to 0.10% in May and -0.25% in Aug 2021. ASN no longer expects negative interest rates and that seems the most likely route now.

Therefore, with this shift in policy, a swing trade on EURNZD short could be excellent as the ECB prepare a new wave of support for a COVID-19 impacted continent. Expect sellers on pullbacks in the medium term as long as Europe’s situation looks challenging with rising virus cases, deflationary issues, and an impending slowing economy. See full statement here.


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Market Mood AUDNZD 12.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the AUDNZD pair on Youtube.


Weak AUD, Strong NZD

Yesterday’s RBNZ meeting resulted in heavy NZD buying as investors see the RBNZ walking back from negative interest rates. Although the RBNZ committee kept the possibility of interest rates alive for next year their assessment was upbeat enough for ANZ and ABS investment banks to change their forward guidance expectations. ABS no longer expect the RBNZ to move to negative interest rates next year and NZ10 year and yields shot higher.

The bond yield spread between the Australian and New Zealand 10 year bond narrowed which indicates further downside ahead in the AUDNZD pair.

Therefore, expect AUDNZD sellers on pullbacks.

Trade Risks: The main risk to this trade is if the outlook for Australia significantly improves compared to New Zealand.

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Week Ahead 16.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Explosive moves higher in global equity markets were seen this week as two large events hit markets simultaneously. First of all Joe Biden was named as US President-elect as he surpassed the required 270 electoral votes. Secondly, Pfizer and BioN-Tech announced their vaccine was over 90% effective in combating COVID-19 and that regulatory approval could be sought as soon as the end of November. These two pieces of news caused risk assets to sharply rally higher and bond yields too as better times for global growth are seen ahead for 2021.

Other key events from the past week

1. Vaccine news: Pfizer and BioNTech’s breakthrough, November 09. The production of the vaccine will be scaled up into 2H of 2021 to reach 1.3bln doses for 2021. The ultra-low temperature freezers (-70C) needed to store the vaccine are commercially available to help with logistics.
2. NZD: Interest rate decision, November 11. The RBNZ kept rates unchanged as expected. However, they were more upbeat on the economy and this caused investors to reduce their expectations of negative interest rates coming from the RBNZ. New Zealand bond yields rose sharply higher lifting the NZD this week.
3. Gold: Record loss on vaccine news, November 09. Gold futures posted their biggest loss in 7 years as positive vaccine news boosted the USD and US bond yields. What does this mean for gold moving forward?

Key events for the coming week

1. DXY: More dollar gains? November 16. The Dollar Index is stronger on the positive vaccine news. This does raise some questions now as to whether the reflation expectations have been priced in for now. Profit-taking on recent USD short positions may halt USD losses next week as 92.00 holds firm for the DXY.
2. AUD: Employment data, November 19. In a light calendar week, the employment data out of Australia will be interesting. The RBA wants to see employment rising to support any consideration of a future increase in interest rates and low unemployment levels will support the AUD going forward.
3. EUR: COVID-19: Europe shuts down, November 16-20. France, Germany, UK, Italy, and Spain have all announced new lockdown measures. Despite recent vaccine news rising COVID-19 cases will still weigh on European growth.

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Bitcoin goes mainstream?
by Giles Coghlan, Chief Currency Analyst, HYCM

In recent mainstream media reports the words Bitcoin and cryptocurrency are only associated with two groups of people. Firstly, terrorists and criminals. Secondly, with those who want to see a new, utopian future. So, very limited mainstream appeal.

Crypto’s perception changing?

However, recent weeks have seen a major shift in the way that Bitcoin is understood by the world when PayPal announced it will allow its 340+ million user base to buy and spend Bitcoin. This was huge news. Now, there were some small print to this headline that is worth being aware of. Firstly, users cannot transfer cryptocurrencies into or out of PayPal. Secondly, users will not have control of the private keys (the long string of numbers and letters that allow holder to move their digital assets). Notwithstanding the previous two points the endorsement by PayPal sends a green light to the world. Crypto’s are ok to be used by ordinary people. It is the mainstream adoption that this signals which is so bullish for Bitcoin. When central banks are also talking so openly about digital currencies the world is being told that digital currencies are the next, legitimate step. This helps the BTCUSD buyers case.

Bloomberg and JP Morgan send another signal

The famous hedge fund manager Paul Tudor Jones said just last week that Bitcoin’s bull run was just its ‘first inning’ and it was the ‘best inflation trade’. Paul Tudor Jones reported that he has a small, single digit investment in Bitcoin himself. Bloomberg issues an intelligence report projecting Bitcoin to be at $100,000 in five years. JP Morgan’s Global Quantitative and Derivatives Strategy team consider Bitcoin to have considerable upside potential. This shows that Bitcoin is being opened up to more conservative and traditional investors. With JP Morgan and Bloomberg giving positive reports they are opening the gates for more bitcoin buyers from areas that would have normally steered clear of Bitcoin.

All of this means that Bitcoin’s appeal is set to reach more traditional and highly capitalised investors in the near term. Now, no matter what your view is on Bitcoin, new ideal currency or weird anomaly, BTCUSD looks like a buy on the dips as long as this positive stance for Bitcoin remains.

A retest of the weekly broken trend line would be the first obvious test for the bulls.


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Market Mood AUDJPY 13.11.20
by Giles Coghlan, Chief Currency Analyst, HYCM

Listen to the latest market mood for the AUDJPY pair on Youtube.



Strong AUD, Weak JPY

The RBA is expected to keep interest rates at 0.10% now for the foreseeable future. This means the RBA’s easing cycle is done for now. Also, with the positive vaccine news pro-cyclical currencies like the AUD should benefit as commodities move higher. Iron Ore demand on global growth prospects will boost the AUD and rising equities will also support the AUD medium term. Finally, China’s recovery helps the AUD as around 30% of all Australia’s GDP comes from its trade with China.
The JPY should remain weak going forward as positive risk sentiment of Pfizer’s vaccine news boosts market sentiment. The risk on tones weaken the JPY.

Therefore, expect AUDJPY buyers on pullback.

Trade Risks: The main risk to this trade is if the COVID-19 vaccine proves ineffective and the medium term global growth outlook changes.

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The impact of fiscal policy and national debt on FX markets
by Giles Coghlan, Chief Currency Analyst, HYCM

Monetary policy concerns the policy action of central banks to ensure smooth financial operations. Fiscal policy on the other hand relates to the role of Governments to provide financial assistance to national economies. Economies are usually first and foremost supported by central banks in cutting interest rates to support growth. Cheaper interest rates means that borrowing is cheaper and companies are more able to borrow money to fuel expansion and growth. However, the problem is that central banks have now cut interest rates to as low as they can. Many of the world’s central banks not have interest rates at or around 0. Of course there is the potential for central banks to use negative interest rates, but the effectiveness of negative interest rates is far from clear.

In a world where monetary policy is running out of impact fiscal policy is set to become more and more important.

So what does this mean?

This means that if fiscal policy is a new major tool to help lift countries out of our present COVID-19 slump then countries abilities to provide economic support will be closely scrutinised. One area that is increasingly of a concern is the level of debts that individual nations have. The currency markets set to outperform will be those who have the means to use the greater firepower. Those with less national debt will be most able to provide strong fiscal support.



Politicians in countries with large debt to GDP ratios will face pressure to avoid further spending. The UK for example has public debt coming in at over 100%. The UK has a budget deficit forecast of over 18% for this year. This makes headway for the GBP tricky as the UK’s Finance Minister has made clear that the public finances will need to be replenished through tax rises. Also, the worker furlough scheme has been replaced with a less generous scheme. The YEN is an exception to this rule with the JPY gaining on safe haven demand despite its 200+% debt to GDP rate. However, this could be the new age of fiscal policy usurping the previous place of monetary policy. Even is a Brexit trade deal is passed the 1.3500 level should contain the GBPUSD in the medium term with more downside than upside favoured.


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