When someone asks me what market fundamentals I worry about, I usually quote Billy Joel from “We Didn’t Start The Fire”. You know it.
Birth control, Ho Chi Minh, Richard Nixon back again
Moonshot, Woodstock, Watergate, punk rock
Begin, Reagan, Palestine, Terror on the airline
Ayatollah’s in Iran, Russians in Afghanistan
(Tell me you didn’t sing that to yourself)
I do this so that everyone can have a good laugh and I don’t have to bore my questioner to death with a genuine answer.
But there is one line that’s becoming very relevant today, ironically enough.
North Korea, South Korea, Marilyn Monroe
Pity I’m not talking about Marilyn Monroe.
Kim Jong-un seems to love testing his missiles and bombs over the weekend (I think he’s trading and loading up on gold and the Yen late on Fridays). The market gaps open and we all wonder what Donald Trump might say in response.
This rather long introduction is for the benefit of newer traders who might wonder, why, when Kim Jong-un fires missiles at Japan, the Japanese yen appreciates in value? Seems crazy right?
I’m going to unpack it as briefly and simply as I can for you, and then I’ll get on with the pairs I’m keen on trading this week.
Risk-on, risk-off Miyagi-sun
Investors like to put their money where they get the best returns. Often, the best returns go hand in hand with increased risk. Think about a simple loan – if the bank thinks you’re not going to pay them back (you are riskier), they might still give you a loan, but they hike up the interest rate so that the reward meets the risk.
Global markets are no different. When North Korean missiles threaten world stability, investors rush to assets that are less risky (assuming that the riskier stuff will be harder hit). Some of these assets include gold, the yen and the Swiss franc. Investors get out of “riskier” assets like equities and the US dollar.
I’m not going to go into the ‘why’ of each of these assets having a different risk status, except for the yen, because I brought it up earlier. The simple answer is that the Japanese economy, although robust and extremely stable, has experienced a steady GDP decline since the early 90’s. In fact, the 90’s are known as the “Lost Decade”. That’s a bleak term if ever.
Anyway, holding the yen provides very little return and is often seen as just as beaten down as the Japanese economy. In other words, it can’t really decline much more, at least not nearly as much as the dollar or cable, when the missiles start flying. So it makes sense to buy to protect wealth when the riskier stuff is too scary.
So yes, North Korea firing missiles at Japan results in the Yen appreciating. Interesting that, isn’t it?
I like the Swissy for a long (sorry Kim, not buying the war-mongering yet)
We saw a spectacular pin-bar print off resistance last week, but price remains constrained in the August channel I have drawn in. I think the only way to go is up.
Trade idea: Wait for a break of the upper channel trendline, acting as resistance. Be smart and wait for further confirmation in the form of a retest.
Last week, I said I was interested in a buy if price bounced off 1.2430. Price bounced off 1.2440 and I ignored it.
I’ve drawn the bounce in the blue box. Price managed a weak attempt higher before slamming back down again. Why wasn’t 1.2440 good enough to take a buy? Because the real buyers, if there were any, were always going to be patient enough to wait for the right level.
Trade idea: Price is stuck right now. Let’s give it a day or two and see if the buyers or sellers come in for a new leg either way.
The Kiwi has cleared support at 0.7230 nicely
I’d like a reason to sell now. I don’t have one yet.
Trade idea: An upward sloping channel on the 4-hour would be a splendid sell signal. We have one forming right now. A break of the channel (and retest) gives us an indication of where price is headed, and where to put our stops.
The very docile EURGBP is retracing nicely to support.
Trade idea: If/When price gets back down to 0.9100, let’s look for a bounce and buy into the lovely uptrend. This trade is last on my list, but probably my favourite pair.