Asking The Right Question

Answers How to Make Money in Forex 2019

In a week that saw earnings season open for real, positive noises on China, and the British government lose its Brexit vote, but win a confidence vote, resulting in a see-sawing GBP swing 2.5% to end almost flat, we now look forward to the rest of the year in forex.

The outlook for the foreign exchange markets for 2019 depends on a number of factors as in any other year. The crux is what factors and their impact on respective currencies now and throughout 2019. As ever, you only get the right answer if you ask the right question.

The key to consistently accurate analysis, particularly in the longer term, is not to take a snapshot and extrapolate, like so many outlooks for the next year. Instead we should determine which are the current main drivers of currencies, and how they will develop in the first month and quarter and throughout the year. For any market where the pillars of analysis (FITS: fundamentals, intermarket, technical and sentiment) vary considerably over time, that can be challenging. But for foreign exchange, analysis is compounded by more than just two country sets of inter-related FITS. Currencies appear variably driven by interest rates, trade balances and inflationary growth and are therefore more prone to government or political influence (the trade war, Brexit, OPEC, Turkey, Italy are perfect examples fro 2018). The trick is to look beyond what pundits are saying today to what they will say tomorrow—and often in retrospect. Foreign exchange is complex and begs more dynamic analysis and/or simplification to transform analysis into effective trading strategies.

For this reason and the fact we are very excited about the prospect for forex markets in 2019, we will be updating our subscriber Forex Analysis pages far more frequently in line with their periods. The three-monthly views will be updated every three months, the 10-day every two weeks and the 48-hour every two days. Following a brief successful experiment in 2018 we will also be adding a Next 8-hour outlook for all major USD pairs every day. This also partly reflects the forex trading market of 2018 where many trades performed very well in the short term only to be unwound in a continuously ranging whipsaw market. Similarly we will also be issuing far more forex trades with Matrix (Risk/Return x Probability) scores over 10 rather than 15 to capture these much clearer day trades.

For our Forex Outlook 2019, which will be sent to subscribers next week, we have asked what really drove currencies in 2018, what is driving the market now, and how that may change during 2019, and most importantly what impact that will have on the various currency pairs. The result is a series of more exciting markets and trades than we have seen in a long time.

We have then explained how we expect these market narratives to develop through the 12-month period. But more importantly we have sought to identify more accurate drivers (Nominal Growth, Interest Rate Differentials, Trade Balances, Stock Indices) or measures than are readily apparent (Historical Fractals, Matrix 3-month Forward Fractal) to see they what they say each currency is likely to do, and not only reconcile that to the current narrative but suggest reasons for any possible change to that narrative.

In our series of articles on Foreign Exchange at the end of 2018 we identified the main currency drivers as the interest rate differential, the size of trade balances and the relative inflationary growth outlook (often opposed to actual) between the two respective countries.

These drivers are clearly inter-related but do not always move in sync, and their impact is variable due to the influence of governments (notably the Trade War, Brexit, NAFTA and Turkey in 2018), central bank policy and market sentiment. Although we believe relative nominal growth is the key driver, and both yields and trade balances are a reflection of this, it doesn’t matter in reality provided that we can identify what currencies are more likely to react to in our chosen time frame.

Many resort to technical analysis to bypass these. Yet an understanding of what is driving a market, and in particular historical precedent of similar previous conditions, helps identify which (probabilistic) technical patterns are more likely to work and provide context. In this respect the longer term Matrix fractals (leading 3-month forwards) remain statistically accurate guides to the future longer term direction of currencies as they appear to encapsulate all the above considerations. On this basis, the longer term prognosis of the EURGBP Forward Fractal for Sterling generally and presumably Brexit is not good.

And yet the GBPUSD Forward Fractal suggests Cable will remain supported, thus flagging USD weakness.

The foreign exchange market was largely range bound in 2018 compared to the previous year, even though it largely took the form of a gradual Dollar uptrend for much of the year.

2018 is perhaps best seen as a year of a gradual slowing in the expectation of rampant US and therefore global inflationary growth. The main cause can clearly be attributed to the start of the trade war and its variable impact partly conditioned by the involvement of the various countries and their vulnerability.

In general, the initial reaction to Protectionism is for the Dollar to rally due to the substitution and inflation effect, but later, as this begins to hurt economic growth, the Dollar turns down. We have little reason to believe this won’t happen again.

However the uneven distribution of these up and down moves in the Dollar is due partly to sentiment but also localised events. Brexit and associated political uncertainty continued to hang over the Pound in 2018. In contrast, complacency or a disbelief that the US ‘Goldilocks’ economy would not continue has supported US bond yields and indeed the Dollar. Europe suffered from a steady disinvestment due to the end of quantitative easing and a fall in the expectation of inflationary growth, as reflected by the German DAX underperformance. The consequent (fear of deflation) fall out in commodities largely explains why commodity currencies AUD, NZD, and CAD were amongst the worst performers. The Yen was a ranging oddball as it separated from its interest rate differential for much of the year—an early warning of the risk aversion at the end of the year.

2019 is likely to be regarded as the year of actual rather than expected slowing in global inflationary growth due primarily to the Trade War, for which there is historical precedent.

The impact on currencies should remain less than uniform as markets are likely to remain fragmented until the latest saga of divisive Protectionism ends. Ultimately, USD is likely to be the worst affected, and the consequent spur to commodities suggests that AUD and NZD could possibly be the main beneficiaries. A sentiment driven GBP should recover slowly as USD weakness squeezes (perhaps justified) UK bears even though we doubt Brexit’s impact, or even possibly its commencement will be resolved in 2019. JPY is likely to remain strong and go back to its interest rate differential (particularly if the BoJ actually starts its tightening programme) but the extent is dependent on the scale and timing of the next major bout of risk aversion in stocks. This will be fully addressed in INDEX 2019 next week.

Here’s to making the very best.

Good Luck

Ed Matts
Matrix Trade