An FX Parity Play post Brexit

Could Brexit push EURUSD, GBPUSD, and EURGBP to Parity in 2020 …or sooner?

The tea leaves in the UK are wilting fast as the Brexit deadline is fast approaching. While goblins and ghosts will be meandering the streets in the US on Halloween night (October 31), the UK will be bracing for the scare of the century, namely, a possible departure from the EU. Leading the charge are two factors: Boris Johnson’s ego and the fear of Labor Leader Jeremy Corbyn becoming the next PM. Both outcomes are down right scary!

Mired within the cross hairs of British politics lies the uncertain future of Sterling and the Euro. Both currencies stand to lose value against the USD and other safe haven currencies, i.e. CHF and JPY). At the very least traders can expect lows to be tested once again. Here’s why…

Since Trump took office, investors have been living a new economic normal that has yet to be fully reflected in global currency values. As a result, central bank reactions have varied widely.

As of late… Mario Draghi has renewed QE efforts creating more ‘easy money’. Jerome Powell is patching up a US short term liquidity issue with a QE-like repeat performance. GDP numbers are dropping due to unresolved US-China talks on trade tariffs. Major European banks and pension funds are choking up against EU’s negative interest rates. Worse of all, global monetary policy tools that central banks once relied on to maintain economic stability are no longer effective. These and other factors are pushing economic leaders to compete on the basis of their devalued currency rather than optimal resource allocations and coordinated globalization.

This relentless ‘race-to-the-bottom’ syndrome among central bankers has investors worried and will very likely be the root cause for a potential parity FX play against the USD in the months ahead.

Comments?

© 2019 Tom Kadala

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How to FX Brexit…

From the RagingFX Trading Desk…

The jury is finally out. Parliament has for the second time voted down Theresa May’s tentative Brexit agreement. Despite recently acquired legal assurances from Brussels of a limited back stop with Ireland, a major sticking point, the British Parliament would have nothing more to do with May’s two years of haggling with EU negotiators. What lies ahead is most certainly the growing uncertainty of the British economy.

Just as most FX traders have been baffled by the recent strength in the dollar, they have also shaken their heads in disbelief at Sterling’s rise. On the dollar, some argue that the dovish outlook from Powell and the disappointing 20,000 NFP numbers from last Friday hide the fact that the USD is fairing out better than its peers, …hence the show of strength is really ‘relative’ strength from an overall decline.

To some degree, could the same be said about Sterling’s recent strength? The UK economy is firing on all pistons fueled by historically low unemployment numbers and an increase in tax revenues from earlier this year. But, here is where the difference lies. Sterling’s ‘relative strength’ comes from an artificial demand founded upon frenzy, stockpiling efforts from both consumers and government buyers living in fear of a ‘no deal’ Brexit.

After March 29 when Article 50 is to be invoked, the British economy will return to a lower equilibrium point. The irony is that it no longer matters if Brexit is approved or not; nor if there’s a ‘no deal’ Brexit, a second referendum, or new elections. The damage to the UK economy has already been done, because it will take months to work through the artificially bloated inventory of goods, especially among soon-to-be tight fisted consumers living in fear of losing their jobs to a forthcoming recession. Add unprecedented political uncertainty of the likes not seen for decades and Sterling strength will undoubtedly be short lived.

On the near term, we expect Cable to trade with high levels of volatility within a 1.30 to 1.35 range to start. Over the mid term… look for eventual spikes to give way to a predominant downtrend where it will potentially test a 1.14 low.

Comments?

© 2019 Tom Kadala

Hanging in the Balance for FX Traders… Brexit, Trump’s Tariff Threats, and the EU’s unprecedented Plea

From the RagingFX Trading Desk…

Dominating headlines for this week include Brexit, China, and Germany. Here’s is our take for the weeks ahead…

On the Brexit front we anticipate an extension to the March 29, 2019 hard deadline for at least another year. The EU will be holding their elections in May, which will hamper a second referendum attempt. Keeping the status quo, at this juncture, we believe is what is best for both sides, which will most likely secure Theresa May’s role as PM for the near future.

This past weekend Germany caved after witnessing Theresa May’s historic Parliamentary loss of support for the current Brexit proposal. Merkel’s supposed successor, Karrenbauer, issued an unprecedented, emotional plea from the CDU asking the UK to reconsider reentry. The $120b investments and more than twice that in trade exchange value between both countries are weighing heavily on the minds of German leaders.

If you agree that Germany holds the purse strings for the EU, this gesture has significant ramifications politically. If cooler heads prevail, both sides will seek remedies behind closed doors that should buy more time for negotiations.

What does all this mean for FX traders?

Going forward, we see a global recession triggered by the tariff war between the US and China. This morning the latest IMF global predictions concur. China’s debt levels will continue to rise as the government continues to release more funds into the economy. The resulting inflation will depreciate the Renminbi against the US Dollar. In addition, the slowing Chinese economy will dampen commodity demand, which in turn, will hurt emerging markets, all of which will eventually lead to urgent bail outs of their respective dollar denominated liabilities. Those governments saddled with Chinese loans may have little recourse, since the IMF will not recognize Beijing’s competing alternative, the Asian Infrastructure Investment Bank.

In this economically declining scenario, the USD will remain strong at least for a few more quarters due to the current economic momentum. On the mid to long term, we would not be surprised to see the Euro reach parity with the USD as the EU seeks to rebalance its tariff-stricken industries.

© 2018 Tom Kadala

A FOREX Perspective on the US-China Tariff War

When the White House launched its first round of global tariffs to protect the steel and aluminum industries, they realized quickly that they had missed their intended target, China. After issuing a list of exemptions, they unleashed a second round of tariffs for $50b, this time aiming straight at China’s economy. The response from China came as expected in the form of a tit for tat. Trump then doubled down with a $100b tariff threat at China, where a similar response is expected soon.

What is happening behind the scenes?

Let’s start with a closer look at the import and export numbers between both countries. In 2017 China imported $130b of American goods, while the US imported over $506b in Chinese goods. The trade deficit of $376b no doubt can be viewed as a cause for concern. However, more revealing is the $130b figure because it represents the maximum the Chinese can retaliate against US imposed tariffs. Already with $150b on the line, the Chinese will have a net of $20b more in US tariffs to match. In essence the tariff war chess game between the US and China has reached a maximum ante even before negotiations have begun.

Two questions remain… What else can the Chinese do to match the US tariff burden? …and how exposed is the US economy if the Chinese tariffs are imposed?

Some have suggested that China could stop buying US debt. Such a move is unlikely because the dollar is expected to strengthen for two key reasons. First, US interest rates are on the rise in response to historically low US unemployments levels and, more so, from a broadened US economic recovery. Secondly, and perhaps least talked about is the repatriation of corporate funds overseas. Portions of a 3.5 trillion dollar corporate earnings kitty are being readied to return to US shores beginning in Q2, As this unprecedented flow of funds are transferred into US bank vaults, the impact from the increased demand for USD currency will be felt globally.

For now, China has no reason to sell its dollar denominated investments. The potential combination between increasing interest rates and currency appreciation is a formidable investment with low risk. As for US companies that will be impacted by Chinese tariffs, the net effect from having to pay a higher price for Chinese goods will be partially offset by their stronger USD earnings.

In light of this scenario, we expect the next wave of Chinese tariff retaliations may come in the form of a weakening of the Renminbi, hence, reviving the appeal for Chinese exports, while also maintaining the status quo with weakened non-USD currencies. A stronger US dollar against a weaker Renminbi could potentially be devastating for net exporting countries such as Germany. We expect the economic set backs could temporarily drive the euro below parity with the USD, while their economies adjust accordingly.

With the US corporate tax at a very competitive 21% rate, one could expect net exporters such as Germany to migrate their manufacturing bases and corresponding supply chains to the US. This trend has already begun and is expected to accelerate, especially if the US-Chinese tariff war continues unchecked.

© 2018 Tom Kadala

Powell’s Debut Rattles FOREX Currency Markets

Powell’s first news conference was definitely a switch from the scripted presentations given by his predecessor, Janet Yellen. Despite the difference in style, the message was clear: interest rates are on the rise, unemployment is at historic lows, and what remains to be seen are wage increases followed by an increase in productivity, otherwise, we can expect another recessionary pull back.

What does that mean for Forex traders?

Today we saw the dollar weaken against most currencies. At first it may seem counterintuitive for a currency with a rate increase to fall favor with traders, however, this anomaly is actually a repeat performance from previous USD rate rises. There are numerous academic arguments to support the pull back, however, our favorite is what we have heard from top traders at Goldman Sachs, “it’s just what happens.”.

From a more academic perspective, the 10-year T-Bills at 2.9% are teetering upon a psychological level of 3% where traders and investors believe the US stock markets may stall the longest bull market on record or even reverse it. Their argument is largely supported by the increasing default exposure from emerging countries such as Turkey, which have funded their long term projects with US Dollar denominated short term debt. As rates increase, their dollar denominated interest payments increase accordingly and become harder to pay back. The same is true with US credit card holders. In addition, as US consumer debt levels continue to surge, default levels may reach new levels at home, which could potentially stall the consumer retail engine that represents 70% of the US GDP.

With this unsettling USD backdrop, the GBP (British Sterling) is gaining unexpected strength against both the Euro and the USD. Recent developments between the two Brexit negotiators, Davis and Barnier, arrived yesterday with the usual British pomp and circumstance but in reality only delivered an extension of one year to the status quo. Some progress may have been made on some fronts, but the number of unresolved issues hasn’t changed significantly. Only the final Brexit date was moved to 2020. All of these shenanigans may be negotiating tactics of sorts, but at the end of the day, the feeling one can get from the very strained discussions between Westminster and Brussels is that eventually a referendum will be reintroduced in favor of the ‘Remains’.

Brussels’ negotiating tactics involve a high level of tolerance with little meaningful progress. They are letting this inevitable scenario play itself out. Unfortunately for Britain, when their leaders finally do choose to rejoin the EU (in whatever capacity), they will have gained less for their economy than what they had in place prior to triggering Brexit.

© 2018 Tom Kadala

Have Trump Tariff Threats become a Bargaining Chip for Unilateral Trade Agreements?

Market reactions to Gary Cohn’s resignation as the White House chief economic advisor were swift and uncanny. One can only guess that every Goldman Sachs trader, Cohn’s former firm, were tipped off well in advance of his final decision to resign. The warning probably gave the firm’s traders enough time to prepare a severe sell off once the markets closed. Border line to insider trading, such a move might trigger an SEC investigation, but it’s unlikely. Like the NRA, Goldman Sachs ‘walks on many swamps’ in Washington, …and has for decades.

It’s not the first time that Goldman Sachs comes to Washington for a brief stay and leaves significantly wealthier. Henry Paulson was a classic example of a ‘wolf-in-sheep’s clothing’ during the financial crisis of 2009. One thing for sure, like the well trained traders that they are, Goldman Sachs alum know when to leave Washington just as they know when to exit a trade. Hence, Cohn’s resignation was just another timely departure. In December he achieved a key objective. namely, passing the Tax Reform bill. …and now that all that is done, it was time for him to leave.

Post Cohn, what next?

Intended or not, Cohn’s departure may be part of a much larger Trump/Navarro scheme.

Consider this possibility… What if the steel and aluminum tariff threats were actually a foil to coerce affected nations, which there are many, to request/beg for a unilateral trade agreement with the US? A prime example of this relatively ruthless negotiating strategy is the upcoming NAFTA renewal agreement involving both Mexico and Canada.

Surely politicians are expected to respond with counter protectionist measures and tough talk, but at the end of the day, the underlying message that will continue to resonate the most will be the implementation of a solution that will remove the tariffs completely, such as one that is conveniently wrapped into a unilateral trade agreement.

In essence, Trump/Navarro created the threat that would drive the outcomes they sought.

You may recall that early on during his first year in office, Trump bowed out of the Trans Pacific Partnership (TPP) agreement due to its multilateral structure. He accused it of being opaque and prone to unfair practices. Now with the stroke of one threat, he may very well have achieved his goal of undoing multilateral agreements altogether and replacing them with more transparent and comprehensive deals.

© 2018 Tom Kadala

Did Beau Biden’s Battle with Brain Cancer Change the Course of History?  

What would the world be like today, if Beau Biden had become a cancer survivor?

His father, Joe Biden, would have run for President of the United States and very likely won the national elections in 2016. The barrage of executive orders, the divisive hatred among so many Americans, and the degradation of the highest office in the world may never have come to be.

The Biden’s never revealed the type of brain cancer that inflicted their son. By its complexity the disease might have been glioblastoma, an aggressive cancer that spreads throughout the brain with finger-like tentacles or the more common type called gliomas. Either way, every brain cancer patient is different and developing a tailored treatment for each individual continues to be the industry’s greatest challenge.

I have heard some amazing survival stories where friends and colleagues skirted death one more time after receiving a miraculous drug, cancer treatment, or inexplicable voodoo. But for all the great stories of cancer survivors, thousands upon thousands either live their remaining months at the painful mercy of chemotherapy or choose to meet their maker on their own terms. Morbid as it may sound, I had to ask myself, how come some cancer patients survive, while others do not? …and how can so many customized treatments fail, like that of Beau Biden, when others have managed to become cancer-free well beyond their predicted life expectancy?

A Google search on cancer survivors led me to a tumor-removing procedure and treatment whose statistics surprised me. The study appeared incomplete because, as stated in the footnotes, the cancer patients in this particular clinical study, never died. Ironically, the lack of life termination data left the study inconclusive. Patients who were expected to survive for less than a year were still very much alive, now 10 to 12 years later and enjoying 100% remission. The conclusions from the abstract read like the cure for a common cold and the treatment used, called brachytherapy, was easy-to-understand. Despite the astonishingly high survivability from this clinical study, however, what surprised me most was actually something else.

Brachytherapy is not new. It has been around since the early 19th century. When doctors remove cancerous tumors they carve them out in much the same way that a gardener would when removing a large weed. However, just as in the case of a gardener, its nearly impossible to pull every root out of a weed as it is to remove every last cancer cell associated with a specific tumor. The hidden remnant cells that are left behind become the primary cause for the resurgence of the disease in cancer stricken patients.

To remove these stray cancer cells before they can cause a recurrence, doctors will subscribe some form of radiation treatments, one of which is called brachytherapy. …and herein lies the difference among treatments that really work to cure a patient and those that simply prolong the agony associated with the disease.

Most hospitals will use external applications such as chemotherapy or laser beams to kill any remnant cancer cells after a tumor has been removed. Although effective, these externally-applied treatments also come with formidable side-effects such as loss of hair and extreme debilitation. In addition to these side-effects, the guarantee of a 100% cure has frequently remained elusive at best. Frankly, neither the doctor nor the patient can ever know for sure if every last traces of cancer cells have been completely annihilated.

An alternative approach to external radiation is brachytherapy. Immediately after a tumor has been surgically removed, doctors implant radioactive seeds right along the wall of the cavity. These technologically advanced seeds are custom prepped with dosages of Cesium 131, a radioactive isotope that similar to a biodegradable stitch, virtually disappears after 9 days of emitting more effective killing energy than chemo or beams can. To maximize their impact, these seeds are assembled in what is trademarked as a GammaTile®. …which is no more than a preassembled, mat-like structure that houses the required number of seeds, each spaced accordingly to emit a steady flow of localized radiation.

You might be wondering, as I did, “…why hasn’t anyone written about GammaTile® cancer-curing treatments, if indeed they are so effective?” The pure and unadulterated answer is the cost of the treatment. No, not because it is too expensive, but just the opposite. It is too affordable! A typical brachytherapy GammaTile® treatment runs about 75 to 90% less than chemotherapy treatments and other similar biological therapies.

Big pharma won’t support brachytherapy because they would sell fewer addictive and expensive drugs to insurance companies. Hospitals won’t support it because the number of visits is reduced significantly, and doctors avoid it because insurance companies won’t pay for it. The fact is that a viable cure for cancer using GammaTiles® and brachytherapy has failed to enter the mainstream of cancer treatments largely due to special interests, ironically, none of which seem to involve the better interests of the inflicted patient and their families.

Not all hope is lost. The Barrows Cancer Center expects to approve an official insurance code for Cesium 131 by July 2017, which would at the very least make it easier for doctors to get paid by insurance companies. …a bold step in the right direction!

…the steep price our society pays.
To appreciate the hidden burden our society bears to keep proven cures for  cancer out of the mainstream, one need only ponder the loss of Beau Biden. Just think, what might have happened had he survived his battle against brain cancer with a simple GammaTile® solution. His survival could very likely have changed the course of history.

The question remains, how many more Beau Bidens must we lose before the cure for most common cancers can be treated and supported as just another common ailment?

© 2017 Tom Kadala