Global inflation, company layoffs, economic sanctions, geopolitical conflicts and so on have investors shuddering from the thought of investing. Volatility has picked up well beyond expectations as recession fears loom in the forefront of everyone's mind. With all these issues, it's hard to tackle markets when we have been so used to different monetary policy, risk-on sentiment and economic growth. As the FOMC meeting is just over the horizon, it is important to brush up on key concepts to help us prepare for market uncertainty. So, here are some ways to make money trading during turbulent market conditions.
Due to ever-changing market conditions, examples of risk-off pairs tend to change as well. Risk-off currencies basically are the ones that perform better in times of uncertainty, economic struggles, hawkish monetary policy or high inflation.
Here is a list of risk-off currencies that tend to do better in recessionary times:
Historically, these currencies have been considered 'safe haven' investments when the economy is suffering. USD has always been a safe haven because of the Federal Reserve and their decisions impact the global financial market. Ever hear of people making Swiss bank accounts to shield their money (or keep it hush-hush)? The Swiss Franc is considered risk-off because of it expendability with debt. As a constantly profitable and small economy in the financial sector, the Franc never really gets into deep waters like Germany, United States, Canada, Euro-Area, etc. which are much larger economies. Lastly, when US stock markets fall, the yen tends to appreciate, making JPY a historically profitable play in poor economic conditions.
Here is a list of all the risk-off major pairs that would perform well/poor if a global recession were to happen now:
You might have noticed that USD/CAD is not on the list. That is because the Canadian economy has been very strong as of recent. Their jobs data is better than the US and most other countries while the oil-dependent economy has benefitted from sanctions on Russia and supply-chain shortages. Overall, if the energy crisis on oil continues, the loonie will persist, but if oil prices fall, USD will overtake CAD.
Because of the Fed's impact on the world financial system, USD will continue to be strong especially if it's central bank continues to raise rates like it has been doing so far this year. Gold is also on the bullish list because of its extraordinary circumstance. Due to reasons mentioned in this article about gold, we think a recession would be a good opportunity to start building positions on gold for the long term.
The process of trading in a recession can either be through the use of short term or long term plays. GBP/USD and EUR/USD tend to follow the US stock market (SPX500 or NAS100). If you have ever traded these indices, you would know how volatile they can be on a regular basis. This volatile behavior is mildly reflected on the pound and euro when it is up against the USD, but the correlation is generally the same as the SPX500. If one was to trade GBP/USD or EUR/USD, quick short plays might be the best option. Ranging plays would also work, but there might be heavy ups and downs along the way.
All forex pairs enter into long-term swings either to the upside or downside. But, some pairs like to take exuberant amounts of time in a single direction before changing course. These pairs are AUD/USD, NZD/USD, USD/CHF & USD/JPY.
Similar to the pairs just mentioned above, gold is another example of an asset that takes a long time to move, allowing for investors to build large positions over time. Commodities like gold also tend to perform their best during economic declines.
For the past several years, gold has risen over time to the highs of $2000 while holding an average price of $1883 in 2022. In the last 3 months, price has been struggling as investor interest has huddled around the USD and risk-off currencies. However, there is a chance that this precious metal will be able to surge on weak dollar sentiment.
Pressures continue to mount on the dollar as inflation hits 40-year highs while the hawkish Fed stays the course of aggressive monetary policy. Since March, the Fed has been conducting monetary tightening to counteract the expanding consumer price index. But inflation is still out of control.
The central bank took even took measures beyond what economists originally expected. Rates flew past the 2% target while 25 basis point hikes in interest abruptly turned to 50 to keep up with the rising pace. The combative Fed is doing what they can to curb a devaluing dollar, but nothing seems to quell this upsurge. CPI keeps coming in hotter and hotter above forecasts.
Consumers are paying over $5/gallon on average at the pump as spending is forced to increase overall. This has been hitting the wallets of every day Americans and discouraging the amount of spending that was more prevalent in the years prior.
The number of layoffs in May increased exponentially compared to other months as the job market slows again. 17,000 new employees were laid off in May while 5,500 were already let go in the month of June.
From the image above, we can see a startling pattern forming within the last four to five months. The number of layoffs is increasing with each month suggesting a huge slowdown in the economy and a looming possibility of a recession.
The combination of surging inflation, higher interest rates and a slowing economy, the US as well as other countries have entered a period of stagflation which is neither good for the economy nor the dollar. This could be an indication to start showing some interest in gold.
Price could definitely surge in the coming months, and if it does, we might even see the metal climb well above the $2000s and may even touch $3000. This could also take lots of time for things to come into fruition, but we have an idea of how we want to approach the potential gold spike.
Because of our long term outlook, we want to approach gold from a long term perspective. There are three levels/zones where we would consider picking up entry points to build our positions. The first PT is in the $1780s, the second is in the $1670s, and the third PT is much lower in the mid $1400s. We believe these levels to be key in gold's direction going forward and will be pivotal points that this metal could test should price dip lower.
This morning saw demand for USD rapidly pick up steam as US inflation data came in hotter than expected. Month-over-month CPI had been forecast to rise by 0.7% in May; at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed that it had increased by 1%, or 8.6% year-over-year, a forty-year high. Likewise, Core CPI (which excludes food and energy prices) was forecast to rise by 0.5% month-over-month, instead hitting 0.6%. On this news, the DXY is up 0.8% and has risen over the 104 level intraday, as EURUSD is down 1% and the S&P 500 is down nearly 3%. With this context in mind, let’s discuss 3 ways to capitalize on inflation now.
Trade Major Pairs
This CPI news is a huge fundamental catalyst for USD pairs since it verifies that the US economy is indeed still overheating, validating further interest rate hikes by the Federal Reserve. This is very bullish for USD, which makes buying the USD against other currencies even more appealing. If traders are searching for optimal USD pairs to take positions in, a good place to start is by locating pairs where analysis leans in USD’s favor to the greatest degree possible.
Some such options include a) shorting GBPUSD and EURUSD, which receive -7 (‘strong sell’) and -5 (‘sell’) signals, respectively, from the EdgeFinder, and b) going long on USDJPY, which receives a 4 (‘buy’) EdgeFinder signal. Because USD experienced so much buying pressure this morning, conservative traders may want to find an opportune point of entry by conducting technical analysis, e.g., waiting for a pullback and retest of key support/resistance.
Though admittedly a controversial opinion, I am waiting for an optimal point of entry to purchase gold against USD. XAUUSD experienced quite the selloff this morning before a startling recovery, jumping from a low of 1825 to hovering around 1855 at the time of writing this. This jump was seemingly prompted by finding support around the 1830 level, a clear zone of support on a 1-hour timeframe.
I interpret fundamentals being bullish for XAUUSD due to demand for the precious metal in several different industries and its historical status as a safe haven investment in times of economic crisis. There have been periods where gold’s rise in value does not correlate with USD depreciating in value, which is helpful to consider in cases like these. According to the latest COT data, institutional traders are similarly long on both USD (76%) and gold (73.56%). I am planning to purchase XAUUSD if price action retests the trendline depicted on the 1-day timeframe above, though this opportunity may not come if demand continues to grow quickly.
Invest in the Stock Market
Though it may seem strange in the face of persisting hyperinflation and potential for recession, economic downturns and stock selloffs do present myriad buying opportunities for long-term investors. If you are not planning on retiring for decades, you can utilize dips in the stock market and indices to build wealth over time, assuming you are willing to sacrifice immediate results. For example, when the Dow plummets over 600 points like it has today, investors can seize these events as opportunities for cheap purchases that will yield returns years down the road.
If your investment portfolio keeps crashing in the meantime, this does not have to be discouraging since they are merely unrealized losses; they will likely grow in value through the decades if you are invested in index ETFs and other trustworthy funds. Any further selloffs present even more opportunities for regular, small purchases. (However, investing in individual stocks is a completely different story, and I personally believe that even the most skilled retail investors are not sufficiently equipped to handle the inherent risks involved.)
The dollar started showing weakness on some pairs today as investors anticipate a higher rise in inflation tomorrow. USD is looking especially weak against the pound, yen and swiss as dollar sinks against the swiss by over half a percent. Because of this mixed sentiment, here is a forecast of what we think the dollar pairs might do going into tomorrow's inflation report as well as next week relative to the currencies it trades against.
ECB was expected to keep interest rates at 0% which came in as expected this morning, so no surprise here. Interest has been negative for a long time, so zero is a step in the right direction, but it is also not very promising when going against the other majors like the dollar, kiwi, loonie or even pound. Economists do expect to raise rates in July though, so traders might be pricing in the future hikes which are targeted to hit 1.3% by the end of 2022.
Our bias: There is a pretty strong correlation to the S&P, just like GU, so the thought of risk off sentiment and higher euro rates could be bullish for the pair. It would also depend on how CPI goes tomorrow on the USD. Higher CPI would mean Fed will try to stay the course, strengthening the dollar, but falling inflation could loosen up the Fed and weaken the dollar.
With surging inflation in the UK, the pressure is mounting on the pound. The BOE is shooting for around the same interest rate as the ECB, at 1.38% by December. Boris Johnson survived the governor confidence vote, but the pound is now looking really weak from a fundamental standpoint. The Edgefinder thinks the pound is a strong sell which is concerning, especially as economists think inflation will hit 10% this year before curbing.
Our bias: The question is whether the BOE is too aggressive on the pound during a recovering economy, or if they’re not aggressive enough to curb inflation. Outlook is weak on this currency, so the pound might suffer in the meantime.
Canada’s version of Non-Farm Payroll comes out this Friday with the expectation of adding 28K jobs, which is 13K jobs more than the month before (economic expansion). Their bank is also aggressively hiking rates as well. Last week’s hike was 50 basis points while oil rises on supply chain issues with sanctions regarding Russia and Ukraine. So it’s helping out the commodity driven economy.
Our bias: Canada is like a powerhouse right now, I would not go against this pair. You’d be a loonie to short the loonie.
The yen sank to 20 year lows while BOJ governor, Haruhiko Kuroda says he's not going to loosen his hawkish stance towards interest rates. They also left the key short term interest rate the same (-0.10%) which doesn’t seem very productive especially if the bank is trying to be hawkish.
Our bias: The yen is likely not going to be bullish for an extended amount of time at any point soon.
The long standing war in Ukraine continues to drive up commodity prices due to supply chain issues and geopolitical tension. Gold’s performance also depends on whether the US economy slows down, so unemployment claims are something to look at as well as NFP, but NFP beat expectations last week. Bond yields and gold’s price go hand in hand and the US 10-year note touched above 3% today, suggesting weakness in the metal.
Our bias: We are mostly neutral on the metal and I think there are better things to trade right now.
Bond yields also heavily affect the stock market as well as jobs data. Depending on CPI this Friday, the S&P will either look bullish or bearish for the rest of the week and going into next week. If CPI is higher, that would not be good for stocks in my opinion bc it will encourage the Fed to remain strong on the USD, especially with the beat in NFP last week. But if CPI is lower, maybe the Fed will start to tapering with the idea of relaxing their heavy hawkish stance.
Our bias: The SPX500 never really came down to hit a bottom before bouncing, and it never really hit any resistance before it retraced. So, I don’t really know where it’s going to end up. But I do see lots of bullish setups in the short term. Just looking for quick bounces and dipping out before the market gives it all back.
ADP data just came out today with some disappointing numbers, furthering our sentiment towards a less hawkish stance from the Fed with a focus on economic expansion. Here are some new NFP trade setups for tomorrow's news.
Employment is predicted to be somewhere between 295-325K new jobs added. Analysts expected that jobs added will land somewhere less than last month's actual. This could push for a less aggressive stance by the Fed, although they were very clear about multiple 50 bp hikes in this year alone.
Additionally, economists expected an increase of 295,000 jobs from today's ADP, but saw less than half that amount this morning. This is highly concerning for the job market and economic growth. So, the Fed might switch up their stance a bit and focus on growth which would be bullish for risk-on pairs.
Investors could be looking for a close above the 1.26000s for a clean sign of a breakout on the 4H. Yesterday's sell off resulted in a big demand zone which then led to several green candles in response. Price did touch higher than the resistance zone, but it couldn't close above. In order to see a test at the 1.29000s, price will need to do so before then.
Gold also seems to be bullish at the start of the New York session. The miss in ADP numbers is helping the metal gain a foothold over the dollar as price climbs 1%. Gold’s price is testing resistance in the $1860s and coming up to the 200 simple moving average on the 4H chart. The combination of a break in this level and a miss in NFP tomorrow could mean a test at the $1890s.
SPX500 dipped under a supportive trend line before veering back up past support. This false breakout to the downside suggests that price could be looking to test resistance around $4200. A hard rejection from the lows may be due to the anticipation of a miss in NFP, however, volatile market swings could be in store for the index for the next few days. Right now, technicals point toward a push higher at $4200.
After a month of over 13% gains, gold is still a buy for a couple reasons. The past three days have given back a little more than 5% of the overall gains, but this retracement could be a good sign for the gold bulls that missed the first colossal run.
Although there have been talks of a ceasefire on the Russian-Ukraine borders, progress is little to none as we don't see any real sign of Putin taking the foot off the gas right now. What we do know is that the fighting continues to be present and sporadic with mixed military sentiment from Russian soldiers who have been largely misinformed about their objectives.
COT also suggests more bullishness for the metal as the number of long contracts has increased by over 4 million while short interest has decreased by 10.4 million contracts.
Commodities have been on a tear lately due to the oil supply cutoff and fears of persistent fighting in eastern Europe. Uncertainty will keep investors on edge and steer them away from risk-on behavior. So, gold and USD will be good safe havens in the meantime.
A couple things to notice on the 1D chart suggest a more solidified direction is set for gold. One of the factors is the natural pullback we just saw. An indefinite rise to the top without any sort of pullback would raise some eyebrows, so a minor pullback on the daily is a healthy thing for price action. The metal also landed right on support, which could serve as a good entry level for long positions as the latest candle shows rejection from the lows. And lastly, gold formed a golden cross pattern in February marking that a new direction has likely been decided for the metal to the upside.
All these factors in place could help launch gold higher as it has done for the past month or so. However, volatility has increased tremendously, so a small leverage size is still recommended for these giant moves.
The buck looks weaker today as Regional Bank of Australia governor, Philip Lowe is set to speak later today. The discussion will likely cover interest rates and economic outlook going forward, and traders will try to decipher clues on future policy. Here are our forecasts and our top setups on the buck.
Investors seem to be mostly bearish on the buck amid the risk-off behavior echoing throughout the global market due to conflicts in Russia-Ukraine. The retail trader is now easing off speculative plays and shifting towards the USD and 'safer' currencies.
The weekly commitments of traders data revealed that big money is growing their positions on long contracts on both gold and the buck. The monetary shift also included a considerable decline in short contracts for both markets. If this trend continues, we could start to see a more valuable buck over time.
The pair ended up retreating back under the 200-day and hovering just above the rising trend line on the 1D. The rising trend line looks like AU's strongest support right now, so a long position there would be something worth considering if price comes back down to that level. And depending on market conditions (gold loses value, RBA keeps rates the same), that support level could serve as a potential short setup on a break underneath.
This pair is showing some key indicators for a directional shift. One is the double top at 1.07957, and the other indicator is the lower low on today's candle paired with the dip under the 50 DMA. A close underneath the previous low would help solidify bearish sentiment on this pair. However, the 1D chart still has strong support at 1.06126 which would be a difficult level to break under.
AJ actually looks relatively strong here after retracing from a long term resistance level from the 1D timeframe. Although price retraced from resistance, it seems like the pair will try to make another test at the triple top, in which case will make a break above resistance more likely. Price is currently on support so it will be interesting to see where price will end up after today's session. If gold continues to outperform, so will AUD, probably.
The price of gold and oil rise as USOil surges above $100 as the Russian-Ukrainian conflict intensify. This marks the highest price has been for 7 years.
The US is set to release 30 million barrels from global oil reserves. Global supply as a whole will decrease by 60 million. Major banks in the US are now predicting a price target of $125 per barrel in the second quarter.
Above is an image of Crude, Brent and natural gas P&L over days, months and years. With new price predictions of longer term growth, we can now expect that gold will likely benefit while equities will likely suffer.
With this in mind, let's watch these pairs now to catch potential trade setups before they take off.
Gold is definitely more bullish after hearing news of harsh sanctions on Russia and their oil supply. Price is coming back up to test the highs near $2000 on the 1D timeframe. The metal also broke above a double top around the $1950-60s but couldn't close above. So, today's movement looks like it wants to test that level for another attempt above that double top.
SPX500 came up to hit a falling trend line on the 1D chart after a bullish couple days. Now it looks like price is coming back down with weak momentum overall. Lower lows and highs suggest we could see SPX hit a price under the $4000s level.
International conflict has investors flocking to the war-hedging metal which recently touched the $1,900 mark for the first time since June of last year. Russian troops have gathered at the borders between them and Ukraine and have yet to ease off. A big question now is whether the gold rush will continue or not, and that all depends on what happens next. Price is down -0.5% on the day at the time of writing this.
The factor that can move this precious metal higher is the inverse reason for the stock market: the anticipation of a Russian invasion. If tensions persist, so does the upside for gold.
Another factor that can help gold is COT data. Today, we will see a more updated report on non-commercial position change in futures contracts. Last week's report showed us a huge decrease in short positions as well as increased buying on the long side.
However, retail is ready to catch a pullback as short sentiment is overwhelmingly bearish. Some analysts expect the metal to hit as high as $2000 before any kind of pullback, but I am not confident in that move. I do believe we can see some more gains within the next week or so, but another $100 move seems unlikely. We are also nearing the heavily anticipated interest rate hike from the Fed which will only hurt gold.
Gold hits a massive run to the upside after tensions on the Russian-Ukraine border escalate. The pair did end up touching the $1900s and looks like the move could continue if tensions don't ease. $1917 is the next big resistance level which could serve as the top before we see a pullback to the $1800s. But, a break above this level could lead to a move to $1958.
Several days ago, global markets fell into frenzy on the Russia-Ukraine conflict going on. The Russian military sent troops the the border between the two countries, although recent reports claim that some of the troops have been sent back to base. There are still no clear signs that de-escalation has occurred on the borders, but diplomatic engagement still seems on the table for Russia although it is hard to tell. The outcome of this occurrence is completely uncertain, and the relation between Russia and forex is causing some wild behavior.
If one thing is for certain, the growing tensions cause the USD to fly higher on the risk-off sentiment from investors. At the same time, when we heard report of calling troops back, the dollar fell while currencies like GBP, EUR, CAD, AUD and CHF began to rise over the USD. Sadly, escalating conflict leads to a higher dollar and gold price, so if we disregard trading for a minute, we should just hope that the tensions ease even at the cost of a falling USD.
Oil prices rose to the highest level in 8 years to the high $95s yesterday on escalating conflict. Investors fear that if this incident gets worse, oil drilling will cease. This caused a surge in oil price on the anticipation of lower production. USOil dropped 2.89% at the time of writing this after news of some troops returning home.
American, German and British indices rose this morning on the recent news. However, if tensions were to get worse, we could probably see another decline on all sides. Indices are probably not the best thing to trade during this time due to the higher volatility that can come into play in the global equities markets. This is true especially during attempts at negotiations ahead because we can't say who will agree to what and if Russia will accept control over a small part of Ukraine or if there will be a military pullback.
We are still waiting for updates and will be keeping up with further news.