What we've witnessed for the past few months is that the market, as well as currencies can sell off like crazy quicker than they can recover. What drives prices is not only fundamentals and technicals, but it's surprise.
Surprise has caused a global panic, economic shutdowns and crashing markets. We saw a crash that was never seen before back in March yet now it seems like nothing happened. Is everything really okay? Can we trust the Fed to keep the US afloat forever? Will this affect everyone else in the world?
Spotting Surprise Before it Happens
In the recent months, the Fed has promised to keep the market/economy up by issuing stimulus checks, printing money and lowering interest rates. This process clearly worked in the short term as we saw the market come back up 47% from lows. However, most news is already out, the Fed has worked just about every trick they have, and the market awaits more data by the end of summer.
What's important to know is that jobs data is going to come out again with 44 million people still unemployed. The stimulus program has worked so far, but a lot of the funding is set to end soon. By July, PPP loans (Payroll Protection Program), government checks, and most of the federal money will start to dry up. These were temporary measures to help uphold small businesses, support the banks, fund the unemployed, etc. But now they are running out of time and money. 30% of Americans have already missed their housing payments this month, and are going to lose the extra $600 a week for unemployment benefits according to CNBC.
This is definitely something to look out for in the future. People who are unemployed will suddenly have nothing once the checks run out. New York City is expected to file 50,000 evictions. Because so many people are missing payments, it's highly unlikely that we'll see mass evictions, but land lords will have to deal with little to no income for a while as people continue to miss payments.
On top of that, everyone has held back on spending and is focused on saving. There is so much money in the market now, but there is very little activity as growth declines as well as jobs.
How will this affect currencies?
Usually, traders turn to the USD during hard economic times because it's one of the 'safest' currencies to be in, but now analysts are fearful of a crash in the dollar. We saw pairs like GBP/USD and EUR/USD collapse with the market. When certain countries like China or European markets crash, it's likely to cause the US market to come down too, and vice versa. The reason I am currently bearish on the market/USD is the same reason I'm bullish on gold. You can read about my trade ideas for gold in the article I wrote a few days ago here: https://a1trading.com/2020/06/24/trade-ideas-on-xau-usd/
Correlation has been very strong between certain markets and certain currencies recently, and the trend is likely to continue. We've been talking about a bear market a lot recently on the A1 websites, and I don't want to seem like I am a perma-bear in the US stock market. But issues that have been pushed back a couple months are now about to reemerge, and the Fed will have to come up with new ways of propping the market up once government funding runs out. The problem I'm seeing with our recent monetary policy is that such techniques are implemented to temporarily fix things. It's almost like Americans don't want to get hit with this sad reality, so they push it back for a little bit and try to forget about it. If the stars of misfortune align, we will be looking at no more government funding, a 40% increase in homelessness, bad jobs data at the end of summer, little to no GDP growth, devaluing of the US dollar, and stagflation. Investors have purely relied on the Fed's support, but that won't last forever. What we will see in July/August will probably be the most important thing so far this year, as market direction will most likely be determined and the government has to think of more ways to support our recession.
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Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.
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