How to FIND the BEST PAIRS to trade! Examples and explanations.
Here the first part of the lesson: How do interest-rates effect the market and how do I find good pairs to trade?
The market offers you 5 main asset-classes:
1️⃣ Bonds
2️⃣ Stocks
3️⃣ Commodities
4️⃣ Metalls
5️⃣ Financials
What we want to indeifity as a trader is the cashflow, means where big players are buying or selling.
They don`t buy breakouts or an obvious momentum that already happened, instead they accumulate or distribute for days / weeks as they have a lot of capital to invest and cause support / resistance aswell as bottoms / tops.
Important for them are always the fundamentals such as Economic data, Inflation and so expectations for the monetary policy of central banks they price in.
Before we start the journey we need to understand the effect of Interest-Rates
I explain that simplyfied and in short as I its a complex topic:
The Interest-rate is the rate a central-bank lends money to privat credit institutions for. So your bank aswell as mine has a bank-account at the central bank of your country.
They give them money in order to have enough capital to hand out credits to privat customers aswell as companies. The lower the interst-rate is the more demand is in the market.
I mean, if you want to buy a car would you rather finance it with 5% or 2% interest-rates? You have the opportunity to buy a car with less debts at the bank.
Same for companies, if you need a second office, goods, more capital for production etc. you rather take that opportunity when rates are low.
Credit-business has a huge competition and banks will offer lower and lower interst-rates to attract more customers.
The longer lent term the more risk is involved as you could for example lose your job and won`t be able to pay back the credit anymore, means interest-rates are usually higher due to the risk than short-term-lendings.
The yields are shown in the bondmarket👉
This is why everyone talks about a "reversed rate-curve" as a sign for a recession. Because your bank gets money in the short-term from the Centra Bank on order to hand them out in the long-term to make money. If the risk of an upcoming recession is present the short-term involves more risk, thus short-term yields are higher than long-term-yields and banks can`t give out any credits anymore as they pay more to the central bank than they make.
Here a quick overview of interest-rate-effects:
Higher interest-rates
1️⃣ Increased cost of borrowing 👉 Reduced investment 👉 Lower economic growth and bad for stocks
2️⃣ Higher mortage interest 👉 Reduced consumption 👉 Lower economic growth and bad for stocks / house prices
3️⃣ Increased return for savings 👉 Less spending 👉 Lower economic growth
4️⃣ More demand in the currency due to higher interests / returns 👉 Lower inflation
Vice versa with lower interest-rates. The lower the interest-rate, the more consume and investment is in the market.
You see there is a lot to learn and to understand and to give you all information I`d have to finish a course.😆
Let`s start with the corona-crises:
The FED has just started to raise interest-rates after the financial crisis in 2008. And as you probably understand now, they lowered them back in the days to provide more money to the market and to boost consume / investment to rescue companies.
After the raise corona came and shocked the market. The first reaction of the FED was to lower interest-rates. They do this because they want you not to keep your money on your bank-accound and instead spend it to boost the economy and of course to use the chance to get a credit for better conditions.
Additionally they have raised their total balance-sheet, continued with quantative easing (printing money to buy bonds) and we`ve got the stimulus-package.
Demand and Supply regulates a price ... now we have tons of supply and fear of inflation.
Now ask yourself: What is the best trade here?
Probably to short the US-Dollar and to BUY stocks!
What currency has the strongest weight in the US-DOLLAR-BASKET? 👉 Euro with ca. 57%. Euro will have the strongest rally due to the weak US-Dollar.
What is asked when the stockmarket pumps? Australian Dollar aswell as New Zealand Dollar 👉 Both will fly, but even more than EURO because of the USD weakness.
Most attractive pairs:
1️⃣ AUD/USD long
2️⃣ NZD/USD long
Also good pairs:
1️⃣ EUR/USD long
2️⃣ GBP/USD long
We know AUD and NZD are both stronger than EURO due to the risk-on in the stockmarket means:
1️⃣ EUR/AUD long
2️⃣ EUR/NZD long
Whatlese do we know? We know Crude OIL pumping due to risk-on in the market. It goes up as a pre-indication for inflation and a healthy economy. Who exports OIL? Ah yeah... CANADA.
So if there is more demand in OIL and the market buys in CANADA investors have to exchange their currency into the Canadian Dollar.
USD falls due to low interest-rates 👉 Canadian dollar moves up due to pumping OIL 👉 USD/CAD SHORT
Just a few examples here how to think.
Central-Banks are independed institutions and have the following task:
1️⃣ Provide economic growth
2️⃣ Price-Stabillity
Central Banks aim for an Inflation of 2% a year (compared the year before) because they consider this as a healthy level.
They basically define this as a fine line of "prices are not going crazy" and "companies make more money." A little bit of inflation, or higher prices increase earnings of companies that can as a result expand, offer more jobs etc. 👉 Which defines the first task economic growth.
The problem is.. they can provide money to the market in case of fiscal support is needed, but they can`t take it back and SAY GUYS WE NEED OUR MONEY, its too much floating and inflation is too high.
1️⃣Healthy economy:
Rising inflation and a growing economy
"Rate hikes getting likely as economy doesn`t need fiscal support"
2️⃣Unhealthy economy:
Stable inflation but a stagnation of the economy
"Rate hikes getting less likely as economy needs fiscal support."
Now we have a dilemma here.....
3️⃣ Disaster and current situation
High inflation but a stagnation or even a slowdown in economy
"Rate hikes are tricky as the economy needs fiscal support while inflation is already HIGH."
Either price-stabillity or the economy suffers❗️
Now keep this in mind: Jerome Powell promised Biden to fight the inflation at all costs in order to get his second term in office.
It is tricky to know what he is gonna say, but we know he promised it to the President. This is why the market is so shaky.
The market hopes to see a dovish Jerome after the Sell-Off in stocks.
At the same time the market knows we will see a year with rate-hikes.
What do you think will be the best pair to trade after the FOMC?!
The market offers you 5 main asset-classes:
1️⃣ Bonds
2️⃣ Stocks
3️⃣ Commodities
4️⃣ Metalls
5️⃣ Financials
What we want to indeifity as a trader is the cashflow, means where big players are buying or selling.
They don`t buy breakouts or an obvious momentum that already happened, instead they accumulate or distribute for days / weeks as they have a lot of capital to invest and cause support / resistance aswell as bottoms / tops.
Important for them are always the fundamentals such as Economic data, Inflation and so expectations for the monetary policy of central banks they price in.
Before we start the journey we need to understand the effect of Interest-Rates
I explain that simplyfied and in short as I its a complex topic:
The Interest-rate is the rate a central-bank lends money to privat credit institutions for. So your bank aswell as mine has a bank-account at the central bank of your country.
They give them money in order to have enough capital to hand out credits to privat customers aswell as companies. The lower the interst-rate is the more demand is in the market.
I mean, if you want to buy a car would you rather finance it with 5% or 2% interest-rates? You have the opportunity to buy a car with less debts at the bank.
Same for companies, if you need a second office, goods, more capital for production etc. you rather take that opportunity when rates are low.
Credit-business has a huge competition and banks will offer lower and lower interst-rates to attract more customers.
The longer lent term the more risk is involved as you could for example lose your job and won`t be able to pay back the credit anymore, means interest-rates are usually higher due to the risk than short-term-lendings.
The yields are shown in the bondmarket👉
This is why everyone talks about a "reversed rate-curve" as a sign for a recession. Because your bank gets money in the short-term from the Centra Bank on order to hand them out in the long-term to make money. If the risk of an upcoming recession is present the short-term involves more risk, thus short-term yields are higher than long-term-yields and banks can`t give out any credits anymore as they pay more to the central bank than they make.
Here a quick overview of interest-rate-effects:
Higher interest-rates
1️⃣ Increased cost of borrowing 👉 Reduced investment 👉 Lower economic growth and bad for stocks
2️⃣ Higher mortage interest 👉 Reduced consumption 👉 Lower economic growth and bad for stocks / house prices
3️⃣ Increased return for savings 👉 Less spending 👉 Lower economic growth
4️⃣ More demand in the currency due to higher interests / returns 👉 Lower inflation
Vice versa with lower interest-rates. The lower the interest-rate, the more consume and investment is in the market.
You see there is a lot to learn and to understand and to give you all information I`d have to finish a course.😆
Let`s start with the corona-crises:
The FED has just started to raise interest-rates after the financial crisis in 2008. And as you probably understand now, they lowered them back in the days to provide more money to the market and to boost consume / investment to rescue companies.
After the raise corona came and shocked the market. The first reaction of the FED was to lower interest-rates. They do this because they want you not to keep your money on your bank-accound and instead spend it to boost the economy and of course to use the chance to get a credit for better conditions.
Additionally they have raised their total balance-sheet, continued with quantative easing (printing money to buy bonds) and we`ve got the stimulus-package.
Demand and Supply regulates a price ... now we have tons of supply and fear of inflation.
Now ask yourself: What is the best trade here?
Probably to short the US-Dollar and to BUY stocks!
What currency has the strongest weight in the US-DOLLAR-BASKET? 👉 Euro with ca. 57%. Euro will have the strongest rally due to the weak US-Dollar.
What is asked when the stockmarket pumps? Australian Dollar aswell as New Zealand Dollar 👉 Both will fly, but even more than EURO because of the USD weakness.
Most attractive pairs:
1️⃣ AUD/USD long
2️⃣ NZD/USD long
Also good pairs:
1️⃣ EUR/USD long
2️⃣ GBP/USD long
We know AUD and NZD are both stronger than EURO due to the risk-on in the stockmarket means:
1️⃣ EUR/AUD long
2️⃣ EUR/NZD long
Whatlese do we know? We know Crude OIL pumping due to risk-on in the market. It goes up as a pre-indication for inflation and a healthy economy. Who exports OIL? Ah yeah... CANADA.
So if there is more demand in OIL and the market buys in CANADA investors have to exchange their currency into the Canadian Dollar.
USD falls due to low interest-rates 👉 Canadian dollar moves up due to pumping OIL 👉 USD/CAD SHORT
Just a few examples here how to think.
Central-Banks are independed institutions and have the following task:
1️⃣ Provide economic growth
2️⃣ Price-Stabillity
Central Banks aim for an Inflation of 2% a year (compared the year before) because they consider this as a healthy level.
They basically define this as a fine line of "prices are not going crazy" and "companies make more money." A little bit of inflation, or higher prices increase earnings of companies that can as a result expand, offer more jobs etc. 👉 Which defines the first task economic growth.
The problem is.. they can provide money to the market in case of fiscal support is needed, but they can`t take it back and SAY GUYS WE NEED OUR MONEY, its too much floating and inflation is too high.
1️⃣Healthy economy:
Rising inflation and a growing economy
"Rate hikes getting likely as economy doesn`t need fiscal support"
2️⃣Unhealthy economy:
Stable inflation but a stagnation of the economy
"Rate hikes getting less likely as economy needs fiscal support."
Now we have a dilemma here.....
3️⃣ Disaster and current situation
High inflation but a stagnation or even a slowdown in economy
"Rate hikes are tricky as the economy needs fiscal support while inflation is already HIGH."
Either price-stabillity or the economy suffers❗️
Now keep this in mind: Jerome Powell promised Biden to fight the inflation at all costs in order to get his second term in office.
It is tricky to know what he is gonna say, but we know he promised it to the President. This is why the market is so shaky.
The market hopes to see a dovish Jerome after the Sell-Off in stocks.
At the same time the market knows we will see a year with rate-hikes.
What do you think will be the best pair to trade after the FOMC?!