Typical Signs Of A Change In Bias
Using examples, this video discusses the typical signs that we can look for when evaluating when a medium term bias has changed.
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With all the choppy price action currently going on with the US dollar recently, it's a good idea to discuss the typical signs that we can look for when evaluating when a medium term bias has changed. When that overall fundamental outlook has changed.
Now, the very first and probably the most obvious clue that a medium term bias has changed is to evaluate whether the reason for the asset trending up or down in the first place has suddenly changed. So if there was a specific positive or negative driver did that drivers suddenly changed or did something happen that makes that driver less important or not as impactful anymore.
So in this case, think of a central bank that was expected to hike rates and suddenly the bank or the central bank makes a 180 degree turn and now suddenly the markets are pricing in a potential cut where they were pricing in a potential hike. That would be a very big change from a prior reason to expect a certain trending move and then that suddenly changes.
So if we take a look then at the dollar's medium term downside bias, I mean there's been a couple of factors driving the dollar lower from the latter part of 2020. And we've had ever increasing risk appetite across global macro markets, which was of course negative for the dollar from a purely safe haven point of view.
But the biggest driver was the market's overall bets in a broad based global synchronized recovery where the US was actually expected to underperform the rest of the world by quite a bit. So has that changed?
The second part we know has recently changed and we quickly get that on the screen. The markets... Where the market was pricing in a much lower growth for the US from the start of the year, just to shy months away, we can now see how the markets expectations for growth in the US has changed with the onset of that new fiscal stimulus bill and the fact that the Democrats have taken a blue sweep victory which obviously gave them the opportunity or increased probability to get that fiscal package of one spot nine trillion dollars across the board.
So we can see that from a pricing point of view, from an expectation point of view the markets have really changed in that where the US was expected to be one of the major under-performers, they are now expected to be one of the major out-performers versus things like Europe, et cetera. Now, what makes this tricky is that the US has caught up... has basically just caught up with the rest of the world. And yes, it has surpassed growth expectations for some major economies like Europe but the idea of reflation, that expectation of seeing a broad-based synchronized global recovery which is usually dollar negative that part has still not changed.
So yes, even though there's a growing change in the relative growth and inflation dynamics which is currently supporting or favoring the dollar the reason why the dollar isn't higher just based on that alone right now is because everybody is expected to grow.
Yes, they will be faster and some slower but a global synchronized recovery nonetheless is still expected. And usually on balance that should be more dollar negative. Now, the second way, of course of evaluating whether the medium term trend for something has changed is to evaluate whether new incoming events or news or expectations or factors or drivers or catalysts has been impactful enough to change the medium term outlook.
For more detail... watch the video
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There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
With all the choppy price action currently going on with the US dollar recently, it's a good idea to discuss the typical signs that we can look for when evaluating when a medium term bias has changed. When that overall fundamental outlook has changed.
Now, the very first and probably the most obvious clue that a medium term bias has changed is to evaluate whether the reason for the asset trending up or down in the first place has suddenly changed. So if there was a specific positive or negative driver did that drivers suddenly changed or did something happen that makes that driver less important or not as impactful anymore.
So in this case, think of a central bank that was expected to hike rates and suddenly the bank or the central bank makes a 180 degree turn and now suddenly the markets are pricing in a potential cut where they were pricing in a potential hike. That would be a very big change from a prior reason to expect a certain trending move and then that suddenly changes.
So if we take a look then at the dollar's medium term downside bias, I mean there's been a couple of factors driving the dollar lower from the latter part of 2020. And we've had ever increasing risk appetite across global macro markets, which was of course negative for the dollar from a purely safe haven point of view.
But the biggest driver was the market's overall bets in a broad based global synchronized recovery where the US was actually expected to underperform the rest of the world by quite a bit. So has that changed?
The second part we know has recently changed and we quickly get that on the screen. The markets... Where the market was pricing in a much lower growth for the US from the start of the year, just to shy months away, we can now see how the markets expectations for growth in the US has changed with the onset of that new fiscal stimulus bill and the fact that the Democrats have taken a blue sweep victory which obviously gave them the opportunity or increased probability to get that fiscal package of one spot nine trillion dollars across the board.
So we can see that from a pricing point of view, from an expectation point of view the markets have really changed in that where the US was expected to be one of the major under-performers, they are now expected to be one of the major out-performers versus things like Europe, et cetera. Now, what makes this tricky is that the US has caught up... has basically just caught up with the rest of the world. And yes, it has surpassed growth expectations for some major economies like Europe but the idea of reflation, that expectation of seeing a broad-based synchronized global recovery which is usually dollar negative that part has still not changed.
So yes, even though there's a growing change in the relative growth and inflation dynamics which is currently supporting or favoring the dollar the reason why the dollar isn't higher just based on that alone right now is because everybody is expected to grow.
Yes, they will be faster and some slower but a global synchronized recovery nonetheless is still expected. And usually on balance that should be more dollar negative. Now, the second way, of course of evaluating whether the medium term trend for something has changed is to evaluate whether new incoming events or news or expectations or factors or drivers or catalysts has been impactful enough to change the medium term outlook.
For more detail... watch the video
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
