We’ve got a quick question here from a subscriber, asking what they can do to identify turning points in currency trends.
This is a great question, by the way, and one that we’ve discussed, in some parts, in many other videos as well.
Now there are many factors that can influence the overall trend of a currency. But what you will find is that, in the short term, let’s say intraday to a few weeks, that’s mostly going to be driven by sentiment.
So short term sentiment factors, and this sentiment can be from a multitude of reasons from politics to economic data, geopolitics, cross asset correlations and of course, monetary policy.
Now, one of the challenges between the macro fundamental bias and the sentiment bias is that the sentiment can sometimes be misleading and it can be inaccurate or skewed. Give you a skewed signal for the currency, over the longer periods.
Now in the longer term, medium to longer term, the most important factor that you need to consider, in terms of finding that turning point is central bank policies. In other words, monetary policy, right? So as interest rates, that’s going to be the key driver of currency prices, both in the short term, medium term and in the longer term. And that needs to be our starting point when trying to determine possible currency turning points.
Now, when we talk about monetary policy, the biggest focus will always be, as we said, on interest rates but even more important than just the current rate that the market is at, is the rate path, right? So what the market thinks the central bank will do next, as opposed to what it has done already. So it’s just about where interest rates are now and whether they have cut or hiked or just, you know, stayed neutral today.
It’s not just about that, but where the market thinks rates will go after that most recent decision. So looking at the rate path is the first step you need to consider for finding possible turning points. And that means you’ll need to pay attention and stay up to date with where a central bank is right now, in its rate cycle. For example, have they just started a hiking cycle after a long period of staying at neutral or have they already hiked seven times? So there’s a big difference between the two in terms of where they are with that rate cycle. Apart from that, you’ll need to stay up to date with the market’s expectations for where the rates will go next. And how do you find that?
Well, basically through your research and analysis, right? So you need to read. You’re gonna read and read some more, get a feel for where different analysts and investment banks think rates are going and why, more importantly. Get access to some money market pricing to see where markets think rates are going. The good news is that if you are a Financial Source subscriber, you know, most, we basically go through all of that research for you and provide filtered analysis and commentary in those bite size chunks, with the weekly reports, with the daily reports. And of course in the terminal as well, we have the, the OAS market pricing that gives us the interest rate probability tracker.
So you basically already have that for you in the, in the terminal. And apart from just the rate tracker, the most current expectations for money markets, you can also see, more important, what the markets think in terms of rates going forward. So you have that rate path visible in the terminals. You don’t need to go and find all of that additional information, if you have access to the terminal.
Now, if you don’t have access to all of that, of course, you’ll need to be prepared to spend a lot more time reading and researching central bank statements, reading investment bank previews and analysis, reading market commentaries, etc, to find all of that information. It might take you a while to get into the swing of things, so to speak but once you understand the dynamics, it’s really like riding a bike.
It will, of course, require lots of practice on your part, but catching those turning points, based on monetary policy can be some of the best trading opportunities. So it’s definitely worth the trouble and the effort looking for them.