EUR/USD may provide a buying opportunity if fears of a second coronavirus wave come and then go, but the pound has a long list of issues. Richard Perry, Market Analyst at Hantec Markets, discusses his views, explains what is well-correlated with gold, and what sees for oil. In an interview with Yohay Elam, Perry also provides tips for traders, some inspired by volatility – which in turn may rise with growing concerns. The full interview with actionable trading commentary is below.
Yohay Elam: So, we are having this conversation as non-essential shops are about to open in the UK. How has the lock down been?
Richard Perry: Yes, the UK is (very) slowly coming out of lockdown. On a personal level, we have bunkered down and tried to make the best of it. Working from home has been good, but difficult given that I have a young child who needs to be home schooled.
Yohay Elam: Extra work for you
Richard Perry: However, as you say, the shops are beginning to re-open and life is slowly getting back to normal. Extra work, yes indeed! I seem to be doing more work at home than the office.
Yohay Elam: Same here, less separation between work and leisure hours
Richard Perry: Plus we are recording a new series of videos every week and I am continuing with my webinars too. Well maybe so, but I am still trying to exercise too. Having spoke to people from other European countries, the UK lockdown has been no where near as restrictive.
Yohay Elam: Did the series of videos begin before the pandemic, or an initiative that came during this new period? Indeed, exercising outside was forbidden here for six weeks, sending us all to find YouTube videos of exercising from home
Richard Perry: Our Trader Talks videos have been in the pipeline for a while actually. However, we have pushed ahead with it during the past couple of months and we are getting very encouraging traction. It is a relaxed format where I discuss my favourite trade of the week with another trader called Steve Miley, The Market Chartist. They have been well received so far and it is definitely a format which I think adds to our research offering. Check them out... And wow, six months, not ideal, especially for the people living in apartments with young families.
Yohay Elam: Thanks! Watching your videos published on FXStreet, I'm sure these will be interesting and useful to traders
Richard Perry: We hope so
Yohay Elam: Anyway, stricter than in the UK
Richard Perry: Arrr yes, of course. For a while, we have been looking to move more into the video side of getting our research across. The analytics suggest that videos of 5 to 7 minutes are really popular for traders and we are hoping to give them something to digest, in an easy to understand format. Our Trader Talks videos along with our daily research videos achieve this.
Yohay Elam: Indeed, I used to do long 45-minute daily sessions. People tuned out after the initial part
Richard Perry: Me, the same. Traders just do not have that long. Plus markets move very fast these days...
Yohay Elam: Indeed, volatility is back
Richard Perry: Well, if you'd said that this time last week, I would have said "not so much", but now...
Yohay Elam: Especially with a risk-off mood
Richard Perry: Yes, I think I have mentioned "traders take the stairs up, but the elevator back down" more times than I would like in 2020.
Yohay Elam: That adage doesn't rust
Richard Perry: Risk-off seems to be back with a bang!
Yohay Elam: Indeed, buying the dip on vaccine hopes is out, selling rallies with coronavirus statistics in
Richard Perry: The trouble is that the risk trade was so stretched, the re-emergence of a COVID-19 infections could now pull it all the way back.
Yohay Elam: Markets tend to exaggerate in both directions
Richard Perry: This could be a very dangerous moment, if retail traders panic again. Back in March, it was all about margin calls and the baby was thrown out with the bath water.
Yohay Elam: A sell-everything mood
Richard Perry: I just hope the concerning news out of China over Beijing's infection rates can be contained. If the virus spreads again, then there is a real risk that markets could move aggressively lower again.
Yohay Elam: Do you see markets more worried about Beijing than about rising cases in California, Texas, and Florida? Or is the news from China compounding US news?
Richard Perry: It will be interesting to heat what Fed chair Jerome Powell talks about this week. The fear is absolutely a combination of the two. The two largest economies in the world, both seeing infection rates pulling higher again.
Yohay Elam: Powell spoke on Wednesday, and I thought he would have little to comment on, but with second wave fears, markets will probably listen
Richard Perry: So, we have been looking for a near term dollar snap rally, and if this newsflow continues to strike fear into markets, then the dollar bounce back is on. It would then be a case of how significant the second waves are and how quickly they are contained. We still see a case for broad dollar weakening in H2 2020. A near term technical rally could be a great opportunity to buy EUR/USD around $1.10/$1.11
Yohay Elam: A second wave could have a more significant impact on business and consumer confidence. So potentially this fear fades
Richard Perry: Again, it depends on how well it can be contained. If the spread is broad and lockdowns are re-enacted, then yes, confidence plummets again. Also, there will be greater difficulty in the re-opening a second time. It would be an even slower recovery than before.
Yohay Elam: People need to work, but may shy away from leisure activities
Richard Perry: A "V" shaped recovery already looks highly unlikely. A tick recovery would also be much flatter if there is a significant second wave.
Yohay Elam: A Nike's swoosh, but there are different ways to paint that upward curve
Richard Perry: For the UK's perspective, the economy is around 80% services based. A second wave would have terrible economic consequences. Germany would be able to ride it out much better due to its much larger weighting in industrial production.
Yohay Elam: Perhaps that also explains the UKs slow opening, its dependence on services
Richard Perry: Add in the incredibly bad timing of Brexit trade re-negotiations too and the UK will continue to underperform (at least on equities).
Yohay Elam: Cornavirus should have been the perfect reason / excuse to extend the transition period
Richard Perry: GBP is supposedly deeply undervalued by maybe 10%/15%, but the path to clawing that back, even with a dollar correction expected (that should be Cable supportive) it could be a difficult path to recovery. I agree on the transition extension. It is political ideology before all sense and reason. But there again, "Brexit means Brexit" I suppose... haha
Yohay Elam: Brexit means Brexit seems immune to coronavirus... With every day that passes without certainty on Brexit and as the reopening is slower, perhaps cable becomes less undervalued
Richard Perry: That and the kids...
Yohay Elam: haha
Richard Perry: Yes, all the way through since the 2016 vote, the suggestion has been that fair value on Cable is over $1.40. The path to get there, with the deep damage to the UK services sector likely to have a very slow path to recovery, at a time where the UK is surgically removing itself from the EU with a rusty knife, it does not paint a good picture for the UK's relative economic standing.
Yohay Elam: Indeed. The Bank of England will announce its decision this week
Richard Perry: Yes, more QE likely
Yohay Elam: Here is the eurozone, and also in the UK, it seems that printing more money boosts the currency
Richard Perry: I think the path to negative rates it unlikely though.
Yohay Elam: Bailey said it is "under active consideration," but seemed to curb his enthusiasm
Richard Perry: Well, I think the ECB has done a good job in its actions recently. Maybe it is taking Christine Lagarde a while to get used to being a central banker, but the PEPP purchases have really stabilised the euro
Yohay Elam: Lagarde seemed to understand that defending spreads could well be the ECB's job. Indeed, PEPP has fewer limitations
Richard Perry: Plus coming at a time when German and France (the two biggest economies) are pushing for closer integration, is a big boost of confidence in the euro project
Yohay Elam: The "Frugal Four" have still not signed off on the plan, but I guess that when Germany and France agree on something, they are unstoppable.
Richard Perry: PEPP seems to be a good move, as long as they can get it past the German Constitutional Court. The Frugal Four are clearly still an issue, but the fact that Germany are pushing it is key. I think it really does mean that we can see EUR/USD pushing into the high teens by the end of this year. An initial decline, maybe as a USD technical rally sets in, but then as USD falters towards the end of 2020 (lack of yield differential) we can begin to see EUR/USD above $1.15 in due course. The big caveat is going to be how severe the second wave is
Yohay Elam: Real change in Europe and no extreme second wave in the world's largest economies is the recipe for a rally in EUR/USD
Richard Perry: Yes!
Yohay Elam: You've mentioned potential panic among retail traders. There seem to be more of them at this point than before the pandemic. I read that people that used to bet on sports are discovering the stock market
Richard Perry: OK, I did not see that... Not ideal for them, as depending upon the products they are trading, they could really suffer. We try to educate our traders away from seeing forex and bullion as a betting culture. Slow and steady wins the race.
Yohay Elam: The lockdown is a perfect period to educate
Richard Perry: I agree, it will have given lots of people time for reflection and to expand knowledge.
Yohay Elam: Regarding gold
Richard Perry: One of my favourite assets
Yohay Elam: A safe haven?
Richard Perry: Yes, very good question. Look at today for example... Markets feeling very much risk-off, but gold is trading -1.2% lower
Yohay Elam: Indeed. The big picture is that the world is suffering and gold is up, but the day to day action is different
Richard Perry: It is not always a reliable safe-haven play.
Yohay Elam: In March it dropped sharply when markets were in a "sell-everything" mood
Richard Perry: Yes, it has a bias towards being a safe haven, but it has many moving parts to it. Back in March, gold became very positively correlated to equities. The selling pressure that was driving margin calls, meant that gold was also being sold as part of portfolio liquidation. We could easily see this happening again if there is a massive dump in equities. The best correlation that I look at is still with bond yields. The US 10 year yield and gold run a negative correlation on average of around -0.5 (which is a strong average). It means that watch the direction of yields and it will give you a good steer for gold.
Yohay Elam: Great insight!
Richard Perry: The problem for gold is that whilst massive monetary policy debasement and huge economic fallout of COVID-19 should be positive for gold, the US dollar acting as a safe haven if hampering upside.
Yohay Elam: In March, it was the dollar against everything
Richard Perry: Furthermore, if yields become stuck (yield curve control perhaps) then gold may also struggle for traction.
Yohay Elam: So the Fed would depress gold instead of fueling it
Richard Perry: I have been very bullish on gold until the past few weeks. I am still positive looking further out, but see it as a difficult path to navigate towards $1800
Yohay Elam: Two steps forward, one step back
Richard Perry: For now. I still see a path higher for gold, but am far less bullish than I was back in March/April
Yohay Elam: I see
Richard Perry: I am still a buyer into near to medium term weakness (perhaps driven by a dollar technical rally)
Yohay Elam: How do you see the yen and the franc? You've mentioned the franc in today's video
Richard Perry: The yen is a classic safe-haven play. QE forever by the BoJ (and now unlimited) will sustain this view. The SNB seemed very intent on defending 1.05/1.06 on EUR/CHF. It is also very much in the safe haven camp
Yohay Elam: They will probably pledge to intervene again this week
Richard Perry: There is a good support band 1.0600/1.0650 now on this pullback which will start to look attractive again as always
Yohay Elam: An opportunity in that region
Richard Perry: Again, if this second wave story runs ahead, then there could be further near term weakness, but the EUR/CHF recovery story is building medium term now I believe
Yohay Elam: Alongside EUR/USD
Richard Perry: Yes
Yohay Elam: Oil has been volatile as well. To say the least
Richard Perry: Yes, for oil there has been a shift in the outlook for demand in the past week. Once more, there could be a slower path to recovery. I still like Brent Crude with a good support band between $33.50/$36.40 for the recovery to continue. Some near term flushing out seems to be underway
Yohay Elam: Probably no negative prices again though...
Richard Perry: Not for Brent Crude anyway...
Yohay Elam: Brent has been less wild
Richard Perry: For WTI, if the world catches COVID-19 again, then why not. Yes, the OPEC+ actions have certainly helped to create a more stable Brent
Yohay Elam: They had more success than I thought
Richard Perry: Well, there has been a huge downside move to recover.
Yohay Elam: Markets exaggerated there as well
Richard Perry: A stable/supportive outlook for supply and if the demand story can get back on track, oil has some real upside still in it I believe.
Yohay Elam: Oil ETFs reportedly attracted retail traders. Back in April, when prices were mad
Richard Perry: Volatility will do that...
Yohay Elam: Many traders have been entering the markets with higher volatility. Any advice for them?
Richard Perry: High volatility is seen as a way to make a quick buck, but can also lead to quick losses as well. We would always urge our traders to always be mindful of trading conditions, and not to put trades on without the necessary preparation. It is so important to know your way around a market before trading in size. We also urge the use of stop-losses. In fast moving markets, trading can be an extremely damaging activity for traders that are new to markets
Yohay Elam: That's another great advice that is immune to the virus. Always place a stop. Alright, I think we have covered a lot of ground. Great and useful insights for traders. You've been generous with your time!
Richard Perry: There are lots to read on our website, in the Learning Hub about how to trade.
Yohay Elam: A good place to start
Richard Perry: You are very kind, Yohay. I've enjoyed chatting with you about a whole range of topics which I hope that traders will find useful
Yohay Elam: Thank you very much, Richard. The pleasure is mine
Richard Perry: Thanks for having me!
Yohay Elam: You're most welcome
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