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USDPLN Trade Idea March 2020 Short

Updated: Aug 2, 2020

Market Climate Opinion

Although the financial markets are seeing a heavy beating with stock indices dropping significantly and risk currencies on the downside too, we are seeing some potential extreme measures being put in place. This is not only coming from a monetary level but also at a fiscal level. Central banks are slashing interest rates in most economies and the likes of the Federal reserve, and the Bank of England have mentioned quantitative easing as a lever to help stimulate the economy. This may help the consumers and businesses run smoothly during the pandemic of COVID-19. However, as traders we want to understand the impact it can have on currencies and stocks.

As many of you may know already slashing interest rates is a sign that a currency may depreciate, this combined with quantitative easing (printing money) creates an increase in the money supply so we’ll see a surplus of currency in the economy. Following the laws of supply and demand what impact does this have on those countries printing money? Well, when supply increases, we see a decrease in the value as seen in the image below.

As supply (S) shifts to the right and increases to (S1) quantity(Q) increases to (Q1), but if we look on the vertical axis the original price decreases from P to P1. In our example this could be the case for a currency which its central bank is printing money. We need to always remember and respect what the central authority can do as traders or else our analysis can mean nothing.

That is why although currently our analysis on USDPLN does not just yet look like a short bias there are some factors that could push it over the edge due to the extreme measures being put in place. Our most recent score on the USD has shown a -10 on "Currency Strength Meter" and on the PLN, we have a +31. This is on an individual basis now we want to compare the 2 economies together to come up with a solid trade idea.

Starting off our analysis on USDPLN with the GDP differentials again we can see that they’re a highly correlated indicator, although lagging in nature you will understand if you’ve covered our master class thoroughly it’s still important to analyse on a relative aspect.

Most recently in 2020 the IMF has forecasted a 2.1% growth in the US economy and a 3.1% growth in the Polish economy overall showing a -1% differential in favour of Poland. We’ve therefore given it a -2 on our system as a weak short bias. Especially considering the current economic outlook for the globe looks to be quite depressed with businesses and consumers on lockdown it’s bound to have an effect on predicted GDP.

As we can see from the imports and exports of the United States and Poland, we can identify manufactured goods such as Planes and Gas turbines are traded frequently. So we’ve chosen to include some major companies in our analysis to check the correlation and the impact it could have on the exchange rate.

AC SA is a Poland-based company that specializes in the automotive industry. The Company is a manufacturer of Liquefied petroleum gas (LPG) and Compressed natural gas (CNG) systems under STAG brand for cars, trucks and other mobile vehicles. It offers more than 200 auto-gas products, such as: controllers, emulators, switchers, fuel level indicators, reducers interfaces, diagnostics scanners, recorders and others.

In relation to the USDPLN exchange rate we can see that they have a fairly inverse relationship. Since ACGP has decrease in value by 12.26% recently we’ve actually scored this as a positive score of +7 because negative returns on the stock is likely to see an increase in the value in the exchange rate.

General Electric Company is a global digital industrial company. The Company's products and services range from aircraft engines, power generation, and oil and gas production equipment to medical imaging, financing and industrial products. Its segments include Power, which includes products and services related to energy production; Renewable Energy, which offers renewable power sources; Oil & Gas, including liquefied natural gas and pipelines; Aviation, which includes commercial and military aircraft engines, and integrated digital components, among others; Healthcare, which provides healthcare technologies in medical imaging, digital solutions, patient monitoring and diagnostics, and drug discovery, among others; Transportation, which is a supplier to the railroad, mining, marine, stationary power and drilling industries; Energy Connections & Lighting, which includes Energy Connections and Lighting businesses, and Capital, which is a financial services division.

Therefore, based on the products they’re selling we’ve chosen to include this in our analysis against the USDPLN exchange rate. Interestingly the 2 assets follow each other fairly similarly, but if you look deeply into the data within smaller time horizons you can identify an inverse relationship. For example, in 2017 GE collapsed dropping in value significantly whereas in that period USDPLN started it’s upwards trend. Since February however we’ve seen a huge drop in value of -41%. Although these numbers are higher due to the share price being so low price it’s still a significant drop and scored extremely high on our scorecard of +10. It’s very rare to see the value drop so much as it’s nearly over 4 times the typical standard deviation.

The Boeing Company is an aerospace firm. The Company operates in four segments: Commercial Airplanes (BCA); Defense, Space & Security (BDS); Global Services (BGS), and Boeing Capital (BCC). BCA segment develops, produces and markets commercial jet aircraft and provides fleet support services, principally to the commercial airline industry worldwide. BDS segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for strike, surveillance and mobility. BGS segment provides services to commercial and defense customers worldwide. BCC's segment portfolio consists of equipment under operating leases, finance leases, notes and other receivables and assets held for sale.

Since planes and aircrafts was a big export, we’ve chosen BA as an asset to analyse against the exchange rate. Although, the data could be quite skewed due to the recent mishaps of BA plane crashes and many airlines no longer accepting their aircrafts.

Excluding data before 2008 we can see that since 2009 both the BA price has been rising and the USDPLN exchange rate has been rising. So, we could actually assume a positive relationship with the two assets which is normally quite strange with stocks and the USD value. Only recently due to bad press of BA planes we’ve seen a steep drop in value of BA. But can we use this to our advantage? Considering the significant drop of -65.81% since Feb we’ve given it a -10 as it’s a fairly positive relationship.

Overall, in our trade analysis we must consider that the central authority in this particular case the Federal Reserve announced it would revive the QE program. It would purchase $500 billion in U.S. Treasury’s and $200 billion in mortgage-backed securities over the next several months. It wanted to make sure banks had enough liquidity to help businesses impacted by the corona virus pandemic. This normally helps keep businesses afloat but also reduces the value on the USD.

This has a very high chance of decreasing the value of the USD in the future.

Regarding the US interest rates they’ve been on a steady drop since early January with the FED decreasing it by 1bps on the 15th of March. Similarly, Poland’s central bank also reduce their interest rates to 1% a reduction of 0.5bps. This has created an interest rate differential of -0.75% in favor of Poland, so we’ve scored it at -1 on our relative analysis.

Our final coverage will be of the S&P500 and USDPLN to gauge the overall wealth of the United states. We can see the two assets are correlated positively both rising since 1993. There has been an overall drop of -31.90% in the S&P in the last month so we’ve scored it at a weak short bias of -2 because we are predicting central banks to intervene as they have said they would.

Taking a look at price we can see that USDPLN has reached a significant 2017 resistance where sellers were able to take control. It has recently this level and since created a weekly spinning top. I’ll be keeping an eye on the daily and weekly price action to see if there are more signs of shorting the pair as this could potentially be a large downwards trend in the coming future. Especially since the FED has announced several months of QE and the pandemic recovering in China it won’t be long until the world recovers and the virus is contained. Each country’s governments will be placing harsh restrictions so that these targets are met which is why we’re fairly confident in a potential sell off. However, this is considering our assumptions are met.

Taking a look at the market sentiment of the USD we have seen a confirmation that Hedge funds are selling the USD. Most likely all their long positions have been fulfilled and their positions have flipped. This gives us confidence that there may be an imminent down trend coming for the USD. Overall, we’ve scored the USD at a total value of -6 including the "Currency Strength Meter" scores and +27 for PLN.

Now that’s all that left is waiting for a good technical time to enter. There are many methods out there to do this so use it at your own discretion.

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