What’s up LITA traders and financial readers! Markets have been on the ups and downs on a macro economic level, COVID is still having a lost lasting impact amongst countries with places like France and other European countries being hit again with a second wave. These uncertain black swan events make it very difficult to come up with trade ideas because any second the central authority or government can interfere with the free markets. However! We’re going to still get at it and see what opportunities we can get hold of in these situations.
The Logikfx Macro Currency Strength Meter started to show some interesting divergences in economic data. You can see the blue line is USD value and the purple line is Russian Roubles (RUB). What we have is the USD value dropping significantly over the past month from 45 now down to 8! Whereas the RUB has increased from 20 to 40 in the same period. This has created a crossover in the currency strength meter which might be an early signal of an impending short on USDRUB!
Overall, from the strength meter we want to filter out the rest of the market and focus on USDRUB to analyse relative factors, COT and price together to come up with a final informed decision.
That’s exactly what I’m going to do in the rest of this trade idea post so make sure to read all the way through!
Gross Domestic Product Analysis
The GDP differentials have been fairly interesting over the past 25 years. Since 2000 the GDP differentials have been growing in favour of the United States, this can be seen in the blue line climbing up since then. What then followed was USDRUB climbing in price too as the USD became more valuable in comparison to the RUB.
Now, the IMF have made a forecast this month that the US will continue to grow favourably in comparison the Russia. However, these predictions are very volatile in the current climate due to COVID. It’s important to keep an eye on this forecast as they will change if new data comes out signalling opposite convictions. E.g. if COVID gets worse in the United States it’s unlikely they’ll grow faster than Russia, especially considering there’s some speculation that Russia has developed an early vaccine for COVID which could help boost the economy.
For now, GDP doesn’t look in favour of the short so we’ll keep an eye on this to wait for a good signal.
Trade Analysis – Imports and Exports Trade Balance
United States and Russia are fairly large trading partners both big buyers and sellers of Oil and interestingly Russia buys a lot of aircraft material from America which is why in the analysis we’ve chosen Boeing as a company to include. That’s why we’ve gone down the Oil and aviation industries for our trade analysis.
Exxon Mobil is a massive oil company in United States and most forex traders understand there’s a inverse relationship between oil and the USD. Generally commodities will have an inverse relationship to the USD so there’s no surprise here that there’s an inverse relationship between Exxon and USDRUB. When Exxon goes down USD seems to rise. We’re currently at all time lows for Exxon so there’s room to move up which could see USDRUB fall in value, especially if the Untied States continue to open up its economy which will get people buying petrol, exporting more oil and factories using oil etc. The recent values dropped by 1% so we’re a little bit neutral right now, we want Exxon to rise in price again like it did around April.
Here we’ve included Crude oil as part of the analysis as we’ve kind of analysed the impact of refined petroleum we also want to see how the crude version impacts USDRUB. Since the 2000s we have VERY interesting statistics. That being there’s a 91% negative correlation between oil and USDRUB. Again, we’re data driven and reinforce that saying that oil has an inverse relationship with USD value. Recently, oil has been on the rise gaining over 20 points which is great for our short idea. This means on a crude level oil is agreeing with our short idea on USDRUB too.
Now if you remember I mentioned the Russia was a big buyer on Aircrafts and planes from United States. Who is a massive aircraft manufacturer? Boeing. That’s why we’ve chosen it in our trade analysis as it makes complete sense to analyse America’s biggest aviation manufacturer.
What we’ve identified from the data is that over the last 10 years there’s been a 66% positive relationship between USDRUB and BA. A massive anomaly in the data is this year during COVID airline industry took a massive hit due to travel restrictions around the world. This demand shock trickles down right to the suppliers of aircraft as if no one is ordering flights then no one needs planes right. The stock price of BA took a huge hit in march dropping over 50% in value. It’s recently made a tiny retracement but we don’t see this growing much further as there’s going to be many restrictions on air travel for a while.
Interest Rate Differential Analysis
We’ve chose the past 10 years of data to analyse for our interest rate differentials and across the board it’s been fairly interesting. Although the interest rate differentials have maintained negative USDRUB has continued to rise, showing and proving why you can’t just include one economic indicator in your analysis, if you’d have just chosen interest rates alone you would have lost money for 10 years. That’s why it’s important to analyse a basket of indicators which have high impact.
Since 2015 the differential has been rising which has shown a rise in USDRUB too. Most recent data is also rising which isn’t great for our short idea. What we want is a lower interest rate differential for our short idea so this indicator is yet to be ready for our short idea. The differential is likely to get closer to 0 as US interest rates are so low at 0.25% and Russia has some area to work with at an interest rate of 4.5%. Overall, we’ll be keeping an eye on future rates and forecasts to see if it agrees with the short idea.
Stock Market Analysis (S&P 500)
The final factor we’ve analysed is the S&P500 priced in RUB to gauge how wealthy America is compared to Russia. WHY? Because majority of peoples pensions are held within their country of residence stock index. It’s basically a barometer on how rich or poor people are. Since the S&P500 has fallen in value by 6.5% it shows that US pensions are becoming worth less compared to Russia and the rest of the world. What we’d do as investors is long USD to protect against deflation in the S&P500 assets. This is great for the short idea overall.
What to watch out for now:
Monitor GDP differential, should be decreasing for short idea.
Keep an eye on Exxon Mobil for greater returns with inverse relationship this will give us a great short conviction
Market Sentiment – Commitment of Traders Report Analysis (COT REPORT)
Our loyal readers and traders will understand how we analyse the COT report indicator. What we’re interested in is the pink line, hedge funds. For the USD we want it to be below 0 on the chart and for RUB we want it above 0. This would mean the market agrees with our short idea on USDRUB.
What do we have? We have just that! USD this week has just dipped this week into a negative sentiment whereas the RUB has maintained a positive sentiment. That means overall market sentiment is good but fundamentals could have a stronger short conviction. Let’s take the final look at price now.
USD/RUB Price Outlook Weekly & Daily
Starting from the top down we’re look at weekly level of price. You can see a solid rejection at around 79.8 highlighted on the top green line where sellers came in and pushed buyer straight back down. This created a little supply or sell zone between the two green lines basically highlighting that sellers come in at these levels. What I’m expecting is confirmation of sellers in this region so we’ll take a dive into a daily time frame to pin point where this may occur.
On the daily time frame we’ve created a shorter time horizon sell zone between 79.8 and 77. Due to fundamentals not being extremely weak just yet price has time to move into this daily zone before showing signs of reversal. I’ve highlighted in red a potential outcome. But honestly, what we’re just looking for is a confirmation of sellers, so daily lower lows and lower highs would be great before trying to get in. This would also give us time for fundamentals to align with a greater short conviction!
Two main things to wait for is to keep an eye on macro currency strength meter for a weak USD score and then also keep an eye on the relative analysis so that we’ve got that strong short conviction! Afterwards remember to use the volatility ATR calculator to set stops and targets based on volatility.
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