New Horizons

April 05, 2016 09:17


A look at some of the Fundamental or Macro stories behind our new instruments

In the last week we have introduced a number of new trading products,further extending our coverage and providing our customers with additional trading opportunities. I thought it would be a good idea to look at the fundamental and macro background stories for some of these new instruments. After all we may know their names but do we know much, if anything beyond that?

Details of the new products can be found here new-instruments and full contract specifications for these and all our other products are available here.

A familiar face

A good place to start is with an instrument that we have often referenced in our articles,but until now have not been able to trade and that is Dollar Index (ticker USDX on our MT4 platform).

Dollar Index measures the performance of the US Dollar versus a basket of other currencies, in this instance 6 of its peers. These are the Euro, Yen, Pound Sterling, Canadian Dollar, Swedish krona and Swiss franc. The Dollar Index is often referred to as a trade weighted basket and it was originally composed to reflect the trading relationships of the US economy. Whilst it still endeavours to fulfil that function,it has also become popular and frequently used tool for speculation and efficient asset allocation and hence a conduit for global macro trading strategies. In other words by trading Dollar Index you are able to take view on both the dollar and each of the underlying currencies in the basket.

For instance four out the six members of the currency basket currently have negative interest rates in place (Euro, Yen, Swiss Franc and Swedish Krona) and each of their respective economies is highly dependent on exports. The attractiveness of which is often driven by the exchange rate of their respective currencies,from the buyers, or importers perspective.

The oil price is also played out in Dollar Index as well. Firstly because alongside most other commodities Oil is priced in dollars. But also because the Canadian Dollar or loonie has a direct & inverse correlation to Oil prices. The lower the oil price the weaker the Canadian Dollar and vice versa. Japan is of course highly dependent on energy imports having few natural resources of its own and a nuclear power generation industry, that remains largely mothballed, post the Fukishima disaster.

I hope you can start to see how important and useful an instrument dollar index can be

Clearly if you wish to be long or short the dollar or the baskets constituents, then it's going to be much easier and quicker to place one trade than to trade six individual pairs. Equally if you wish to respond to news flow and have sense of whether its dollar positive or negative but don't have the time or inclination to work out which of the many dollar pairs its most or relevant to. A trade in Dollar index could give instant exposure, which you could finesse at a later stage.

Clearly if you wish to be long or short the dollar or the baskets constituents, then it's going to be much easier and quicker to place one trade than to trade six individual pairs. Equally if you wish to respond to news flow and have sense of whether its dollar positive or negative but don't have the time or inclination to work out which of the many dollar pairs its most or relevant to. A trade in Dollar index could give instant exposure, which you could finesse at a later stage.

China 50 - FTSE China A50 Index futures CFD

This is an index comprised of 50 leading Chinese equities (A shares). Concerns over the strength of the Chinese economy were the root cause of the volatility seen in global markets in July and August 2015 and again in the opening two month of 2016.

The underlying cash A50 share index is down by some 20.58% over the prior 52 weeks. But it has been recovering of late, as hopes of continuing additional stimulus and better economic data, have improved the prospects for both this index and the wider Chinese markets in the minds of investors.

Of course the real rate of growth in the Chinese economy is still something of a mystery. Regular readers will know that we do not believe the official headline GDP growth numbers of 6.5% to 7% per annum and our intuition is that growth is more likely to be around 4%. Well below the headline numbers but still the envy of western developed economies.

The fact that the index is comprised of 50 individual shares lends itself to a direct comparison with the Hang Seng Index,which itself reflects the performance of 50 leading Hong Kong listed shares. Over the longer term (three years) the China A50 index comfortably outperformed its neighbour. However the Hang Seng Index has been the better performer over the opening three months of 2016.

As you might expect these two indices often exhibit a close correlation. For example over 50 bars of daily data the Admiral Markets correlation matrix shows a reading +80 between the two, which rises to +95 on a weekly basis. Of course correlations continuously evolve and will often vary in strength and possibly direction over different time frames. You may also like to note that the China A50 share index is currently negatively correlated to Dollar Yen, over 50 bars of daily data in our matrix ,with a score of -58 at the time of writing.

Natural Gas

Long before the Oil price was headline news every day, US Natural Gas prices were the subject of considerable media attention. The shale / fracking boom in the USA meant supply was plentiful and that additional supply growth was readily achievable. Unsurprisingly US Natural Gas prices fell sharply. In fact since the end of February 2014 they have fallen by around 70%. However in recent week's prices seem to have bottomed and are starting to recover. Testing back to and potentially through $2.00. Moving above both the 50 day EMA and the downtrend line drawn from the January 2016 highs as they do so. (See the chart below)

Natural Gas daily chart

This recent recovery in Natural Gas prices needs to be weighed against the prospect of further increases in supply. For example the US Energy Information Administration,or EIA,predicts that US Natural Gas production will average 79.7 billion cubic feet per day in 2016 and rise to 81.4 Billion cubic feet or Bcf in 2017. That compares with average daily production in 2015 of 78.3 Bcf.

But by the same token the EIA is also forecasting an upswing in US gas consumption. With growth of +2.9% anticipated in 2016 and another +2.2% in 2017. For the sake of comparison that equates to consumption of 76.7 Bcf in 2016 and 77.3 Bcf in 2017. What's interesting about these consumption forecasts is that industrial demand,is seen by the EIA, as the main driver of growth in gas consumption.

Chart plots Natural Gas vs US Manufacturing PMI data

As we can see from the chart above there is certainly a case for thinking that the fortunes of US industry and Natural Gas are interlinked. The recent improvement in the ISM manufacturing survey data and the headline Manufacturing PMI number may represent the green shoots of a recovery. Though as we can see from the chart both the PMI data and Natural Gas prices still have plenty of work to do.

Platinum and Palladium

These are the new kids on the precious metals block, with Platinum only being recognised as precious metal in 1751 and Palladium only being identified as a separate metal some 200 years ago, by English Chemist Willian Hyde Wollaston. Gold and Silver have of course been recognised as both individual elements and precious metals for more than 2000 years.

Both Platinum and Palladium have industrial applications as well as their use in jewellery and both are comparatively rare minerals. In recent years the pair have become associated with catalytic convertors that help to reduce harmful emissions from motor vehicles. Palladium is also used in the purification of Hydrogen and within fuel cells powered by that same gas. Platinum production is associated with South Africa whilst Russia has some of the world's largest Palladium deposits. Though South Africa and Russia are each significant producers of the other metal respectively.

Chart shows the prices of Platinum and Palladium over the last 10 years

As we can see the prices of Platinum and Palladium have been closely correlated over the longer term. However more recently (since 2013) Platinum has diverged away from the Palladium price. That said if we look at the price action between the metals over the last three months, on a shorter term chart then Platinum has clearly led and outperformed Palladium during February and March 2016 .Though the pair may now be back in sync once again.

Please contact your account manager if you have any questions regarding our new trading instruments or any of our other services.

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