- There is virtue in finding the most simple and strait forward trade opportunities possible, but it can also limit
- Simplicity can generate immediacy and volatility but complexity more often produces longer-running trend
- We consider the ‘simple’ appeal of the Aussie jobs data for AUD versus the many faceted BoE decision for GBP
There are detriments and benefits to both simple and complicated market scenarios. We ran through the virtues of seeking out simple trades recently: it creates easier-to-analyze scenarios, it can offer more definitive outcomes and it can generate concentrated volatility. At the same time, that concentration and simplicity usually comes at the loss of momentum. Rarely are critical turning points in central themes that influence the entire financial system decided so unilaterally. For contrast, complicated market events can be very difficult to evaluate (you have to determine what factors take greater precedence), it is can result in various measures of influence (conflicting components) and volatility can in turn be disrupted due to the lack of clarity. On the other hand, these are the kinds of considerations that tap deep veins for the markets. Trends, in other words, can arise from these types of developments.
The Fed decision this past session is a great point of evidence of this phenomena. There were many elements to this policy meeting – from the decision to hike rates to the forecast for future tightening to the evolution of policy to include the stimulus program wind down. There was plenty of speculation surrounding this event, and there is every opportunity for these aspects not to align and to in turn stymie the market’s response to the event risk. As it happens, all the elements did align to support the Dollar. And yet, there was not an overwhelming shift in bearing from the market. While there was a degree of volatility, the true potential for this multi-faceted event rests with the longer-term trend it will feed.
Looking ahead, we select two events over the next 24 hours that carry the hallmarks of the contrasting simple and complex scenarios. For the ‘simple’ example, we have the Australian Dollar’s potential response to the employment data for May. While this is an important economic update, it will struggle to genuinely alter the course of the Aussie Dollar’s general trend. To change the Australian currency’s tide, we would need to see the market’s universal appetite for high yields shift – for better or worse – or witness a wholesale change in the currency’s own offering. Instead, the AUD data’s clear line of beating or missing expectations and its loose importance for the economy can charge a short-term volatility for pairs like the AUD/USD or AUD/CAD. Alternatively, the Bank of England rate decision can alter the monetary policy standing of the Sterling and given a deeper reflection of Brexit troubles in the background. That said, the likely shift from the central bank will likely be more subtle which can temper volatility but offer the longer term trend. We reflect on the virtues and vices of simple and complex opportunities in today’s Strategy Video.
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