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Introduction to Scaling in Trading Scaling in trading involves adjusting the size of trading positions based on specific criteria or rules. This concept is crucial for both discretionary and automated traders, with the latter group often finding it easier to implement due to the structured, rule-based nature of automated systems. For discretionary traders, scaling introduces flexibility to tailor position sizes to fit current market conditions or account balance.

Scaling strategies can apply to an entire account or to selected strategies, depending on the trader’s goals, approach, and the quality of their data. A well-planned scaling approach can enhance profit potential while managing risk, whereas an ad-hoc or uninformed scaling practice often introduces additional risks without promising substantial rewards. This article outlines critical concepts and principles in developing a robust scaling strategy, helping traders determine a path suited to their trading goals and risk tolerance.

Types of Scaling Approaches The choice of scaling approach is based on factors such as experience, trading objectives, and risk tolerance. Any structured scaling approach generally surpasses none, and selecting one today doesn’t preclude exploring others later. We’ll examine four common approaches to assist you in making an informed decision.

Fixed Lot Size Scaling Fixed Lot Size Scaling involves trading a consistent lot size for each position, regardless of changes in account balance or market conditions. This approach is straightforward and accessible, especially for beginners who might not be ready to adapt position sizes actively. However, fixed lot size scaling can be restrictive; it does not account for changes in account value or market dynamics, limiting the ability to manage risk effectively during volatile market periods.

Example in Automated Trading Fixed lot size scaling is especially useful when transitioning a model from backtesting to live trading. For example, if an Expert Advisor (EA) performed well during backtesting with a fixed lot size of 0.1, starting live trading at this minimum volume is prudent. Doing so allows traders to verify live performance against backtest expectations, ensuring the EA’s effectiveness in real market conditions before considering scaling up.

Fixed Fractional Scaling Fixed Fractional Scaling trades a set percentage of the account balance, automatically adjusting position sizes with account growth or shrinkage. This inherently responsive approach aligns with the account’s performance. For example, a trader may risk 1% of the account per trade in leveraged trading, calculating this amount based on the potential loss if a stop-loss is triggered.

This risk tolerance can vary depending on the individual’s strategy and objectives. Benefits and Considerations This approach helps manage risk, especially as the account size fluctuates. However, the varying lot sizes across different instruments and exposures require close monitoring.

For example, in a portfolio with both Forex and commodity trades, the risks associated with each asset type might differ. Traders must consider this variability to ensure their risk exposure remains consistent. Selective Strategy Scaling Selective Strategy Scaling increases position sizes based on the proven success of specific strategies or components within strategies.

This approach accelerates gains, but reaching a critical mass of trades to evaluate performance becomes more challenging due to its selective nature. Example of Strategy-Specific Scaling Consider a trader using multiple strategies: one focusing on trend-following and another on range-bound markets. If the trend-following strategy demonstrates a high win rate and favourable profit factor over time, the trader may selectively scale this strategy’s position sizes.

Meanwhile, the range-bound strategy could be scaled conservatively until it shows consistent performance. Selective scaling like this allows traders to leverage their most reliable strategies for greater potential returns. Variable Scaling (Advanced) Variable Scaling is a sophisticated approach adjusting trade sizes based on market conditions, including price action, trends, signal strength, and volatility.

Advanced traders using variable scaling develop a system to dynamically adjust position sizes based on indicators, providing flexibility to respond to market changes. Example Using Volatility Suppose a trader monitors market volatility through the Average True Range (ATR) indicator. In periods of low ATR (indicating low volatility), the trader might scale down positions to reduce risk.

Conversely, during high volatility, they might increase position sizes to capitalize on larger price swings. This approach requires a deep understanding of technical analysis and specific criteria for guiding scaling decisions. Broad Principles for Effective Scaling Effective scaling relies on well-defined criteria aligned with account size, risk tolerance, and trading performance.

Key metrics include account balance, margin usage, and trade success metrics. Incremental scaling allows traders to gradually adjust position size, thus managing risk as trading volume increases. A structured scaling plan ensures scaling decisions align with the trader’s goals and risk management rules, avoiding emotional, unplanned adjustments.

Optimal Conditions for Scaling (“The When”) Scaling should be guided by specific performance metrics that assess result reliability. Key indicators include: Win Rate: Consistency in win rate over time is crucial. A stable win rate suggests that the strategy performs well across various market conditions.

Profit Factor: A ratio of gross profit to gross loss. Generally, a profit factor above 1.5 indicates more profitable trades than losses. Drawdown: The peak-to-trough decline in account balance.

Lower drawdown suggests more stability, supporting the case for scaling. When combined with net profit and worked out as a ratio, with automated trading we would expect a Net profit to drawdown ration of at least 8:1 Risk-Reward Ratio: A higher ratio shows that profit potential outweighs losses, making the strategy more viable for scaling. Sharpe Ratio: This risk-adjusted return measure indicates better performance relative to risk.

For instance, if a trader maintains a high win rate, profit factor, and low drawdown, they might consider scaling up. However, if metrics vary significantly, scaling should be approached cautiously. Determining How to Scale The degree to which you scale is a crucial component of your plan.

Scaling is often done incrementally, such as moving from a starting lot size of 0.1 to 0.3, 0.5, and so on, based on the strength of results. For instance, a trader may scale up by 0.1 lot for each 5% account growth, provided performance metrics remain stable. It’s essential to clearly define this scaling plan before implementation, follow it precisely, and review it over time to ensure it meets trading objectives.

Psychology and Challenges of Scaling Scaling involves a psychological shift, as traders manage larger positions with increased potential profit and loss. Traders often encounter procrastination, impatience, or anxiety, especially when adjusting to larger numbers. Managing Psychological Challenges To illustrate this principle in an example, if a trader accustomed to $100 maximum profits scales to a position where potential profits reach $400, the temptation to close trades early may be overwhelming.

To ease this transition, a trader might simulate the larger trades in a “ghost account,” which mirrors live trading without risking real capital. This simulation allows the trader to become comfortable with the numbers, building confidence without financial exposure. Creating and Committing to a Scaling Plan An effective scaling plan is data-driven, with metrics and thresholds to guide scaling actions.

Regular reviews ensure the plan adapts to evolving market conditions and performance outcomes. Like all elements of a trading system, a scaling plan requires discipline, objectivity, and data-driven actions rather than emotional reactions. Summary Scaling is an advanced trading concept that, when applied correctly, can optimize profit potential while managing risk.

This guide outlined various scaling approaches—Fixed Lot Size, Fixed Fractional, Selective Strategy, and Variable Scaling—each with distinct applications depending on the trader’s experience, strategy, and market conditions. Fixed lot size scaling offers simplicity and is suitable for beginners or automated trading, while fixed fractional scaling aligns well with account growth or decline. Selective strategy scaling focuses on increasing successful strategies' position sizes, while variable scaling dynamically adjusts to market conditions, requiring deep technical knowledge.

The guide also emphasized key performance metrics for effective scaling and highlighted the psychological challenges involved, with strategies for managing emotional responses. Ultimately, a successful scaling plan is disciplined, data-driven, and regularly reviewed to ensure alignment with trading objectives. Traders who develop and commit to a structured scaling approach can enhance their trading results by making informed, calculated adjustments to position sizes based on performance metrics and risk tolerance.

Australia's second quarter CPI due out on the 31st of July could go one of two ways so let's dive into how it will move and how to trade it. First way - Coming in line or below Currently 24 of the 30 surveyed economists see inflation coming in line or below expectations. That is June quarter CPI coming in at 1% quarter on quarter and 3.8% year on year.

Trimmed mean expected to come in at 0.9 of 1% quarter on quarter and 4% year on year remembering this is the preferred measure of the RBA. If this is indeed the case it would mean a step down from the March quarter read which was 1% and would hold year on year inflation at 4%. We need to highlight the RBA own forecast as well, because at the last Statement of Monetary Policy update the forecasted head inflation was the same as the consensus 3.8% year on year.

But trimmed mean inflation is 0.2% lower at 3.8% year on year. This will be interesting because the Hawks out there believe anything that is 3.9 or above will be a trigger for the RBA next Tuesday. The variance can be put down to several things how the trimming is actually done but what really matters to us as traders is the impact of dwelling and rents on the inflation figure which has been a key factor for inflation overshooting over the last two years.

If we have a look at rent, expectation is for a 1.9% June quarter rise down from 2.1% in the March quarter. So trending in the right direction but still well above a comfortable and sustainable level. Rent’s overall contribution to the full figure at this point is 0.12 compared to house purchases which is only 0.08 the expectation for the June quarter is 1% the house purchases have 1.9% for utilities.

This gives a combined figure of 1.35% for the June quarter in housing. It is the number one thing to watch on Wednesday. Health is the other part of the inflation data to watch.

We've not got any major updates in the monthly CPI data about health and the expectation is for the June quarter to see a 2.5% increase in health inflation. This is the other part of the data that will matter. We highlight all this to give you as much information as possible to make informed decisions at the 11:30 Australian Eastern Standard Time drop.

Because if the data does come in at these levels it will probably be enough to confirm the RBA will hold at their August 6 meeting. And in line or below figure is likely met with dovish views and bearish trading. More on that below.

Second way: Above expectations What's so interesting about Wednesday's CPI is that for the last 6 consecutive quarterly updates Australia CPI has not just come in above consensus it has been above the full range of views. It's why its giving us reason to pause and to suggest that there is every chance based on the data from the monthly inflation figures the upside surprise is a very real possibility. Retail spending although sluggish has remained above expectations, services have seen reasonable price increases during the April to June.

As things like insurance, telecommunications and utilities increase prices well and truly above the inflation rate. Education already expected to be strong has also seen wage increases during this quarter along with higher infrastructure spending from state governments. Housing which is already forecasted to be strong has surprised to the upside in every one of those six previous readings and according to Core Logic and Prop Track data of the April to June figures suggests that it could be a seventh time in a row housing comes in above expectations.

The final unknown is the energy rebates. It's been so surprising just how long injury baits have been able to hold down electricity prices in the CPI. Several forecasts now show the snapback from these rebates is on.

If this transpires, the expectation is for energy to snap 7.2% higher in the June quarter. Now the caveat here is that already the federal government has put a new $300 per household energy rebate policy in place so maybe this will be ignored. But there's no getting away from the fact energy is the big unknown and one that could blow the CPI data well above expectations.

This is likely to see bullish bets being made on the August 6 RBA meeting and strong positioning in the Aussie dollar. We think at the moment this outcome is being discounted by the market and by the economic world. Because the question that needs to be asked can the RBA justify inflation now running above its own target for three years in a row?

We would argue it probably can't. What trade First and foremost, we need to warn against looking at AUDJPY and AUDUSD. The reason for this, do not forget pretty much at the same time as Australia’s CPI is being released the Bank of Japan is forecasted, for the first time in decades, to release it artificially depressed interest rates.

We know that the BoJ has been defending the JPY over the past month and having seen the AUDJPY get to as high as ¥109.5 in early July the cross now sits at parity. If the BoJ does do as forecasted the cross could do anything on Wednesday. Then there is the unknown about how traders will position with all the machinations the BoJ action and the CPI data means – realistically the cross could experience some mass volatility.

The other is that it is the beginning of the US Federal Reserve’s July meeting and although there is no expectation that they will cut rates on Thursday, it is unknown what would be said during chairperson Powell’s press conference. FX safety trade has been pretty solid over the last period and money has flowed back to the USD. We are unsure about what could happen over the 48 hours between the CPI and when the Fed reports for that reason, we think the USD is probably not the one to look at for this particular piece of data trade.

Thus crosses such as EURAUD, AUDNZD and even AUDCAD are probably better options if you are going to trade pre and post the CPI data as there is no major impact on the other side of the cross from fundamentals in the next 72 hour period. If you are looking to the August 6 RBA meeting you can look at AUDUSD and AUDJPY but with entry points late on Thursday or Friday when there will be a greater understanding about what the Bank of Japan and the US Federal Reserve have done and will do in the future. Happy trading

In the words of one of the greatest supporting roles of all-time, this being Rafiki from the Lion King – It is time, (finally). We understand this is a bit tongue and cheek but the amount of false starts in 2024, we think it sums up what traders have been experiencing. So, we have reached the other side of the mountain.

The cuts are coming. The question now is by how much and how often. It is this question that we traders now need to address.

First let’s look to Thursday's September Federal Open Market Committee (FOMC) meeting. Current market pricing has the FOMC reducing the target range for the federal funds rate by 43 basis points, which puts the probability of a 50-basis point cut in the range of 65 to 70 per cent. This would bring the Federal Funds rate to 4.75 per cent from 5.00 per cent.

The consensus from the economic community also points to a 50-basis point cut. However, the number of 50-basis point worth of cuts versus 25-basis point worth of cuts sits at 24 to 20 suggesting a more conservative view than the headline figure. Our two cents on this using the recent communications from the Fed and barring more severe economic deterioration, we think the Committee will likely opt for a series of 25 basis point cuts going forward including Thursday’s meeting.

What is not disputed is whatever they do on Thursday it’s likely to be the beginning of a series of rate reductions aimed at recalibrating monetary policy to better align with evolving economic conditions – which as we have discussed over the last few weeks is pretty gloomy. So who is right on Thursday’s meeting and what else can we traders take out of the current FOMC environment. All the Talk – nothing is linear The future trajectory of US monetary policy will depend on several changing factors, labour market dynamics being the biggest one.

Take Federal Reserve Governor Christopher Waller’s recent remarks that emphasised the uncertainty surrounding the pace and total amount of rate cuts. He highlighted that these decisions will be data-driven and measured. While he believes “it is time” to begin cutting rates, the start should be a modest reduction as the data, while suggesting things are poor, are not flashing red.

He also remains cautious about making any definitive projections regarding the pace of future cuts. This is important for us – the market is basically pricing in an almost linear decline in rates through to August next year. Waller thinks it isn’t that clear cut - as he distinguishes between "softening" which it currently is doing in the labour market and a "deterioration” which would be out and out capitulation.

This suggests that aggressive action (such as 50 basis point rate cuts) would only be considered if there is a notable and sustained decline in employment. Now if we take Waller’s comments and marry them with New York Fed President John Williams as a clearer picture of the board’s thinking emerges. Williams uses the term "dial down" to describe the gradual reduction of rates and stressed that policy adjustments should move "to a more neutral setting over time." This is not the language of a Board considering hard and fast action on monetary policy.

Rather one that is looking for a steady, deliberate process. Which brings us to one of the more dovish players on the Board San Francisco Fed President Mary Daly’s – have a look at these words when asked about rate cuts: "regular cadence" in adjustments, this aligns with Waller and Williams remarks and suggest the expectation of a methodical approach rather than abrupt shifts is the better trading view. Now there are some caveats to what we have just presented.

Waller did not entirely rule out the possibility of larger cuts particularly if there was a sharp labour market contraction. The current economic outlook does not suggest such a drastic deterioration in the labour market, but Waller’s flexibility indicates the Fed’s readiness to act decisively if conditions worsen, so again not linear and the hard and fast option may still materialise. The Man himself: A Clear Path Forward This is all well and good but really what does the man himself think?

Gauging his plethora of talks, speeches, firesides and everything else that’s in the public domain Fed Chair Jerome Powell looks to be leaning into the expectation that rate cuts once started will be pretty consistent until it hits target. He has, like the others, emphasised that the path forward remains data dependent. What we think he will say going forward is that while inflation has not yet been fully tamed, the current stance of monetary policy remains restrictive enough to continue exerting downward pressure on inflation.

At the same time, expect him to point out that the Fed has room to lower rates while still working towards its dual mandate of maximum employment and stable prices. Specifically, Powell may highlight the need to prevent further slowing in the labour market, and that recalibrating rates downward is crucial to avoiding an unnecessary shortfall in employment. He is also likely to frame the upcoming rate cuts as a measured approach to bringing inflation back to target while safeguarding the labour market and broader economy.

Crystal balls – How far down the mountain So where does all this leave us? The consensus for the FOMC’s Dot Plot Projections reflect a path of gradual rate cuts. That same consensus is forecasting that the Committee will project rates approaching 3.00 per cent by the end of 2025, reflecting a moderate easing cycle designed to balance the need for inflation control with concerns about growth and employment.

Based on all of the above, expect the median policy outlook to include three 25 basis point rate cuts in 2024, followed by five additional cuts in 2025, and one final cut in 2026 to bring us down the mountain. This would bring the terminal federal funds rate to a range of 3.00 per cent to 3.25 per cent, although don’t be surprised if the forecast ends with the rate slightly lower, in the 2.75 per cent to 3.00per cent range, aligning with the Fed’s longer-term rate expectations. So it is time – tomorrow’s FOMC meeting is likely to mark the beginning of a rate-cutting cycle, with gradual easing expected through 2024 and beyond.

Inflation remains a key focus but it is increasingly shifting its attention to preventing an excessive slowdown in the labour market, signalling a clear path towards further rate cuts while maintaining a balanced approach to managing economic risks.

We all know the market term ‘don't catch a falling knife’. And in the current market conditions why would you? But with indices, the likes of the magnificent 7, industrials and banks doing so well in 2024 people are asking where's the value?

And that is why people chase falling knives, because they perceive this value. They perceive that if others are doing so well these beaten up companies should surely catch up and therefore give them a big windfall. So we wanted to go through some of the 20 big stocks in the US that are down 20 plus percent or more in 2024.

You will know the majority of these names they show up in everyday life and across all sectors and industries. The interesting thing about them is that they are very diverse across pharmacies, industrials, streaming firms, financial firms and more and that's why there is a huge caveat to this list. Because the majority of these 20 plus losers have structural reasons as to why they have lost 20 plus percent.

Let's really have a look at some of those that are probably an interesting opportunity, take Nike for example. NIKE is down to 30.4% year to date and 41.1% from its 52-week high. Compare that to its main European competitor in Adidas up 23.7% year to date and only 9% off its 52-week high Year to date performance of NKE to ADS So should you catch the Nike falling knife?

Well first and foremost the issues hitting NIKE have been some external issues, but mainly internal ones. Sponsorship deals with Olympic teams have been higher than expected and have hit cost, while on the revenue sign uptake of Olympic branded apparel is below historical Olympic standard. Then there is the deal with the German National Football team, something now he thought was a coup having booted Adidas off what has been nearly a 6-decade partnership.

However this turned out to be something much less profitable than Nike thought explains its current conundrum and share price poor performance. The answer to the falling knife question with NIKE will probably be answered over the next three weeks as the Paris Olympics take off and apparel numbers come in. Therefore it is possible that now he could recuperate some of the losses had seen on its share price pretty rapidly but again we always caution catching a falling knife but it is one to watch.

Which brings me to the next falling off to really have a good look at paramount global. The content and streaming giant has had a really tough time in 2024. Down 23% year to date and 34.2% from its 52 week high the streaming giant is facing cost blowouts, content competition and legacy issues to its cable and freeway TV programming.

There's always been a discussion that the streaming wars would come to a head sometime early after COVID-19. With over 30 different streaming providers competition is so high and costs ballooning that sooner or later a consolidation will come. The question is will paramount the first major player to fall in what probably will be a house of cards scenario?

Let's have a look and compare it to some major players like Disney and Netflix. As this chart shows both Netflix and Disney are still up in 2024 how Disney has had some structural issues around its amusement parks Netflix on the other hand is on a tear. This chart clearly shows paramount's biggest problem.

It's not the biggest provider like it Once Upon a time was, it is coming up against really stiff competition in Netflix and outside of cable it doesn't really have a diversified revenue stream like Disney. What's more it's facing real legacy issues with its free to air and TV services in general. Whenever you see a firm ‘slimming to greatness’ by cutting costs and slashing services it is an immediate red flag and normally suggest that this further to fall before the knife actually finally hits the floor.

Paramount will still be Paramount it will still produce content people want to see but in the current environment and the competition it faces you will not be the Paramount of yesteryear. Finally let's have a look at some of the other major names that sit on this list: Lululemon Athletica is down 44.6% year to date and 45.3% from its 52-week high. Like all things in consumer discretionary apparel is one of the key areas facing the biggest headwinds and lululemon is not immune.

Online e-commerce player Etsy is also facing similar problems down 23.7% year to date and 39% from its 52-week high. Etsy is a small item provider with high turnover which means volume is the key. In a world where people are battling the cost-of-living, small items are easy to go by the wayside.

Finally we come to Walgreens Boots Alliance - the worst performing big cap player on the S&P 500. Down a whopping 57.4% year to date and 64.8% from its 52-week high WBA is in freefall. We need to go through why Walgreen Boots is getting absolutely towelled up.

First and foremost, you need to understand the shift in the US around health care services. Players like Walmart, Kroger and CVS have all expanded their health care services from in store and beyond. Walgreens certainly reacted to this shift and spent heavily in this area spending $8.9 billion to acquire Summit-Healthcare City to compete.

But the plan eventually failed and saw then CEO Roz Brewer fall on her sword. New CEO Tim Wentworth 's basically unwinding the health service position by trying to wind down the company’s investment in Village MD and divesting parts of the Summit-Healthcare City acquisition. But again like Paramount – slimming to greatness is not a strategy that has really worked longer term.

So what is Walgreens Boots Alliance going forward? If it's not trying to take on main competitors in healthcare services WBA is basically saying it's a retailer that just happens to be selling healthcare products. In Australia that certainly works for a player like Chemist Warehouse but in the US competition is much higher and thus margins smaller and overall revenue growth in the sector is anaemic 2% per annum.

This explains the share price fall that we've seen in WBA but the final humiliation came in the last month. WBA has now dropped below a market cap of US$10 billion and that means it can no longer be included in the NASDAQ 100. Being sold out of index funds has only ramped up further selling in this once large firm.

This normally signals the final shake out of a share price and the falling knife that is WBA is clearly coming towards the bottom, a bounce is probable. But with its current strategy it is unlikely to recuperate historic highs anytime soon.

There is a clear and present danger in trade at the moment – overconfidence. Overconfidence that policy and private capital will align and deliver trader a bullish windfall. However, from where we sit, this overconfidence should be defined as likely-disappointment.

Let us explain. China 2024 is not China of 1994. After a week away for Golden Week celebrations, there was a hype ahead of Tuesday’s National Development and Reform Commission (NDRC) briefing.

The hype was clearly at disproportionate levels. But the hype was not completely unjustified after broad fiscal intervention several weeks ago that included interest rate reductions and liquidity injections by the People's Bank of China suggested that China might be returning to policy moves of the 90’s, 00’s and 10’s. What the market got was anything but.

NDRC announced that it would advance 100 billion yuan (about $21 billion) from next year’s budget to enhance local government investment and…that was it. Full stop. The NDRC then basically reiterated existing policies, such as support for migrant workers and recent graduates.

NDRC Chairman Zheng Shanjie expressed confidence in achieving the nation's economic targets, aiming for a growth rate of "around 5 per cent." Disappointment with a capital D. Beijing had signalled a renewed appetite for bolstering economic growth through monetary interventions in recent weeks, but investors and economists are increasingly looking for fiscal measures to sustain market optimism and address real structural concerns. One of the biggest structural issues, youth unemployment—which neared 20 per cent in August— which is weighing on China's economic outlook.

While the government has pointed to emerging job opportunities in sectors like electric vehicles (EVs) and drone operations, the broader transition toward a green economy has not been enough to sustain growth. Projections for China's full-year GDP growth have slipped to 4.8 despite the government suggesting it will be ‘around 5 per cent’ To give more context about the expected stimulus, have a look at some of the market analyst forecasts ahead of Tuesday’s announcement: Morgan Stanley had projected a fiscal package worth around 2 trillion yuan ($952 billion), potentially aimed at infrastructure spending and local government financing. Citigroup was even more optimistic forecasting a 3 trillion yuan package ($1.4 trillion), with possible allocations for social welfare and banking sector recapitalisation.

Markets reactions were that of confusion – initially Chinese equity markets, including the CSI 300, surged but quickly retreated back to lower levels. The Hang Seng plummeted correcting 10 per cent marking its steepest decline since 2008. The overconfidence from the market coupled with Beijing raising expectations to fever pitched levels show the trap that is presenting in markets currently.

Interestingly enough without new fiscal stimulus, the world’s second largest economy will face continued challenges, particularly given China’s structural issues such as high youth unemployment. All this is leaving market participants speculating on how the government plans to address local government debt and financial stability. Because despite hopes for a more aggressive fiscal push, such as direct consumer stimulus, Tuesday’s announcement has now left analysts in a quandary and have start to doubt official channels.

This is now leading traders and investors alike to now dismiss the likelihood of demand-driven stimulus in the near term and have moved to a "wait-and-see" approach regarding Beijing's commitment to reflation. All of which is seeing Chinese indices and Chinese-exposed sectors giving back significant gains of the past 2 weeks. China isn’t the only one – RBA is on a collision course to disappoint We also need to warn about the state of the Reserve bank of Australia.

As recently as October 8 economists are forecasting on a consensus basis that the first rate cut of the upcoming cycle will occur in February. However, how that conclusion is being reached is hard to understand when you look into recent statement and then the minutes from the recent September meeting. The minutes reflect a moderately more hawkish view of the RBA's Statement and Press Conference, which is the third time this year this has happened.

We should point out that RBA Governor did not aim for a dovish tone during the press event it was more ‘neutral’. But when pushed on things like ‘considering hikes.’ She suggested it was not which was construed as a more dovish view. The minutes however revealed a different story with the Bank keeping the option of raising the cash rate on the table, as financial conditions have eased, potentially complicating efforts to bring inflation back to target.

While the second quarter GDP household consumption component was weaker than the banks had forecasted, the Board believes it's too early to judge whether this will continue. A point backed by the last consumer confidence number that saw confidence back at level now seen since the start of the rate hiking cycle. Thus, the outlook for improving consumption remains unchanged.

Then there is the labour market which remains tight. The Board believes labour conditions are consistent with an economy close to full employment, noting that "the share of unemployed people finding jobs was high and the share of workers losing jobs was very low." A further positive is the participation rate increasing is likely due to readily available jobs, demonstrating an "encouraged worker effect" rather than more people falling out of work. The minutes also show that policy discussions leaned hawkish.

Board members felt that “not enough had changed since the last meeting” to alter their view that the current cash rate was the best balance between inflation risks and labour market conditions. They discussed what kind of data might warrant more restrictive monetary policy, such as stronger consumption or tighter supply combined with weaker productivity. Additionally, even if the Board's outlook is correct, if financial conditions aren’t restrictive enough to bring inflation down, “monetary policy may need to be tightened.” Eased financial conditions and rising credit growth over the past few months made this scenario more plausible, and banks appear well-positioned to meet any increase in credit demand.

All this – suggested Australia is facing the same situation the US faced in 2024. That being later than forecasted rate cuts by upwards of 6 months. All growth in indices, risk and currencies is based on rates being cut early.

The reactions to ‘disappointment’ are likely to be high and we are mindful that overconfidence in positioning will lead to trading issues. Watch this space.

Market action and underline breath of the last two and half weeks has been extreme and rather eye opening. The S&P 500 has made 38 record all time highs in 2024 so far, however since its most recent peak on July 16 it has traded lower ever since. Now we need to put that into perspective, the pullback since its July high is 4.75 percent to date.

The pullback that we saw in April was 5.7 per cent, the rally at the end of the April pullback was 14.1 per cent to that July 16 high. And overall the S&P 500 is still up 6.6 per cent year to date. But what's really catching our attention is that the pullback in the second half of July looks very much like the pullback that started in July 2023.

If we compare the SNP's year to date performance in 2023 to what we have seen today in 2024 the correlation is surprisingly tight. Have a look at this chart. Yes, the path of the market in the first quarter of 2023 was different to what happened this year but by the end of March (2023 and 2024) the S&P was up a similar amount on a year to date basis.

What we can then see is that from the start of the second quarter through to mid-July that correlation is really tight. So the question we're now asking is are we going to experience déjà vu? The pullback that began in late July 2023 went all the way through to late October 2023 Started slightly lighter than what we've seen this year.

But as the price action shows if we follow what happened last year we could be in for a couple of months of high volatility and the Bulls quickly reassessing their current trajectory. It's going to be interesting because unlike in 2023 where the issues came for monetary policy and the prospect of rate rises or cuts. 2024 has an external factor we only experience every four years and that's a U.S. presidential election. And what might be a trigger point for the bottom of the market if we are about to experience a multi month pullback would be the November 5 election.

Second to that is that all things being equal a rate cut or cuts will have happened by the end of October something that didn't happen in 2023. What's hard to equate is the impact one or more cuts will have on indices in particular as according to the market pricing it's already factored in. It's why the current pullback although close to 2023 the deja vu we are experiencing right now is just that deja vu and not something to be factored into your thinking.

What’s going on in FX? What we are watching very closely on a monetary policy and FX perspective is this coming Wednesday's CPI read in Australia. Over the last 2 1/2 weeks the AUD has been savaged.

So much so that several traders have exited their bullish positions in the Aussie. It's not hard to see why with the AUD/USD losing some two cents in this. Yes this is down to USD strength on the back of a change in the democratic candidate,risk increases in markets, and signs of economic reactivity in the world's largest economy.

But it's not only the AUD/USD but it's saying movements of this kind of magnitude news over the last week and a half of intervention by the Bank of Japan has seen the JPY recuperate some of the losses experienced this year. Again using the Aussie dollar as an example AUD/JPY moved from a high of ¥107.56 to as low as ¥100.5 inside 10 days. This all suggests that at the moment FX is probably ignoring fundamentals and is being caught up in short term external factors.

It is why this coming Wednesday's CPI numbers could be a real turning point in the trading of FX of the last few weeks. Because it should sharpen traders' minds back to the fundamentals. As this chart shows, the expectation of a rate rise on August 6 has been as high as 27 percent in fact at one point in the last two months it's been as high as 46 per cent.

This in our opinion has been fully factored out of FX trading in the Aussie over the last couple of weeks. Thus, if Australia’s trimmed mean inflation rate comes in anywhere north of 3.9 per cent year on year. This chart should rapidly change and be pricing in the probability of a rate hike as high as 80per cent for the August 6 meeting.

What this means for FX is that the current sell off in the AUD is probably overdone and will rapidly unwind itself. Those bulls that have been shaken out over the last week and 1/2 will more than likely reinstate positions. Crosses that have been savaged are also likely to face a rapid snapback because from what is currently presented in the data suggests the Aussie is more fairly valued where it was two weeks ago rather than where it is now.

The caveat If however Australia is trimming inflation rate comes in at or below 3.9 per cent. Then the current pricing of the Aussie is probably fair, and the reaction is likely to be negative. All pricing this year in the local currency has been on the premise of an improving China which is yet to materialise and the divergence that's happening at the RBA.

If inflation indeed is showing signs of finally declining in Australia then there will be a reaction to the downside because the probability of a rate increase in 2024 will drop back to almost 0, as there will be no data strong enough to convince the RBA to raise rates again is there a hesitant hawk something we discussed 4 weeks ago. We will do a full report on the CPI next week and how to trade it leading into the August 6 RBA meeting.