The week ahead builds towards Yellen's Jackson Hole speech ( 5 hours before Draghi's speech) in what looks like a vital event for the dollar. CAD was the top performer last week, while the pound lagged. CFTC positioning data showed less enthusiasm for USD shorts. We turn to US Treasury Secretary Mnuchin's speech on tax reform and Trump's speech on Afghanistan at 9 pm Eastern. The USDJPY Premium short was closed for 185-pip gain.
From time to time there is a synchronicity in related charts that makes intermarket analysis so effective. This is one of those times.
A look at USD/JPY, gold and 10-year Treasuries shows that the trio are all flirting with major breakouts/breakdowns. USD/JPY briefly fell below the June low of 108.69 on Friday before recovering after Bannon left the White House. The bigger level is the April low of 108.13 and a break would signal a full retracement of the post-election gains.
In the bigger picture, the dollar's path depends on growth, a coherent administration and the ability to deliver on election promises like tax cuts. Bannon himself said his ouster signals a more-traditional Republican administration and that's something the market may like.
The other major front is Fed policy and the global deflationary trend. Gold and bond yields are screaming that a rate hike cycle isn't needed. So far, Yellen has leaned against the market but we will be looking for signs of a shift at Jackson Hole on Friday. The likelihood is that she sticks to the script or defers to talk about regulation (the topic of her speech is financial stability). In any case, the trio of USD/JPY, gold and 10-year yields will tell the tale.
Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +79K vs +94K prior JPY -77K vs -96K prior GBP -32K vs -25K prior CHF -1K vs -1K prior AUD +51K vs +58K prior CAD +51K vs +63K prior NZD +25K vs +33K prior
The general theme was that US dollar shorts were trimmed. What's striking is how quickly the positions shifted, especially EUR/USD, despite a very modest move higher in the US dollar in that period. It indicates that the dollar longs are always waiting in the weeds, ready to bounce.
The other theme was the cut in yen shorts once again. That has been a pain trade and April's dip to a four-month low in USD/JPY argues that more pain could be on the way.
The big moves today were undoubtedly in equities. But the euro suffered a minor bump on the release of the minutes from last month's ECB Governing Council policy meeting, which revealed growing concerns with a possible overshoot in the value of the euro. Before we start speculating over when ECB policy makers may start jawboning the currency lower, it's worth reminding the times when and why the ECB warned over excessive euro strength. Full charts & analysis here.
Commodity currencies dominate a quiet Wednesday summer session as traders await this evening's release of the minutes from the Jul 26-27 FOMC meeting. Recall the dollar fell sharply on that day, partly due to escalating adversity between the White House and Washington as well as the Fed statement itself.
So what did the Fed say on Jul 27? The Committee made two minor changes: i) saying inflation was 'below' target rather than 'somewhat below'; and; ii) that the balance sheet runoff will start 'relatively soon' which could mean later than September. Also note that 3 weeks after the Fed decision, July CPI was a miss. Today's minutes may further enlighten us and whether the inflation tweek was a mark-to-market reflection or a possible sign of the Fed's plan, the latter could be USD bearish.
Let's also not forget tomorrow's release of the ECB minutes from the Jul 20 meeting/press conference, which triggered broad EUR strength and sharp DAX selling after the ECB was perceived to be largely on course towards curtailing QE. Today's rally in the DAX and retreat in the euro were spurred by Reuters reports that Draghi will not make any policy-related remarks at next week's scheduled speech at the Jackson Hole symposium, thus, allaying (or delaying) worries about any references to a curtailing QE. Yet, this remains a matter of “when” rather than “if”.
A new index trade has been issued to Premium subscribers after the two previous trades were closed at a profit.
|Eurozone Final CPI (y/y) [F]|
|1.3%||1.3%||Aug 17 9:00|
The war of words between Trump and Kim escalated Thursday and that sent a shudder through markets and a flight to safety that boosted gold near some key levels. The yen was the top performer while the kiwi lagged. US CPI is due on Friday. The Premium short on DAX30 was closed at 12010 for 220 pts, leaving other 2 indices trades in progress. The latest Premium video on the current and future trades is below.
Hedge fund heavyweights Ray Dalio and Jeff Gundlach touted gold this week and the chart is worth a close look. It climbed $10 to $1286 on Thursday; that's the best level since early June. It's breaking a major 6-year trendline resistance, nearing a double-top that was carved out just below $1300 in April and June. Gundlach highlighted how the chart was forming a cup-and-handle pattern. Dalio said rising political risks made a 5-10% allocation to gold necessary.
The market is spooked at the moment, but not as much as the 36 point decline in the S&P 500 would indicate. Ten-year yields were down just 4.6 bps and the FX moves are miniscule compared to US stocks, which had their second-worst day of the year.
A big part of the story is volatility. Trades betting on low volatility are far too crowded, something we've pointed out time and time again. As trouble stirred this week, the VIX jump was inevitable, but is it a squeeze? That brings us back to gold. If the fears are real and lasting, then that zone around $1300 will be a critical bellwether. A break would put the 2016 high of $1376 in clear focus.
In the background, the US dollar continues to struggle. The PPI report was soft, and it could well be a preview of Friday's CPI. The consensus is for a 1.8% y/y rise and 1.7% on core. A miss to the downside will spark serious doubts about a December hike.
The geopolitical fear trade lifted off Wednesday in a classic flight to CHF, JPY and gold on North Korea worries. The Swiss franc led the way, while the Australian dollar lagged. Early in Asia-Pacific trade, the RBNZ held rates while the kiwi fell sharply when the assistant governor McDermott accentuated the change in the language that the currency "needed to" weaken. US PPI and Fed's Dudley are due next. All 3 Premium index shorts are in the green.
Markets are an unparalleled price discovery mechanism, except in once case. Add a bit of fear into the equation – especially fear of life and death – and markets overreact. Recent examples are the trouble in Ukraine and the ebola episode.
War is naturally frightening and uncertain. Now that North Korea has nuclear weapons (or close to it) it will remain a part of the trading landscape. Expect that to provide several opportunities to fade the "fear trade". The first came on Wednesday as stocks and USD/JPY fell only to later recover most of the dip. Bids in bond and gold mostly remain but once the rhetoric cools, so will the trade.
Fading armageddon rests on two critical assumptions: 1) That the US will obliterate North Korea if it uses nuclear weapons. 2) That Kim Jong-Un values his life.
The only conclusion is an extended stalemate, which is really just a continuation of the status quo since the end of the Korean War. The media thrives on inspiring fear but the best trade is almost always on the other side so expect that to remain the case for North Korea.
A more traditional trade is ongoing in the New Zealand dollar after rates were left unchanged at 1.75% and Wheeler said they would remain there for the foreseeable future. But 8 hours later, NZD/USD later fell by anotehr half a cent when McDermott stepped in.