Good Evening All. It's a good thing I left writing this piece until later in the day with the massive moves we've seen in the Treasury market following Powell's hawkish comments.
*POWELL: CAN CONSIDER WRAPPING UP TAPER A FEW MONTHS SOONER
I've been very vocal in my pushback on the market belief that the Fed will hike multiple times in 2022. I continue to stand by this view and believe that inflation is transitory, despite the belief by many that Team Transitory is dead. Nonetheless, this has left some bruises to my views, and certainly has rattled the Treasury market a little bit. The equity market has also slumped lower, and USD strength has been a big part of the day.
What I find particularly interesting though about these comments from Powell is the curves reaction. Basically, the market seems to think that faster hikes will help to keep longer-term yields down. The 10y yield has dropped a whopping 20bps in the last couple of trading days.
Source: Refinitiv
WHAT'S THE VIEW?
I'm pretty comfortable with my previous analysis in the first edition of Treasury Tuesday's. I still think the 2y yield is too high. With the 2y at 50bps I really don't see the Fed hiking several times in 2022. I stand by my view that a maximum of one hike will be made in 2022. I see room for the 2y to drop to around 40bps by the year-end - particularly with the Omicron concerns.
For the 10y, I see the current yield as too low. If we are in a higher inflationary environment, then I do still suspect the Fed will want to move to a higher level of rates. We must of course be wary of the long-term downtrend in the 10y, and I certainly don't expect this to break, but a move higher up to 1.8% seems reasonable to me over a 12 month horizon.
For the long-end of the curve, I expect to see an increase here too, but only to around 2%, i.e. not as high as pre-pandemic levels. This is based on the view that the 30y should be relatively close to the long-term growth rate close to 2%.
Expecting a steepening:
Recently, we've seen a very big flattening of the Treasury curve (higher 2s, lower 10s) and I do expect this to unwind. I can certainly see big upside for the 10y if the right conditions materialise, whereas I don't see much more room for near-term 2y upside.
The 2s10s spread (first chart above is very much flattened) and the 5s2s is the flattest it has been in over a month.
TRADE IDEA:
Open trade idea: Buy 2y Sell 10y Treasury bond. This will then be a play for wider spreads in the near-term. Timeline is for the next month. TP when the spread hits 130 bps (my guess would be 1.7% on 10s and 0.4% on 2s). SL at 80bps.
In practice, this is done by Selling SHY (2y ETF) and buying IEF (7-10y).
EURUSD: View played out nicely, although for the wrong reasons. EUR weaker on the Payrolls report - I was quick to cash in when we dropped to around 1.128.
GBPUSD: Neutral view was about right until the end of the week.
EURCHF: This currency is just mad. I stand by my long-term bullish views.
USDJPY: Bearish view was pretty much correct. Stayed below and continued lower than key marked levels. Breach of trend was also a nice opportunity to add to shorts.
Gold: Still baffled by gold as of late, but I think long is the right place to be right now.
Brent: Neutral view and staying out of the market was the right course of action. Much uncertainty remains but now we've had a big drop I'm starting to look more toward longs again.
Equities: Bearish week-end view was pretty nice on the whole. I have been short since 4700 so to get down to 4500 is very nice.
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Welcome to the third edition of No Rest for FX. Last week's edition has now been updated with a "performance review" of how my various calls went over the week. Available here
It's now time for the third edition, the central view is that Omicron continues to dominate the discourse, but I wouldn't be at all surprised to see some dip buying in the early part of the week. My bias remains for lower SPX however.
All charts cTrader FxPro unless otherwise stated.
EURUSD: BEARISH - ECB Speakers likely to add weight with new variant
Short and sweet this week. I'm expecting even more dovishness than usual from the ECB and a lot of pushback from Lagarde about any possible tightening action. Pre-Omicrom we had been hearing that the ECB would just let its emergency purchases end in March, now I see this as unlikely and wouldn't be surprised to hear some murmurings about extensions or expansions of the APP.
Then, it'll be payrolls, and another decent numbers as I suspect might bring some pricing for faster tapering back to the market. I don't think we will see faster tapering, but I think the market will expect that. I'd be short EURUSD targeting 1.1240, SL at 1.1380.
Note that from a more technical perspective, I reckon if we break above 1.142 approx then we could be back into serious bullish territory for EUR, so do be careful out there.
GBPUSD: NEUTRAL - No real view this week.
Think all attention will soon turn to the BoE, the market now sees a much lower chance of a hike at the next meeting (50/50 compared to previous pricing close to 100). As I've said a number of times, I see the probability of a December hike as close to zero - especially with Omicron.
EURCHF: BULLISH - Commentary same as last week.
No surprise... I'm bullish EURCHF. Yes, it's been bloody painful for me and anyone who followed me into this trade about 2 months ago. Nonetheless, are the charts perhaps... just perhaps pointing to some kind of break higher? We've been trading in this tight range for the last couple of weeks. Sure, those on the other side will say this is consolidation before another leg lower. But do we believe this? The SNB is making more and more interventions, and as I've been saying for months, it is only a matter of time. Comments like the below pointing to increase intervention - we've seen it before, in 2011 with the introduction of the cap at 1.20, then its sudden removal in 2015. The SNB sure does like to surprise.
Source: Reuters
USDJPY: BEARISH - Haven JPY likely to do well - REMAIN SHORT CHFJPY
JPY broke above 115 early last week, but then following the "Risk Off" Omicron news, the JPY strengthened significantly. Notably, CHFJPY also weakened, so the JPY was the preferred haven.
This week, I think we could see more JPY strength as some of the more bullish bets for USDJPY are revised lower in this uncertain environment. That said, I don't want to trade USDJPY outright due to the technicals marked on the chart. We have that trend line which has held well and we are now in oversold territory, could see a technical rebound higher, although I do see a structurally lower USDJPY through 2022.
XAUUSD: BULLISH - Fail to understand the selloff Friday.
I fail to understand why gold slumped so much Friday on the "risk off" pandemic news - initially gold went higher then it got a bit battered. To me, this new wave should support gold for three reasons:
1) Gold is a haven asset and should benefit from uncertainty.
2) This probably means more dovish policy in a high inflation environment - this should benefit gold.
3) This also raises the probability of further bottlenecks later on if lockdowns returning - raising future inflation.
Technically, we look pretty good too, with the 1770 supports holding up well.
BRENT: Neutral - All about OPEC
I'm going to level with you... don't trade oil this week. Nobody knows what OPEC+ will do Thursday (well... until the race to leak the results starts).
EQUITIES - BULLISH Mon/Tues as buy the dip does well, BEARISH week-end as more Omicron / payrolls uncertainties weigh.
TREASURIES - NEUTRAL - Payrolls will be a driver, so don't expect much action before Friday unless we get major debt ceiling news.
More generally, I expect we will see a steepening of the curve in the coming weeks. I think the 2y yield is still too high, and the 10y yield is too low. This would be where I'd play for any steepness. This would also be a bull steepening (since 2y rates would be coming down and this makes it cheaper for markets) so this could be a positive catalyst for another equity (and especially tech) rally to ATH.
It's likely to be a lively week ahead for markets as we start to gather more information about the Omicron variant of COVID-19. The initial market reaction was certainly not positive, with markets suffering there worst declines in months on Friday (and that was on a short US trading day with relatively low volume!). Obviously, the highlight of the week will be payrolls... fear not I will be providing a primer.
In weekend news, Omicron dominates, and in the UK... it seems like masks are back, though hopefully not for good (guess the theme of today's non-sequitur).
But this of course will still only be a single part of the story, the week ahead is awash with Central Bank speakers from the Fed and the ECB, before they will enter the blackout periods in the run up to their meetings later in the month. Here's the December major central bank calendar. The Fed's definitely going to be the one to Rule The World of markets though this month. Are they going to increase the pace of taper? With Omicron I see this as basically a probability zero, but I've been wrong before.
Yes... there are some busy weeks ahead (I better start writing the next Week Aheads in advance...). But all that is in the future, for now:
Highlights for this week:
Lagarde speaks Monday... I've been pushing back on the excitement of ECB speeches for a while. They're dovish, expect a lot of rhetoric on the threats from new virus variants, and a dovish tone to be struck - wouldn't be surprised at all to see some EURUSD weakness tomorrow.
Powell speaks tomorrow 9pm our time. Lots of chitchat from the Fed, don't expect major changes from Powell but no doubt will be some attempt to shape the market view for the meeting in a couple of weeks. Powell also speaking Tuesday in testimony before Congress - this is a relic of the CARES act, but worth watching to see the view on the outlook.
Yellen also speaks tomorrow and the topic of focus is likely to come back to that dreaded debt-ceiling. Wow, that came around fast, but we're going to have to have a little Patience in order to get through this one. With this coming around, there is the usual mumbo jumbo articles on the web about changing the rules, but let's be real, the Democrats don't have the votes. There's a very interesting article from The Atlantic on the brinksmanship of the debt ceiling... highly recommend reading.
Starting to think Hamilton should've been my non-sequitur :)
Core inflation data from Europe on Tuesday. Consensus for 2.3%, but I'm not convinced any number will seriously shift the European narrative. End of the day, oil tumbled 10% on Friday as well so a big contributor to EU inflation pressure has at least partly abated very recently (obviously this won't be included in the October print, but worth bearing in mind).
OPEC meets on Thursday. With the slump in crude on Friday in what definitely wasn't oils Greatest Day, and uncertain demand outlook, the planned production increase of 400k per month is probably going to be put on hold.
PAYROLLS FRIDAY!! Get Ready for It. This is the key moment of the week. Payrolls will determine direction. Remember last time, a beat on payrolls was actually seen as disinflationary!! This was because it showed an improvement in supply. I suspect a similar thing to happen this time around, especially if we can see a big beat. I will publish a full primer of this on Thursday.
Non-Sequitir:
OK this week's artist was ridiculously easy. No prizes for guessing Take That. No question they've produced some great songs... well 28 top 40 songs to be precise.
In 2011, they set the record for the fastest selling tour tickets in history, and this was only beating their own record!
It's pretty gloomy out there today as the discovery of a new COVID-19 variant (which scientists believe is the most concerning yet) has rattled markets and sent equities sharply lower.
As a result of this, I think it's time I wrote a detailed piece on the likely moves if this turns out to be a serious threat which causes many of the restrictions from the past to be considered once more. I think the first thing this mutation does (even though it hasn't been discovered in the G10) is cause central bankers to hold off on any monetary tightening until we know more. That means the Fed probably maintains the taper pace (hence the EURUSD strength this morning) and the BoE doesn't hike in December. But we'll cover all this in more detail in the piece ahead.
In this extended piece, I'm going to do a section on each asset class namely:
1. Equities
2. Fixed Income
3. FX
4. Commodities
And then try and wrap it all together into some kind of coherent conclusion on the methods you can deploy to help weather the risks ahead.
THE EQUITY MARKET:
Ok to kick things off, I'm not going to be doing an extended sector by sector analysis of what to own and sell in a new COVID wave. That will follow in its own individual piece.
Instead, I am going to look in broad strokes at the general equity market performances, and where you might be safest putting your money.
OK, so let's revisit March 2020, everything kicked off with just absolute broad selling of everything, I remember on several occasions we hit circuit breakers (where equity market falls were so great that a "break" of 15 minutes is triggered to try and calm markets). This was naturally a very scary time. Now, I'm not saying that this new variant is going to trigger the same wave of downdrafts in equities, but what is important to remember is that the recovery was triggered by central bank action.
Let's say that this variant is concerning enough that 10% is lopped off the equity market in total before we have more clarity about its prevalence and the threat it poses, I'm not sure what gets the market back up to all-time highs. If new lockdowns are introduced, central banks of the world are effectively out of firepower (except for QE). So this means that a rapid rebound in equities is not necessarily guaranteed.
So my suggestion for the immediate is to take out some downside protection. Buy some puts in the "recovery trade" (names like airlines, oil, commodities, financials etc), and also perhaps add some to the pandemic winners (think delivery companies, tech, WFH trends).
However, the threat of a lack of central bank action in the face of higher inflation means that such a recovery is not guaranteed. Thus, I would look to find the serious value within the market on a geographic level. From this perspective, I favour the FTSE 100. Sure it has a lot of exposure to financials and commodities, but it is already ridiculously cheap. Don't forget, there's also a lot of healthcare there which could be poised to weather the storm. The chart above really shows the difference between the US and the UK. The UK has not even recovered to pre-pandemic levels in the FTSE 100, whereas the S&P500 has surged higher. Europe is also not too expensive compared to the US, but I favour the UK.
Multiples in the UK also make it look cheap - currently trading below 15 times fwd earnings. This to me is a bargain when we compare to the 20* + earnings seen in other markets. But the most important thing you can do right now... is protect your downside. If you've been a reader of this blog previously, as I outlined in "The Bears Who Cried Wolf" this is something which you should have positioned yourself for recently.
FIXED INCOME:
Again, I am not going to delve too deeply into FI, I will do a more precise analysis in the second edition of "Treasury Tuesday's" where I will look at the outlook for different maturities of yields across markets.
For now, let's just have a look at the damage...
Source: Bloomberg
What's really striking to me is the Asia Pacific damage... AUD 10y down 13bps to 1.73%. Remember that these are the economies which have generally been a bit more hawkish on the inflation side of things - the RBNZ hiked recently to 0.75%, AUD abandoned YCC etc.
So clearly, a dovish reaction is expected from the central banks one more... but they don't have the policy room to cut as much as they did previously, perhaps explaining why the drop hasn't been more considerable a la March 2002. The US 10y down 11bps probably taking a faster pace of tapering out of the equation.
If we look at the 2y yield, we see that's also lost 10bps in the US. To me, this is where there could be the most action. Further lockdowns could put increasing pressure on the Federal Reserve to slow down the pace of its proposed hiking cycle. This is particularly true if restrictions return to the US, but bear in mind that lockdowns elsewhere will have repercussions on the rest of the supply chain. This makes the 2y pretty difficult to call, but the Fed is the Central Banker to the world, and too hawkish a stance will cause a backlash in the financial markets it will try to avoid.
UPDATE: A previous version of this report said the 2y yield had dropped just a basis point. This was incorrect and was due to delayed data. Apologies for any misunderstanding this may have caused. The rest of the logic still holds. The 2y could be in for a real shock down to around 30bps if this weakness persists, in my view.
My view from here is the 10y is probably appropriately priced. It is in the short-end of the curve where we could see a rapid repricing lower. This would be consistent with 2020 but I'd expect to see a steeper short-end curve as we see both bets that there will be a DELAY to the hiking cycle, but also that inflation pressures are likely to continue for longer.
In other words, the Fed will act to protect the economy, at the expense of more longer-term inflation.
Final comment on the UK: This new variant and the closing of UK borders to some nations is probably a sufficient condition for the BoE to delay hikes. When we couple this with Bailey's recent comments effectively saying that forward guidance is dead, I now believe that the December rate hike is increasingly unlikely. My favourite trade therefore (what a surprise) would be to short GBP - I'm currently playing this through FX Options. Please do reach out for any details. Below is the UK yield curve... something weird is definitely going on.
FOREIGN EXCHANGE:
Now we get to the juicy part. Let's start off by looking at the broad USD and EURUSD performance back in March of 2020: Notice that the Green line has an inverted axes, this is so it is more clear that when the USD strengthens the EUR weakens etc.
We can see that the USD got sharply stronger as the pandemic worsened as it utilised its "safe haven" status. As the Fed slashed rates and global policymakers provided stimulus, this was quickly reversed even in the face of global lockdowns!!
This was the "Risk Aversion" principle which saw the USD move in the opposite direction to equities. Within this "Risk On - Risk Off" (RORO) framework, when equities went up the USD went down and vice-versa. This can be seen most clearly in the following chart:
This paradigm worked well through 2020, however this year there has been a divergence as the focus has shifted onto inflation and therefore the rate hike path cycle. This 2021 paradigm is more in-tune with the "traditional" economic view that higher rates leads to stronger currencies.
So, the likelihood is, and we have seen this today, that a increasing risk aversion environment will lead to a stronger USD. Emerging Market currencies have been hit particularly hard.
The interesting part:
However, today in the market we see something very, very interesting: EURUSD is going up!
Source: cTrader FxPro
What this is clearly telling us is that the market is pushing back Fed rate hikes into the future. We all know that the ECB is ultra dovish and is never going to hike, but therefore rates are already at rock bottom. This means we see a convergence between USD and EUR rates, and EURUSD has risen commensurately. In the rest of the world, there are more hawkish bets being priced, so these currencies are weaker, but not for the EUR.
What's the trade?
If we really believe that this variant will cause more dovishness from central banks and a delay to hawkish actions, then this can only be a good thing for the EUR. There are a few other currencies with exceptional dovish policy which will benefit, but most of the gains should be present for EURUSD. GBP will struggle as this is one of the most hawkish CBs, as will NZD and AUD, but for the EUR, it could be time to shine. And this is exactly what we saw coming out of the extreme March volatility where the EUR just grinded higher and higher.
HAVENS: CHF or JPY?
Well let the market tell you... I also thought this was interesting this morning to see CHFJPY really moving lower - USDJPY aggressively moved on the back of "haven" demand. Gold is higher, and all-in-all I would rather play with the JPY as a haven bet than the CHF - this is simply because the CHF has strengthened so much already.
COMMODITIES:
Well Brent is another story of the day, plunging 6% lower or so... guess Joe gets his lower gas prices... but at what cost?
Clearly, this section doesn't need much elaboration. If we start to see more lockdowns (this will particularly be the case in China where the government has its zero tolerance approach to COVID), then we will see demand for commodities crushed.
Source: FxPro MT5
Think back to April 2020, oil prices touched a low of -40USD per barrel. Yes negative 40 USD per barrel. Is this likely to happen again? Definitely not. However, we saw back then just how quickly crude can move when demand dries up. Even if we see only a couple of million barrels per day of demand drop, then this could rapidly become a problem for stockpiles around the world.
GOLD:
BUY BUY BUY. I know this is what I have recommended forever, but as I've said many times recently, if you expect the Fed to be more dovish, then you have to get long gold since we are also facing higher inflation. It is a haven, it has been our currency for ten thousand years, just go out and buy some. You'll be grateful for it one day :)
That brings a wrap to this rather long piece. Congratulations to those who got to the end but hopefully this is useful to you.
I've tried to prioritise speed in getting this out (and hopefully beat many banks research/compliance departments), so I offer apologies for any mistakes, but hopefully this has helped, and do reach out with any questions.
This one is going to be a bit of a longer one and it’s also going to be a little bearish on the outlook for equities going forward. I know, I know… I’m usually just discussing FX, but I want to take a look at the possible outlook since inevitably equities and FX have links and overlaps. That being said… since the financial crisis, it’s been a rough ride for anyone who dared to question the relentless rally of the S&P500. The bears, generally, have been much like the proverbial boy who cried wolf, and I don’t want to be one of those doomsayers who makes a career out of being wrong
S&P500 Chart
Easy ways to protect the flock:
Now, the first thing you should all know is that my current pessimism is not just a result of having two rough days in the equity market. I have been, at best, neutral for the last month or so, and to me it looks like the S&P500 is, to some degree, running out of momentum. Likewise, I’m rather concerned by the current valuation of US stocks, especially when compared to the lower valuations in Europe, but especially the UK. So, to me, the time looks right for a slight repositioning of the portfolio – certainly away from tech – to focus more on the relative value in the market.
Buffett Indicator (US Stock Market / GDP)
Source: Currentmarketvaluation.com
The UK, in particular, looks ridiculously cheap when compared to most other developed markets. We’ve seen this being an after-effect of Brexit and the continuous drag which politics continues to exact on UK equities. However, we have to be real, we should expect a steeper yield curve, continued elevated materials prices and also relative value to outperform as the hot multiples in tech come off their highs. This all points to a juicy investment case for the FTSE 100 and broader indices.
FTSE 100 performance versus SPX and Eurostoxx indexed
Don’t be a sheep:
Long-time readers will of course know that I hate the bond market far more than the stock market. This largely comes down to my inexperience probably, but the idea of buying an asset which yields a paltry 1.5% a year in a 5% inflation environment just doesn’t excite me. And this is why I’m an advocate of repositioning rather than an outright switch into a more defensive bond position. I’m about to contradict myself, sorry. I’d also like to see a little bit of cash available – if we do get a decent correction, then it’s worth having 10-20% on the sidelines ready to go and take advantage (yes, I know cash yields nothing… so surely I’d rather own bonds? No. You can always lose money in bonds too if yields spike aggressively higher). Or, if you’re especially keen to lose money, Germany can help you there.
US Treasury / Bund yields.
If the worst happens… you can always buy new sheep
OK… I admit I’m really stretching the metaphor here now, and this is probably not the best title, but it’s late Tuesday and I’m tired . Either way, I’m not the only one who seems to like cash now… have a look at Berkshire’s Cash pile and you’ll see that Warren has plenty of cash ready to deploy for when the time is right. I’m not saying Warren is bearish, but clearly there aren’t many deals to be had.
Berkshire Cash Pile.
Who else in the village goes hungry?
When the village doesn’t heed the warnings of the boy, they all suffer (the metaphor’s about to get stretched even further). Who else is affected when the equity market sells off? Well when we have intensive selling, this tends to be due to “risk aversion” in the markets. Consequently, the USD would be expected to do well, along with the JPY and CHF. The charts below consider these correlations with other markets.
USDJPY v SPX - Extreme risk off leads to stronger JPY
Gold v SPX - Gold harder to judge... but generally extreme risk leads to higher gold.
Morals of the story:
Liars are not believed even when they speak the truth. This could be my position if I stick to my bearish views forevermore, and it does seem like the bears are increasingly to be ignored. However, I do think it wise at the moment to diversify a little, move a few sheep inside away from the wolves, and keep some spare powder dry to take to the market if the worst happens. It’s a tough world, and taking a little money off the table now could make you feel pretty good about yourself in a few months time.
I know full-well a few of my readers will take my bearishness as a signal to YOLO into SPX puts, this I respect, but don’t advise. The S&P500 has been on a remarkable run the past decade, and history says that bull markets don’t last forever. We have all the symbols of massive speculation in the markets.
Buyer beware. Crypto mania in random assets like “Squid Coin” (from the popular “Squid Game franchise) have just seen hundreds of millions of USDs stolen from investors, NFTs sell for unfathomable amounts of money, and increasingly I seem to be getting stock tips from friends who have no interest in markets whatsoever. When the shoeshine guy knows more about the market than you, it’s time to sell.
Well, today was tricky. It's safe to say I was quite wrong with my prediction for a muted market reaction. The line below doesn't look too good now...
I don't think this will be a big boon for the USD
Well, what's a man to do? I mourned my losses for a while, tried to stay out of the market to avoid the dreaded bottom left quadrant of the prospect theory curve. That link is well worth a read for anyone unaware of prospect theory.
So what went wrong?
First, my view of the reaction for Powell. I assumed everything would be very muted, and this was clearly not the truth. Next, I tried to scalp the moves as I continued to falsely believe the market would adjust back to its previous levels. This led to more losses (the gold chart below is particularly painful).
Then I took more risk than I should have and got short SPX on the though this would make for a hawkish Fed. This would've been perfect - if we hadn't hit an all time high first. I got stopped out at the top, although I was able to have another go at the same trade and am now up quite nicely on my new shorts.
Conclusions:
Just a rough day at the office. My positioning was too aggressive into the announcement (although to be fair it was unscheduled), I reacted without thinking carefully enough to the news, then was too early with some of the other trades.
The lesson is probably not to overtrade, and if there's a market reaction you haven't expected, get out and re-evaluate before jumping back in.
Cheering up time:
Think it's time for a beer or two, and maybe a glass of wine. I did find myself much cheered up though after reading about the Bozza gaffes today. For anyone who hasn't read about this... have a read of the below. I think my favourite part is when he does an impression of a petrol car.
EURUSD - Bullish view realised... not quite for the right reasons but almost. Fed uncertainties definitely the drivers of the EUR strength as Fed hikes priced out with the new variant.
GBPUSD - Natural view was logical and played out relatively well. Going toward BOE expect more weakness as more hikes are priced out. We've gone from market pricing of 100% chance of a hike to just a 60% chance or so - you're welcome everyone who listened to me thinking it was fanciful the BOE would hike.
EURCHF - Well I'm always bullish, and continue to hold the view.
USDJPY - Perfect viewpoint of short below 115.
Gold - This has been a tricky one to digest this week and I have to say it's been tough. It has been tricky since on the one hand lockdowns mean more stimulus, but on the other they probably also mean lower inflation. Not sure how much I buy that but there we go. Would rather be long than short from here. Key support holding up well.
Brent - Bullish view worked for the first part of the week, and I was long but fortunately closed the position before we had the news of the new variant. Key thing to learn here is the tight stops.
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Welcome to the second edition of No Rest for FX. Last week's edition has now been updated with a "performance review" of how my various calls went over the week. It was a bit of a mixed bag, but my trade idea of sell EURGBP paid off nicely. You can see the updated version here.
So the second edition is below, it's the same format as last week but we also have a view on bonds (US Treasuries) added this time around.
All charts cTrader FxPro unless otherwise stated.
EURUSD: BULLISH - USD Weakness on Fed Uncertainties
As we go lower and lower on EURUSD, you'll see my charts zooming further and further out. In the short-term and medium-term, I'm now bullish on EURUSD. I think all of the dovishness of the ECB is now basically priced in. The chart above really does show the extremes of what has happened.
The good news for EUR is that we do have some substantial support around this area though, and if you look at the extremeness of the move, I think we are definitely in for a reprieve. I've added an indicator I don't often use... the Bollinger Bands, which essentially are a measure of how big moves are relative to historical levels, and I've blown up the input periods to 100, from 20. You can see that even with this long range, we are seeing pretty extreme moves (the purple line is one standard deviation below norms).
I reckon we can see a decent bounce this week, especially if we find out we're getting a Brainard Fed. This could give us a lift to the mid 1.13s. Even if we don't get a Brainard Fed and Powell keeps control, I don't think this will be a big boon for the USD - sure the 10y will gain a couple of bps, but it's hardly going to be a game changer given this is the presumptive stance. The balance of risks is definitely for weaker USD this week.
GBPUSD: NEUTRAL - No real view, Bailey speaks Thursday, no game changers.
Neutral this week on GBP. I don't really have a view given the dearth of data which is likely to move the market. Sure I could make the same argument as for EUR that we'll see strength, but I'd rather play that through EUR anyway. Staying away from GBP this week. Wouldn't be at all surprised to see a tight range between 1.34 and 1.355.
EURCHF: BULLISH - Commentary same as last week.
No surprise... I'm bullish EURCHF. Yes, it's been bloody painful for me and anyone who followed me into this trade about 2 months ago. Nonetheless, are the charts perhaps... just perhaps pointing to some kind of break higher? We've been trading in this tight range for the last couple of weeks. Sure, those on the other side will say this is consolidation before another leg lower. But do we believe this? The SNB is making more and more interventions, and as I've been saying for months, it is only a matter of time. Comments like the below pointing to increase intervention - we've seen it before, in 2011 with the introduction of the cap at 1.20, then its sudden removal in 2015. The SNB sure does like to surprise.
Source: Reuters
USDJPY: BEARISH - Below 115 I'm happy to be short.
Source: Refinitiv
Last week we had a decent test by JPY to reach 115 and cross that resistance, but we didn't get there. This is pretty important since a firm resistance level has now been established. As long as we are below that level, I'm happy to be short USDJPY.
I've updated the chart above, and we can see that the tie to yields is still important. I don't think a couple of basis points will make a big difference if Powell is renominated, but watch out for the Lael Brainard coup. This could (as pointed out in the week ahead, be a risk off move for markets and drive a bit of haven buying).
Useful below to see Japan has no chance of raising rates, which is probably why the currency has been under so much pressure, but let's be real no one expects a hike anyway, and I think we've come far enough.
Source; Trading Economics
XAUUSD: BULLISH - Strong support to keep gold up and carrying on
Source: Refinitiv
This chart is very interesting. Generally gold and EURUSD move in the same direction... weaker USD is good for gold. However, recently we have seen a pretty big divergence away from this, so what do we have... weaker gold or higher EUR? Higher EUR is the answer to me, I struggle to find a bearish case for gold at the moment.
We have mega dovish central banks still (adding accommodation in high inflation). This can ONLY be supportive environment for gold.
BRENT: BULLISH - Tight market to drive prices higher
I don't but all this nonsense about SPR releases around the world. To me this is just jawboning by the various leaders of the world to try and sort out their own economies. Besides, is high prices a reason to release from the emergency reserves? No. Let the market do its thing.
Short term I'm bullish, see oil at USD90 by year-end, and then expect a fall as US shale really gets cracking again.
EQUITIES - BEARISH
Downside risks to me in the week ahead seem greater than any possible upside. FOMC minutes are likely to be a much of a muchness, and then we have the Brainard / Fed risks. S&P500 to drop 1-2% would be my guess, probably led by names who can't pass on inflation too easily.
TREASURIES - 10y Yield in the Spotlight
Bit of an emphasis today on the 10y simply because I think this will be the one which moves if we get a final decision from Biden on the makeup of the Fed for next year. If we get a Brainard Fed, this will be more dovish than a Powell Fed, so we will likely see rates lower for longer - the 10y will reprice higher, causing yields to fall. I think this would be worth a 5-10 bps fall in the 10y.
If we get a Powell Fed, I think the 10y will probably see a couple (maybe 2-3bps) increase on the announcement. It's not going to be that big a deal for status quo but some of those bets on Brainard will have to be taken back out of the market pricing.
This will, of course, have implications for the USD. Continued Powell likely supports the recent run of USD strength, a switch to Brainard probably pushes the USD into a bit of a reversal. FYI, I don't think a Brainard Fed is likely, but I do think the risk/reward is better to be positioned for Brainard since the moves will be bigger with a non status quo choice.
More generally, I expect we will see a steepening of the curve in the coming weeks. I think the 2y yield is still too high, and the 10y yield is too low. This would be where I'd play for any steepness. This would also be a bull steepening (since 2y rates would be coming down and this makes it cheaper for markets) so this could be a positive catalyst for another equity (and especially tech) rally to ATH.
It's another busy week ahead for financial markets and not just in terms of economic data or central banks. What we're all eagerly waiting for is an announcement on the next Fed Chair. Will Biden reappoint Powell for a second term? Or will it be Lael Brainard who takes the top job? The main scheduled release to watch will be the FOMC minutes Wednesday to gain a picture of just how hawkish the committee is becoming. We get revised estimates of GDP for the US too.
Across the pond it's ECB minutes Thursday, we also get various survey data across the week. Finally, in APAC we have the RBNZ and South Korea with monetary policy decisions.
Oh yeah, and there's this small thing the Americans have called Thanksgiving. Watch out for volatility in low volume markets Thursday.
Highlights for the week ahead:
Source: Reuters (Brainard - Left; Powell - Right)
Who's going to lead the Fed next year? This is the question which is top of mind for most investors. This week, I'm favouring short USD positions simply because I think there is an outsized chance that Powell will be out and Brainard will be in.
Brainard is significantly more dovish than Powell. This would likely point to a much more patient Fed (see the cheat sheet below for details).
Source: ITC Markets
I also feel like Powell being replaced would be a bit of a shocker for markets, so while it would almost certainly have a negative USD impact, I don't necessarily think the easy money attitude of Brainard would be good for equities in the short run. This is because inflation is the key for now, and a Fed which would make a serious policy error on inflation is probably more likely under Brainard... in which case a rapid hiking cycle would likely be painful.
FOMC Minutes:
We have more Fed news ahead with the FOMC Minutes being released Wednesday. Personally, I don't think this will be as exciting as some pundits are making it out to be. End of the day, we know they decided to taper. The key will be to see how much they talk about adjusting the PACE of asset purchases. If they are keen to say they will increase the pace to respond to various inflation signals, this will be pretty key.
ECB Minutes:
I suspect this will be as dull as dishwater. They're dovish, they're holding rates forevermore. What more is there to say? Well, the only thing I'd watch for is any discussion of dissents. Maybe some of the hawks are starting to come alive a bit more. The chart below shows German Inflation... and it's running HOT relative to what the Germans are used to. If this isn't transitory, there will be some who want to act to curtail inflation excesses sooner rather than later.
Source: Refinitiv
The RBNZ:
The next RBNZ meeting is on the 24th November, and markets are pricing in a 100% chance of a 25bps rate hike, and some are calling for a 50bps hike. This reminds me much of the story last month where everyone expected a dramatic pivot from the BoE, and then it didn't happen. Yes, I think the RBNZ will hike 25bps, but the 50bps in my opinion is unlikely.
If we do only get 25bps, then that 50bps positioning will have to be unwound, so my bias this week is for lower NZD, but I probably wouldn't actually put the trade on since any talk of further hikes in the future could probably offset any short-term downside pretty quickly.
Source: Refinitiv - implied rate is 0.869% for the meeting. Basically a 50% chance of a 50bps.
Other than that...
Watch out for Fed speakers and ECB speakers left, right and centre. Clarida stung me last week on Friday, so be careful out there.
Non-Sequitur: Thanksgiving
Source: AP
President Biden pardoned two Turkeys over the weekend, Peanut Butter and Jelly. Did you know, that on an average Thanksgiving Americans consume over 46 million Turkeys. The average Turkey serves about 10 people, so that's 460 million servings! I guess everyone needs a cheat day : )
