UPDATE:
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).
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.
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.
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That's all for today folks.
Happy Trading.
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