Intraday Market Thoughts

Never Sleep on the Fed

Jul 26, 2017 15:31 | by Adam Button

This evening's FOMC decision is being billed as a non-event but that kind of apathy is an elixir for volatility. The healthcare vote in the Senate adds new US dollar risks this week. Market probability of a December rate hike have dropped to 46.5% from 48%. Earlier today, June new home sales rose 0.8% to 610k, slightly below the expected 615k.

Click To Enlarge
Never Sleep on the Fed - Bitcoin Daily Jul 25 2017 (Chart 1)

The Fed-trade appears to have hit an impasse. The market has seen a multitude of soft inflation and growth numbers while the Fed insists that positive sentiment numbers will result in better times ahead. Time will tell, but in the meantime we will look for preliminary signals. Some came Tuesday with US consumer confidence at 121.1 compared to 116.5 expected. The Richmond Fed was also strong at +14 compared to the +7 consensus. Those numbers are likely to improve the resolve of Fed hawks, who have been rattled by weak numbers this year. That could translate into a more upbeat or confident tone in the economic assessment. The problem with those figures is that they belong to the "soft" data category, as opposed to the "hard" data, such as retail sales, which have contracted over the last 2 months.

The crux of the problem is inflation, whose latest numbers were also weak, helped set the latest round of USD selling. We don't get the sense the Fed wants to extend itself further into a bet on higher prices until the numbers pick up.

So the Fed is widely expected to stay on the sidelines. If there is a surprise, it's more likely to be on the optimistic side, or along the lines of a more detailed mention of the asset sales plan. We think the market could be underestimating that hawkish tilt and the dollar could certainly bounce if it happens.

The other area to keep an eye on is Washington. Senators will now spend the next few days debating healthcare reform after passing a procedural vote. Expect some messy twists and turns leading to an expected vote on Friday. The margin for error is razor thin and that may cap any dollar gains.

Act Exp Prev GMT
New Home Sales
610K 615K 605K Jul 26 14:00

Bitcoin & Ethereum Webinar

Jul 26, 2017 13:42 | by Ashraf Laidi

On Jul 4th webinar, when Bitcoin traded at $2590, I mentioned the technical and fundamental reasons why it would drop below $2000. 12 days later, Bitcoin fell to $1800.   Today's price is at $2540, down $400 over the last 2 days despite the BIP91 lockin. Find out why & what's ahead in Monday's webinar.

Bitcoin & Ethereum Webinar - Xtb Webinar Bitcoin Cover Aug 2017 (Chart 1)

The Global Petrie Dish

Jul 25, 2017 17:59 | by Adam Button

The rising tide of global growth is lifting all boats but there are lessons in how some are recovering better than others. The Aussie is the strongest, while the JPY is the weakest as equity indices enter an obligatory corrective rally ahead of the Fed. Month-to-date, all currencies are up against the dollar, with the loonie on top and GBP at the bottom. The Premium Insights will issue a trade tomorrow ahead of the Fed decision.

Click To Enlarge
The Global Petrie Dish - Performance Jul 25 2017 (Chart 1)

In the pre-crisis era there was an economic orthodoxy that virtually every country followed. That order has broken down in the past decade and led to a series of economic experiments and now we're beginning to see the results.

The big surprise of 2017 has been it was the surprising outperformer of 2016. The IMF said on Monday Canada will lead G7 countries in growth and that's with commodity prices halved from two years ago. Economists still don't quite believe in how strongly it's grown.

A pessimist would say that unsustainable asset price rises – housing in this case – have juiced consumer spending. A more favourable judgement would be that stimulative government policies boosted growth.

The UK could have been in the same position as Canada but fiscal tightening and Brexit uncertainty undercut some of the growth potential. It's a similar story in Europe where fiscal discipline and pockets of tight bank lending have held back the recovery.

In the US, Washington is incapable of consensus and the gridlock continues but there is always the belief that politicians there will do the right thing…once all the other options have been exhausted.

The two biggest losers in Monday's IMF update were the US and UK. The commonality there is political uncertainty.

The lesson so far this year is that it's tough to pick the winners and losers because it's such a fine line. In generations past, one country would be growing 4% and another 1%. Now, the difference in forecasts between the top G7 country (Canada 2.5%) and laggard (Japan 1.3%) is small but still has big implications in FX.

We could see just how big those implications are if Japan ever turns the corner. The minutes of the June BOJ meeting showed the board has no plans of exiting  policy any time soon as long as CPI does not reach 2% despite tightening labour markets.

Act Exp Prev GMT
CPI (q/q)
0.4% 0.5% Jul 26 1:30

Euro Faces Hardened Test

Jul 24, 2017 12:43 | by Adam Button

European indices are selling off again, not only due to the prospects of invevitable QE tapering from the ECB, but also due to ongoing declines Europe's auto sector due to allegations of price collusion.  Daimler-Benz and BMW are down 15% and 11% year-to-date. On Friday, the Premium Insights locked in 345-pt gain in the Dax short trade opened on Monday. A new note had been issued to indicate the next step (when & where). 

Click To Enlarge
Euro Faces Hardened Test - Eurostoxx Auto Sector Monthly (Chart 1)

The euro surged last week and is now less than 50 pips from the August 2015 high. The Swiss franc narrowly beat the euro last week as the top performer while the pound lagged. CFTC positioning showed increasingly-crowded bets against the yen. The euro has been skidding along the lows for more than two years but is now threatening to break out. Large gains in three of the past four weeks has EUR/USD bumping up against 1.1714 and a break would be a foray into the massive void formed by the drop to 1.05 from 1.40 that started in 2014. Here's Ashraf's January piece (when parity forecasts were FX traders' favourite past-time) asserting not only EURUSD would not reach parity, but will hit $1.10.

The latest leg of gains comes as the US dollar struggles economically and politically. The non-stop drama and gridlock in Washington increasingly threaten another round of risk aversion.

Inertia should keep a bid in the euro early in the week but the calendar picks up midweek with the FOMC, some higher-tier US data and German CPI on Friday.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +91K vs +84K prior GBP -16K vs -24K prior JPY -127K vs -112K prior CHF -4K vs 0K prior CAD +8K vs -9K prior AUD +51K vs +37K prior NZD +36K vs +32K prior

The yen trade is beginning to look saturated, especially when you factor in the carry trade. The positioning is the kind of thing you might see before a squeeze on risk trades.

The Canadian dollar finally flipped to a net long position. That means the squeeze on the shorts is done but there is still plenty of ammunition if longs want to get involved. In AUD and NZD, meanwhile, the trade is starting to get crowded.

DAX Boxed in by Draghi

Jul 21, 2017 18:43 | by Ashraf Laidi

The before-and-after DAX30 charts from Monday and today highlight the straightforward nature of technical formations in translating into anticipated outcomes. You may recall we posted this as our Monday mystery chart  and issued it as a short for our Premium subscribers to enter at 12550 and exit today at 12205.  Other index trades are kept open into the weekend alongside 2 FX and 2 metals trades.

DAX Boxed in by Draghi - Dax July 21 2017 Animation (Chart 1)

DAX30 is set to complete its 2nd monthly decline after an uninterrupted 6-month rally, which was the longest since the June 2012-Jan 2013 advance, following the Italy/Spain debt resolution of summer 2012. The ECB's inevitable start of effective tapering (not meaningless tapering seen in March when duration was extended and size curtailed) is boosting the euro and dragging German and European equities.

The argument that any ECB tapering would not hurt stocks on the grounds that assets proceeds would be reinvested does make sense, but may not stand to weigh on the euro due to the somewhat converging US-Ezone policy paths. In fact, as long as the tepid performance of hard US data makes no case for H2 Fed hike and German-US 10 year spread breaking above its 6-year trendline resistance, the euro reward tend to be more material than the impact on European indices.