Intraday Market Thoughts

A Rotation Trade Hidden in the Fed Talk

by Adam Button
Jul 29, 2014 22:33

The US dollar climbed broadly as traders buckle up for a big day but the source of buying might not be what you think. The dollar was the top performer while the kiwi continued to lag. The day ahead is jam-packed with top-tier indicators.  In today's edition of the Premium Insights, we publish a new justification for the existing EURJPY trades with two new charts as they net +150 pips gain. Both EURAUD trades are netting +500 pips gain, while last week's PRE-RBNZ AUDNZD trade netted +190 pips.1 of 2 GBPUSD long  was stopped out. Full access to trades & charts is in the Premium Insights.

The market will be transfixed on the news and releases in the day ahead but below the surface a little-talked-about trade might be poised to have a bigger impact.

Chinese shares have surged 6% in the past week and some related products have seen massive volume spikes. Rumors of market liberalizations are fuelling the gains but we wonder where the money is coming from.

Over the last two years money flooded into Europe and propped up the euro but that money might be looking for a new home. Fund managers like Bill Gross have proclaimed the end of the bull market in periphery bonds as Spanish 10-year yields fall below 2.5%. Lately, equities have also cooled off.

Could that hot money be leaving Europe and heading for China? That sort of flow would help explain the persistent weakness in the euro and strength in the dollar.

It's something to monitor but for now the focus now shifts to a number of major releases. Markets will begin to simmer with the release of June prelim Japanese industrial production at 2350 GMT. The consensus is -1.2% m/m and -5.2% y/y. Soft employment and retail sales data yesterday raised risks for further easing from the BOJ and kept the yen under pressure despite risk aversion.

That will be followed by German CPI, ADP employment, US GDP and the FOMC decision. Markets may be hesitant to react to any single release but watch for an extended move over the following days as traders digest the news.

Ashraf previewed those events and more earlier.

Act Exp Prev GMT
Industrial Production (JUN) (m/m) [P]
-1.2% 0.7% Jul 29 23:50
Industrial Production (JUN) (y/y) [P]
1% Jul 29 23:50
Retail Trade (JUN) (y/y)
-0.6% -0.5% -0.4% Jul 28 23:50
Retail Trade s.a (JUN) (m/m)
0.4% 4.6% Jul 28 23:50
Germany CPI (JUL) (y/y) [P]
0.8% 1.0% Jul 30 12:00
Germany Harmonised Index of Consumer Prices (JUN) (y/y) [P]
0.8% 1.0% Jul 30 12:00
Germany CPI (JUL) (m/m) [P]
0.2% 0.3% Jul 30 12:00
Germany Harmonised Index of Consumer Prices (JUL) (m/m) [P]
0.3% 0.4% Jul 30 12:00
ADP Employment Change (JUL)
230K 281K Jul 30 12:15
GDP Annualized (Q2) [P]
3.0% -2.9% Jul 30 12:30
GDP Price Index (Q2) [P]
1.8% 1.3% Jul 30 12:30

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