Fx Thoughts : It’s Not Ebola, It’s All About QE-la

For the volatility and finger pointing last week, Greed reared its pretty head, taking only 1 comment from a non voting (till 2016) member of the FOMC to get the markets back to risk on mode.

Yes. Bullard said that he thinks that the Fed should consider delaying the end of QE3 and the market just ran and ran with it.

FED NOT NUMBERSTaken from Michael McDonough, Global Head of Economics/Chief Economist at Bloomberg LP.

So much for the Ebola, ISIS, oil prices, economic data and company earnings. Yes, what happened to Ebola this week ?

It is all about QE and the brain dead risk-on vs risk-off switch that allows monkeys the chance to be excellent traders too.

Cynical comments like “You know there’s something seriously wrong with the markets when the last 3 rallies were all caused by Fed minutes, and, or, Bullard” flying around the internet but I pay little attention these days.

It is clear that markets are  highly disoriented and need a cooling period which makes this week perfect because we are heading into the FOMC black-out period ie. NO FED SPEECHES till 30 Oct.

Smaller central banking role this week, accompanied by some speeches out of RBA, BOE and ECB.

21 Oct 830 am RBA Oct Meeting Minutes
22 Oct 430 pm BOE Minutes
22 Oct 10 pm Bank of Canada Rate Decision

Economic data will rule with a bunch of PMI numbers for Europe, CPI numbers for Australia and NZ etc.

It is less about the headlines and economic data these days as inflation news can bring about a sell off or a rally and the reporter can spin a nice story to support both cases.

It is more of market sentiments and markets are still jaded and confused as far as I can make out, going by the average daily trading ranges of currency pairs, as fickle as ….. puppy love ?

I will not be expecting big moves this week, considering we have Diwali mid week which will absent quite a few Indian traders in the market and China’s 4th plenum in progress at the moment.

The broad themes that are closest to my heart right now are as follows.

1. ECB started their covered bond purchases, buying French and Spanish securities today.
2. Commodity prices will filter into inflation numbers of EM, bringing inflation lower which makes rate hikes less likely.
3. Fx reserves are falling for central banks, led by China, as a function of a stronger USD.
4. What about the FOMC ??????

My trades

Gold – unlikely to trade higher from here (especially with Diwali buying over) and the FOMC approaching which will re-instill the hike fears. I note that Bitcoin traded flat for most of last week.

Bitcoin daily price chart

Bitcoin daily price chart

As volatility abates this week, I would expect a revisit of carry trades, observing that the NZ dollar, Turkish Lira and Indo Rupiah have been top gainers last week.

WCRS

My USDJPY target of 106 was attained last week and I am out of that pair till closer to BOJ on 31 Oct. https://tradehaven.net/market/fx/fx-thoughts-beware-of-central-banks-they-are-scared-too/

Lots on news on the domestic front in Japan – the  government pensions allocating 25% to domestic stocks from current 12% which led to Nikkei clocking its biggest 1 day gain of 3.98% yesterday; Abe delaying the consumption tax hike; and women ministers in the cabinet resigning en masse. No fun !

The AUDUSD trade has been infuriatingly slow but I am still inclined for it to head higher than lower as the “uncles and aunties” interest levels are re-ignited. 0.89 should be within reach this week although some analysts are bearish ahead of the domestic CPI numbers. I prefer to play the range on the long side which delivers positive carry as well but I would not be expecting a sustained rally in the short term.

aud weekly chartAUDUSD weekly candles.

The AUDCAD is also broaching its 5 year average of 1.00, currently at 0.9941, which is neutral zone – yawn.

USDNOK should be the fun pair this week losing out big time on oil prices in the past 2 weeks.

USDNOK VS WTI CRUDE CHART

USDNOK VS WTI CRUDE CHART

 

I am long crude, from last week (https://tradehaven.net/market/commodities-make-the-world-go-round-time-to-be-greedy/). I think WTI could break above 85 and USDNOK break under 6.5 in the near term.

Some observations that I have came across are that firstly, the leveraged positions in fx is partly causing this excessive volatility and indeed, macro and fx themed funds do thrive in this environment not to mention the HFT firms that seem to be paying very small fines for all the losses they have inflicted; secondly, foreign exchange and the USD index has emerged a a hedge these days for illiquid assets on the balance sheets of global fund managers.

It has been the same for the AUD like I mentioned last week.

“the correlations which I ran for the year of 2014 to date show that the AUD dollar has become highly correlated in the past months to the EM FX index that implies that the AUD dollar could have become a proxy hedge for the more illiquid EM currencies.” https://tradehaven.net/market/fx/australia-focus-chinese-kangaroo-stew/

No wonder the DXY Index has been falling as the Russell 2000 Index rebounded in the past fortnight and we know that the Russell has been the proxy hedge for junk bonds !

DXY INDEX VS RUSSELL 2000

DXY INDEX VS RUSSELL 2000

 

It is definitely dominoes stacking up here even if we go back to normal, the hedges will have to be unwound which makes me extremely wary of future USD weakness.

Until we sort that out, it will be a trading market and for me, a new found preoccupation with the new Xbox game, Destiny, which I am having a go at, after my Halo exploits half a decade ago (Halo 3).

I highly recommend the game for the dull moments in between the trading ranges of this week , taking our minds off Ebola for the moment.

destiny