Victor is sensing the complacency we've seen across the assert classes has changed. The Dow swung 400 points on two separate days and the Canadian dollar boomed on an unemployment number, indicating increasing volatility going forward.
I have a longer term Pro-USD bias...perhaps because I’ve made money the past few years being short currencies against the USD...but right now I’m unsure what to do so I’ll stay out of the currency markets. Victor outlines opportunities in Gold, Crude Oil and the Stock Market
LIVE FROM THE TRADING DESK - NOV 18TH TRADING NOTES
Choppy price action in currencies: The September 8 Key Turn Date launched the US Dollar on a 2 month rally against most other currencies...the US Dollar Index rose 4.5%...but the past 2 weeks the price action was choppy with Euro, Yen and Gold all higher against the USD while AUD and NZD fell and CAD went sideways. My core short term trading idea since the Sept Key Turn Date has been to be long USD but for the last 2 weeks I’ve been on the sidelines...unsure what to do.
Some analysts make the argument, and they may be right, that the recent 2 month USD rally was only a correction in the downtrend that started in January when the US Dollar Index was at 14 year highs. Interest rate premiums clearly favor the USD (at the 2 year point of the yield curve the USA is premium Germany by 242bps., premium Japan by 192bps.) but those premiums have not deterred a good rally in Euro and Yen the past 2 weeks. The ECB says the Euro area needs continuing monetary stimulus while the Fed says they will be “taking back” previous stimulus and raising rates...while the BOJ remains “peddle to the metal”...but still the USD looks wobbly.
Perhaps the USD is weighed down by “political uncertainty” in Washington relative to the “political certainty” (don’t laugh!) of the Euro zone.
Other analysts make the argument, and they may be right, that the recent 2 week decline in the USD is but a brief correction in the early stages of a developing USD rally.
I’m aware that I have a longer term Pro-USD bias...perhaps because I’ve made money the past few years being short currencies against the USD...but right now I’m unsure what to do so I’ll stay out of the currency markets.
Gold: I bought gold this morning. A small position, and I’ll be gone if it falls back below yesterday’s close, but today’s price action looks good. I’ve noticed that YTD trading volume in the gold futures market is already higher than any previous year...and there’s still 6 weeks to go in 2017. That seems counter-intuitive given the sideways price action we’ve seen in gold while open interest remains well below last year’s levels. It’s as though gold has been “churning” below the surface...just waiting for a breakout one way or the other.
WTI: I’ve been out of the crude market for the past 2 months or so...waiting for an opportunity to get short. I’ve missed a great opportunity to trade the market from the long side because I’ve got a bearish bias...likely due to the fact that I’ve made money the past few years being short crude! Anyway, I waited and waited while the market rallied...apparently embracing the story that the cut back agreements by OPEC and some non-OPEC countries were not only “doing the job” but would be extended at the OPEC Nov 30 meeting. The “political uncertainty” in Saudi Arabia seemed to provide the “cherry on top” of hugely bullish sentiment and WTI rose to $58. I decided that this was “As good as it gets,” for WTI and got short. Prices fell $2 but then turned around and began to rally. I covered and went flat.
Last weekend it was easy to imagine that markets would be volatile this week: President Trump was set to nominate a new Fed Chairman, tax reform plans were to be unveiled, the Fed and the BOE were meeting, the post-hurricane employment reports were due, stock markets had raced to new All Time Highs...what could possibly go wrong?
Not much, apparently, as implied volatility fell back this week to near All Time Lows across asset classes...currency markets muddled mostly sideways with the US Dollar Index inching to its strongest weekly close since July...bond yields fell as the market reversed from pricing in a possibly tighter Fed...and stocks ambled to new All Time Highs!
Fed Chair: The President nominated Powell to replace Yellen when her term expires in February and the Senate is expected to approve his nomination. He provides continuity with recent Fed policies (better the devil you know...) but also showcases that Trump remains intent on “shaking things up.”
Tax Reform: There was very little reaction to the tax reform details across major stock indices, currencies and interest rates. There was, of course, a tsunami of politically motivated commentary about how bad or how good the proposals were, and whether or not the proposals will ever become law.
The Fed meeting: wasn’t expected to provide any fireworks, and didn’t. They see “solid” US economic growth and markets are now pricing a 90% chance that the Fed will raise short term interest rates by ¼ in December...and with financial conditions the “easiest” in over 2 decades the Fed may be tightening more in 2018 than the market is currently pricing...which would be USD bullish.
The employment report: was expected to show a big, possibly huge, post-hurricane employment rebound...but the net market effect of the report was subdued. Jobless claims fell to a 44 year low.
Consumer confidence: reports this week showed that American consumer confidence is at a 15 year high due to gains in the stock market, housing prices and wages(?) Consumers are now 70% of US GDP so their high confidence level may have a positive feedback effect on the stock market and housing prices...although I have to wonder if this isn’t a classic “end of cycle” picture especially with consumers running down their savings and going deeper into debt so that they can keep buying things! Another cautionary sign is that the growth rate for national wages is about half the growth rate for national housing prices.
The Canadian Dollar: One of the primary drivers of CAD-USD since May has been the 2 year interest rate spread. At the May CAD lows the spread was 65 points in favor of the USD, at the Sept 8 Key Turn Date the spread was 25 points in favor of CAD. Since early September the spread has gradually gone in favor of the USD and for the past week or so has hovered around 20 points premium USD. The 180 degree pivot by the Bank of Canada in early June, and the subsequent “backing away” by the BOC in September obviously influenced the interest rate spread and thus the FX rate. BOC Governor Poloz spoke before Parliament this week and maintained a “worried” tone. The correlation between CAD and WTI, which has been important for much of the past couple of years has been practically non-existent the past few months.
WTI: following the OPEC production cutback agreements in November 2016 and the OPEC/Non-OPEC agreements in December 2016, front month WTI topped out around $55 in January and February 2017 (I wrote that the crude oil bullish news had reached “As Good As it Gets” back then) and WTI began a stair-step decline to $42 in June. Since that June low market sentiment swung to believing that the cutback agreements have indeed reduced global supply below global demand, thus shrinking the inventory overhang, and prices have risen...with WTI closing above $55 this week for the first time in over 2 years. Rumors that the agreements will be extended when OPEC meets on November 30 have helped fuel the rally. It’s interesting that crude oil has rallied over 15% since early September even as the USD has risen against nearly all currencies. Crude oil, in other words, is rallying in terms of all currencies...a hallmark of a strong bull market.
The US Dollar rally: accelerated this week. I’ve been short other currencies against the USD since early September and took partial profits this week even thought I think the USD rally has more to go.
Diverging monetary policy: between the USA and other countries has been a key FX driver. On the September 8 Key Turn Date the 10 year treasury yield was at its lowest level since Trump’s election...but since then it has rallied to 5 month highs. Real yields have also been rising. The 2 year Treasury yield is at a 9 year high. Part of the reason for rising American interest rates (and a rising USD) is that traders are positioning for a more hawkish Fed. US Financial conditions are the easiest in 20 years...paving the way for the Fed to keep tightening.
Fed Chair: Fed Governor Powell is the front runner to replace Yellen but Trump might surprise markets and nominate both a Chair and Vice-Chair (Powell and Taylor?)
Tax cuts: Stock markets, interest rates and the USD have been rising in anticipation of Trump’s tax reform plans.
Euro: EURUSD hit a 2 ½ year high at 1.2150 on September 8 and has fallen about 5% since then as a result of 1) diverging monetary policy (ECB maintains accommodative policies while the Fed tightens,) 2) Political concerns (where Catalonia goes others are likely to follow) and, 3) unwinding of huge speculative long EURUSD positions.
CAD: Hit a 2 ¼ year high at 83 cents on Sept 8 (after the second Bank of Canada interest rate increase on Sept 6) and has fallen about 5 ½ cents since then as a result of 1) diverging monetary policy (markets anticipate that BOC will “pull back” after having gone “too far too fast” while the Fed continues to tighten, 2) Political/economic concerns (Trump may scrap NAFTA, Canadian economy softening after interest rate increases and huge CAD rally) and 3) unwinding of long speculative CADUSD positions which had reached multiyear highs by early September...and then got even bigger as CAD fell!
USD universally strong: USD has been rising against nearly all currencies and gold since that very important Sept 8 date: the USDX is up ~4.5%, AUD is down ~6%, NZD is down ~6%, MEX is down ~7%, YEN is down ~5%, and gold is down ~$100 or 7%.
Stock markets: American markets keep making new highs (with any dip seen as a buying opportunity.) Tax reform has a number of “positives” for American companies including repatriation of overseas money...which could be used for share buy backs. It’s interesting to watch the TSE march steadily higher since Sept 8 as the CAD has fallen...to see that the German DAX has rallied sharply to New All Time Highs this week as the Euro fell...similar to how the British stock market rallied last year when the pound fell following the Brexit vote.
WTI: the front month contract traded to $54 this week, its best in 8 months, up $12 (28%) from the June lows. It’s interesting to see crude oil rally while the USD is rallying as market psychology embraces the bullish WTI narratives (Saudi “we will do whatever it takes”) while ignoring the bearish ones! I have traded WTI mostly from the short side the past 3 years but have been basically aside the past couple of months.
China congress: the congress is over, Xi has consolidated his power. Two weeks ago I suggested that there was probably a lot of “managing” of the news before and during the congress to avoid any embarrassment and I wondered what could “bust loose” once the congress was over. Maybe the 10 cent decline in copper Friday after hitting a 3 year high last week is one of those “bust loose” things. I think China is the world leader in the volume of copper traded.
How to understand currency trading: I’ve been trading currencies for 40 years and one of my favorite chestnuts is that currency trends run WAY further than seems to make any sense, and then turn on a dime and go the other way. I think the Sept 8 Key Turn Date was one of those “turn on a dime” dates.
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Victor Adairs says it's an interesting combination: The major US stock indices keep making new All Time Highs, the USD has fallen ~11% since December with bearish sentiment at an extreme, credit quality spreads are narrow and volatility is extremely low across asset classes. In other words, the markets look to be set up for "change."
Victor's starts with Joseph Schacther's take on the oil market (hint, Victor thinks J.S. is brilliant). What to do with Worldwide stock markets blasting to new all time highs, the US Dollar just closed with a weekly key reversal down, its sitting on a knife edge and if it breaks, it's going to effect a lot of markets.