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.