Our thoughts on select markets as we wrap up the trading week.
Key events this week:
1) Bank of Canada signaled a change in interest rate policy
2) Federal Reserve was more “hawkish” than expected
3) WTI was hit with more bearish news
4) the CRB commodity index dropped to a 14 month low, down 9% from 2017 highs even as the USD fell 7%
Canadian Dollar: hit a 14 month low May 5 at 72.50 and then rallied in step with crude oil. But when crude oil “topped out” on the May 25th OPEC meeting and turned lower CAD drifted sideways for the next two weeks, taking its que from the weaker USD. On Monday and again on Tuesday this week top Bank of Canada officials indicated that the 2 “emergency” quarter point interest rates cuts made in 2016 had “done their job” and market expectations shifted dramatically to expecting interest rate hikes from the Bank of Canada sooner rather than later.
CAD had its best 4 day rally in over a year rising from 74 to 76 cents Friday through Wednesday...a 3 ½ month high. The trading volume of Canadian dollar futures hit an All Time High on Wednesday June 14 (Fed day.)
We went back to being short CAD at the end of this week because: 1) it had rallied 2 cents in 4 days 2) crude oil had taken another leg down 3) the Fed was a little more hawkish than expected 4) the Canadian stock market dropped to 7 month lows (down 5% from the February All Time Highs) while the major American stock indices were at All Time Highs. We remain short CAD.
The US Dollar Index: dropped to a new 7 month low early Wednesday morning on weaker than expected inflation and retail sales reports and then rebounded sharply later that day and again Thursday on Yellen’s more hawkish than expected press conference remarks. We had been long the USD Index from the previous week and were stopped out on the early morning fall to new lows, but we “stepped up” and bought our positions back as the USD rallied on Yellen’s comments. (This was a “hard” trade to do, but as so many veteran traders will tell you, the “hard” trades often turn out to be your best trades!) We remain long USDX thinking that it may be turning higher after months of bearish pressure.
Crude oil and Gasoline: fell this week on bearish supply/demand/inventory reports with the front month contracts for both markets closing the week at 7 month lows. Gasoline has fallen harder than WTI since the May OPEC meeting as American demand continues to be softer than expected. We have been short WTI since late May and remain short although after this week’s sharp break we wrote OTM puts against our position to moderate our bearishness.
Two “Big Picture” energy insights: 1) American frackers have been hugely successful in ramping up their production and lowering their costs whilethe “rest of the world” has been very slow to embrace fracking. It seems inevitable that they will “step up to the plate” and when they do that’s going to add to the low cost supply of oil. 2) The USA now satisfies 8% of their total electricity demand from wind and 2% from solar and you have to wonder how quickly these alternative energy supplies are going to grow.
Gold: failed to rally above $1300 last week and turned lower, tried to rally this week and got turned back again, ending the week on its lows. This market looks heavy and is struggling with even a slightly firmer USD and rising real rates. We have no position.
American interest rates: the 10 year yield has fallen back to pre-election levels as G5 inflation expectations have been drifting lower since January and the Trump reflation story has faded.