Monday, 26 September 2016

Weekly Markets Outlook & Trade Ideas w/c 25 September 2016


General Overview:

What a difference a week makes.  The nervous build up to ‘Super Wednesday’ quickly morphed into a relief rally following the announcements and respective press conferences from the BoJ and in particular, the FOMC.

Here is not the place for a detailed review of the BoJ and FOMC’s respective actions, however, in short: the BoJ tweaked their QQE programme with a focus on “yield curve” control, monthly purchase amounts kept steady and no further negative cut in short term interest rates.  Further, the BoJ said that it had set a new target for consumer prices, saying it intended to “overshoot” its existing price target of 2 percent price rises, year-over-year.  The “yield curve” control is intended to steepen the yield curve thus helping the banking sector that naturally prefers to enjoy positive carry between long and short-term interest rates.  USDJPY initially spiked, reaching a high of 102.79, before quickly trading lower to 100.10 before recovering a touch.   I think we can safely say that the market is discounting the BoJ’s monetary policy effectiveness.  It seems that the BoJ, whilst avoiding a full-blown policy capitulation, has tacitly acknowledged that it is no longer going to fight the market forces that are strengthening the Yen head on and weighing on Japan’s export led economy.  However, it remains committed in its attempt to stimulate its economy’s anaemic inflation, in the long run.  The BoJ is on course to hold 50% of outstanding JGBs in 2017, which may be sounding alarm bells in certain quarters.

The FOMC kept rates on hold with a hawkish bias:

“The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

The FOMC’s “hawkish hold” announcement and Yellen’s press conference saw the USD weaken across the board and the S&P 500 rally.  Globally we saw an immediate return to  “risk on”, with all the major equity indices rallying (e.g. DAX, FTSE), higher yielding currencies performing (e.g. AUDUSD) and commodities bouncing back (e.g. Brent Crude oil, Copper).  The rally was broad with emerging markets and high yield also benefitting.   Furthermore, gold and silver also rallied on the lack of an immediate rate hike, meaning that these non-interest bearing quasi currencies become even more attractive.

So what are the implications for markets going forward?  The week ahead is packed full of event risk and I suspect the initial euphoria of the FOMC’s “hawkish hold” will wear off as market participants return to the fundamental question of whether on-going central bank stimulus is truly able to sustain risk markets at such lofty levels.  This would seem like economic sophism to me, however, in the short term we need to appraise markets for what they actually are doing as opposed to what they ‘should’ be doing.   These market conditions continue lend themselves to range trading – as opposed to break out and new trend formation trading - where existing technical levels have continued validity.  That said, other themes such as risk sentiment, Brexit and Crude Oil market’s supply/demand dynamic all have the potential to be the catalyst for a break out and indeed even for starting new trends.

This coming week we have a plethora of central bankers speaking publicly potentially offering clues with respect to relative monetary policy.  The Fed and BoJ are immediately back in the spotlight with no less than 14 Fed members slated to speak together with BoJ’s “Summary of Opinions” release from last week’s meeting, minutes from the July meeting and indeed Governor Kuroda himself to speak once more.  Further, we have ECB’s Draghi presenting to the European Parliament on Tuesday and attending the EU Committee on Wednesday; BoE’s Deputy Governer Shafik speaking on Wednesday.

Monday through Wednesday sees an eagerly anticipated informal OPEC meeting in Algeria where the oft-hyped potential output freeze amongst its members.  Crude Oil futures had been slowly bid up in anticipation of a rumoured productions freeze at this forthcoming meeting, however, Friday saw Saudi and Iranian officials poor cold water on this speculation and futures dropped sharply.  Oil, as a thematic driver of global markets, has taken a bit of a back seat recently; I expect it to be thrust back into the limelight.

Other event risk mainly takes the form of economic data.  China Industrial Profits (August) and US Consumer Confidence are released Tuesday; China Consumer Sentiment on Wednesday; UK Consumer and Business Confidence released Thursday; China Manufacturing PMI, Eurozone Unemployment Rate, New York Fed GDP Forecast, US PCE Deflator (Inflation), US Personal Income (spending) and China Manufacturing Services PMI all slated for release Friday.

FX:

Majors

USDJPY – This currency pair has a finely balanced set of fundamental and technical factors currently affecting it.  The downward trend channel resistance is still very much in play (currently around 102) with the horizontal support level of 100 nearing convergence.  Whilst this range is still valid, its narrowness and congestion will result in a break out one way or another in the near term.  I prefer to wait for trade set ups linked to the latter with a sound fundamental driver – e.g. a broad market “risk-off” sentiment – rather than trading the pair now.  I will closely monitor price action particularly as we approach the upper end of this range, and if it holds, potentially take a short here, with a view to breaking through the lower range boundary at 100.  VIEW: ST- mixed, MT – bearish, LT - bearish



GBPUSD – Brexit factors continue to dominate.  Cable traded at the level of its upward trend support 1.2915 on Friday.  I took a long at 1.2920 (as per last week’s trade suggestion), have trailed my stop to b/e, and I look for a range play to 1.3400.  I like this trade on the basis that the triggering of Article 50 appears to be someway off, UK economic data continues to be fairly robust and technical levels appear to be dominating.  I expect to see this (now risk-free) trade perform in most scenarios, other than a strong USD rally.  VIEW: ST – mixed/bullish, MT – mixed/bullish, LT - bullish



EURUSD – Brexit and other fundamental themes continue to affect the Euro.  However, technicals are not condusive to interesting trade set-ups, in my opinion.  VIEW: ST – mixed, MT – mixed, LT - bearish

USDCAD – Having traded sharply down from the upper end of its range at 1.32 last week, USDCAD has traded back up, offering another opportunity for trading the range, lower support at around 1.2850.  I did not take this trade as per last week's trade ideas and this week OPEC’s meeting and its affect upon USDCAD should be closely monitored given the high correlation with Crude Oil.  VIEW: ST – bearish,  MT – mixed, LT - mixed

AUDUSD – Last week saw Aussie strengthen off the back of the Fed’s hold benefitting the higher yielding currencies (with the Aussie outshining both Kiwi and CAD).  AUDUSD (0.7623) is back at the upper end of its range, with the downward trend resistance coming into play at around 0.7680.  This is a range I like and there is a fairly compelling argument to take a short around this upper range level.  VIEW: ST – mixed, MT – mixed/bearish, LT – bearish

NZDUSD – The Kiwi saw significant weakness last week following the RBNZ holding rates with accompanying dovish rhetoric.  The Kiwi has a lot further to fall than its commodity currency peers having outperformed them significantly in 2016.  NZDUSD technicals are not particularly compelling, however, some of the Kiwi crosses are worth examining, as highlighted below.  

Minors/Crosses

GBPJPY
EURJPY
AUDJPY
NZDJPY
CADJPY

The Yen  crosses are particularly sensitive to markets sentiment, with the AUDJPY, NZDJPY & CADJPY particularly so.  My view is that there is not much more room to increase positive market sentiment further and therefore the next significant move is a broad and market-wide “risk-off” trade.  Appraising the crosses the Yen crosses in this context highlights NZDJPY given that it has the furthest to fall in this scenario.  I have a keen eye on this pair as a means of taking Yen exposure in a risk-off market, when the time comes.

EURAUD
EURNZD
EURCAD
EURGBP

EURGBP is the standout pair for both fundamental reasons (Brexit, affecting both Euro and Sterling) as well technical.  0.87 is a key level of significance.  I expect the pair to fall short of this level and to trade down, with a possible Head & Shoulders pattern being carved out.  I like shorting EURGBP in the medium to long term; closely monitoring this pair for developments.

GBPAUD
GBPNZD
GBPCAD

Pound Kiwi is notable for it is trading close to its all time low (1.77) and also forming a triple bottom.  Coupled with fundamental factors there is a compelling argument to take a long here, in this region of 1.7700 to 1.7950.



AUDCAD
AUDNZD

The Aussie significantly outperformed the Kiwi this passed week, well done anyone who took that trade.  I am unclear as to whether this trend continues and so remain flat.  On the other hand, AUDCAD looks very interesting on the long term charts.  We are close to completing a 3 year Inverse Head & Shoulders pattern, with a further IH&S comprising the right shoulder, having been carved out over a year.  The neckline is around 100.60 and I have an initial target of 107 would make sense.  I am monitoring this pair for this potential medium term trade.



NZDCAD

I am already long NZDCAD with the pair trading near to my entry of .9570.

Emerging Markets and Others:

USDZAR

The South African Rand has rallied significantly in 2016 to within touching distance of the significant upward USDZAR trend resistance.  This technical level has been valid for many years, going back to 2011.  Currently trading at 13.64 the resistance level at around 13.40 offers a compelling long USDZAR set up.



USDNOK
EURNOK

Both USDNOK and EURNOK are in the process of completing long term H&S patterns.  Together with the fundamental picture in the Crude Oil markets these pairs may soon warrant closer attention.

Equities:

S&P 500  2,165
Nikkei 225 16,693
DAX 30 10,610
FTSE 100 6,882

Global equity indices enjoyed the FOMC’s “hawkish hold” fillip and rallied from Wednesday night through Thursday.  Friday saw more realism return, however, all major indices traded significantly up on the week.  The on-going debate over the efficacy of central banks’ policies stimulating real economies over asset markets is playing out in the markets.  Real growth is generally weak across many countries and corporate profits continue to decline.  In my mind, many years of low, zero and negative interest rates coupled with QE has greatly distorted asset markets and elevated them to eye-watering valuations.  Can these levels be sustained in the absence of real growth supporting them?  My on-going view remains that markets remain very fragile and should sentiment change it will happen very quickly and a number of equity indices have a long way to fall, for example the S&P 500 itself.  However, in the meantime we should avoid fighting momentum whilst being mindful that it is a dangerous game to pick up pennies in front of a freight train.

I am monitoring all the major equity indices for set ups, trading either way, however currently remain flat.

Commodities:

Brent Crude  
Gold
Silver
Soyabean Oil

Broadly speaking, commodities benefitted from last weeks USD weakness following the FOMC’s “hawkish hold”.  Brent Crude traded up for a 3rd day until Saudi and Iranian officials poured cold water on supply freeze rumours sending crude sharply lower.  All eyes will be on the OPEC meeting for direction here.  

Both gold and silver benefitted from the FOMC’s lack of hike.  Gold, at 1,337, is close to the top end of its range (1,340).  A break above here could attract new buyers and may see us on the next leg up.  Silver broke up through its downward channel (and bullish flag pattern) on strong volume before easing back to the channel level, now acting as support at 19.68.  This is bullish.  I will be closely following price action next week and potentially take a long here if the support holds.  Alternatively, a less aggressive entry would be following bullish confirmation at 20.00 and 20.14.





Soybean Oil is close to completing a 3 year IH&S pattern.  This pattern has great structure and further, the impressive2016 H1 rally in soya beans points to bullish fundamentals on soybean oil.  (Soyabean price action tends to precede that of soyabean oil.)  I will look to take a long upon confirmed completion around a price of 34.70.



Last week’s trades:

EURJPY, long – stopped out , 113.35, -2% ROC
Zinc, short – stopped out b/e
Nikkei, short – stopped out, 16,635, b/e
Coeur Mining – stopped out, 13.15, -2% ROC
Sugar – Took Profit at target, 22.55, 10% ROC

Long Sugar worked out extremely well with a near text book impulsive break-out from a 3 month ascending triangle with the take profit close to the highs.  Coeur Mining Inc. and the silver miners in general require reevaluation, please see below for the precious metals.

*Trading Watch List / Ideas for potential execution:*

Short AUDUSD, order open stop 0.7690, SL 0.7770, TP 0.7450 RRR300%
Short EURGBP, order open stop 0.8700, SL 0.8770, TP 0.8370 RRR 471%
Long GBPNZD, order open stop 1.7700, SL 1.7595, TP 1.900 RRR 1238%
Long AUDCAD, order open stop 1.0070, SL 0.9870, TP 1.0700 RRR 315%
Long USDZAR, order open stop 13.30, SL 13.15, TP 15.00 RRR 1133%
Long Silver, order open stop 19.65, SL 19.40, TP 22.50 RRR 633%
Long Gold, order open stop 1,344, SL 1,334, TP 1,380 RRR 360%
Long Soyabean Oil, order open stop 34.70, SL 33.00, TP 43.20 RRR 500%

*Current Positions:*

Long NZDCAD at .9570, SL .9495, TP 1.07
Long GBPUSD at 1.2920, SL b/e, TP 1.34

User does not receive investment advisory, investment supervisory or investment management services and uses all information mentioned herein on his sole discretion and responsibility.