Market
participants continue their lively debate: what next in this confusing ‘brave new
world’? Has the Trump trade – long USD
and US stocks (e.g. Russell 2000); short Gold and bonds – run its course? What next for the U.S. Dollar? Should I take the red pill or the blue pill?
In this update I will briefly review some major themes within the FX and commodities
space. To summarise: the USD and DXY are still uncertain of
direction having narrowly avoided a capitulation recently; the AUD is showing
continued upside momentum; select emerging market currencies BRL, RUB and
especially ZAR showing continued strength. And we have buoyant commodities
markets, notably precious and industrial metals where I particularly like two
ETFs, $SIL and $XME, as a way of playing this strength.
FX:
Inspection of DXY
weekly chart indicates an arrest of the 6-week decline in USD with a bullish
engulfing candle and reclamaition of the technically significant 100.50 level,
having re-tested a major two year consolidation pattern’s boundary line. The market is still undecided as to which way
it will take the buck medium term, however, in my opinion we may see some near
term modest strength, depending on the flavour of the multitude of Fed-speak we
have next week, including Ms. Yellen’s testimonies.
Similarly, EURUSD
prints a clear bearish engulfing candle on the weekly, neatly rejecting the
boundary line of a 2-year consolidation pattern following a retest last week. The near-term prognosis is bearish. Of note is the increased congestion that a
long-term downward trend line confluence with 1.04-1.06 area provides. This will need resolution over the coming
weeks and we may see a significant breakout move, one way or the other.
USDJPY loved
Trump’s comments regarding a forthcoming announcement on tax policies which saw
an impulsive move up on Thursday although this move is capped just below 114
for now. USDJPY appears to be charting a
2-month falling wedge, usually a bullish pattern. A breakout to the
upside would see us target 118 area. And
to the downside: 107.50.
AUDUSD continues
its impressive and spritely rally.
Further confirmation is required, however, the predominant pattern
appears to be the completion of a major 2-year head & shoulders
bottom. I would like to see the
0.7750-0.78 resistance area taken out convincingly before we target 0.87 on the
upside.
My pick of the
minors is EURAUD where we appear to be commencing a sustained move down. All that remains in terms of resistance is the 1.38 level ahead of targeting 1.25.
In emerging
markets the Brazilian Real and Russian Ruble continue to perform. However, it is the South African Rand that
catches my attention the most at this point.
USDZAR has been consolidating for several months following its steep
decline from a high of c. 18 a year ago. Further, we have confluence of several
long term trend lines that will require resolution. USDZAR, currently trading at 13.35, may be
readying itself for an assault on the 10 level.
Commodities
My pick of the
commodities space are precious metals and industrial / base metals sub-sectors. Silver is my favoured pick which I continue
to be bullish on. I highlighted the $SIL
(Global Silver Miners ETF) at the start of January as a long following a
convincing break out of a major falling wedge pattern and I continue to like
this asset. $XME (Metals & Mining
ETF) is another ETF that I am bullish on.
I like this sector in the near/medium/long term.
And finally, in case any doubt still lingers: always - I repeat, ALWAYS - take the RED pill.
