Firstly, let me start by saying I hope you all had a good weekend.
Secondly, a warning, with Europe still on holiday tomorrow, liquidity is bound to be very tight until the US session (at the very least), if you are going to be trading, please becareful. Spreads are likely to be very wide and there may be many erratic movements.
Our account status on HF:
Not much to add. With markets closed over the weekend, we remain in the excellent situation we were in last week. Massive gains in equity, massive gains in balance and our only open trade being USDCHF longs.
Things to watch out for this week:
A lot of US data is due for release this week. The most important of these is no doubt the employment data due out on Friday. And judging from the weekly initial jobless claims, and the PMI’s, it is very likely that data should be firm this week but I believe that we will see in excess of 200,000 jobs added an unemployment possibly fall to 4.8%. This should put upward pressure on the US dollar and pressure on the Fed. In fairness, it seems that the Federal reserve is actively confusing the market the moment. While the FOMC was exceptionally dovish at the last meeting, last week we saw no fewer than four officials of the Federal reserve state that an increase in rates is just around the corner with many of them highlighting April as possibility.
In addition, on Monday you cannot afford to ignore the PCE which is expected to be even firmer than the 1.7% posted from January. Since the Fed had a target of 1.4% in December 2016 (i.e. it has picked up way faster than they ever could have anticipated), any increase will put exceptional pressure on Yellen and company. Expect the USD to be supported should data live up to its expectations this week. And if it should, expect the clear divergences in monetary policy between the US central bank that is expected to be tightening and the rest of the world which is easing to become even more apparent in the exchange rates. The last time we were at a point like this was in August 2015 when all of the naysayers were claiming that there was not a chance in hell that the Federal reserve could have increased rates and the next move would be to actually decrease. Where are these people now? Oh that’s right wiped out and on the 10th accounts.
Last week Japan posted a soft PMI, falling to 49.1 with export orders falling to their lowest in more than 3 years at 45.9. This in addition with the deflation shown on Friday is likely to put downward pressure on the JPY (assuming that there is no risk aversion).
Industrial production is also expected to show contraction this week and will boost expectations of stimulus from the BOJ which in the presence of deflation, recession and falling exports and production has no choice but to act agressively and soon.
As I stated previously in the week, the Swiss franc has been surprisingly resilient possibly due to backing its received as a hedge against the potential looming threat of Brexit. However a strong Swiss franc is an extreme danger to the Swiss economy and as Jordan (Chairman of the SNB) constantly reminds the market, the central bank will not hesitate to intervene in foreign exchange markets in order to control and limit the strength of their currency. Thus far they had stayed their hand due to Draghi strengthening the euro (albeit by accident) when he declared that he believed there was no further need to cut rates further. However, do not expect them to stand on the sidelines for long. It is my firm belief that the time for the SNB to intervene in the markets is fast approaching and it could be only days away.
As we know, the Australian dollar has recently enjoyed an exceptional rally which has taken it from .67 all the way to the mid .76s and is currently treading water just north of .75. This was on the back of a rally in commodity prices and the world calming down over China. I do not expect this strength to persist. Fundamentally, it is uncertain how long this rally in commodities will continue (it is already showing signs of slowing down). In addition, we know from the RBA that they would be happier with the Aussie dollar closer to 0.65 as it helps Australian services and Australian exports. Furthermore the spread into year generic government bond yields between the United States and Australia indicates that the fair value and price of the AUDUSD should be closer to 0.72.
In addition, looking at the candles on a monthly basis shows that the 50 moving average has just performed a death cut on the Hundred moving average. This indicates that there are risks to the downside and the pair could fall very shortly. Fundamentally and technically, it could be worth trying a short on this position.