Outlook for the week ahead:
The week ahead brings with it much in the way of important fundamental data. Other than many central banks speeches, we also have an array of results which will influence the market. In the US we have personal spending and income which are expected to show significant improvements and we also have durable goods orders which are also expected to show an increase. All of this should support the US dollar which has been outperforming the market recently. There is one possible point of weakness which is that the Q4 2015 GDP data from the United States is expected to be revised downwards from 0.7% growth to 0.4% growth, so this could put some downward pressure on the dollar which otherwise should benefit from positive data this week. In addition, after the weekend the market, would have had time to digestive the better-than-expected inflation data from the United States without having to instantly react to the crash in oil and equities that shortly followed its release and cancelled out the initial dollar rally. Therefore do not be surprised if when the market opens the bid sentiment is behind the US dollar. I believe that talk of rate hikes from the FED will start to re-emerge this week.
In the Eurozone not only do we have Eurozone PMIs due for release but in addition there is to be a revision of German GDP and Eurozone inflation is expected. In all honesty judging from the general consensus all of these results will show no more than anaemic growth and inflation will virtually be flat. This will not go well for the euro and I expect the euro to continue the declines that it had last week. The euro will only proceed with a strong rally should once again the markets tank.
With regards to the Swiss franc, it became significantly weaker last week (the USDCHF increasing 1.31% to close at a 0.9904) as the market expects further intervention from the SNB either as a direct intervention in currency markets or further monetary easing. With inflation on Thursday that is likely to show further contraction, I think it very likely that the Swiss franc may continue to weaken this week. In addition to this there is a speech by the central bank’s president on Tuesday and he is very likely to use the opportunity to indicate a willingness from the bank to weaken the currency further.
In Australia, we saw some gains last week due to a rally in gold and commodities. However given a rise in the unemployment rate to 6% and a general slowing of the economy it can be expected that this will turn around. Indeed even a member of the RBA (Edwards) suggested over the weekend that the Australian dollar should be the equivalent of $.65. With data that is expected to show a decrease in construction and capital expenditure next week, it is likely that the Australian dollar will come under pressure.
The New Zealand dollar is likely to decline at the end of this week when data is expected to show that exports have shrunk in January and the trade balance has become even more negative.
David Cameron has what he feels is an appropriate deal for the UK public to vote on staying in the European Union. However with that said as the results of many polls no doubt come in and out, the pound is likely to remain very volatile and this week we shall be avoiding it.
Given expectations for greater than expected personal spending and income and respectable durable goods orders, this week may be a decent time to go along in US equities. I wish to point out though that this is a very risky move as oil remains volatile and any crash in oil will take equities down with it. Therefore before making any such commitment to the markets, please take the risk and reward scenario into consideration. In short make sure that any risks you take are worth it.
Go long on Japanese equities before CPI data comes out. Negative inflation data from Japan will increase market expectations of further stimulus from the central bank and that will result in a rally of equities.
IQ Option ideas:
As usual purchase options of a short duration just before economic data is due for release. Selling the JPY just before the Japanese CPI and selling the EUR just before its CPI are sound ideas.
Over a one week period I would suggest the following:
Current HF situation:
We currently have an unrealised net loss of 19.8%. Of this 10% is due to an error we made in selling gold. We took these sell positions on the back that we believed that the better-than-expected inflation data from the United States on Friday would make the market realise that the Fed will be continuing their tightening of monetary policy this year. Our view was further reinforced by the technical charts which showed a bearish Harimi on the 1 week level:
Review of literature posted by Goldman Sachs also suggested that the rally in gold was overdone and that now is the appropriate time to go short on it. In addition, we consulted the median estimates of all of the research houses most of whom had forecasted gold to begin a retreat towards the 1100 level over the next month. Suffice it to say that unfortunately this position went against us but much like we hedged our way out of our young problem this time last week, we intend to do the same. We have changed our overall position with a buy to make us neutral and as we see the market determining which direction it wants to take we will adjust opposition with the intention of initially minimising losses and then hopefully finally merging with a gain. If we are unable to do this, we will simply close the positions and take the hit.
We are long 600,000 units on USDCHF with a target of 1.02. reaching this target will hopefully help us realise a net gain of $12,000. Presently the CHF sits between its 10 and 30 day moving average and I expect it to climb and break its 30 day average:
Please note I know we are very volatile on HF. In the last 2 weeks going from a 50% unrealised net loss back to break even, to a profit of 10%, back to break even, to a unrealised loss of nearly 20%. This is because we are taking chances (which we have to in order to get rewards) and the market is very volatile and went completely against us at the end of the week. Nobody is more frustrated about this poor performance than I am. It really cuts deep to see all your models for financial data live up to expectations and your positions to work, only to see them voided by an oil crash 10 minutes later. I just take the approach that as long as damage is limited, fire power preserved and we are patient, we can hedge our way out of bad situations and still make new profitable trades.
New positions which we will take:
We will look for opportunities to sell AUDUSD hopefully once it reaches closer to 0.72 levels with the aim of taking profit at 0.70.
We will look to buy USDJPY before Japanese inflation data with the expectation that a flat (I believe it will be negative given JPY strength in January) CPI will prompt expectations of further stimulus from the central bank that will result in the weakening of the JPY. I will not take this position too early in the week as it is entirely possible that should risk aversion and panic grip the markets (as it seems to do at every chance in 2016), it is entirely possible that the pair will dive to even newer lows. I also wish to point out that Nomura and Goldman on Friday both re-affirmed their expectation for the YEN to weaken towards 130 towards the end of 2016.
Wish you all a good week and wish us all good luck,