Updates

Update: 28th February 2016 – Outlook for week ahead

The next week will be very active in terms of fundamental data. There is virtually hundreds of different sets of data that are being released over the next week. However given the fact that we have limited time, I will only cover the following as I believe the following will be the most important:

The US employment data on Friday:

The highlight of this week of course will be the US non-farm payroll. Indeed one should pay attention not only to the change in payroll figures but in addition to any increases in hourly earnings which would imply that wage pressure is continuing to build. In our post over the weekend we addressed how inflation is now actually ahead of the Fed’s estimates and how it may actually encourage them to act sooner rather than later. While I do not remain convinced that the Fed is guaranteed to move on March, a solid payroll figure and decent wage increases will make March a strong possibility. In short do not be surprised if many of the people saying that the Fed would take no action in 2016 suddenly change their stance and start talking about rate rises happening in March or June.

With regards to the actual number I believe that we will see a solid report. I base this on the number of jobless claims each week staying consistently under 300,000 for 50 weeks in a row now which in my opinion is a clear demonstration of a firming labour market. In addition as a result of this firming in the labour market, I expect wages to increase as a reflection. I will be very surprised if weak data is posted on Friday.

Eurozone inflation on Monday:

This will be the straw that breaks the camel’s back and by camel I mean Euro. Inflation for February will virtually be non-existent in the euro zone given the relative strength that the euro has had in recent weeks (particularly against the US dollar and the pound) and the general softness in oil prices. Expect a virtually flat inflation reading which can be expected to weigh heavy on the euro as such a reading will prompt expectations from the market of further stimulus from the ECB. The hope of extra stimulus should also give European equity markets some much-needed support.

Chinese PMI’s:

We will see two different types of PMI is this week. The official government sanctioned PMIs and the Caixin sponsored PMIs. While I expect the government PMIs to be firm given all of the bravado by the PBOC in recent weeks, the non-official PMIs (which the markets love to react to) are expected to post results that show a contraction in manufacturing. While this should be no reason to panic given the fact that the Chinese economy is actively developing and therefore moving away from a manufacturing driven economy to a service orientated economy, it seems that these days the markets love to panic and they will not see the positives in this and just see it as another reason to be concerned over Chinese growth. Should the manufacturing PMI disappoint, expect the yen to strengthen as people look for haven assets and at the same time expect the New Zealand and Australian dollars to become significantly softer due to concerns over both countries trade relationships with China. In short if the PMI is a good solid number then sell the yen and buy one of these two currencies. If it is weak then buy the yen and sell one of those two currencies. A good choice to actually target in either situation would be the New Zealand dollar as the NZDUSD is currently trading just next to its 10 and 100 day moving average.

US ISM Manufacturing PMI:

This is the data that in the last two times it has been released has caused significant panic and growth concerns over the US economy. Now this week the general consensus of analysts is that they expect it to continue to be weak. Now I’m not going completely against them to say that I expected to show excellent growth but I do not think that it is going to be as bad as many think. If you scrutinize the non-farm payrolls carefully over the last two months, you will see that they added in excess of 30,000 jobs to the manufacturing sector and I’m sure that by now in the last two months these added jobs would have led to increased productivity. Therefore do not be surprised if the figure posted is actually better than expected.

RBA interest rate decision and statement:

The Central bank of Australia is expected to hold rates at 2%. However many analysts are predicting further rate cuts in 2016 and with comments from members of the Central bank recently saying that they feel that the Aussie dollar is overvalued, they may take advantage of the post decision conference to try to lower the price of the currency by indicating that they foresee the need to take action in the near future. Therefore even should they hold the rates at 2% which will initially result in a strengthening of the currency, do not fall into the trap of instantly buying. Wait to see what they have to say in the conference as you may be falling into a massive bull trap.

Canadian GDP:

Many expect Canadian GDP for the last quarter to be flat and show no growth. Now I don’t really have a call on this one as I do not have any accurate models for Canadian GDP that I would like to trust, since I find modelling hydrocarbon economies hard. However suffice it to say that even if there should be small growth, which the market would interpret as anemic or stagnant, there would be significant Canadian dollar weakness as people would expect further rate cuts from the bank of Canada. In addition should oil prices continue to be volatile next week, it could put downward pressure on the currency. Be very careful.

Australian GDP:

This is expected to show anemic growth at best and unless it completely defies estimates it is likely to be bearish for the Australian dollar.

Japanese Household Spending:

This will be very important as it will give a future indication on spending in the Japanese economy (consumer behavior) and how it will have a direct effect on inflation. A strongly negative number will result in yen weakening as it will increase expectations of further stimulus from the bank of Japan next month.

HF trade ideas:

Over the next week I believe that there will be softness to the euro, the Swiss franc, the pound and the New Zealand dollar and Australian dollar. However a lot of this is dependent on the data that will come out towards the start of the week. Therefore instead of jumping in and trusting it to luck, we shall assess the situation as data becomes available to us, deciding what we believe is the best course of action and then respond accordingly.

CFD trade ideas:

Should euro zone inflation prove to be flat as expected, go long on euro equities.
If US data is firm, sell GOLD or Silver.

IQ Option Trade ideas: Use short expiry times. Juleayr has had experience deciding the best times to take advantage of data releases and I am sure she will be more than happy to help should you ask her.

On Monday just before eurozone inflation data:
PUT EURUSD

Before Japanese House Hold spending
CALL USDJPY

On Friday before US NFP’s
PUT GBPUSD
PUT GOLD

Otherwise you can formulate your own plans around data releases. If you do, please share them with us all after and let us know how you did.

Anyoption trade ideas: Longer term trades (1 week or 1 month)

PUT AUDUSD
PUT NZDUSD
CALL USDCHF
PUT GOLD

Finally I would like to wish all of you the best of luck in the week ahead and I hope that after recovering from the entirety of our draw down last week that we can use this week to go straight for the green and try to achieve new highs together. Thanks for reading,

Mohammed

P.s. Sorry for the lack of charts my Bloomberg terminal expired. Will renew it on the 1st of March.

5 Comments

  1. Hi Mohammed,

    Nice reading your posts and see that you are still active. I copied you once but I got out after losing 90% and I see what a great person you are and I just want to say that you are doing a great job!

    I just have one question. With Iran’s sanctions currently being removed and they are coming back to the global oil market, Saudi Arabia are still pumping huge amounts of oil and the supply of oil is too much. Do you still think that the oil will stay on these levels for a long period of time? If not when do you think the oil price will recover and if it recovers do you think it will stay on a stable price afterwards?

    Thank you!

    Regards
    Ruhat

    1. Oil took some reprieve last week as Iraq and Nigeria announced an 800k per day cut. This cut should accommodate Iran to some extent, but oil is still vulnerable and there is still an oversupply of 4 million barrels a day. Prices will only recover when supply and demand are balanced again and when that will happen is anyone’s guess.
      Some people say that the OPEC will come to an agreement (unlikely as any cuts they make will have non OPEC members pumping more to take their market share). Others say that Shale producers are going broke and exhausting credit supplies (this has some truth, but there are so many of them that a few going bust wont make a difference). With the story changing everyday and so many alleged deals taking place, it is still entirely possible for oil to fall to $2 as some are calling. There is one thing in common that everyone does agree on though. Prices will stay lower for longer.

  2. Hello again,

    Great job getting the HF account to break even and also exceed that, gives a little relief to be on the positive side. Anyway its a pity to read about what the outcome could be if more things went our way….

    Anyway lets look forward and man youre a great trader!

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