After the disasters of the last few days very few people are probably going to read this, however in being true to myself I have to persist and go on with the journey. After all, I would lose all respect for myself if I did not try again just because of one (all be it massive) failure.
I do not expect risk aversion to be as dominant this week as the previous week due to the PBOC ceasing to weaken the yuan. While they did this four days in a row last week, the fifth day they strengthened it and are unlikely to reverse that action given the prior disaster they released on the markets. In addition, I strongly suspect that the suspension of their circuit breaker gives them the chance to intervene in their markets should things crash. They have done this before, and I do not think it to be highly unlikely that they should not do so again by using some of the $3 trillion they hold in reserve. While there still exists risk to the downside until and possibly beyond their GDP release on the 19th, I feel that the possibility of an upside outweighs this.
There has been one significant central bank development over the weekend: SNB chairman spoke about the CHF being overvalued and the central banks willingness to intervene should the need arise. In addition he made a comment that it is not possible to determine how long the deposit rate will remain negative. These are quite bearish comments for the CHF. Unless there is another bout of overwhelming risk aversion next week, the CHF should lose ground against the other majors. One possible trade idea would be to buy USDCHF since:
USD to be supported by:
- Phenomenal Employment data.
- Market expectations from FED.
- Lacker, Bullard (both hawks) speaking.
- FOMC becoming more hawkish (changing voting members, which the market will take into consideration)
CHF to be hindered by:
- Weakening Euro due to expected increase in stimulus and expected contraction in industrial production, later this week.
- Expectations of divergent monetary policy, after comments by Jordan from SNB on willingness to intervene.
Technically, the pair is near its 30 day moving average and I cannot see it dropping much lower. I would take the strategy of going long on this pair with a target of 1.03, SL of 0.9748 and Move SL into green when given the chance to avoid recoils in case oil or equities crash to even further lows.
A second opportunity I see is the AUDUSD, and the opportunity to go short on it. Because:
- Same reasons as above
AUD weighted by:
- Commodity prices falling.
- Expected further cutting from RBA.
- Unemployment expected to increase
Please not though, the last 3 estimates by the market on the employment data have been GREATLY wrong and the best way to play this one will either be a trade with an iron tight SL, or simply taking a PUT option out on the pair.
I believe that it is very possible that the USDJPY has a limited downside at this point as it has already gained a lot of ground and the strong Yen hurts the Japanese Economy (which is already underperfoming as explained several times over the last few days). It is very likely that this pair begins to recover this week as the markets stop panicking and begin to process the data that supports the FED being able to raise rates several times this year. It is also likely that this strong JPY will make the BOJ do more to lossen monetary policy and they NEED it to be weaker so that they can export more. It is vital to their recovery.
With regards to the GBP, we have more bad news here im afraid. After Prime Minister Cameron came out today and said that he will not resign even if they lose the EU referendum. Effectively he has confessed to the markets that the British people voting for a BREXIT is a strong possibility and this will instill panic in the markets tomorrow. I think we have not seen the bottom of the GBPUSD and this does not bode well for our positions of GBPJPY and GBPCHF. In addition, the BOE minutes this week are likely to highlight risks to the UK economy from China and the continued collapse in equities.
Therefore this week, we will try to profit from out USDJPY and USDCHF buys and try to target new trades while we wait for the UK economy to show signs of life. This is how I feel the best way to handle things at the moment is,
Regards and Good luck to anyone still reading,