Ken Veksler, Senior Manager, Trading Advisory.
Well, our man Ben was out overnight spruiking his wares for all the world to hear… What did he have to say for himself? In simple terms that the economic environment in the US was “unusually uncertain”… In my view that translates to even he is not entirely sure of how the future looks. What is definitive, however, is rates will indeed stay low for quite some time and the yield play/differential becomes even more important. As we witnessed, the key beneficiary of this being the JPY and subsequently the USDJPY, but more on that a little later.
Otherwise we had equities doing little of any significant note other than sitting in what has now become a fairly well defined range. On the S&P 1085/90 marks the top end while 1055/45 marks intermediate support. Earnings reports after market failed to ignite any real enthusiasm and outside of some initial jawboning from the Japanese there really was little else of note happening out there.
The day ahead is data heavy and kicks off with Euro zone PMI followed with UK retail sales and in the US this afternoon home sales and weekly jobs data. Of course there will be the usual risk on/off tussle for dominance in the market around these numbers but I choose to bury my head in the sand and instead maintain my overall macro objectivity with regard this market.
And so with that in mind and the fact that this is my last day in the office until the 4th of August, I choose instead to leave you with what I feel may unfold in the coming 10 days or so as regard the major crosses and themes.
Tomorrow is going to be the marquee event that the market has supposedly been waiting so long to see, the Eurozone bank stress test results published at 1600 GMT. Not to offend anyone in Brussels or the ECB, but quite frankly I simply don’t care and as far as I’m concerned neither should you. This is going to be nothing short of pretty and fictitious accounting and window dressing to appease policymakers rather than people like you and I that live in the real world. Looking at the stress parameters on their own is enough to understand that we’re dealing with a parallel universe. The harsh reality is that the vast majority of these banks will not survive should the fate of credit markets follow the same path they have been until now. There is not enough liquidity in these markets and there is equally an insufficient amount of capital reserve in many of these banks to withstand the systemic pressures that we will continue to face in the near-term.
But I digress… the major crosses...
The theme for the summer as I highlighted about a month ago is to be long of JPY, both against the big dollar and the other crosses, and thus far it has proven to be rather profitable and for the most part devoid of significant volatility. As mentioned above just take a look at the spreads in the 10yr yields in the US and Japan and from their folks you’ll get a clear understanding of why we have seen these moves. So with that in mind 85.80 becomes crucially important on the USDJPY and outside of any jawboning by the Japanese with regard the overt strength of the JPY we should see this level tested and in all likelihood taken out opening up a raft of stop loss orders which are rumored to be sitting all the way into 84.00. If you’re short stay that way in the USDJPY, and if you’re not quite there yet, then look for 87.50 and 88.30 as levels to sell into.
On the commodity front, and thereby the AUDUSD and USDCAD, I am a dissenter and don’t believe the hype. What do I mean? Well simply that it’s a bubble and one that especially in thin summer markets is likely to disappoint rather than reward. So with regard the AUDUSD this means that I remain bearish and look for 0.8850/70 to be sold into and stops go in above the 0.8935/50 level looking for moves back into 0.8670 and 0.8530. Confirmation of this to me comes in the form of last night’s break and sustained hold below 0.8780, with only a small pop this morning allowing for fresh reloads of strategic shorts. On the USDCAD this translates to boring yet successful range trading which as noted several times before if it aint broken then no need to fix. I refer of course to 1.0630 in the immediate topside with the possibility of extension to 1.0700 while the downside is ensconced in 1.0350 and deeper into 1.0280/50 if you get the opportunity. Below the latter level of 1.0250 this cross becomes well oversold and a more convincing buy opportunity.
Of course all of you are wondering where to next on the EURUSD… and I tell you in response that we are going to be trading a newly defined range with the boundaries being 1.2550 and 1.3150/3200. The move overnight is not a surprise to me and shouldn’t be to you either, this simply is a consolidation of the recent move and breakout higher which was due to see some retracement. Going forward over the coming week or so, I would be a buyer for choice on dips into the aforementioned levels and play it purely from range trade view. Once the reporting season has finished it is then that we can reevaluate if that range is likely to continue or we wait until the 16th of August when the second batch of stress test results are released. In this instance it might be worth considering buying a strangle using options around the levels of 1.2550/2600 and 1.3200 with an expiry of around 2 to 4 weeks.
The Cable is likely to move in tandem with the EUR and needs to respect 1.5130 and 1.5300 as levels, breakouts from either of those levels will signify deeper moves and the risk in my view is the potential for the downside looking for (although not likely to find in my absence) 1.4750. In recent days this cross has been all about the EURGBP which looks to test and in all likelihood bounce out of the 0.8330 (with 0.8380 being the first real hurdle). On the upside however I favor another test of 0.8530, with a real chance of a break here….
So, in short, stay long the JPY and disregard any jawboning from the Japanese and most importantly of all be careful out there.
I leave for holiday tonight and will be back on the 4th of August so until then I wish you luck and safe helmet wearing.
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