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Vitezabraham

Dominant currency sentimentHello Traders! BOE rate outlook continues to improves following uk CPI Heading into todays European trading session, the risk tone is mixed. Asia - Pacific indices are weaker, measures of volatility mixed and safe heavens pressured. Leading Asia-Pacific indices to the downside is the ASX 200 at -0,68% followed by the Topix at -0,61%, the Hang Seng at -0,49 and the Nikkei 225 at -0,40 %. The CSI is positive on the session at + 0,05%. In the FX complex, despite the weakness in equities, It's CHF leading to the downside, with JPY also pressured across the board. USD remains the exception, with the currency remaining supported by FED rate hike expectations. Looking ahead, inflation is likely to remain a theme throughout the day, with EU CPI due to be released in todays European session and Canadian CPI due to be released later today. Have a great day! Regards, Vitez
by Vitezabraham
1
NZDJPY Swing trade + Fundamental DriversHello Traders! A high conviction trade is in the table, anything around 80.200 region is very good. Place stops below the supply zone. Take profit at the highs. Fundamental Drivers New Zealand Dollar (NZD) Fundamental Bias: Bullish 1. The Monetary Policy outlook for the RBNZ At their Oct meeting, the RBNZ delivered on expectations to raise the OCR to 0.50%. As the hike was already fully priced, the lack of new hawkish tones we saw a textbook buy-the-rumour-sell-the-fact reaction in the NZD pushing lower. There was additional focus on the RBNZ expecting headline CPI to climb above 4 percent in the near term, but the most important part of the statement was the subsequent comment that the bank still sees CPI returning towards the 2 percent midpoint over the medium term and that ‘the current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement’. Thus, despite recent covid concerns, inflation concerns and energy concerns, that part of the statement acknowledged that nothing has changed in terms of the bank’s OCR projections released at the August meeting. Unsurprisingly, the bank also stated that their future rate path is contingent on the medium-term outlook for inflation and employment, which means keeping close tabs on incoming data and the virus situation will remain a key focus for us in the weeks and months ahead. With the bank now being the first to hike rates among the major central banks and sitting on the highest cash rate among the majors, and with an OCR projection that is still head and shoulders above the rest, the bias for the NZD remains firmly titled to the upside, and as rates keeps rising, the currency’s carry attractiveness will be a key focus point for the NZD in the months ahead. 2. Developments surrounding the global risk outlook. As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the NZD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the NZD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 3. Economic and health developments Virus cases can still have an impact on NZD sentiment, which means the fact that NZ virus cases is at record high levels is something to pay attention to. For now, it’s had very limited impact on the NZD due to the NZ government abandoning their covid-zero strategy and since virus risks have been downplayed by the RBNZ, but further escalation leading to more lockdowns will be important to keep on the radar. Japanese Yen (JPY) Fundamental Bias: Bearish 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. Have a great week! Regards Vitez
Long
by Vitezabraham
GBPJPY Swing trade + Fundamental driversHello Traders! We approached a significant support zone also having a strong fundamental upside bias. Enter at trend line break or the breakout of the zone. Stops below the zone. Take profit at the highs. Fundamental Drivers Great British Pound (GBP) Fundamental Bias: Weak Bullish 1. The Monetary Policy outlook for the BOE The BoE took a hit to their credibility with their November policy decision when the bank voted 7-2 to keep rates on hold and also had a very clear U-turn among some of the recent hawkish comments from the likes of Bailey and Pill. Going into the meeting markets had fully priced a 15bsp hike in 4Q21, and even though analysts and economists were divided on whether that hike would take place in Nov or Dec the bank’s statement and press conference has now seen market expectations for a hike pushed back to Feb 2022. This came from the bank’s dovish tilt regarding growth, inflation as well as a change or tone which said that hikes would be appropriate in the coming months if the labour data comes in line with the bank’s projections. We were anticipating a violent repricing on med-term rate expectations for the past few weeks now, stressing that rates markets were too aggressively priced, but the U-turn from the bank regarding the near-term was surprising and means incoming labour market data will be key in gauging when lift off will occur. When asked about their obvious U-turn, the bank pushed back and said they won’t endorse market rate pricing, but external member Saunders did just that in early Oct. Overall, the bank delivered a dovish tone, and took a big hit to their credibility, which means markets will be a lot more careful with jumping the gun on their forward guidance going forward. A key reason why we have not changed our outlook for the GBP to bearish after the Nov BoE meeting is because the forecasts for both growth and inflation were conditioned on an implied bank rate of 1% by end 2022, which seems highly unlikely. Thus, after this week’s repricing, if rates price in less than 1% by 2022 then the conditioned path for growth & inflation should be higher again all else being equal. 2. The country’s economic developments The successful vaccination program and subsequent reopening of the UK economy was a big positive for Sterling from the start of the year, but with a lot of those positives already in the price and some expectation of stalling growth, the upward momentum will get tougher in the near- term. Also, alongside the BoE’s dovish tilt incoming economic data will be crucially important for markets to gauge the rate path. This incoming week we have the Sep labour report, and with the BoE’s comments that they want to see what the labour market does before acting on rates it means this print will be important, not as important as the October report we get in Dec but definitely one to watch in the week ahead. 3. Political Developments Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Also keep the fishing challenges with France in mind as well. Japanese Yen (JPY) Fundamental Bias: Bearish 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. Have a great week! Regards Vitez
Long
by Vitezabraham
AUDJPY Swing trade + Fundamental DriversHello Traders! A technically and fundamentally appealing trade is developed in the Australian Dollar Against the Japanese Yen pair. Enter at lower timeframe trend line break. Stops below the last supply zone. Take profit at the swing highs. Fundamental Drivers: Australian Dollar (AUD) Fundamental Bias: Neutral 1. The country’s economic and health developments There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – a Q3 GDP contraction is priced in, so eyes are firmly on Q4 data to see whether a strong rebound is possible. Look out for any good news with more reduction of lockdown measures. China – the slowdown in China is important as it’s Australia’s biggest export destination. Markets are watching to see whether the CCP and PBoC steps up with stimulus for the economy and possible support for the real estate sector. Politically, the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. Commodities – Iron Ore, (24% of exports) have continued its drop, and to make matters worse we’ve seen Coal (18% of exports) prices are pushing lower alongside it. This is negative for Aus terms of trade and definitely a risk to keep on the radar in the sessions ahead. Global growth – as a favourite risk proxy, the market’s current question about whether we see a reflation in Q4 will be an important consideration for the AUD. 2. The Monetary Policy outlook for the RBA The RBA’s November decision can be summed up as hawkish in deed but dovish in word. The bank abandoned YCC as markets suspected as they didn’t choose to defend their target in the days leading into the meeting, and they also abandoned their date-based forward guidance that said a lift off in rates would only be appropriate in 2024, by rather saying that conditions for a hike will take ‘some time’. However, Governor Lowe tried his best to sound as dovish as possible by saying that they are prepared to look through temporary spikes in inflation and that market pricing for a hike by 2022 is far away from where their outlook is and is highly unlikely. Even though not all market participants would agree, we think the outlook for growth, inflation, employment and wages do suggest that a late 2022 could be possible, especially if the economy sees a solid bounce back from covid. However, for now, the bank has stuck to an overall dovish tone. Given the importance of wages to their inflation outlook, keeping close track of this week’s Q3 wage growth will be very important for the AUD. 3. Developments surrounding the global risk outlook. As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. Japanese Yen (JPY) Fundamental Bias: Bearish 1. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY. 2. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y. However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track. Have a great week! Regards Vitez
Long
by Vitezabraham
GBPJPY Swing trade that you can take now + Fundamental driversHello Traders! We approached a key level and managed to break an hourly trend line that's enough for a technical entry also having a strong upside bias for the pair. Entry at market or buy stop order at the break is valid. Manage risk below the last significant support area. Fundamental Drivers: Great British Pound (GBP) Fundamental Bias: Weak Bullish 1. The Monetary Policy outlook for the BOE The BoE took a hit to their credibility with their November policy decision when the bank voted 7-2 to keep rates on hold and also had a very clear U-turn among some of the recent hawkish comments from the likes of Bailey and Pill. Going into the meeting markets had fully priced a 15bsp hike in 4Q21, and even though analysts and economists were divided on whether that hike would take place in Nov or Dec the bank’s statement and press conference has now seen market expectations for a hike pushed back to Feb 2022. This came from the bank’s dovish tilt regarding growth, inflation as well as a change or tone which said that hikes would be appropriate in the coming months if the labour data comes in inline with the bank’s projections. We were anticipating a violent repricing on med-term rate expectations for the past few weeks now, stressing that rates markets were too aggressively priced, but the U-turn from the bank regarding the near-term was surprising and means incoming labour market data will be key in gauging when lift off will occur. When asked about their obvious U-turn, the bank pushed back and said they won’t endorse market rate pricing, but external member Saunders did just that in early Oct. Overall, the bank delivered a dovish tone, and took a big hit to their credibility, which means markets will be a lot more careful with jumping the gun on their forward guidance going forward. A key reason why we have not changed our outlook for the GBP to bearish after the Nov BoE meeting is because the forecasts for both growth and inflation were conditioned on an implied bank rate of 1% by end 2022, which seems highly unlikely. Thus, after this week’s repricing, if rates price in less than 1% by 2022 then the conditioned path for growth & inflation should be higher again all else being equal. 2. The country's economic developments The successful vaccination program and subsequent reopening of the UK economy was a big positive for Sterling from the start of the year, but with a lot of those positives already in the price and some expectation of stalling growth, the upward momentum will get tougher in the near- term. Also, alongside the BoE’s dovish tilt incoming economic data will be crucially important for markets to gauge the rate path. 3. Political Developments Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Also keep the fishing challenges with France in mind as well. 4. CFTC Analysis Latest CFTC data showed a positioning change of +94 with a net non-commercial position of +15047. Keep in mind the CFTC data released on Friday was only updated with positioning data until Tuesday 3 Nov, which means the big flush lower in Sterling after the BoE meeting will only be reflected in next week’s data. Thus, we would anticipate seeing a sizeable increase in net-short positioning following the Pound’s reaction after the meeting. With the week light on the calendar front, markets will turn attention to incoming comments from Governor Bailey (sigh). Apart from that we’ll be keeping a close eye on key technical levels to determine whether downside momentum could be stalling out. Have a great weekend! Regards, Vitez
Long
by Vitezabraham
Swing trading opportunity! + Fundamental DriversHello traders! TD Securities have opened a new buy trade on usdcad entry: 1.2413 stop: 1.2200 target: 1.2750 Rationale: We add a long usdcad position to our fx model portfolio and target a move to 1.2750. A lot of good news appears in the cad price. Since September fed meeting, the cad has registered one of the largest builds on our positioning tracker. This has helped to drive a discount on our cross asset fv measure (aprox. 1.25) and an even larger discount on our implied level derived from just global growth expectations and risk sentiment (1.27). Technicals also suggest sufficient signs of bottom in the pair (such as macd). Ourrates team also believes the global frontend repricing has matured. Looking an OIS curve, we think risk/reward is unappealing to price in more tightening at the April 2022 meeting (which is already rather heroic assumption in our view) of for 3 hikes by July next year. While CAD's oil beta has appreciably tightened in the recent weeks, the terms of trade boost may be well advanced as our commodity team expects WTI. oil to average $86 this quarter. We also expect a firmer USD in the weeks ahead, driven by outperformance against the low yielders and sticky fed pricing as well as seasonal boost that tends to occur in November. Fundamental Drivers: United States Dollar (USD) Fundamental Bias: Weak Bullish Primary driver: 1. The monetary policy outlook for the fed Rationale: More hawkish than expected sums up the sep meeting. The FOMC gave the go ahead for the November tapering announcement as long as the economy develops as expected with their criteria fo substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid 2022. Inflation projections were hawkish, with the fed projecting core pace above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was all but met and explained that it won't take a very strong September jobs much steeper than markets were anticipating with seven hikes expected over the forecast horizon from just two previously. It is important here to note though that even though the path was steeper, if one compares that to a projected Core pce>2% for 2022to 2024, the rate path does not exactly scream fear when it comes to inflation. ALLin all, it was a hawkish meeting. The upcoming NOV3rd meeting is expected to see the bank formally announce tapering at a a pace of 15billion per month starting in dec. With that largely expected, focus will fall on rate expectation where eurodollar futures implythree rate hikes between jun and dec 2022, which seems too aggressive right now son any push back or confirmation of that pricing arguably be a bigger driver for the usd and us rates this week compared to the expected tapering. Primary driver: 2. Real yields Rationale: With q4 taper start and mir 2022 taper conclusion on the card, we think further downside in real yields will be a struggle and probability are skewed higher given the outlook for growth, inflation and policy, and higher real yield should be supportive for the usd in the med term. primary driver: 3. The global risk outlook Rationale: One supporting factor for the usd from June was the onset of downside suprises in global growth. However, there has been a growing chorus of the market participants looking for a possible bounce in growth stat q4 after the covid and supply chain related slowdown in q3.If we do indeed see a pickup in growth, while inflation is still elevated, that would mean a reflationary environment, which is usually a negative input for the dollar, so we want to keep that in mind when assessing the incoming us economic data in the next few weeks. primary driver: 4. economic data rationale: Very busy week for economic data with nfp on Friday and the usual slew of economic data that feeds into nfp being releases throughout the week ism report, adp. However, with the FOMC coming up on Wednesday, the data feeding into nfp will most likely take a back seat until we hear from the fed and depending on the type of tone that will largely impact how markets react to Fridays nfp release. Primary driver: 5. CFTC analysis Rationale: Latest CFTC data showed a positioning change of - 1477 with a net non commercial position +34457. Positioning isn't anywhere near stress levels for the usd, but the speed of the build up in large speculator positioning has been sizeable 1 year look back period. Thus even though the med term bias remained unchanged it does mean usd could be sensitive to mean reversion risks while still trading close to ltd highs. This weeks FOMC will take centre stage though. Canadian Dollar CAD Fundamental Bias: Bullish Primary driver: 1.The monetary policy outlook for The BoC Rationale: At their oct meeting the bank suprised the markets by decided to put an early qe purchases and also updated their forward guidance to suggest and earlier liftoff in rates by explaining that they now see economic slack being absorbed by die middle quarters of 2022. The initial reactions very bullish as one would expect an saw the cad appreciate across the board.We think the biggest risk to further upside for the cad from here is the fact that a lot of these positives confirmed by The BoC has already been reflected in both the cad and rates markets over the past few weeks. The Cad has seen a similar run to the upside back in 2021 q1 with the boc's hawkish tilt, and similarly to that we feel current prices for rates and cad already reflect a great deal of positives. Thus even though the med term outlook remains tilted to the upside for the cad there is a risk of seeing some unwind of the recent upside and is something to be mindful of when making any med term allocations to the upside in the cad. Primary driver: 2. Commodity linked currency with dependency on oil exports Rationale Oil staged a massive recovery after hitting rock bottom in 2020 and the move higher over the recent months has been driven by supply and demand opec production cuts, improving global economic outlook an improving oil demand outlook, even though slightly pushed back by delta concerns, rising inflation expectations. Even though further gains for oil Will arguably prove to be an uphill battle, the bias remains which could affect the cad from an inter market point of view, but as long as the med term view for oil remains higher it should be supportive for metro currencies like the cad. The recent energy crisis affecting large parts of the globe's placed upside pressure in oil, gas and coal and has support for the cad. A possible risk for oil prices and by connection the cad is any attempts by the us or opec+ to calm down prices. On the us side they could opt to release more of their reserves and on specs side they could announce additional increases production output. This week we have another opec+ meeting so keeping that on the radar for the cad will be important in the week ahead. Primary driver 3. Developments surrounding the global risk outlook rationale: As a high beta currency, the cad benefited from the markets improving risk outlook coming out of the pandemic as participants moved out of safe havens. As a pro cyclical currency the cad enjoyed upside alongside other cyclical assets supported by reflationand post recession recovery bets. If expectations for the global economy remains supportive the overall positive outlook for risk sentiment should be supportive for the cad in the med term, but recent short term jitters ar timely reminder that risk sentiment is also a very important short term driver. primary driver: 4. CFTC analysis Rationale Latest CFTC data showed a positioning change of +14244 with a net non-commercial position of +3320. With a lot of positives in the price for the cad and the from and yields, it is however encouraging to see that positioning isn't stretched for either large specs or leveraged funds, and suggest that further upside could of course be possible if short term sentiment for oil and risk assets remain favourable. Thank you for reading! Have a great week! :) Vitez
Long
by Vitezabraham
#EURGBP Upside + Fundamental driversHello Traders! Early rate hike priced in for the pound, that may not come as soon as expected. So we can see an overstretched position also if we see more vix upside along risk off sentiment that supports the trade as well. Euro (EUR) Fundamental Bias: Weak Bearish Primary Driver: 1. The Monetary Policy outlook for the ECB Rationale: The ECB provided an overall balanced policy decision at their September meeting. They chose to slow the pace of asset purchases, explaining that the current levels of financial conditions allow them to buy assets under PEPP at 'moderately' slower pace compared to the pace of purchases seen in Q" and Q+. However, as expected, the bank made it vers clear that the move was not tapering it was merely a recalibration of purchases (when you plan to perform less QE that's technically tapering but who's counting).The bank raised their inflation projections for 2021, 2022 and 2023, and even though the 2021 projections were arquablynot as high as the markets were hoping for, the more important me-term projections still showed inflation moving to well below the banks 2% target to affirm the transitory view of recent price measures. All in all, the decision was broadly balanced and as a result failed to inspire any meaningful reaction in European assets. For this weeks upcoming meeting, the markets are not expecting any fresh changes as all eyes are on the December meeting. Primary driver: 2. The country's economic developments Rationale: Earlier issues with vaccinations and lockdowns at the start of 2021 weighted on eu growth prospects, with growth differentials against the US an UK still quite wide, despite some of the recent some of the recent strong economic data. Despite the hit to growth, the recent activity data suggests the hit to the economy from recent lockdowns weren't as bad as feared. That alone isn't enough to change the current bearish outlook. Another factor to watch is the discussions among European states to allow the purchase of green bonds not to count against budget deficits. Such a decision could change the fiscal picture drastically and we would expect that to be a big positive for the EUR and European equities. However, in the short-term, EUR traders will be firmly fixing their eyes on the ECB, which is expected to be a bit of an uneventful meeting. Primary driver: 3. Funding Characteristics Rationale: An interesting driver for the euro is its funding characteristic exhibited during risk off sentiment. AS a low yielder ( like jpy and CHF ), the European has been an interesting choice among the carry trades, especially during 2019 it was favoured against high yield EM currencies, and part of the big upside in the euro during the initial risk off scare in march 2020 was attributed to an unwind of large carry trades. recently we've seen the euro exhibit some resilience during jittery risk tones despite usd strength. As more central banks start normalising policy, the euro's attractiveness as a funding current ycould keep it pressure din the med term vs higher yielders. However, it could spark risk off upside if some of those trades unwind. That doesn't make our a safe haven, but as rates climb globally it can become more sensitive to risk. Primary driver: 4. CFTC Analysis Rationale: Latest CFTC data showed a positioning change of +6291 with a net non-commercial position of -12107. The stretched positioning for large speculators we noted the past few weeks have continued to ease, but net shorts are sizable for leveraged funds. Thus, we would not be interested in chasing the euro lower from here without seeing a more mean reversion first. Great British Pound (GBP) Fundamental Bias: Bullish Primary driver: 1. Monetary policy outlook for the BOE Rationale: The SEP policy meeting from the BoE saw money markets rushing to price in a much faster and more aggressive policy path than previously expected. Even though this course falls in line with our bullish bias for the pound, we do think the market is a bit too aggressive too quick right now. The bank did explain that they now see inflation above 4% by Q4 of this year, and the possibility of more sticky inflation was the key reasons why we saw a 7-2 QE vote split with Saunders and Ramsden both dissenting to cut purchases. However its important to note that the remaining 7 members still see inflation as transitory, and the fact that this expect CPI above 4% means any prints that don't come close to that poses downside risks. Furthermore, even though the bank said their expectations of modest tightening has strengthened. the admitted that lots of uncertainties remain.A big one of these is the labour market, where even though the number of furloughed staff have decreased, that decrease has materially slowed from august which poses more uncertainty for the labour market. Thus, even though our bias remains unchanged, and we see the bank lifting rates Q', we do think the over optimistic moves in the money markets poses sort term headwinds. Primary driver: 2. The country's economic developments Rationale: The successful vaccination program that allowed the UK to open faster and sooner than peers provided a favourable environment for sterling and the strength of the economic recovery has meant solid growth differentials favouring GBP. However, a lot of these positives are arguably the same outperformance we saw earlier. With out above comments about money markets, it also means that there is now more risk to the downside surprises then was the case a few months ago. Primary Driver: 3. Political developments Rationale: Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues. On Friday, the EU ramped up some political posturing with report that said they are mulling róterminating the BREXIT deal if the UK triggers Article 16. For now, these are just threads, but with rates markets still very aggressively priced any further escalation could increase the odds of seeing repricing downside in the GBP, so one to keep on the radar after Friday. Primary Driver: 4. CFTC Analysis Rationale latest CFTC data showed a positioning change of +13594 with a net non commercial position of + 1615. Sterling have been a very impressive rebound from recent lows as market s reacted positively to recent BOE comments which sparked additional downside in SONIA futures, which are now fully priced for 15-basis point hike in Q! and about three 25-basis point hikes by end 2022. Even though GBP has enjoyed upside on the tightening expectations, the reasons why markets are pricing ia steeper rate path is out of fear of inflation and not due to a more positive economic outlook, which as we highlighted above does pose headwind for the Pound in the weeks ahead if growth of inflation data surprise lower in the weeks ahead. Have a great week! Vitez
Long
by Vitezabraham
4
More USDollar strength? #DXY + Fundamental driversHello traders! I expect more upside for the dollar both technically and fundamentally. Fundamental Bias: Weak Bullish Primary Driver: 1. The Monetary Policy outlook for the FED Rationale: More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid- 2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation. All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish. Primary Driver: 2. Real Yields Rationale: With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term. Primary Driver: 3. The global risk outlook Rationale: One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata.org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term, the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation) Primary Driver: 4. Economic Data Rationale: Economic data will be very light in the incoming week with the main highlights being PCE and Advanced GDP (old news). Also keep in mind that the Fed has largely reduced the impact of economic data going into the November FOMC meeting by already acknowledged a Nov taper and a possible mid-2022 conclusion. So, even though data will be important, it’s unlikely to sway the Fed from their tapering plans. Primary Driver: 5. CFTC Analysis Rationale: Latest CFTC data showed a positioning change of +872 with a net non-commercial position of +35934. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a key focus for the USD in the week ahead. Have a great week! Vitez
TVC:DXYLong
by Vitezabraham
Bulllish USDollar, inflation fears? + Fundamental driversHello Traders! Todays NZD CPI came a lot bigger than expected, also even Japan has Inflation impact this rise the concern of high inflation sooner rate hike. That would lift the currency. United States Dollar USD Fundamental Bias: Weak Bullish 1. The Monetary Policy outlook for the FED More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid- 2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation. All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish. 2. Real Yields With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term. 3. The global risk outlook One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata.org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term, the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation) 4. Economic Data Economic data will be very light in the incoming week with the main highlight being IHS Markit Flash PMI data. However, also keep in mind that the Fed has largely taken the sting out of economic data going into the November FOMC meeting as they have already acknowledged a November taper announcement as well as a possible mid-2022 conclusion. Thus, even though economic data will still be important, it is unlikely that incoming data will sway the Fed from their tapering plans. 5. CFTC Analysis Latest CFTC data showed a positioning change of +3036 with a net non-commercial position of +35062. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year, 6-month and 3- month look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a focus for the USD.
TVC:DXYLong
by Vitezabraham
Classical Head and Shoulders on the AUDCHF + Fundamental DriversHello traders! Heading into todays European session, risk tone is leaning risk on. Asia pacific indices are positive, measures of volatility subdued and safe havens pressured. Australian Dollar ( AUD) Fundamental bias - Neutral 1. Country's health and developments. There are 4 key drivers we are watching for Australia’s med-term outlook: The virus situation – a Q3 GDP contraction is priced in so the question now is whether restrictions can be lifted in time to see a Q4 rebound. China – the current slowdown in China is important as it’s Australia’s biggest export destination. Markets are watching to see whether the CCP and PBoC steps up with stimulus for the economy and possible support for the real estate sector. Politically, the recent defence pact between the US, UK and Australia could see retaliation from China against Australian goods. Iron Ore – as Australia’s biggest export (24%), the over 50% drop in Iron Ore from YTD highs is a negative driver for terms of trade, but the recent >70% climb in Coal prices (18% of exports) in recent weeks have offset the fall in Iron Ore. Even though China’s green initiatives weighed on Iron Ore, the current energy crunch has been a key driver of higher Coal prices. Global growth – as a favourite risk proxy, the recent fall in global case numbers and potential for a strong bounce in global activity data will be important. 2. Monetary policy outlook for the RBA At their Oct meeting the RBA kept all policy measures unchanged and confirmed market expectations that the bank will use the meeting to kick the can down the road. They reiterated prior guidance that their central scenario expects the economy to only reach appropriate conditions for higher rates by 2024. Similar comments were made about wage and price pressures, with the bank explaining that they are still subdued, and remains a key focus point for the bank. On the labour market there was positives and negatives. The negatives were a nearly 4% drop for hours worked in August (the best indicator of labour market conditions right now, according to the bank), but on the positive side they also noted that data on job vacancies have shown that companies are seeking to hire workers ahead of the expected economic reopening in October. The bank shared similar thoughts about the virus situation, stating that lockdowns are expected to see material downside to Q3 GDP but that they still expect a solid rebound as vaccination rates increase and restrictive measures are eased. Thus, incoming virus and economic data remains a key consideration for the RBA. 3. Developments surrounding the global outlook As a high-beta currency, the AUD benefited from the market's improving risk outlook coming out of the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets supported by reflation and post-recession recovery best. If expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but recent short-term jitters are a timely reminder that risk sentiment is also a very important short-term driver. 4. CFTC Analysis atest CFTC data showed a positioning change of -3596 with a net non-commercial position of -89979. As most of the AUD’s mean reversion this past week took place from Tuesday the most of it won’t reflect in current positioning data. With net-shorts for large speculators still at historical levels and leveraged funds also increasing shorts, the odds of seeing short squeezes higher is still on the cards and risk to reward for chasing the AUD lower from here remains unattractive. Swiss Franc ( CHF) Fundamental bias - Bearish 1. Developments surrounding the global risk outlook. As a safe-haven currency, the market's risk outlook is the primary driver for the CHF with Swiss economic data or SNB policy meetings rarely being very market moving. Although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall dovish disposition and preference for being behind the ECB in terms of policy decisions. The market's overall risk tone improved considerably after the pandemic as a result of the global vaccine roll out and the unprecedented amount of monetary policy accommodation and fiscal support from governments. The Delta variant and subsequent impact on growth expectations is of course a sobering reminder that risks remain. Thus, there is still a degree of uncertainty and risks to the overall risk outlook remains which could prove supportive for the safe havens like the CHF should negative factors for the global economy develop. However, on balance the overall risk outlook is still positive in the med-term and barring any major meltdowns in risk assets the bias for the CHF remains bearish in the med-term. 2. Idiosyncratic drivers for the CHF espite the negative drivers, the CHF saw some surprisingly strength from June. This divergence from the fundamental outlook didn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests. Recent research from the team has revealed an interesting correlation between the CHF and simultaneous price action in both Gold and the USD which could explain some of the recent price action. We also need to be careful of the possibility of SNB FX intervention. Apart from that, ING investment bank has recently argued that recent CHF strength could be due to the lower inflation in Switzerland compared to the EU which meant that the real trade-weighted CHF has been trading too cheap. They also expanded that the ECB’s bond buying has meant that their balance sheet is expanding more rapidly compared to that of the SNB, which could have been reasons why the SNB did not see the need for any meaningful FX intervention lately. The bottom line is that there are often plenty of idiosyncratic drivers which might or might not impact the CHF and makes short-term price fluctuations a mixed bag for the most part. 3. CFTC Analysis Latest CFTC data showed a positioning change of -4092 with a net non-commercial position of -15679. The CHF positioning continued to unwind some of its recent surprising strength over the past few weeks. The CHF is back inside net-short territory as one would expect from a currency with an overall med-term bearish outlook. Even though we expect the currency to continue weakening in the med-term, any drastic escalation in risk off tones could continue to provide support for the safe-haven currency in the short-term and is always something to keep in mind.
Long
by Vitezabraham
USDCHF Banks sell into strength.Hello Traders, We have broken an important monthly trend line this is short term bullish for the pair. Yield spread and order flow indicates the labelled levels to hold back the currency and make it move down to the year end. Short term upside. (Check out my next post.) Medium term downside. Green lines are sell limit orders. Pink areas daily Supply/Demand Black Monthly Supply/Demand. Pink Rays daily Trend lines. Black Rays Monthly Trend lines. Have a great week!
Short
by Vitezabraham