The Most Important Trade to Get Right This Fall - Sept 26Submitted by Polar Futures Group on September 26th, 2016
If you only get one trade right for the rest of the year it needs to be the USD. If you get that trade right, your positions across asset classes have a much better chance of being right as well.
Since the turn of the year the USD has largely been weakening as the likelihood of further interest rate increases in the US diminish. However since the beginning of May the USD has managed to gather strength, putting in continuously higher lows. Over the last 5 months the USD has been getting into a tighter wedge position that will provide a breakout opportunity in the coming weeks or months as shown on the daily chart below.
Why is this one trade so important?
Because the broad USD downtrend (red line) is supporting so many other markets! If you can determine which way the USD will break out you will have tremendous opportunities at catching significant trends across markets. The following charts show how the general weakness of the USD has helped many different assets climb through the start of the year.
The Japanese Yen has been rising since the start of the year, but is wedging itself over the past 3 ½ months. The Japanese Yen has rallied ever since the BoJ decided to go to negative rates. Has the latest move to “control the yield curve” given the Yen its last surge higher?
The EUR has also been moving higher from the start of the year and wedging over the past 5 months while the ongoing banking crisis deepens.
The Canadian dollar surged after a Bank of Canada hold on interest rates in January along with a strong rebound in oil prices. However CAD has continued to wane as oil prices don’t seem to be able to hold above $50. The domestic economic data in Canada has also hit a soft patch which has tilted the stance at the Bank of Canada towards “lower for longer” on rates and growth removing some CAD support.
The Australian dollar has seen a strong move higher this year on the back of commodity prices, but after a couple of interest rate cuts it seems to be running out of steam. As with the Canadian dollar it remains very susceptible to a reversal in commodity prices.
The amount of uncertainty in the markets this year has been a boon for the gold market as speculators have loaded up on the yellow metal in record amounts (futures and ETF’s).
After prices started to plummet in July 2014 oil put in a solid double bottom at the start of the year. A dramatic reduction in the amount of active drilling rigs and slowing US production had many looking to the “cheap” oil markets as a source of good returns as prices bounced. However continued oversupply and increasing global production has stalled the recovery.
With much choppier price action throughout the year copper has maintained a slight upward bias, but hasn’t been able to must much as demand from China remains sluggish.
The oil market sell off and global worries had stocks frightened to start the year, but as oil prices recovered, so have stock prices. After hitting fresh all time high’s this summer stocks haven’t been able to maintain any upward momentum.
But is the treasury market giving us some warning about what is to come?
The US 10 year hit a low yield of 1.3579% in July and has since been moving higher. Note prices have broken down through their uptrend from the start of the year as yields have moved back higher.
The same action that we have seen in the 10yr is also reflected in the US long bond as it convincingly broke through its uptrend.
The broadly weaker USD year to date has been a supportive factor across asset classes. Going forward getting the direction of the USD right can provide a great opportunity for medium term positioning. If we look to the US treasury market for a hint of what's to come you could start positioning for a stronger USD or ready yourself for a break when it happens. Looking back over a longer period at the trend lines of the first USD chart we can see that a breakout in either direction provides the scope for a sizeable move.
Given that my longer term view is that we are still in a multi year USD bullish move I have used the wedging patterns over the past few months to get on the short side of commodities, commodity currencies and US treasury notes. These positions are currently smaller than full positioning as I will be looking for a break of the established trends to be adding to my positions. Or, if the USD goes the other way, I will be looking to get out of my positions and reassess my USD view. I believe there will be great opportunities to capture a shift in trends across many asset classes.