Trading Desk Notes - June 9thSubmitted by Polar Futures Group on June 11th, 2018
May 29/30 was a Key Turn Date for Market Psychology...a date when the Euro currency “bounced back” after looking into the black hole of an Italian inspired existential crisis...a date when prices of a number of different markets registered sharp reversals as contagion fears surged and then subsided. Key Turn Dates are especially important because they mark a “point in time” when there has been a powerful reversal in Market Psychology.
Since that Key Turn Date EURUSD is up ~2.5%, USDX is down ~2%, the S+P is up ~3.5% at 3 month highs, the US long bond is down ~2% while gold and CAD are about unchanged. The mood is cautiously "risk on" and there are several good reasons for that caution:
- The stealth strength in the US Dollar continues to show up in emerging markets around the world. The currencies of virtually every country south of the Rio Grande are weakening...the Mexican Peso has fallen 12% in 2 months, Brazil is down 20% since the end of January, Argentina is down >30%, and Venezuela...well who knows? The central bank chiefs of both India and Indonesia have asked the Federal Reserve to slow down the pace of monetary tightening as their currencies have each fallen ~8% since January.
- Trade tensions are growing as Trump steps up his game. NAFTA looks to be dead in the water and tariffs are due to be imposed on China mid-June. The bullish case is that Trump is just “negotiating”...the “in denial” case is that he’s just getting started. The USA has had a massive and growing trade deficit with the Rest of the World for years especially Asia (mainly China, Japan and Korea) and Europe (mainly Germany.) Trump sees the USA as the country that has suffered the most from protectionist measures around the world and therefore he has nothing to lose and everything to gain by disrupting the current order
- The Italian existential crisis blew over but could be back in a heartbeat. From the 1960’s until the introduction of the common currency Italy and the other Club Med countries were able to compete with Germany and maintain a “lifestyle” by devaluing their currencies. The “shock absorber” that currency devaluation provided is no longer available so the “shocks” show up in a different way...high unemployment, for instance, or populist governments. If markets begin to believe that Italy will try to “re-negotiate” in any way with Brussels then contagion fears will ripple across markets.
- The Federal Reserve meets next week and seems determined to stay the course...increasing interest rates and shrinking their balance sheet while US government deficits get bigger...which likely leads to higher US interest rates and a higher US Dollar.
- The ECB meets next week and may initiate plans to end their QE program. Who buys Italian bonds (or any European bonds for that matter) if the ECB doesn’t have their back?
My short term trading: I started the week long Euro and British Pounds, short WTI and took profits on those positions. I’m flat at the end of the week but I’ll be looking for opportunities to buy the USD. My view is that the USDX rally from mid-April to late May is just going through a correction now. If the USDX breaks above 95 (where it topped out in November 2017 and May 2018) I could see it accelerating higher. I think the USD strength against EM currencies is a canary-in-the-coal-mine.
Canada: The Bank of Canada is likely to raise s/t interest rates by ¼% at their July meeting but will “fall behind” the Fed as they keep raising rates into 2019.
What I really think: Interest rates have been way too low for way too long and that’s changing...led by the Federal Reserve. Rising interest rates are going to have a profound impact on investment decisions that were made on the assumption that interest rates were going to stay low for a long time. I think this “disruption” will produce dramatic price changes across markets and major profit opportunities!