Opening a trade in USD/JPY after a jump up in the pair over the past week or so that is creating an entry point. The outlook from the Federal Reserve around rates is putting real pressure on the USD with the market is pricing in 4 rate cuts from the Federal Reserve by June 2020 and a 65% chance the first cut will come this month.
The US outlook is also worrying from a currency perspective as corporate earnings are starting to disappoint, forward indicators such as the Empire State PMI, Jobs claims and Building Surveys are beginning to slide. Risk off flows look likely and flows to safety are growing.
Market currently pricing a 25-basis point cut at Tuesday’s RBA meeting at 78%. The market has completely priced in a further 50 basis points out of the cash rate by December 2019.
However, the flow in the pair is heavily skewed to the USD side and the likely unwinding of USD longs over the coming month with the Federal Reserve in play puts upside into the pair. The RBA governor Philip Lowe highlighted this exact point last week stating that if all central banks are looking to stimulus simultaneously those smaller players (Australia) will not see the economic benefit of a lower currency.
Risk for the trade: Iron ore prices falling back below US$100 a tonne, trade wars intensify.
Trade Idea: Sell USD/CAD
Enter: above $1.32, Stop: $1.338, Target $1.291
Pair should trade lower over the coming months as Canadian economics remains robust even in the face of a slowing global market while the US is slowing. Governor Poloz should be happy core inflation came in above expectations at the recent release and that should see the Bank of Canada on hold for the coming period. Couple this with Canadian corporate earnings which are holding the line – CAD looks attractive.
We also expect the unwinding of USD long positions to drive this position lower.
Risk to the trade: negative outcomes from G20, collapse of oil below $50 a barrel.