The Trade Week Ahead – DXY Me This Fed

Happy New Year all, it certainly has started with a bang: an FX flash crash, a US government shutdown getting ‘canorous’, Brexit going nowhere, and China being fingered as the cause of a demand collapse. Summary: volatility is king.

Events of the week to watch:

• FOMC minutes: This might be a little less influential after Chairman Powell’s remarks late last week but still key to most FX trades. He stated that the committee could be “patient” now because of “muted” inflation, and that monetary policy “is very much about risk management”. What he meant by ‘risk management’ was FOMC’s adjustment course in 2016 which was cautious to a point of being dovish. This will be a long-term impactor on the DXY trade (see below)

• Australia’s trade balance: The shining light of 2018, better than expected trade balanced and higher than forecasted ‘value’ takes was one of the main reasons Australia’s GDP remained above expectations even with the disappointing Q3 read. The November trade balance however is likely to be hit by the oil crash and a China story that was starting to show sign of ‘wobbling’.

• Central Bankers: Mark Carney (BoE), Stephen Poloz (BoC) and 6 different FOMC members are all due to speak this week with varying agendas. Carney will be interesting as he has weighed into Brexit issues in the past; considering there is 14 days to the final vote there is a good chance he will talk – GBP will move off his comments.

Trades to watch:

• DXY: End of last year I turned short on DXY. DXY monstered everything in 2018, however the events of the past week confirm my DXY call. We now have a ‘patient’ Fed – meaning it is likely to push pause on its rate hike cycle for at least the next 6 months to monitor the effects of its tightening cycle. Couple that with the forward-looking ISM data from the past week and ‘data dependent’ Fed really doesn’t have a reason to hike harder.

• JPY: We shouldn’t ignore last week’s “flash crash”. Yes, we should ignore the wild swings during a crash, it’s the settling post the event that needs attention. USD/JPY settled over 1% below its pre-crash level that is a telling outcome. Now, liquidity issues likely played a role, but the underlying mover was fundamental and stems from the issues facing DXY – US manufacturing data was weak, volatile equity markets and a Fed in pause mode – this all equals ‘risk’ and thus flights to safety aka JPY. The market therefore is likely to go through an adjustment period to the new data set ups – it will be bumpy and uncoordinated.

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