To help me better understand, maybe taking an example of the recent price action would help?
It looks like E/U was waiting for some sort of catalyst to break the range it was in since last week.
Am I right to believe the catalyst was the LTRO repayment news? I think but I’m not sure that some were buying on the bottom of the range all week in expectation that the announcement would be bullish for the Euro while others were selling on the expectation that the strong resistance would hold while hoping for some bad Euro news or something. So when the range held and no new low for the week could be made after the bad French PMI and then the losses were reversed on the good German PMI, I though the bears had nothing left to fight for and would soon throw in the towel as we were getting closer to the Friday announcement. I think it was a good trade to buy after the German PMI news what do you think?
For U/Y though, I thought it would fall some more and then range for a while up until we start to hear rumours of the next BOJ governor and what he plans to do… ’cause like you said the easing announced this week will only start next year and that is a long way. I was very surprised to see it rise like that and all I could find was this “Deputy Economy Minister Yasutoshi Nishimura said yesterday the currency’s decline isn’t over and a level of 100 versus the U.S. dollar wouldn’t be a concern”
Maybe the market is starting to expect a more hawkish FED soon? That would explain why the dollar is rising against all other currencies including gold (except the Euro) even in a risk-on environment like the one we have now?
So the market would be thinking that the FED is in fact closer to a start a tightening cycle than other central banks are? They certainly are closer than the BOJ who just announced more QE to start in 2014, than the BOE that just printed negative GDP and where King was happy to talk down the pound, more than BOC after last week speech by Carney, more than the RBA which is already in an easing cycle…. But then again, I wonder if it’s not too early? Ummm
The EUR was waiting for a catalyst, as a lot of my currency files showed that the downside tripping of stops were being bought up. The LTRO was one catalyst, as if they repay it, then that is sort of like tightening monetary policy. There were other catalysts such as better economic data out of Germany. Everyone over the past few weeks has been talking about how the crisis has been averted, and now they can focus back on growth. Yields for the periphery countries have come down over the past few weeks further reinforcing perceptions that the crisis is over. Risk appetite is rampant and that should result in EUR/USD going higher as more people unwind their risk aversion trades. Other than that, the juicy stops were to the topside. There wasn’t a good macro reason to short EUR on the lows of the range. There also wasn’t a good reason to sell EUR on the top of the range if you expected the path of least resistance to be higher, for topside stops to be tripped and for there to be a sent/psych shift higher. Also there were a lot of cross flows from EUR/GBP and EUR/CAD going higher. If the cross pairs are surging higher, that can help prop up EUR/USD and cause it to move higher.
Although I am questioning how much further the EUR strength can go. I think the Fed will continue to reiterate their QE pledge, so that could have further upside for the EUR/USD, but I don’t know how much further it can run.
I thought there would be more profit taking in USD/JPY, but I was wrong.
The profit taking finished and the macro buyers returned. From a JPY weakness catalyst there wasn’t anything specific. Although there have been plenty of officials reiterating that the JPY at 100 would be fine, so that could act like a magnet where the market may want to push USD/JPY to 100.00 before taking profit on it.
But there are more elements to USD/JPY besides JPY specific news. Risk appetite increased from both better US growth, debt ceiling deal and easing EZ tensions, which results in natural USD/JPY buyers. Also economic data out of the US has been better, which leads to more people buying USD/JPY as the new scenario of stronger US growth comes into play where that can lead to less FED QE, etc. Falling U.S. treasury prices, lead to higher bond yields, which can lead to more USD/JPY buyers as people sell JPY to buy USD so they can buy the higher yielding US bonds.
Although I do expect the Fed to reiterate their QE stance which could cause some profit taking, I am not about to short USD/JPY in really big size when the only scenario I have to bet on is profit taking overwhelming the macro buyers. I tried shorting USD/JPY at 90.50 with small size after the barrier was broken. I gave the trade many hours, but it didn’t do anything, so I got out at breakeven.
There are just too many bullish scenarios in play:
- Potential for more BoJ / gov action
- USD/JPY at 100.00 acting like a magnet
- Increasing risk appetite
- Increasing US growth
- Higher bond yields
This goes more into the global macro analysis section where I talk about how you want to chain the scenarios together. When one scenario is fully priced in, you look to see what new scenario can generate order flow to move the market. Or what scenarios combined together can move the market. There were new scenarios in USD/JPY that injected fresh upside momentum. Or there was an intensification of a scenario that injected fresh upward momentum. Intensification such as stronger perceived US growth and even more risk appetite.
The GBP is dropping because UK growth is sluggish and the BoE likes to talk down the pound and there is potential for Carney to come in with Fed style dovish interest rate guidance where he promises low rates for years or some other program to weaken the GBP. Also the market doesn’t know how the prospect of UK exit from the EU will effect growth.
The AUD is dropping and the topside is capped because the RBA may cut rates and the AUD/USD is very high at 1.05 and it is causing pain to the AUS economy the high AUD is causing growth in Australia to be sluggish. The higher a currency goes and if it stays there for a really long time, it acts like an interest rate hike. Thus the high AUD is dampening the growth in Australia. Also, the cross flows in EUR/AUD surging is causing AUD to be weak.
Gold is dropping because there is no potential for capital appreciation in gold. If you own gold, you don’t get any interest. In some cases, owning physical gold costs you -0.50% a year or something. You are hoping for capital appreciation. If you own stocks, you have exposure to a growing economy, bigger corporate profits, and bigger dividends, etc. If you own gold, in the current market moment, there isn’t potential for capital appreciation. Massive more FED QE is not going to happen, the Fed may end QE early, inflation is still tame, there are no safe haven flows, the USD is not falling off a cliff. So there is no reason to own gold. Gold can rise or fall during periods of risk appetite. It just depends on what is going on. As always the daily habits and market sensitivity can pick up on it. Like when I posted in December that Gold wasn’t acting right.
Eventually the market participants start thinking and wondering, why are we owning billions worth of Gold, taking on the risk of 5-20% decline, when they could just buy stocks and make 10-20% a year? So there is a money rotation where people selling Gold and buying equities. Unless something changes in the macro situation Gold topside is capped with macro sellers.