Here are my macro thoughts regarding the situation as of June 18, 2013:
I expect continued weakness in the AUD and NZD, as their central banks want the currency to go lower and can be willing to use monetary policy to achieve their goals. The Reserve Bank of Australia (RBA) would probably like the AUD to fall another 300-500 pips or so.
The Reserve Bank of New Zealand (RBNZ) is threatening interest rate cuts and/or currency intervention if the NZD rises in value, so that gives a reduced risk trade to short NZD/USD, assuming that no bad data is going to come out of the US. Since if the NZD/USD rises, then the RBNZ may intervene and sell the NZD, or they can cut interest rates, thus capping any upside NZD/USD potential. And if the US continues to grow fairly decent, the Fed will continue on a gradual course of reducing QE, which will also add to the case for the market participants not to bid up NZD/USD too much. Other factors that could cause the NZD or the AUD to rise, is if there is a sudden rise in China or Australian growth above and beyond the norm.
As for the CAD, I do think it can get slightly weaker, but since there is no monetary activism from the Bank of Canada, I don’t expect the CAD to drop as much as the AUD or the NZD. The RBA and the RBNZ are actually conducting some form of policy to weaken their currencies, but the Bank of Canada still maintained the very slight hawkish bias. Thus I don’t expect the CAD to depreciate as much as the AUD or the NZD.
As for the EUR and the GBP, they have had a surprising rally against the USD. Both EUR/USD and GBP/USD have grinded higher and I have been attempting to fade the topside stops in EUR/USD lately, but the market doesn’t seem to want to fall that much. The EUR shrugged off some partial bearish comments today from Draghi where he said they use interest rate policy, non-standard measures if necessary. So since the EUR/USD is shrugging off the bearish EUR comments, that is the bullish case. But the bearish case would be that the market is over extended to the bullish side and the potential of decent US data and the gradual Fed taper of QE to cap the EUR/USD topside. I have been believing the bearish scenario so I have been attempting to fade the topside stops. But the market doesn’t seem to budge, so I will re evaluate the situation after the FOMC statement tomorrow.
For the GBP, it is in a similar path to the EUR. Gradual mysterious grind higher in the GBP/USD. I don’t see any game changing catalysts coming from UK, unless the incoming new BoE Governor Mark Carney announced some new policy shift.
The most interesting situation I see is setting up with the stock markets of the world in the form of the S&P, Nikkei, and the USD/JPY pairs. You had the S&P sell off a bit on profit taking over the past month. The Nikkei has fallen much further than the S&P, because it was also up a lot more and because the JPY depreciation was helping to fuel the Japanese stock boom. So the Nikkei is the “high beta” stock market. For every 1% that the S&P moves, the Nikkei can move anywhere from 2-4% or so in a single day.
I feel it is an interesting situation because the Nikkei and the USD/JPY have corrected a fairly substantial amount. The Nikkei was down 23% from the highs, and USD/JPY was down 1,000 pips off the highs. And if the uptrend is truly intact, and if Abenomics is going to work, then I would expect the resumption of the uptrend in both the Nikkei and the USD/JPY. I feel very paranoid about shorting USD/JPY @ 94.00 in this environment after it has already dropped 1,000 pips. The reason being that if the Japanese authorities are truly serious about continuing their reflation experiment and giving it a chance at working out, they may use some form of verbal intervention or institute new policies to cause the Nikkei and the USD/JPY to rise again. I remember reading comments in February 2013 in the year about how one Japanese official Amari said he wanted the Nikkei to hit 13,000, by the end of March 2013. The Nikkei hit 13,000 in April. So I would expect the Nikkei and the USD/JPY to be sold out a bit and expect a resumption of the uptrend, especially considering that the excessively long market positioning in the Nikkei and USD/JPY have been pared back a bit.
There was a really big upside breakout in the USD/JPY and the Nikkei last year, backed by some bold policies out of Japan, and I would expect that such policies would cause the uptrends in the Nikkei and USD/JPY to continue for longer. I find it unlikely that they would just abandon such bold policies and cause a reversal of those trends.
Also, my daily habits are showing that the S&P is getting more and more comfortable being supported and rising, even if the face of the expected QE taper later in the year. One of the reasons stocks fell was because they were partially overbought (excessive positioning), and because the market was uncertain about how the Fed taper would effect the economy. So the S&P dropped on macro sellers from the fears of the tapering of QE, but that huge macro selling seems to have subsided a bit. And if that macro selling and profit taking subsides, then the market can continue to move higher.
Part of the reason USD/JPY declined was because of the risk aversion caused by the expected Fed taper, which was a bit weird because if the Fed tapers QE, that should cause USD/JPY to go up because that means the Fed is closer to winding down their QE program! But the USD/JPY went down regardless because of the risk aversion, and because of the excessively long USD/JPY positioning. But if that excessive positioning has been corrected, and if the risk aversion has subsided, I would expect a resumption of the USD/JPY uptrend.
That being said, I am torn between two different scenarios. Firstly the resumption of the uptrend in the S&P, Nikkei and the USD/JPY, that I have talked about above. And the second scenario being that the market may continue to chop around for a bit during the summer months, before resuming the uptrend later on in the year. I fear that the market may chop around a bit, make a few false breakouts and trip stops both to the upside and the downside in the Nikkei and USD/JPY for a few months before potentially hammering out a bottom. I could see USD/JPY wanted to test the 92.00 – 90.00 level first and see the Nikkei make a few stabs lower during the summer months before bottoming out.
The only reason to sell the Nikkei or the USD/JPY at this level is if you believe that Abenomics will fail and if you believe they will reverse their policies. Abenomics may fail, but if it does, the market probably won’t know that for at least a few more months, so in the meantime, the trend can continue as they stick with their monetary easing policies.
Also, the Japanese stock market has been one of the hottest stock markets in a long time. It brought back visions of the dot com boom to many people. There are all sorts of retail players in Japan who pumped money into their stock market. Tens of thousands of Japanese are signing up for stock lessons. After all it had risen a whopping 80% in just eight months! People don’t forget that easily. Even in the current Nikkei correction, if the market can start rising again, there will be all sorts of money going to pile back into the market and it can go parabolic again.
So those are the two scenarios that I am conflicted with and attempting to find an answer to. Until I feel convinced, I am just sticking with mostly short term tactical trades in the currency and futures markets. Short term tactical trades meaning, attempting to capture the intraday and ODVE movements and only holding trades for less than one day, until I can gain clarity on the next MDMM or GM movement.
If any of you guys can pick good stocks, there are many opportunities to find good long trades in the stock market, since this is still a bullish macro environment, and even if the S&P stays steady in a choppy range, there will always be stocks that stage big upside MDMM and GM movements, if you can find them.
As for Bonds and Gold. I would expect continued downward pressure in the Gold market. If the US economy continues to recover gradually, and more money pours into stocks, people will continue to sell Gold. The Fed is going to gradually taper, and inflation is still well contained in both the US, Europe, Australia, Japan, etc as some key commodity prices are well contained or have fallen in value. Therefore, it is just a matter of time before Gold breaks through the $1,300 level. I don’t see anything that can save it, unless the US recovery falters and the Fed decides to ramp up QE.
Bonds are in a similar situation to Gold. The upside in bonds is very limited if the Fed continued the gradual taper and the US economy performs decent, and if there are no risk aversion events from the EZ or another part of the world. So I would expect a gradual sell off in the bond market. The market is kind of sold out a bit where it is, and it is looking for fresh catalysts to make new lows, and the Fed with its QE is still propping up the market, so the sell off should only be gradual and not violent. The Fed is out there buying up $1-2 billion of bonds per day, so that is propping up the market. And if the Fed is going to taper QE, it will most likely reduce the purchases of MBS first, and then after all the MBS purchases are cut to zero, then it will begin to taper the purchases of US Treasuries.
These were my thoughts. I hope you enjoyed them and let me know your comments.