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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 26 February 2018 at 2:46 GMT

Macro Monday: All eyes on the Fed's Powell — #SaxoStrats

Global Macro Strategist / Saxo Bank Group - Singapore Hub
Singapore

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  • Powell’s Testimony is the key event his first since being named Fed Chair.
  • Questions over whether this will be a continuation of Yellen - and guidance on hikes
  • Three new tactical trading positions on gold, the Kiwi and GBPJPY

By Kay Van Petersen

Summary of the prior week

  • End of CNY: China came back in with a decent +2.6% on the CSI 300 over just Thursday and Friday
  • Minutes: The Federal Reserve: - it was a hawkish theme, more constructive on growth and concerns around fiscal stimulus. RBA – not buying inflation risks. ECB – more hawkish than expected  
  • Flash PMIs: Miss across Europe on manufacturing and services against plenty of beats across both in the US 
  • Eurozone: mfg 58.5a 59.2e, serv. 56.7a 57.7e 
  • US: mfg. 55.9a 55.4e, serv. 55.9a 53.8e 
  • Inflation:  EZ Headline in at 1.3%, Core 1.0% all in-line.  CA cpi m/m +0.7%a +0.4%e -0.4%p.  JP national Core cpi 0.9%a 0.8%e 0.9%p. 
  • FI: Outperformance on bunds against US Treasuries. 
  • FX: DXY bounces back +0.9% post -1.5% retraction 2wks back. Big move seen on SEK +2.6% 
  • Commodities: Mixed – a great week for energy, cotton, iron ore and soybeans…less so for gold and silver. 
  • Equities: Up in the US & Asia, mixed across Europe 
  • Volatility: Starting to get back to more sustainable territory with the VIX at 16.49, -13.80% for the week and over 2/3 lower from the 50.0 highs (6 February 18)

Summary of week ahead

  • Key Focus: Powell Congressional Testimony and end of month, plus manufacturing, ISM and final PMIs 
  • Central banks (SGT): BoK +1.50% e/p (27) Ukraine 16.00% e/p (1) 
  • Fed speakers (SGT): Bullard (26) Bullard (26) Quarles (27) Powell (27/1) 
  • Other (SGT): Draghi (26) Weidmann (27) Carney (2) UK’s May speech (2) 
  • Economic side: US: Core Durable Goods, Wholesale Inventories, Rich Mfg. index, 2nd 4QGDP 2.5%e 2.6%p, Chicago PMI, Personal Spending, Income, ISM mfg 59.0e 59.1p, UoM CH: Mfg. 51.4e 51.3p, serv. 55.3, Caixin Mfg. 51.3e 51.5p EZ: Private loans, Final mfg 58.5e/p, PPI, Flash CPIs headline 1.2%e Core 1.0%e JP: RS, Capital Spending, Jobs data UK: mfg. 55.1e 55.3p, money supply, construction PMI 50.5e 50.2p NZ: TB, visitor arrivals, ANZ biz conf. AU: Private Capital expenditure, Private Sector Credit

COT report

  • FX: Largely unchanged USD positioning, with large short USD exposure. EUR and MXN are the biggest long positions against it. EUR close to 85% of one-year highs. JPY surprising the most shorted and positioning only fractionally changed from previous week despite JPY strength.
  • Commodities: Long commodities remains overall the speculative theme. Some reduction in longs in Energy space, WTI still at 90% of one year. Gold buyers returned. Big copper build in positioning. Cocoa and Soybean remain at their year highs in terms of long positioning.

Thoughts on market positioning and sentiment

  • Regime Change: Lower equity volatility should be constructive for continued bounce, this is key delta today from say 6-12 months ago. That is, 2017, post any volatility spike, we’d be back to 10-12 levels on the VIX in a matter of days. This time around we are around  three eeeks and still at 16.49 Delta is much higher yields, plus high probability of higher rates – key issue is Fed spooking the markets.
  • China: Potential moves to technically remove maximum two-year terms in constitution, allowing Xi to serve for beyond his 2023 term – should not be a surprised, well flagged by Andrew Bresler’s China Macro Monthly. Catch the latest piece here, - "Risk of trade wars in the rise".
  • March 4, Germany: Successful new coalition should clear up further upside for EURUSD bulls 1.2295 and Bunds Bears 0.653% (note we’ve had a very big reversal of -10bp on bunds in just two days). Recent polls seem to show that there will be support for a grand coalition, yet far from a sure thing. 
  • Lack of a grand coalition could see the EUR break 1.2200 and gun for 1.2000…. Bunds are already pricing some election risk… but could still do 10-15bp to 50-55bp.
  • March 4, Italian elections: Markets seems very complacent here, remember the focus last year on French elections, Italian referendum, German elections, etc. Something to keep in mind – just because it is the consensus does not make it wrong, key issue around Italy… is the view that Italy needs the EUR and Europe more than the other way around.
  • New Fed Chair Powell’s Testimony: Key event, surpassing the above two – will be Powell’s first key public address after being names Fed Chair. This congressional testimony will focus of the state of the US economy, note last FOMC minutes showed three dots (hikes) for 2018 and 2019, yet also had a hawkish tone (plus a touch stale as they missed latest consecutive beat on inflation – last rise on CORE CPI being largest since 2005 - as well as beats on average hourly earnings) .
  • Question is, how much will be a continuation of Yellen and/or how much will there be new guidance on increasing the number of hikes this or next year – i.e. currently they have only indicated six hikes between now and the end of 2019. If you look at the Jan 2020 Fed Fund Futures (97.185), the market is currently pricing in a little over four hikes. Jan 2019 FFF (97.885) is almost fully pricing in the 3 hikes for 2018. 

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 New Fed chair Jerome Powell has some big boots to fill and plenty of questions to answer. Photo: Flickr


Technical outlook (James Kim)

  • DXY: prices break above December-February downtrend, supported above a double bottom. Thursday and Friday price action looks to exhaust. Need break of 90.45 to extend further, this is key level for this week. Target 92.20, which is 2017 downtrend.
  • EUR: Finds support at the Dec-Jan trendline, this week’s support at 1.2237.
  • EURNZD: can explore fading gains at 1.6950 target 1.6515
  • EURJPY: good potential short trade, breaks 200 DMA last week. Extremely weak technical, stop 133.5 target 128, with entry at market.
  • AUDJPY: New 2017 lows last week. Sell the rally to 84.20-84.43, stops above this above 85 targeting 82.
  • AUDUSD: Target at 0.79 with support on 200 DMA.
  • USDJPY: positive idea for last week was good, neutral this week after achieving targets last week. Sell rallies on the pair as the long term trendline has broken.
  • S&P: Positive on the near term to 2795 as the target.
  • DAX: 12,748, key level to sell rallies. Technical picture looks weak as it has broken below its long term trendline. Downside targets are at 11,500
  • ASX 200: earning season pushes the market higher, above 6000 level. Now runs into resistance level.
  • XAU: Short trade hits the Dec-Feb trendline. If this trendline breaks opens up 1302 as the next strong support, and buy level for gold.
Global Macro Book (KVP)

  • Ran head first into our very tight stop on the long US Treasuries versus short bunds spread 
  • DollarYen short, we hit our first 106 target two weeks back… have adjusted stop to initial entry level… i.e. any reversal back over 108.50 signals potential change in bearishness
  • Have added three new trading positions: 1. Additional tactical long AussieKiwi playing potential pop, 2. short outright gold and 3. long GBPJPY – all primarily driven by technical & expected further risk-on to sideways trading market (i.e. lower volatility)
  • Think we’ve based on our AussieKiwi & feel we could have a good wk on that… feel there is an easy 100-150pips on the trade… hence the near-term bolt-on trade…
  • Really want to be short Fed Fund Futures & EuroDollar futures… need another risk-off opportunity… ie they run hard. Feel we will get it…
  • Noticed that BRL has lagged the emerging market forex rallies that we have seen over the previous one to two weeks
  • Thinking at some point could be looking at some long-dated 6-12 puts on AMZN as a general hedge against future equity repricing/correction. Amazon & Netflix are up around 30% & 50% YTD.

xxx
 

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A replay of the call is available here


– Edited by Adam Courtenay


Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats or @KVP_Macro. Please join us live for next Monday's Macro Call at 0830 [Singapore/Hong Kong], 0930 [Tokyo], 1130 [Sydney].

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