Article / 29 August 2016 at 3:03 GMT

Macro Monday: Are the USD and US rates at an inflection point?

Global Macro Strategist [Asia based] / Saxo Bank
  • We are at the inflection points of tactically higher moves in the USD and US rates
  • Friday’s price action suggests the market was expecting a more dovish Yellen
  • Key risk is this Friday’s US nonfarm payrolls number

By Kay Van-Petersen

Welcome to Macro Monday, your cross-asset weekly call on global markets.

For week 35 we take a look at the following:

  • We are at the inflection points of tactically higher moves in the USD and US rates that could potentially run for the next one to four months
  • Friday’s price action post Jackson Hole suggests that the market was expecting a more dovish Yellen. Janet Yellen’s speech focused on the pre/post GFC toolkit of the Fed. She spent very little time on current monetary policy but what she did touch on was constructive
  • Interestingly enough, the COT report also showed a very big reduction: down 36% in USD net-longs. So this inflection point is happening when the market does not have a big long USD bias
  • Key risk is obviously this Friday’s US nonfarm payrolls, an abysmal number similar to the May NFP would unravel this potential inflection point. Why not wait until the NFP fig? That was the original plan in reversing our previous tactical bearish take on the dollar, but we could potentially move a lot more between now and Friday
  • We also chat on one or two hikes this year? Could the move be in September?

Thoughts on near-term tactical positioning:

  • FX: Prefer USD longs vs. EUR, GBP, CHF, JPY (yes I am actually reversing my uber bearishness on USDJPY – with the Bank of Japan and Fed falling at the same time, risk is now to the upside and it’s a contrarian view). Renewed focus on EM FX with CNY coming back into the headlines, i.e. similar echoes to last year, they devalued before the Fed hike, etc.
  • Equities: Shorts in EM, best through year-end puts on EEM, MSCI EM, Brazil, Kospi as well as European Indices DAX and FTSE MIB. Think US equities outperform, Fed hike is positive – shows the US slowly getting back to normalisation
  • Commodities: Pullbacks gold (From 1326 to 1310/1290), silver etc., metals and in particular copper and iron ore
  • Fixed interest: Bias short in US treasuries, look to potentially reverse position on day of hike. 2s still holding up well. Think 10s could go from current 1.62 to 1.75/80 easily. 2s from 0.84 to 0.95. 5s from 1.24 to 1.40 (Obviously global risk-on/off is dampening factor here)
  • A few themes for DD: Long Italian/bunds spreads? Long US/AU 10-year spreads? Longs Icelandic bonds?
  • Volatilities: Long vol trades in general are interesting (esp. FX). Straddles/strangles/directional – vol is low, especially in the euro and Eurozone given event risk. VIX calls also interesting (trade them), downside protection still cheap

 Markets will be closely watching this Friday's nonfarm payrolls number. Photo: iStock

COT Report highlights

  • FX: Again on GBP, new record short levels – note the majority of this positioning would have been centred on the Bank of England, a hawkish Fed is icing on the cake. Big reduction in net long USD position from $11bn to $7bn. Saw increases in AUD and JPY longs and decreases in EUR and MXN shorts.
  • Commodities: Overall big return into commodities by hedge funds, especially in the energy sector and the grains – with the latter being a complete reversal in positioning (from minus 103K lots to up 837k lots). New record high in sugar and NY Harbor (ULSD). The price of natural gas jumped up 11% last week, with a 50% increase in net longs. WTI saw a similar increase in net longs as shorts continued to capitulate. Soybean oil, feeder cattle, cocoa and coffee continued to see increased net long positioning of +95%, +53%, +38% & +29%.
  • Economy: US NFP on Friday will take centre stage, but Thursday's PMIs and ISM are also key. 
  • Central banks: BoK minutes (30), BZ 14.25%e 14.25%p
  • Speakers: Rosengren (31), Kashkari (31), Mester (1), Lacker (1)
  • Other: Note, it's a UK bank holiday today (LSE closed). September 5 is US Labour Day, long US weekend ahead. 

  • JK on the charts running through a number of names across the different asset classes.
  • ET on the ‘Chart of the Week’, reiterating the oil short from the previous week and putting out a new technical short view on copper. A potentially stronger USD and hiking Fed should be supportive of these technical shorts.
Technical picture

  • USD: DXY to test 200 DMA
  • EUR: looks set for fall, support at 50% 1.1138 followed by the 200DMA
  • GBP: work within the trend lines, momentum skewed lower, expect to trade to 1.30 handle this week
  • CHF: bottom formation complete, looks set to trade higher
  • NZD: closes on its knees, rally may be exhausted
  • AUD: three consecutive weekly weak close. First supported over the weak, 0.7500 may be on track for more downside support 0.73866
  • USDJPY: above its 50% retracement, looks to test trend line at 104 this week and could fail
  • Nikkei: to enjoy broad rally, resistance just below 17,000 look for a test of this but expect strong resistance here. 16500 first level of support
  • Hang Seng: Keeps marching higher
  • S&P: weekly close may be indicating it may move lower, look to sell rallies. 2185 key resistance and stops should be above that level
  • ASX looks exhausted, should roll lower, has a lower swing high expect ASX to follow S&P. First support 5450
  • Crude: Could be supported this week. 46.77 support, below that expect 45.32
  • Copper: flirting at a key level above long-term trend, not bullish due to declining momentum. Daily charts indicate something big is brewing for lower move
  • Gold: Continue negative bias after breaking below triangle formation. Weak close for the week add credence to this. 1292 big support
  • 10-year Treasury: Weekly chart shows break lower in prices and may indicate a move towards 129-16. Similar story in 5 and 2 years
Here is this morning’s recording of this Week’s Macro Monday Call.

– Edited by Gayle Bryant

Kay Van-Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter on @SaxoStrats, @KVP_Macro. Please join us live again next Monday at: 0830 [SG/HK], 0930 [TOK], 1030 [SYD].


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