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 / 05 March 2018 at 2:05 GMT

Macro Monday: Inflation, the only winner in a trade war — #SaxoStrats

Global Macro Strategist / Saxo Bank Group - Singapore Hub
  • Central banks will give forex traders plenty to consider this week
  • The agreement to form a grand coalition in Germany has given the euro a lift
  • The poll in Italy, the third-largest Eurozone economy, could impact the euro, too
  • Any trade war would drive up costs globally, sparking off a bout of inflation
  • Trump's tariffs could prove to be an own goal that hurts the US economy

By Kay Van-Petersen

Summary of the prior week

  • Powell: Very constructive on the US and global economy, calm and collected. KVP’s perspective is that no doubt this is a Federal Reserve that is going to want to hike higher and further. Powell is seemingly unconcerned about market volatility. Let's see what he feels when markets are down 20%.
  • Final manufacturing: PMIs: Slight beats on final manufacturing. PMIs out of Europe, are the opposite of what we saw on the flash estimates last week. Huge beat on US ISM manufacturing coming in at 60.8a 58.7e 59.1p. China Caixin beat
  • US tariffs: US announced much-anticipated tariffs on steel and aluminium, leading to a chorus of a potential global trade war. According to Trump: “ wars are good, and easy to win.”
  • Fixed interest: US10s and bunds a touch tighter over last week It will be interesting to see bonds actually catching a bid on equities risk-off
  • FX: EURUSD reversal to the upside is what really surprised a lot of people last week
  • Commodities: Mixed – energy pull backs, some of the softs like wheat +7.7% had a great week
  • Equities: Red across the board, India bucking the trend
  • Volatilities: Again, the point we’ve been making, the regime in the market is changing… not just in bonds/rates but also volatilities. Post a -14% retraction two weeks back, we popped up c. +19% on the VIX to 19.60 levels


Populism on the rise ... the result of the Italian election has not yet been announced, but exit polls point to a hung parliament, and the centre-right holding the most seats. Photo: Shutterstock

Summary of week ahead

  • Key focus: Serv. PMIs + US NFP|Avg. Hrly + Trade Wars Theme + European Politics
  • Central Banks (SGT): RBA +1.50% e/p (6) BNM +3.25% e/p (7) BoC +1.25% e/p (7) ECB -0.40% e/p (8) BoJ -0.10%e/p (9)
  • Fed speakers (SGT): Quarles (6) Dudley (6/7) Brainard (7) Kaplan (7) Bostic (7) Rosengren (10) Evans (10)
  • Other (SGT): BoE’s Haldane (7) RBA’s Lowe (7) BoC’s Poloz (9)
  • Economy side: US: ISM serv. 58.9e 59.9p, End of latest round of NAFTA negotiations, Final serv. 55.9e/p, Factory orders, TB, ADP, NFP 204k e 200k p, Avg Hrly Est. 2.8%e 2.9%p, Beige Book CH: National People’s Congress Session, Caixin serv. 54.3e 54.7p, TB, CPI +2.4%e 1.5%p PPI 3.8%e 4.3%p, New Loans EZ: Final serv. 56.7e/p, RS, 4QF GDP 2.7%e/p JP: BoP, 4QF GDP 1.0%e 0.5%p, UK: Serv. 53.3e 53.0p, House Prices, mfg. production, TB, IP NZ: Card Spending AU: Building approvals, BoP, RS, 4Q GDP 2.5%e 2.8%p, TB

COT report

  • FX: speculators bought EUR, GBP and JPY while being modest sellers of the other six IMM currency futures. EUR net-long rose for the first time in four weeks and stood at 93% of the previous record set on January 30
  • Commodities: Hedge funds increased bullish commodity bets by 9% to 2 million lots in the week to February 27. Buying was once again concentrated in grains where funds continued to cut shorts in wheat while adding fresh longs in soybeans and corn.

Thoughts on market positioning and sentiment

  • Germany and Italy updates: The much anticipated Sunday arrived and is now behind us. As we anticipated – it was far from a sure thing – Germany’s SPD backs new coalition, good for euro bulls, good for bund bears … brings back more political stability to the kingmaker of Europe. On Italy – consensus view is more of the same and at the end of the day Italy needs Europe, no real delta on whatever election outcomes. KVP echoes the same. New outs this Asia Monday morning suggest Berlusconi side leading the Five Star populist group in election exit results
  • Trump and potential trade wars: Trump "grabs" more of his agenda. Likely be job losses from some of the measures announced last week; expect tit-for-tat which is surely to come as we have seen concerns from Canada, China and the European Union
  • Key takeaway: Trump = Inflationary. We are going from:
1. Overseeing a fiscal stimulus (tax cuts, not reforms) on a red hot jobs market and strongest economy we've seen in over a decade not just in the US but globally, to now
 2. Potentially kicking off a trade war globally. Tariffs and potential tit-for-tat responses are inflationary. This is on top of a Fed that is probably behind the curve. i.e. only heightens the upside risk to rates and strengthens the case for allocating to commodities and before no doubt trying to
3. Start a massive infrastructure build-out for the US - what should have been the first key focus of the administration, if they really wanted to leave long-term structural positive change not to mention finance the spend on lower yields, which is the paradox of how all of this is playing out. The only winner in a trade war is inflation… consumers foot the bill
  • Inflation, inflation, inflation: – It's real and it’s coming. Seeing consecutive beats globally, now watch more and more central banks pivot towards less accommodative / normalisation / more tightening stance. Will also come through at some point with the likes of the RBA: perhaps not tomorrow but almost for sure 2018.
  • March 21 = Fed dots to rise 

Technical outlook (James Kim)

  • DXY: new one-month highs, before outside day reversal. Thursday's weakness could put USD selling pressure this week. Support at 89.52-89.20. Still expect a USD bounce to continue with a buy the dip strategy.
  • EURUSD: Friday's close just below short term trendline. EUR selling is not don’t yet, potential for a new low below last week’s low. Would look to sell towards 1.2550.
  • EURJPY: Nothing to suggest turning point and downside remains the direction. Add to shorts at 200 DMA with targets at 128
  • AUDJPY: capitulation continues, however could recover from here. Hovers just above the 2017 lows, tactical longs.
  • AUDUSD: three closes below 200 DMA which now offers support and selling opportunities into this. Selling bias held.
  • USDJPY: Weakness persists and long term technical support violated. New 2018 lows and this looks likely to continue however very short term may see some retracement to test at short term down trend.
  • S&P: Neutral now after initial retracement. How the technical picture develops from here will dictate price action, the break above or below of the two extremes from last week is key.
  • ASX200: Failed to test higher. Mildly positive outlook however based off the rebound from Friday through to this morning.
  • XAU: Retracement has been completed, long term bullish view now initiated with a goal of taking out the highs.

Macro Monday Books (Tactical and Strategic)

  • Stopped out of our tactical long GBPJPY given the shaky week for sterling, while the yen saw lot of strength
  • Gold had a quite an intra week pullback getting to around 1302.89, just a touch shy of our 1301 target. We’ll continue to look to add to the short above $1340-1360 levels … as we’d like to have a sizeable position going into the March 21 Fed meeting, where we’d expect an upgrade on the dot plots
  • AUDNZD had another test, yet we are slowly grinding out higher highs and higher lows…
  • Trade idea thoughts (more work to be done – food for thought)
  • Long-term value play on GE, seen estimates that suggest SOTP in the $10-15 range. GE closed at $14.12 on Friday March 2. Would have thought a potential bid or even rumours of one could see name lift +5% to +25%, + 1yr 15.00 strike calls would cost you under 10% in premium as you pay away $1.40 in premium for the calls. Stock is down over 50% in just the last few months, seems to be undergoing the perfect storm of pessimism, investigations and consensus bearishness. Worth noting that the stock has an indicative yield of +3.4% which may be too high or a steal… DYOR
  • Herbalife hit records highs last week and is now +40% up for the year (yes a touch over two months), on the news that well known activist and Herbalife bear Bill Ackman has closed out his short after five years of pounding the table on what he believes is a Ponzi scheme. More of a potential signal that the top is in, ATM or OTM 1yr puts could be interesting…
  • Need an inflationary hedge that has not run…
Macro Monday Strategic & Tactical Books (please click to enlarge)

For more on forex, click here.

A replay of the call is available here

– Edited by Gayle Bryant and Rob Ryan

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].

JulioCésar JulioCésar
Table size and image quality is lamentable... It is impossible to read. May you please increase image size or image quality?
Robert Ryan Robert Ryan
Sorry about that. The author has kindly provided a clearer version of the table. If you click on it now, it should be easier to read.


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