Weekly review..USD bulls get a proper squeeze on risk off move.
Take your pick on events this week that prompted a proper correction for the USD and saw risk averse moves in most markets. China , Greece, US data they all played their part, so what happens next ?
- China..With Chinese equity futures down over 5% on Friday on speculation authorities are concerned about speculation and may change margin regulations we might have had worse on Monday if not for, Sundays announcement of a 1% cut on Reserve Requirements for banks to 18.5% ( follows from 0.5% cut in February ). Now this may steady the ship but a move has been expected and surely confirms all is not well in China. A property downturn, factory over capacity and local debt are just some of the negatives that the authorities are fighting. Of course on past form markets will bounce on the stimulus but we will have see. In any event we have some sort of landing coming for the Chinese economy be it soft or hard.
- Greece..I’m not sure Syriza have a game plan or if they didn’t plan things to get this bad. Markets though were busy planning for a Grexit as Greece reaches a liquidity crisis amidst a continuing rift between them and its creditors. European equities suffered and spreads between German and peripheral bonds widened. The ECB though and EU finance ministers though continue to believe contagion would be containable on any Grexit. It remains to be seen but it now seems that one party or another has to make a major climb down. My money is on Syriza although its fair to say things are just too close to call. UK bookmakers pulled out of offering Grexit odds which maybe tells us all that we are at the very brink. Greece has courted Russian support and US rhetoric although the latter insists they ( Syriza) will have to adhere to previous agreements to get any concessions.
- US data and consequently Fed rate hike timing seem to have meant not only is June off the table but maybe the whole of 2015. That certainly could lead to more short term USD weakness although I wouldn’t let it change my long term view of a bullish USD in any way.
- Finland..Just a mention for the small Northern Euro zone country who head to the polls this weekend. The economy has suffered badly recently and no winning party will be in any mood to compromise on Greece. Some ( myself included ) have always believed that a Finnish exit from the the EZ was just as possible as a Grexit. I’m not so sure that’s the case now but maybe if Greece stays and compromises are too generous Finland may well decide to join some of its Nordic partners outside the common currency. What is clear is that the move they made on the last Greek bailout to secure collateral for their loans may have been a wise move.
- Forex..CHF ( 0.9535 ) and GBP ( 1.4960 ) star up over 2% against the weakening USD. The CHF benefitted from increasing EZ tensions while GBP seems to have shaken off election nerves ( temporarily to my mind) . CAD also up 2.5% ( 1.2245 ). Elsewhere the EUR made up 1.9% ( 1.0810) despite the Greek woes. The JPY struggled on the risk sell-off gaining just 1% against the USD ( 118.85). We will have to see how the Nikkei behaves on Monday but a big move lower may see 117 print. That said the Chinese news could put a different tone on things. I’m not sure frankly how markets will react so I would trade it as you see it.
- Equities..Germany’s DAX down 5% as Greece and China weighed and Wall Street also slumped over 1% on Friday. The reaction on Monday to the Chinese RR announcement will be crucial for risk appetite. I wouldn’t want to guess it but on past form stimulus wins over economic data.
- Bonds ..Peripheral spreads widened on Grexit worries and would probably see more strain on the actual event. However, put in perspective of the last crisis I think certainly short term it would not be too damaging. US 10 Yr. stuck at 1.86 and likely to be trading off Fed speak and data for some time.
Next weeks trading Strategy.
- My gut feel is that we could yet see more of a USD correction although I did sell a bit of cable over 1.50 on Friday. We have the FOMC next week and GDP data which might push the USD either way so in any event its right to be cautious. Add Greek uncertainty and how risk appetite pans generally and there is plenty to keep volatility elevated. I know from experience that hanging on to long term views ( Strong USD in this case ) can end up getting you caught out. Too much profit on a long term position can mean you ignore a pull back until you’ve given way to much back. Better to cut and re-establish so that you focus on a position that’s at the money or there abouts. Its also a case of building positions by stages which is what I prefer.
- I tend to think we may be in for some bad news economically from the US which means the Fed might be looking very much on hold until next year. That said I don’t expect European data to fire up much more despite the recent turn. Lower oil has helped more than QE as far as the economy goes and general consumer sentiment. That and the weaker EUR might keep the EZ healthier for a while. Italy and more importantly France are not seeing the improvements they need and the later remains my conviction of being the real elephant in the Eurozone room