Comey and US energy report; trading from 5 to 10 May
10 May 2017
(Stop-loss triggered on long EUR/CAD at 1.4869)
Position
Short one unit AUD/USD at 0.7343; s/l 0.7438
US energy report & Comey
The Comey firing, unsurprisingly, is dominating news. While few seem to argue that Comey’s judgment has been poor and confusing, the timing of this firing, days after the former acting Attorney General Yates gave damaging testimony to the Trump administration, in the middle of the investigation over ties to Russia, is amazing. It suggests Trump has something to hide. Questions over Trump’s ties to Russia are likely to linger and continue to flare up.
The Democrats in Congress and some Republicans are not going to just let this go. The issue will remain a distraction with calls for a special prosecutor or a special Congressional Committee investigation into Russia allegations. The issue will be given life as the Senate will also have to vote on the next FBI director.
Trump administration developments were losing their power over US financial markets. It appeared investors were starting to see it is more noise around the recovery trend in the economy and strong earnings results. This may still broadly be the case.
Nevertheless, this latest distraction may have triggered some squaring in recent long trades in the USD. US bond yields have dipped back from recent gains. The Comey distraction might be seen as further delaying progress in Congress negotiations on tax reform.
As we feared, the NZD is firming ahead of the RBNZ policy meeting, recent stronger than expected inflation and labour market data suggest the RBNZ will raise its forecast path for interest rates. This may also be supporting the AUD.
The CAD is stronger on positon-squaring and a stronger oil prices on the latest inventory data.
Oil prices have jumped 3.7%, testing the lows in March. Crude inventory fell for a 5th week in a row at a time of the year when it is normally still rising to its peak for the year. However, it is still above the record peak last year, so inventory remains at a high level.
Crude oil inventory chart (see pdf)
Gasoline demand also rose significantly in the last week, although it had been easing over the previous five weeks. Over the year-to-date gasoline demand had been rising faster than normal, albeit from a relatively low level, and it remains below the high demand in the last five years at this time of year (that occurred last year).
Gasoline demand – 4-week moving average chart (see pdf)
US production of oil continues to grow steadily and as rapidly as it did before the peak in 2015, and appears on track to reach the 2015 peak later this year.
US production, rig count, and oil price chart (see pdf)
Overall, the price of oil is still likely to be contained by rising US supply, but a deal by OPEC to sustain their cuts may help underpin oil.
Iron ore prices on thje Chinese futures exchange fell back, so far today, to the low side of its recent range, and may be helping cap the rebound in AUD.
Iron ore futures and AUD chart (see pdf)
9 May 2017
Bought one unit EUR/CAD at 1.49733
Sold one unit AUD/USD at 0.7343
Position
Long one unit EUR/CAD at 1.49733; s/l 1.4873
Short one unit AUD/USD at 0.7343; s/l 0.7438
Comment
EUR may find support near the low side of its range. It has weakened recently in line with the stronger USD, and a position adjustment since the French election.
EUR should attract demand to its equity market and stronger economic moment pointing to policy normalisation next year. It should be less sensitive to rising US rates and rising global yields.
EUR/CAD had corrected since last week towards the top of its range in Sep/Dec last year, so it may now find better support.
Oil prices appear to be consolidating below the lows in March, despite reassurances from OPEC/Russia that they are likely to extend production cuts.
CAD should be challenged by US pressure to renegotiate NAFTA and the same issues around its housing market that may be impacting the AUD. A banking crisis is unlikely, but tightening credit conditions may result.
I sold AUD today as it has shown little bounce recently. I had been reluctant to sell with the budget plans for infrastructure spending and possible upgrade to RBNZ rates outlook this week.
But perhaps the bigger picture is a strengthening USD, a refocus on the narrowing AUD yield advantage and drag from peaking housing market.
As discussed in the AmpGFX report today, the risks associated with high household debt may be starting to materialize, and even the thought of rate rises may be undermining household confidence.
If capital is flowing to equities, then Australia appears likely to miss out.
Developments in China have weakened the AUD. It is hard to say if they will persist. But perhaps there is now a more concerted effort to contain credit risks. Iron ore is holding the lows in April so far. But inventory levels at ports are very high.
I am reticent to be short AUD in light of the frequent reversals over the last year, but perhaps it has been building for a deeper fall.
5 May 2017
Sold half unit EUR/CAD at 1.50637 to close long at 1.50806
Comment
The bounce back from the lows in oil was rapid and suggests last round of selling on Thursday was stop loss driven and lacks commitment/power.
The USD/CAD was already relatively stretched after its persistent rapid fall to new lows recently, so it too may be vulnerable to a significant short-term rebound.
The Canadian jobs data were mixed probably don’t mean too much. Similar to the US data, the unemployment rate fell more than expected to a new since 2008, but the number of jobs created was tepid, albeit after strong growth since August last year, and the mix was weak with a big fall in full-time jobs.
The US jobs report was quite strong and should be supporting the USD, perhaps more than it has so far. However, it is difficult to find a currency to buy the USD against – EUR could continue to rise as European political risk eases and Euro eco data out-performs. Commodity currencies may be over-stretched to the downside. JPY might be the best bet at this time, but JPY has also weakened significantly recently, and risk reward, particularly into end week, is no great. I am not convinced it is a good idea right now.
Fed speakers into end week may tend to support the USD as well (Those speaking have tended to sound more hawkish lately – Fischer, Williams, Rosengren). Yellen as always has the greatest potential to impact, But I suspect she will not be in a mood to alter market expectations and will be balanced.
Payrolls growth continues at a solid pace, the unemployment and under-employment rates fell further. Under-employment fell sharply from 8.9% to 8.6%, making the labor market look tighter and raising the odds of the Fed staying on the path to hike.
However, the wages data were weak, consistent with the trend seen in many countries, including New Zealand earlier in the week, tightening labor markets appear to be having little upward pressure on wages. So this puts in question the need to tighten monetary policy and prevents a clear up-move in US yields and the USD.
EUR may rally post-French election; although a Macron victory should be largely priced in, EUR is developing an uptrend. Some nerves over a possible Le Pen victory may still be holding it back. I am inclined to buy EUR, but there is that big tail risk on the election, and the USD should be stronger on its labor data.
I am trying to pick trades more carefully after a poor start to the year, so will step back to reassess next week.