Comment on USD trades (EUR, CAD, AUD, NZD, XBT)
US CPI comes in higher than expected and US yields higher.
US Retail sales significantly weaker than expected, but inflation data the most relevant in the current market context, where the market is worrying that the era of low and stable yields is coming to a close.
Higher yields threaten to keep equity markets volatile, and as we have argued in the past this upsets to some extent the previous tight correlation between a weaker USD and stronger global equities. It should tend to undermine emerging and commodity currencies.
Higher yields in the US should support the USD as its yield advantage rises, although this has not been a driving factor in the last year, it should still have some influence. The divergence between the USD and yield spreads against most currencies looks stretched.
The EUR is not typically risk-sensitive and with a current account surplus might be thought to do well in risk-off markets. However, the EUR has benefited from capital flowing to its equity market and the CFTC spec position data is very long. As such we view it as vulnerable to a correction in a risk-off market. The EUR is very stretched from its yield disadvantage. We also sold it due to a view its chart pattern allows us a clearer place to stop out without losing too much.
We chose to buy USD/CAD because its recent employment data was soft and oil prices have weakened recently, and the yield spread has widened in favour of the USD recently with Canadian yields falling somewhat recently. The USD/CAD is also exhibiting a clearer recent uptrend. The risk to this trade near tern is the Canadian CPI next week, but far enough away not to see an immediate concern.
We thought about selling AUD, but we see a risk that the employment data due later today is stronger than expected.
The NZD has been very resilient of late, and the market may be sensing a recovery in economic data after a period of post-election jitters in the second half of last year. The NZ budget update and 2yr inflation expectations data were both solid.
The USD has sharply reversed all its gains made on the CPI report, which is surprising, but certainly the USD has been sluggish. As I discussed in my AmpGFX report yesterday, it begs the question if the market is marking the USD down due to budget and related political risks. If the USD cannot build something out of this CPI data, it might be a significant hit to sentiment for the USD and could have wider consequences down the track, such as placing further upward pressure on US yields with negative feedback to equities.
I added to the COINXBE position at 370. My position size was a third less than that I established last year, and I wanted to bump it up a bit. I have been planning on this for a while, but wanted to see if it could rise above the Thanksgiving gap last year. It did so today, so I added this piece. I will still call the position half a unit. My intention is to continue to trade it with a focus on its technical performance.
I am not trading it with stops due to the volatile nature of XBT and the fact that COINXBE does not trade on a 24-hour basis, preferring to keep an eye on it and continually reassess. The position size is small enough not to over-power my capital if it were to suddenly collapse.
XBT has taken a lot of hits since last year from increased regulatory scrutiny, limits by banks on allowing customers to buy, and disparaging commentary from officials and respected financial sector people. Its recent price action in the face of this suggests that it has found its feet.
We continue to see the disruptive power of blockchain technology. And as it gains credibility so will XBT that is based on blockchain and has the attributes of a safe haven from traditional financial assets and currencies; in the same way that gold offers an ultimate store of value when government’s take risks with their currencies and economies.
Long half unit COINXBE at 353.0
Short 1/3 unit TYH8 at 120-30; s/l 121-20+
Long half unit USD/CAD at 1.2632; s/l 1.2537
Short half unit EUR/USD at 1.2322; 1.2423