Short EUR/JPY (from 14-Mar to 20-Mar)
Stopped out on 20-Mar
Real-Time AmpGFX – lowered EUR/JPY stop loss, trading thoughts (Thu 3/15/2018 3:00 PM MT)
FX markets remain hard to call. The USD is broadly stronger today, with bigger losses in commodity currencies. EM currencies are also weaker. However, it is hard to say why the sudden dollar strength. I find it hard to pin on comments by Larry Kudlow. I find it hard to take him seriously as Chief Economic Advisor. It speaks to the shallow splashy reality TV style of the US administration.
Earlier in the week, I was spooked out of a short EUR/USD position on what I perceived as a weak USD performance on rising US political risk. Basically, it is hard to understand why the USD was weak early in the week and now strong on Thursday. It suggests we are in choppy FX markets and is best to be patient.
I sold EUR/JPY trying to find the right currency to reflect a weaker EUR outlook. The problem is that there is no clear foil to sell it against.
In a risk aversion outcome, JPY may be the better bet, but it is hard to say that risk appetite will not quickly return given the strength in global economic indicators.
It is hard to buy the USD as it has struggled to gain on stronger US economic reports in recent months, recent inflation indicators have moderated again, and the USD has tended to react badly to political uncertainty in the US.
If I had to trade today, I might swing towards selling EUR vs. AUD, given it has bounced to near resistance, and the fall in AUD has questionable grounding in any new development. But China is in the US trade cross-hairs, iron ore prices are near recent lows, and the banks are coping a shellacking over their part in mortgage market excesses that are being picked apart by the Royal Commission.
I have a short EUR/JPY position that has worked so far. I am worried that a rise in US yields into the FOMC might trigger a period of weakness in the JPY. JPY is trading above 105 and may face more significant USD-support towards this level.
On the other hand, the Abe political scandal is coming back and this could be a trigger for a bout of JPY strength.
In an ambivalent state, lacking much willingness to risk too much, I am lowering my stop loss in EUR/JPY admittedly to a level that risks chopping me out of the short position
Positions
Short one unit EUR/JPY at 131.39; s/l 131.33; t/p 126.28
Real-Time AmpGFX – Sold EUR/JPY to add to short (Wed 3/14/2018 10:14 AM MT)
Sold half unit at 131.31 to add to short position
Positions
Short one unit EUR/JPY at 131.39; s/l 132.27; t/p 126.28
Real-Time AmpGFX – comment on EUR/JPY and EUR/AUD, EUR/JPY orders (Wed 3/14/2018 9:47 AM MT)
Weaker EUR view
I have turned more negative on the EUR outlook, as discussed in my AmpGFX report earlier this week. The comments by Draghi appear to gel with those thoughts. ECB President Draghi has emphasized gradualism and said gains in EUR are not entirely due to economic recovery and may dampen inflation. The data tend to suggest inflation expectations in Europe have fallen.
AUD thoughts
I had thought of selling EUR/AUD yesterday but did not pull the trigger. The reasons for selling EUR/AUD were the very strong Australian business survey and the probability of a strong employment report next week. The strength of the Australian economy is running ahead of confidence which may be held back by the political malaise in Australia and the housing market slowdown.
We know that the market can react to even the hint of a policy tightening well in advance, and the market may be ignoring the strength in underlying demand in Australia.
However, with Trump raising the stakes on trade protectionism, against China in particular, it raises risks for AUD. The banking Royal Commission is also increasing focus on bank excesses in mortgage financing which may also weigh on confidence. So I baulked at buying AUD, and continue to do so at this stage.
US political risk negative for USD
Political risk in the US is increasing as we approach the mid-terms. The election result in Pennsylvania increases this risk, raising the probability that Demoncrats take one or even both houses of Congress. In general, this raises the risk of a combative and erratic presidency, and even impeachment if the Democrats dare to go down that route, which may generate talk of all kinds of crisis of government.
Political risk in the USA has appeared to do more to undermine the USD than to undermine equities or global investor risk appetite. This might lead to a rebound in EM assets and currencies. In this event, it would probably be better to be short EUR/AUD, and EUR/JPY has been somewhat positively correlated to risk appetite in the last six months.
However, there is a range of uncertainties that make it hard to call this outcome. If US political risk were to rise above some threshold it might feedback negatively to global asset markets. Trump has turned up the heat of trade protectionism which may undermine EM confidence. Global equity markets have been more volatile since earl-Feb and investor confidence may be more permanently dampened and watchful for risks.
EUR/JPY losing its positive correlation to risk appetite
In any case, JPY has lost much of its negative correlation with stronger equities/risk appetite. It has further lost a good deal of its negative correlation with rising US yields, but it does appear still more positively impacted by weaker risk appetite.
EUR, more recently, is showing less positive correlation with risk appetite/global equities.
BOJ stance
The BoJ has continued to say it needs to maintain its current easy stance for some time yet, and it is too early to consider an exit. However, this has had only minimal effect in weakening the JPY in recent months. JPY is likely to be much more responsive to even whiffs of BOJ taking their foot off the easing accelerator.
Positions
Short half unit EUR/JPY at 131.48; s/l 132.27; t/p 126.28
Real-Time AmpGFX – sold EUR/JPY (Wed 3/14/2018 8:40 AM MT)
Sold half unit of EUR/JPY at 131.48
Comment to follow