This article was written by David Dixon of Viper Wealth Creation. More about the author at the end of the article.
The first economic release of note from China sent far eastern markets running for cover with Chinese indices down somewhere near 8% at the time of writing. The Nikkei has fallen around 3% in sympathy as the Caixin Manufacturing Purchasing Managers Index came in well below expectations at 48.2, where above 50 denotes growth.
The first economic release of note from China sent far eastern markets running for cover
This is despite oil prices being marked higher due to Saudi/Iran tensions. Europe will likely mark equity indices lower and await the Wall Street reaction this afternoon.
On the FX market the main movement so far is predictably a firmer yen on safe haven plays. In the past we have seen a move into euros as funding of higher risk currencies by the single currency trades have been taken off, so I would not be surprised to see a move above 1.09 on EUR/USD (currently 1.0889/90).
The last week of 2015 saw a firmer looking greenback but I am looking for a correction unless the NFP figures at the end of this week are much weaker than the 200k expected.
Short term I expect a band of 1.0800/1.1090 on the wide in EUR/USD with a move towards the top of the band, in my opinion a good place to short the single currency. The divergence play is old but is still relevant – any risk looks to be on the side of market expectations for two Fed hikes this year being too low, and therefore there is a greater divergence of interest rates between the US and the eurozone. A USD positive.
On the FX market the main movement so far is predictably a firmer yen on safe haven plays
USD/JPY is already lower and a wide band of 119.25/121 should hold although the lower end has been pressured already on equity weakness leading to JPY safe haven strength. This is likely to be a recurring theme and could well move USD/JPY down to 110 later this year. Any move higher I would favour as a selling opportunity although I prefer being short EUR and/or CHF against the yen.
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Sterling is at a crossroads for me with valid arguments in either direction. The main driver for me is market disappointment at BOE hike expectations being further pushed back and European referendum uncertainty in the background. However the cable in my book looks ready for a small bounce back to 1.50. From there I would expect a move down to 1.45 and maybe 1.43 on renewed greenback legs after a healthy correction.
Sterling against the euro at close to the top of the 0.7000/0.7400 band is intriguing and I believe it is one to watch. At this time I favour any moves above 0.7425 as an opportunity to short euros with a stop close to but higher than 0.7450 using a short term strategy like the Viper Rattlesnake. I would aim for a move down to 0.7250/0.7300 using a trailing stop.
For those wanting to be short GBP then I favour GBP/JPY and hope for a move to 180/181 to short. However in the current environment it may not happen anytime soon so keep an eye open for a break lower where the 174.50 level looks significant and a move to 168 could quickly follow. My preferred play is a correction to 180 with a move over time to 155 on GBP/JPY (aka the beast).
As mentioned earlier I like the idea of being short euros and Swiss against the yen however I have taken those off at the current levels of 130 and 119.75 awaiting the European market’s first moves. I expect some volatility and look to short these pairs at 132 and 123 respectively to moves much lower over the coming months.
Sterling is at a crossroads for me with valid arguments in either direction
So to sum up the market has started and expect volatility from some familiar themes, but it’s probably best to take your time and await the NFP for greenback near-term direction while keeping an eye on equity markets for safe haven plays. The S&P 500 should hold 2000 in my book but will come under early pressure. The lower the equity market moves, the more safe haven plays like yen strength will happen. Pick your levels and be patient, don’t be scared to miss out and chase a market that can easily turn around quickly.
David Dixon, Viper Wealth Creation
1980 – 2000, NatWest spot, forward and derivatives trader. Responsibilities included taking on proprietary positions on behalf of the bank in the ‘interbank market’, handling trades worth multiples of millions of dollars, and on occasion billions.
2000 – 2006 he advised corporate and private clients on various financial matters.
2006 – present, David has been working with Clive.