This article was written by David Dixon and Clive Arneil of Viper Wealth Creation.
Last week the market unwound some of the long US$ positions that have been built up over the last year and a half, so is this more than an overdue correction or has the mighty greenback lost its attraction?
Well yes and no!
In the FX market it is difficult to see another currency worth buying against the USD. We have a number of major currencies with negative interest rates on excess funds set by central banks and it looks distinctly possible this trend could continue with further moves below zero.
The US Treasury market rally of recent weeks has largely happened based on diminishing expectations for further Fed hikes this year and is the catalyst for the US$ correction. In fact the market seems to expect no further rate increases even thought the Fed has indicated that up to 4 are on the cards. So we have a situation where the risks are surely skewed to US interest rates being higher more quickly than the market currently expects which I believe makes the greenback a buy here in the short term.
The NFP last week was exactly what the Fed was looking for in terms of higher wages and longer hours being worked, so is inflation about to move nearer the target of 2%?
The euro looks ripe for a fall from the current levels and going short near 1.1200 looks a good risk/reward trade as we move towards a possible further easing by the ECB in March. I believe the EUR/JPY has room to go lower from here too.
The JPY was all over the place after the BOJ move to a 0.1% negative interest rate having touched 121.60 to the USD and ended last week at 116.80 after NFP in the US. Of course as we know the JPY tends to benefit when there is equity weakness and it may well be that 120.00/50 is going to cap the pair while the potential for lower levels down to 110.00 if the market falls below 116.00 is there for all to see.
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Gold has resurfaced as a safe-haven and looks capable of moving higher. The shiny metal started this year at US$1060 and is now 100 bucks higher. The US$1145 level has been breached and is likely to be the new support. If this proves to be the case then US$1200 will be the bulls’ target after US$1185.
The equity markets fell back last week after failing to build on the previous week’s BOJ inspired rally. The S&P 500 failed to push past 1947 which marks 50% of the move down from late December to the 20th January low at 1811. The Chicago mercantile index needs to hold 1870 or a move back to that low could materialize quickly bringing the turmoil we saw in January back with a vengeance.
Oil as ever is a jittery market but I wonder if we may have seen the bottom here. All the bad news may be in the price while supply could be cutting back as the low price takes its toll in particular on US producers.
So to sum up, the greenback correction on the currency markets looks to be close to completion if not already ended save against the JPY which can strengthen further on old short position exits and any further equity market weakness. Against gold and perhaps oil it may be that we have already seen the lows and a fledgling move higher is in play.
As we said before, expect volatile conditions at any time and keep things tight.
Clive Arneil, Viper Wealth Creation
Worked for major brokers for over 20 years trading most instruments in the foreign exchange and derivatives markets.
Brokered deals on behalf of some of the world’s largest banks including Barclays, Citibank, UBS, NatWest and the Bank of England.
Worked mainly in the UK but also in Switzerland, Germany and the U.S.
Retired from the money market at the age of 40 and then worked as a financial data feed specialist supplying market data to banks, brokers and spread-betting companies.
From there he went on to teaching people the skills required to master today’s volatile markets not just in the U.K but also in Singapore, Dubai, South Africa, Germany and Italy.
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’ with trades in 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.