This article was written by Clive Arneil and David Dixon. More about the authors at the end of the article.
As we move into a new trading week it is worth quickly looking back to last week’s market. The Greenback stayed well supported on expectations of a hike in the Federal funds rate at the December meeting of the FOMC. The Euro retained an easier bias on further talk from ECB officials and the JPY neutral after a brief safe haven status last Monday following the terror attacks in Paris. As the week drew to a close there were rumours that the Fed could raise the rate known as the discount window, currently set at 0.75%.
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility–the discount window. The spread to the federal funds rate at which depository institutions (banks and credit unions) actively trade balances held at the Federal Reserve was 100 basis points (bp) until August 2007 in the midst of the last financial crisis. Currently with the target of Fed Funds at 0-0.25% it is lower, a widening of the spread, although not as important as the funds rate itself, would be more than just symbolic in the current climate.
So be aware of this because there could well be movement ahead of Monday evening UK time as the market keeps an eye on the Fed. The FOMC has said that they are “data dependent” and it is very possible that not all members will vote for “lift-off” at their scheduled meeting in December. However it does look increasingly likely a hike of 25 bps to the funds rate and an increase in the discount rate too will come then and not before. Maybe the time to widen the spread will be at the same meeting.
The almighty US$ is expected to stay bid into 2016 and similar to last week I expect to see any correction as an opportunity for Greenback bulls to step in. Against the Euro 1.0750 looks to be a level of resistance that will hold with a measured move lower to parity expected by most investors. I will be looking to use strategies like the Viper Rattlesnake to pick up moves lower in this pair.
Cable has been surprisingly well supported but finished just below 1.5200 on Friday which could prove important. If the pair can push below the 1.5150/75 support zone then expect 1.5000 to be challenged soon with a likely target of 1.4850. There should be good resistance at 1.5350 on any pull back from support.
The USD/JPY is all about the Greenback at the moment with the BOJ staying on the sidelines. Expect support at 121.50/75 to hold with the potential to target 125.50/80 from now to year end. The crowded trade of long USD and short JPY is feeling a bit stale however and a move away from Yen shorts could well be the trade for next year particularly against the Euro and Swiss (more later).
As the week drew to a close there were rumours that the Fed could raise the rate known as the discount window, currently set at 0.75%.
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The Aussie was probably the surprise package of last week with bids coming in strongly at 0.7075 pushing AUD/USD higher to just shy of 0.7250 late on. This looks like an unwinding of some old short Aussie trades but with commodity prices still at or close to rock bottom I do not envisage much more follow through buying with the zone of 0.7300/50 likely a nut too tough to crack. Expect range trading of 0.7100/0.7300 in the short term while stock markets stay supported indicating some appetite for risk taking.
So to sum up as we move towards year end expect USD strength to continue but with an eye to next year watch EUR/JPY which I believe will move towards 126 and beyond while I expect CHF/JPY is to head below 120.00 on way to 115 and then lower still in 2016.
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.