Forex Fundamentals by full time trader & analyst, Judith Waker.

Hardly the lazy hazy days of summer yet.

Last week we had another set of plusses and minuses to grapple with, and account for, Add to that a market close on Friday that reintroduced that risk aversion theme.

The Fangs  (Facebook, Amazon, Netflix, Google) have been active this week, Facebook, and Amazon in focus and an unsettling result for the former.

Of course, the weekend can make all the difference to market sentiment, but it is always worth sorting out the balance sheet with the bigger picture in mind and that is what we do here. We understand (I hope) that exposure in these markets conditions has to be of short-term duration and expertly and strictly managed in terms of risk but it all adds up to nought if we do not know the context in which we are trading…and that means understanding the cycle and the longer term implications.

The Week In Review.

The last shall be first: Facebook. A matter of 120billion disappeared off their balance sheet and that does account in large part for the turn in sentiment at the week’s end. Technology, as I have commented here many times, has been the big supporting sector in the US equities recent advances and suddenly it seems it may have lost its street cred. Amazon did well but did not cause the reaction some might have thought.

The Facebook news weighed against the upbeat US GDP result which in substantive terms was a big advance form the last reading but it only met the estimate. The tax cuts are thought to be a major factor in the increase.

The USD was net positive over the week but we can see it is just stuck in a range. In fact, post GDP results saw a fall into the close. This is the weekly inertia:

and the Friday fall:

In other US data, we saw more of the warning signs with existing home sales falling durable goods improving but missing the estimate, The advanced GDP price index also beat the estimate.

The ECB didn’t make any waves, Mr Draghi was measured and still leans on the cautious side keeping that dovish tone. He gave little away. Earlier in the week, PMIs improved on the manufacturing side but services were all slightly weaker.

The midweek agreement between Trump and Juncker lost some of its shine as the week progressed. It was vague at best but does represent a cooling off in trade war terms.

The Week Ahead

Central bank policy takes centre stage and don’t forget Apple if you are watching US equities. Here are the highlights:

Monday: EZ CPI (Germany and Spain)

Tuesday: Chinese PMIs (state numbers!) NZD business confidence and the BOJ rates and statement…looking for any changes or shifts in monetary policy to the more hawkish side. EZ: German retail, Spanish GDP, overall GDP and CPI. CAD GDP and from the US PCE, core PCE personal spending and consumer confidence. Job stats from New Zealand.

Wednesday: UK manufacturing, advanced NFP, FOMC meeting and the US manufacturing ISM

Thursday: AUD trade balance, UK construction, the BOE rates and a statement from the UK, plus an inflation forecast and weekly US unemployment

Friday: AUD retail, UK services PMI, non-farm data from the US and the non-manufacturing ISM

Opportunities

As far as the USD is concerned, the FOMC on Wednesday is unlikely to increase the rate forecasts…they may well be just as confident as just as optimistic but the market knows that already. This leans risk to the downside. I still like the USDJPY

The BOJ could support shorts and the risk off theme extending into the news week.

Last week the EURJPY short was on the list and did well. That made a better than 90 pip move. I am still interested.

Forex Fundamentals

The FTSE is still a live trade. I prefer this to the GBPUSD which could be volatile.

Forex Fundamentals

 

Finally Gold, for long-term longs, depends on the USD and the risk environment.

 

The US 10 yr note is also on watch for a long (implying USD weakness) The FOMC is the catalyst. As always it is not just what is said but the tone and language.

Keep an eye on the Nikkei for sentiment clues:

 

Once this week is over we are in vacation month and liquidity will drop and that can enhance volatility and unpredictability in price direction. It does not mean it will be quiet with politics still very much at the forefront of the market’s attention.

I am choosing very few pairs in forex this month and they will depend purely on the unfolding fundamental realities. This could be the month where positioning for a longer term bias may be our best work. Be ready for risk-off…always..there are too many warning signs to miss the opportunity whenever that might materialize.

Tax cut hype, trade war lulls and loaded GDP data can be very misleading to the ill-informed and they are likely to short-lived phenomena.  If you understand that you can prepare for both the optimism and the inevitable realities.

Judith Waker