As the likelihood of a full on trade war between the US and China subsides Pres Trump has now turned his attention to the European Union and has threatened to slap tariffs to the tune of $11 billion on products from the EU. This puts even more pressure on an embattled Euro on the brink of recession. Germany is expected to reduce its growth forecasts next week and with the ECB talking about additional QE is fair to say the Eurozone is not in a good place despite its bullish run this week.

Despite the lack of any real growth we have moved into a risk on the environment which hit the dollar last week. Emerging markets have strengthened, and yields have increased on the back of fairly positive numbers coming out of China. Finally, Brexit concerns may take a backseat in the short term now the EU have agreed an additional extension, which in turn could lead to the Parliament passing the withdrawal agreement on offer followed by a 2nd referendum, this appears to be the most likely outcome.

Remember it’s a shortened week this week and we need to be mindful that there might be a drop in liquidity which can cause spikes, particularly towards the end of the week. Let’s have a quick look at things to watch out for this week this week:

  • Lots of FOMC members talking early in the week. There is an interesting issue with the Fed and that is president Trump assigning two controversial figures to the panel and his continued push for lower interest rates. Questions are beginning to be asked about how independent the Fed is at present.
  • On Tuesday we have UK average earnings index, an important indicator towards inflation as well as New Zealand CPI. New Zealand have been struggling recently so this will be a good indication as to whether things are improving.
  • Wednesday we have Chinese GDP, this is a very important release and could set the tone of the market for months to come. The anticipation is for China to slow slightly, but any significant shock will have a major impact.
  • We also have GBP and Canadian inflation figures many will be watching what comes out of the OPEC meetings, particularly in the shadow of last week’s crude inventories.
  • On Thursday we have an important slew of data, and remember with liquidity low we could see volatility. We start with Australian employment figures followed by many of the major PMI ratings for the Eurozone. Last month they were hideous, so it will be important to watch to see whether they rebound or are still on a declining trajectory. We also have retail sales for the UK, Canada and US, all of which are leading indicators of economic growth.

All in all busy week and I would strongly recommend taking a backseat going into Thursday.

Now onto the charts. We can see that the yield curve between the two-year and ten-year yields for the US increased last week and the spreads moved further apart which confirms the picture for a risk on environment.

We can also see the S&P 500 performing strong with a very steep weekly trendline and flirting with its all-time high.

The dollar index took another run at the key level of 97.5 but again couldn’t break through. This highlights the weakness we saw in the US dollar this week as investors look for higher yielding investments.

The Nikkei has been in an uptrend for the last few months and is also approaching a key level at 22,000. If it breaks through here we can expect more yen weakness, alternatively if we see a reversal this will suggest the opposite.

We have seen a strong and sustained increase in oil prices since the New Year which is supportive both for the Canadian dollar and more globally inflation. Most OPEC countries look for a price of around $80 before they consider it healthy, so with OPEC meetings this week it will be important to see what actions if any come from that meeting.

Possible Trades

We saw a big break in the AUDJPY last week which again reaffirms the risk on environment. Looking for a pullback around 79.80 for a long.

Gold is another interesting opportunity. In a risk on environment we tend to see weakness in gold, so I would be looking to short at the return to the trendline or a break and retest of the key level at 1280.

I will also be watching the S&P 500 quite closely. It’s decision time soon and it will either have to break down again or resume its record-breaking run.

Last but not least we have a possible short on the EURCAD depending on what comes out of the OPEC meetings. We have a small flag pattern plus a pin bar, if we see oil prices boosted then expect this to break down.

That’s all for now folks, happy trading.

Andi

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