Hi members,
Another brilliant piece of research done by James (iamjacka). He is done trading for this year and is now only focusing on the macro picture waiting for the fundamental releases this week. This in fact is a very wise decision considering the amount of news releases we have this week. Here is James in his own words.
If you want to follow his technical set ups go to the forum 🙂
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My last trade closed for the year last week – so I’m going to shift my focus away from technicals and focus on my macro picture for the short and medium term.
I think it is much easier to pick the technicals back up in January after some time away than it is to understand the macro picture. I’m going to try and keep dialed into macros all through the holidays as I don’t want to lose touch with what is going on. Plus, with all the releases I’m calling time on the year.
There are 34 red flag releases this week. With rates driving the market and the shift by central banks to be guided by data to influence their rate decisions and outlook statements as they get closer to their target rate zone, it could be a potential minefield this week.
During this year, there was a clear signal that rates would rise and inflation was the only measure that banks were interested in. The central banks were hunting for any signs they were denting inflation as they shifted from very low rates (in some cases negative). As they had so far to travel from a rates perspective it was a case of guessing how high rates would go in the short term before there were signs of inflation peaking, now there are signs that inflation is potentially peaking the shift of focus is to limit the damage to the economy.
This means it’s no longer just inflation numbers that are the biggest drivers but things like employment, growth, and manufacturing are all significantly more in the equation to drive the next rate decision than earlier in the year.
The impact on a lot of what the central banks have already done is somewhat lagging meaning that the impacts will not be felt right away. For example, if you look at mortgages here in the UK, once the BoE rate increases, the impact is not felt immediately; it takes time to work through the system. It may be the next mortgage payment in 4 weeks or it may be when your fixed rate mortgage term expires and your payments jump from a nice 1% to >5%. This takes time.
But looking at the mortgage delinquencies for the 3rd quarter of this year in the UK (https://www.ukfinance.org.uk/data-and-research/data/arrears-and-possessions) there was a 2% increase in arrears for buy-to-let mortgages. These mortgages are often backed by other rental properties and the structure of the finance arrangements such as interest-only mortgages on multiple properties make rate increases and cost of living issues particularly risky to the owner (repossessions are still somewhat skewed due to COVID mandates and guidance so the large quarter on quarter increases may not be fully representative). The UK is not the only place this will impact – Canada has a huge debt-driven real estate market with debt to income ratio is pushing 200%. This means that for ever $1 earned, $2 is owed! Coupled with the lagging effect of rates, decreased GDP and higher unemployment things could start falling over in a big way. What is the central bank meant to do? Decrease rates to help and restart the higher inflation push . . . [more] difficult times ahead.
Anyway, I digress. Back to the news for the week: 7 currencies all have big announcements!
Red Flag news:
USD
Big Fed funds rate out this week. A strong consensus is that 50bps will be the size of the increase.
With the NFPs printing strong, unemployment remaining at low levels, and statements such as “ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting” from the Fed I think the risk is to the upside. But the CPI release on Tuesday could impact any decisions. If inflation prints higher than expected I think the probability of 75bps increases – or potentially 50bps with a statement to say that higher (in excess of 5.25%) rates are required in 2023. This could see the dollar rise via the search for yield and fears about increased chances of recession (safe haven).
Last week’s services PMI and factory orders were better than expected, potentially giving a bit of slack for a bigger-than-expected increase.
Eurozone
It’s cold in Europe. I’ve had sub-zero temperatures for the past week and as I write this I can see snow falling outside. This brings the gas situation back into play. There are still high levels of gas storage across the EU (approx 89%) but if the winter turns out to be cold for a prolonged time, the outflows from the storage could increase. There is less risk of running out this winter, but the risk is the Eurozone raising concerns about refilling this storage next year without Russia. Reducing demand this winter to go into next year with higher levels via decreased supply to manufacturing and production requirements could impact this. But, the German Network Regulator President said “We Consider Uncontrolled And Widespread Power Outages To Be Very Unlikely”
But if the price of gas goes up, this will add to the costs, both the costs of living and the cost of business may increase.
November inflation prints lower than expected and intent to slow rates sees the expected terminal rate between 2.75 – 3% (taken from ECB.europa.eu)
With the rate currently at 2%, a 50bps increase would leave a potential 25-50bps next year.
ECB members have said the interest rates are the main weapon against inflation with QT being worked to support in the background.
The risk of recession in the Eurozone is beginning to look worse and deeper – any signs to confirm this could result in EUR weakness via flows to safe haven currencies in a risk-off environment.
ZEW surveys from Germany (Tuesday) tend to be pretty good at leading/forecasting German and Eurozone GDP, if that is coupled with poor news this week, I would look for EUR to drop.
Rest of the World
China announced that its COVID restrictions and requirements would be scaled back. Although not an official break from COVID zero, scaling back on testing and restriction of movement implies that COVID zero is likely on its last legs. Opening the economy for work and potential tourism may support the NZD and AUD currencies via increased exports.
But a break away from COVID zero does represent a challenge to China as increased movement usually increases infection rates and therefore pressures on hospitals. With poor healthcare, poor vaccination rates, and poor vaccine efficacy there are a lot of risks to a full reopening.
GBP: Financial industry reform was announced by the chancellor – in the hope to boost growth – it’s unlikely that this will impact markets in the short term.
Inflation, cost of living, and recession risks are the major factors here. There could be a perfect storm of lower GDP, increased inflation, and increased cost of living which could be triggered by the strikes which have been ongoing for the past month and are set to continue throughout December. Increased wages to combat the cost of living can drive inflation and impact on business growth. Wages need to increase to combat the cost of living but there is a real risk that this increase in wages can worsen everything. A moderate increase in wages coupled with a decrease in inflation and high growth would be the perfect mix, but this seems increasingly unlikely. If the BoE hikes in an attempt to get inflation under control, making the cost of living situation worse, driving more demand for wages which could in turn drive inflation higher.
CHF: Swiss rates are still very low compared to its peers but the CHF has never been a high-yield currency compared to its peers. The CHF’s strength lies in its stability and safe haven status which may come into play now. With 0.5% a safe haven outside of the dollar and the negative-yielding yen might support swiss in the coming year.
JPY: The big factor with the yen is the yield curve control in play. Gov. Kuroda during last week said he is sticking to the ultra-low rate policy. But a couple of things are important. That statement was brought about by a BoJ board member suggesting a review in the policy framework. This hints at internal pressures to at least review YCC.
Secondly, Kuroda’s time as governor ends in April 2023 – this could be a trigger to review all of BoJ’s policy.
Japan has several areas which are needed to be addressed – but a shift towards new industry (semi-conductors) as well as new BoJ policy may radically change the yen’s performance.
CAD: There are a lot of risks to the CAD without very many opportunities. As a major exporter of things like oil, gas, and raw materials a slowdown in global growth would hit CAD GDP. Combining that with Canada’s real estate issues could be a big problem. The debt ratio is among the highest which although never truly good, is a lot better in low-credit cost environments. CAD is currently the joint-highest major CB with rates of 4.25% which will be adding significant pressure on household debt servicing. With credit card debt at a record level in Canada, once this cheap credit runs out and needs to be repaid and there is no other credit available to service existing debt, it doesn’t look very good.
We are NOT a “tipping service” our aim is to teach you how to trade for yourself.
Kind regards,
James
