Weekly Review and Outlook 19th September 2016

Mark NugentSept 2016, Trading Plan


Weekly Forex Review – Week Commencing 12th September 2016

Economic Calendar

Monday’s highlight was a speach by the FOMC’s Brainard (Voter, Dove) stating that the FOMC must not remove monetary stimulus too soon and that the case for hiking early is ‘less compelling’. (Newswires). Fed watcher Hilsenrath stated that a divided consensus among officials suggests FOMC will be tempted to avoid a September hike and that low inflation suggests a lack of urgency for rate hikes (Newswires). Goldman Sachs lowered its odds for a Fed hike next week to 25% from 40%. (Newswires). Fed’s Kashkari says economic recovery has been slow and frustrating. Atlanta Fed’s Lockhart is still keeping a September move as a possibility, despite the markets indicating December is more likely. It seems unlikely there will be a hike at next Wednesday’s FOMC meeting. CME Group is forecasting a hike in December.

On Tuesday, UK CPI y/y missed (0.6% vs expectation of 0.7%), causing a significant drop in the GBP. Core CPI y/y missed by a similar margin (1.3% vs 1.4%). German ZEW Economic Sentiment missed (0.5 vs 2.8). BoJ are said to explore delving deeper into negative rates and plans to make this the centre of future monetary easing, according to reports in Nikkei. The report further added that the BoJ will also discuss reducing purchases of 25yr+ JGBs and the increase of shorter-term bond purchases due to declines in long-term yields. (Nikkei). EU’s Juncker is said to warn EU it faces a battle to survive, an existential crisis in the EU between the western and eastern states. The eastern states tell him it is his fault and he is also to blame for Brexit. I love it how the new guys tell it like it is. (Telegraph)

Wednesday saw UK Average Earnings 3m/y of 2.3% vs expectation of 2.1%. In the US, Crude oil inventories declined by 0.6M barrels vs an expectation of an increase of 2.8M barrels. New Zealand GDP missed at 0.9% (1.1% expected).

Thursday’s main event was the Bank of England where the Monetary Policy Committee kept interest rates unchanged and as expected at 0.25% with a unanimous vote. Similarly, the Asset Purchase Facility (QE) remained unchanged at £435B, also voted for unanimously. The meeting minutes stated:

The Committee’s view of the contours of the economic outlook following the EU referendum had not changed. News on the near-term momentum of the UK economy had, however, been slightly to the upside relative to the August Inflation Report projections. The Committee will assess that news, along with other forthcoming indicators, during its November forecast round. If, in light of that full updated assessment, the outlook at that time is judged to be broadly consistent with the August Inflation Report projections, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year. The MPC currently judges this bound to be close to, but a little above, zero.

UK Retail Sales beat expectation and the prior number was revised up (-0.2% vs -0.4%, revised to 1.9% from 1.4%).

Thursday also saw US Retail Sales beating expectations (-0.2% vs -0.4%) and the prior number was revised upwards from 1.4% to 1.9%. Core Retail Sales also missed (-0.1% vs 0.3%) and the prior number was revised down from -0.3% to -0.4%.

Finally, Friday showed CPI m/m and Core CPI m/m exceeding expectations (0.2% vs 0.1% and 0.3% vs 0.2% respectively.)

Market Reaction

It was mixed on the equity markets with all US and UK markets up on the week and all others down. German bonds slipped back into negative yield but closed the week just positive. US and UK bond yields were slightly up on the week. Oil started the week above the 50MA and closed below the 200MA. The USD took courage form the CPI figures and leapt on Friday producing a gain on the week. The JPY strengthened all week, but not massively. The GBP dropped significantly on Friday as the BoE rate statement clearly indicated a further rate cut was likely before year end (meetings are 13/10, 3/11 and 15/12). As to the commodity currencies, the CAD feel on the week but the NZD and the AUD ended the week flat after dropping at the start of the week.

Trading Plan

The GBP weakness strategy paid off: one GBPUSD short closed for a gain of 1.1%, taking month-to-date to 1.65% and year-to-date to 24.7%. The JPY either-way strategy (with a strengthening bias) did not provide any attractive setups. The equity short strategy required us to monitor developments after the drop on 9th Sept and no setups developed.

Weekly Forex Outlook – Week Commencing 19th September 2016

Economic Calendar

The calendar this week is dominated by Wednesday’s US interest rate decision.

Mon – Japan bank holiday.
Tues – Australian Monetary Policy Meeting Minutes; New Zealand Global Dairy; Canada – BOC Gov Poloz speaking
Wed – Australia – Mid-Year Economic and Fiscal Outlook; Japan – Monetary Policy Statement and Press Conference; US interest rate and press conference; New Zealand Cash Rate and Statement
Thurs – quiet day
Fri – Canadian Core CPI and Core Retail Sales

Financial News

Bloomberg reports German chancellor Merkel’s election problems at the hands of the Alternative for Germany party. OPEC reported to be close to agreement to stabilise the oil market with  Iranian President Rouhani said to be involved, which is significant. Finally, there are reports of the astronomically high credit/GDP ratio in China which is seen as a danger to the banking system and is a measure that has often presaged banking collapses in the past.

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