Brexit?

BarroMetrics Views: Brexit?

Today, the Markit/CIPS purchasing managers’ index for the sector moved up to 53.3 from July’s figure of 48.3. This data is on the back of previous stronger than expected employment and CPI.

Figure 1 shows the 15-min GBPUSD chart. Notice the gap that occurred just after the news.  Figure 2 shows the rally within the backdrop of the sideways price action since July 6. Notice that today’s action retraces the down move following Yellen’s August 27 comments.

For me, the price action sets up the GBPUSD for a high reward short. If we don’t see a retracement down tonight, we have weak longs in the market – any Non-Farm number better than consensus will cause nervous longs to exit and thus causing the current up move to reverse.

Of course, the reverse is also true. A Non-Farm number below consensus will be accompanied by more upside.

Tomorrow I’ll have supporting arguments and contra-rise for a rate rise. The next test on the horizon for the USD.

2016-09-01 GBPUSD 15-min

FIGURE 1 15-min GBPUSD

2016-09-01 GBPUSD 290-min

FIGURE 2 290-min GBPUSD

Raise or Not Raise?

BarroMetrics Views: Raise or Not Raise?

The USD spiked against the commonly traded pairs on Friday, August 26 after Yellen said:

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”

Note that she did not say that rates would rise in September. Indeed, reading her speech, I could not find one iota of new information on the timing of the rate rise. Essentially she said:

Rates will rise if warranted by the data. At this point, the data suggests it could be possible rates at some stage“.

And so, we come to Friday’s Non-Farm. Consensus expectations range is around the 175k to 180k with the range at 125K to 215K (last month 255K).

If the figure comes our around 200k or more, there will be pressure on the FED to raise rates in September (if only for the sake of its credibility). Such a number will probably lead to a sharp rise in the USD and fall in the US stock market.

It’s unlikely that the FED will welcome this sort of ‘rate-rise’ pressure. It wants to raise rates so as to be in a position to lower them when the next recession hits. Also, it probably does not want to raise rates ahead of the election results. The Nov 1-2 meeting would be the ideal time (There is no meeting in October).

Long-term readers know that I see the employment stats as tending to reflect FED preferences. For this reason, I see Non-Farm coming at the consensus or the lower range of the consensus range. Such a result would allow the FED to bypass a September rate rise.

How would a consensus number (or a number at the low end of the consensus range) impact the USD and S&P? I’d expect that for Friday, the effect would be for the USD to decline and S&P rally. We may see the USD give up all the gains it made post-Yellen Jackson Hole.

Will I position myself ahead of the number? Nope. But, I will look to trade the GBPUSD and AUDUSD if numbers come out at the extreme of the consensus range.

Black Swan

BarroMetrics Views: A Black Swan

Sometime in October or November, Italy will be going to the polls on a referendum called by Renzi. The referendum is for Renzi’s structural constitutional reforms. If the referendum succeeds, he’ll be free to carry out what appears to be much needed economic changes. If it fails, Renzi will step down – at least he has promised to do so. And, if he resigns, we may well see a parliamentary election that leads to Italy leaving the EU.

Unlike the UK, Italian participation in the EU is key to EU’s continuation. It is one of the core members and the third biggest economy. An Italian departure would lead to a break-up of the community.

What are the chances of Renzi losing the referendum? The polls suggest it is too close to call. And unlike the UK, I don’t follow Italian matters closely – so I have no personal assessment to rely on.

What I do know if there is a populist party, the 5-Star Movement, which has promised to withdraw from the Euro Zone if elected. It has won mayoral elections in Rome and Turin and is running even-stevens with Renzi’s PD party in the polls.

A loss to the 5-Star Movement under current conditions may well be the Black Swan that will bring about a decline in world stock markets.

We’ll see.

 

 

Whither the Summer Hols?

BarroMetrics Views: Whither the Summer Hols?

The doldrums should come to an end with most US schools returning towards the end of August. Moreover, the Non-Farm Payrolls are due on September 2. Given the conflicting views expressed by the FED chiefs on the US interest rise, the Non-Farm will be an important guide to the September FED meeting outcome.

Figure 1 shows that the S&P is at an inflexion point. A bullish-conviction bar close above 2242 will return me back to the 2009 strategy: long or out. A bearish conviction close below 2101 provides an Upthrust Change in Trend of a quarterly magnitude.

2016-08-24_18-15-42 S&P

FIGURE 1 13w S&P Cash

 

 

Thank Goodness for the Cable

BarroMetrics Views: Thank Goodness for the Cable

August is traditionality a tough month for traders. With the US summer school holidays, come light volumes, and directionless trading. This year GBP came to the rescue. Courtesy of Brexit, we have seen a strong downtrend develop.

Today the continuation of the trend will be either confirmed or rejected at 16:30 HK with the release of the UK employment numbers – expected to come in unchanged (4.9%) from last month.

Yesterday’s CPI led to a strengthening of the GBP when it came in at 6% rather than 5%. Pundits expressed surprise at the slight higher number. I don’t know why. In my view, Carney had telegraphed the inflation number when he told us that the BOE would continue with QE even in the face of higher inflation numbers.

I also believe that his comment also implied that the other measures of the UK economy would be worse than normal.

Yesterday’s rally allows a shorting opportunity. With expectations of an unchanged number, the GBP ought to give back the gains it following the CPI  – at least until 2:00 am Thursday (HK time) or 2:00 PM EST when the FOMC minutes are released.

I expect the minutes to show bearish inclination to raising rates. If so, we may see the GBP rally. The structure of the rally will indicate whether or not we have another longer-term shorting opportunity. I’ll cover that tomorrow.

While shorting the GBP (I prefer the GBPUSD pair) is strategically easy; tactically it is less so because it involves a time window between 4:30 PM Wednesday (HK time) to around 1:00 am Thursday (HK time). Given the time window, we’d need to take a position ahead of the number. Executing this entails additional risk.

I’d cope with the risk by taking a position size of no larger than half normal size and seeking to cover if the number comes in better than expected or within expectations.

The target would be around 1.2877 or exiting at 1:00 am, Thursday  (HK Time).

 

Fed Rate Rise September?

BarroMetrics Views: Fed Rate Rise September?

On August 3, Jerome Powell gave some interesting comments at the Brooking Institution conference.

Powell is a member of the Federal Reserve Board of Governors. He told the Finanical Times that “he favoured a ‘very gradual path’ for any rises as US economic outlook was dogged by global risks”.

Note however, that the comment was before the better than expected Non-Farm payrolls number of August 5.

Will that cause him to change his mind?

I think not. He as been consistent is saying that the rate rise ought to be done gradually. I rate him as a ‘1 Dove’ although Bloomberg rates him as ‘neutral’ (See Fed Hawke to Dove Scoreboard)

 

A GBPUSD Short

BarroMetrics Views: A GBPUSD Short

Back home and the jet lag? Well, slowly getting better. The first day, I went to sleep at 5:00 a.m. and got up at 12:00 p.m. Hopefully today will be better.

While in New York, I took a short GBPUSD ahead of the BOE rate decision.

Figure 1 (13-week swing chart) was the basis for my decision. Brexit resulted in a downside breakout from a congestion that started on January 23, 2009.

The pair then bounced off the Linear Regression Primary Buy Zone and retraced to 1.34789. I consider that retracement to be a retest of a 5-day swing magnitude.

If I am correct, we should now see a move to the 5-d Primary Buy Zone at 1.28774 to 1.27810 (Figure 2). At time of writing, the Value Area low at 1.30186 is providing support. A daily close above 1.13253 will provide a ‘death zone’ buy signal and will suggest that the high at 1.3480 will be breached.

So, the 1.3253 level provides a basis for a ‘line in the sand’ stop for the shorts.

There you have it:

  • Entry
  • Stop
  • Profit target for the 2nd third (Rule of 3).

2016-08-08_11-43-48 GBPUSD 13-w

FIGURE 1 13-week GBPUSD

2016-08-08_11-44-19 GBPUSD 5d

FIGURE 2 5-d GBPUSD

Up or Down? II

BarroMetrics Views: Up or Down? II

Yesterday, I provided the technical context. Today, let’s consider a possible trade.

Figure 1 shows the 290-min GBPUSD. We see a possible running correction. If this view is correct, we’ll see the lows at 1.27912 established on July 6 taken out.

Figure 2 shows the alternate view: the move to 1.3102 was a correction to form a measured move up.

The BOE decision tonight will determine which view is correct:

  • A rate cut will lead to Figure 1;
  • A decision not to do anything will lead to Figure 2.

I rate the chance of at least a .25 cut at 67% and have made plans to short the GBPUSD should that come about. A ‘no-cut’ decision, means I stand aside.

2016-07-14 GBPUSD 290-min 5-p (1)

FIGURE 1

2016-07-14 GBPUSD 290-min 5-p (2)

FIGURE 2

Pairs in CrossHairs?

BarroMetrics Views: Pairs in CrossHairs?

There are two forthcoming events that should determine the near-term direction of the GBP. Before I come to the two, let’s have a look at the USD following the Non-Farm.

The number was a very good one over 50K above the consensus number. In the past, such a posting would have sent the S&P down and USD strongly up. Yet, on Friday, we saw a stronger stock market and flat USD.

I thought perhaps we’d see the USD take off this morning, but so far nary a whiff of bullishness.

The best explanation is the markets believe that the FED will not raise rates in July and will not raise rates in 2016. So, if I am looking to short the GBP, I need to focus on what will move the GBP.

And this context brings me to the two events:

  • July 14, the BOE to lower rates?
  • July 29, the EU bank stress test. I am interested in the Italian results.

I expect the BOE to cut rates. The news since Brexit has not been good, e.g., consumer confidence took a big hit (UK Economy Showing Brexit Effects).

It seems to me that putting aside the knee-jerk reaction to a decision to leave rates unchanged (GBP up), the sentiment is such that, in the days that follow the BOE decision, the GBP will head south –  on the basis that Carney failed to show support for the UK economy.

If he does cut rates, the GBP will head south.

Whatever the BOE decision, it will leave the GBP exposed to the July 29 stress tests.

I expect that the July 29 report will place great stress on the Italian banks. (See Essential Repairs). Renzi has said he’ll resign if the referendum fails. Accordingly, he needs to keep the Italian public onside. Now, if a main Italian bank, e.g. Monte Pashi looks likes crashing out, retail investors will lose big time (Essential Repairs).

In the event the bank threat comes to pass, I can see Italy bailing out its Banks whether or not Germany likes it. Such an Italian move would threaten the existence of the EU. The resulting uncertainty will cause a further decline in the GBP.

Let’s see what happens………

 

 

In Hibernation

BarroMetrics Views: In Hibernation

The FX markets seem to have retired for the winter – well, perhaps that’s an exaggeration. But, we can say they are in a state of hibernation. I see it as the calm before a storm.

Let’s see what the European and Aussie pairs have been doing…..

At the airport yesterday, on the way home, I was met with the FT headline:

“Renzi ready to defy Brussels and bail out Italy’s troubled banks”. (see attached for the full story).

I was expecting to see a reaction in the GBP and Euro crosses. Instead, there was nary a response. This morning I read:

“Italy denies report on EU bank bailout revolt”.

The attached shows a one-line rebuttal with no details. Perhaps the denial was the reason why the FX response was so muted?

But, then we have the AUD situation. The elections are on a knife’s edge – a hung Parliament is a real possibility. But, instead of the drop we’d expect to see on ‘uncertainty’, we see the AUDUSD post a reasonable rally of 106 pips.

What then would be the reaction once the results are known?

The stillness permeated into the US stock indices.

The S&P had a very quiet day forming a DOJI after three strong up days and forming right on resistance levels. A pause before the next hurricane?

I have been out of the markets since Brexit because I wanted to see how the markets would respond. I think it’s about time I started preparing for the next trade.

Renzi ready to defy Brussels and bail out Italy’s troubled banks — FT

Italy denies report on EU bank bailout revolt