Kiwi heavy after RBNZ: NZDJPY idea on hold

The NZD fell after the Reserve Bank of New Zealand expectedly kept its benchmark rate unchanged. RBNZ governor Graeme Wheeler highlighted the NZD's strength. The reserve bank regards the NZD as overvalued (i.e. a drag on exports), and as such, the NZD may be the main factor in the decision on when to begin hiking rates. My NZDJPY long idea is clearly looking less attractive as of today. The pair is still on my watchlist, but an imminent trade is unlikely due to downside risk to the NZD.

Regarding the JPY, Shinzo Abe reportedly told Donald Trump he should discuss currency matters at international forums, such as the G20 summit in Hamburg in July, instead of using Twitter. Possible Hamburg accord?

NZDJPY Daily 09/02/2017Open positions as of 09/02/2017 08:31am CET:
EURTRY short from 4.0524, unrealized return: +2.71%
EURUSD short from 1.0795, unrealized return: +1.21%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +4.62% from 4 trades

Money trumps everything: Foreign investments in the U.S.

Isn't it interesting how pithy comments by Donald Trump set so many wheels in motion so quickly? Apparently, this is even true for countries that are potential targets for criticism by the U.S. administration for being alleged currency manipulators or unfair trading partners. Unbalanced trade is a major issue for Team Trump. China is the prime foe, but countries such as Canada, Mexico, Germany and South Korea, who feature trade surpluses with the United States and some of whose currencies are undervalued relative to the USD as measured by PPP, are in Trump's crosshairs, too.

Perhaps the jawboning is a tactic by Donald Trump, the dealmaker, his opening move in lengthy negotiations that will ultimately lead to more jobs in the U.S. and an increase in exports by American companies. The president's tough stance on trade has borne fruit already: Several American corporations have committed to building factories in the United States instead of Mexico. Now even foreign entities seem to be succumbing freely to Trump's demands: Japan's Government Pension Investment Fund (GPIF), which controls more than $1.1 trillion in assets, is reportedly planning to make substantial U.S. infrastructure investments, and technology giant Samsung Electronics may build a new U.S. factory for home appliances. Trump is selling these headlines as early success stories on his way to fulfilling his "Make America Great Again" campaign pledges. Looking at it more objectively, one must ascertain that these "successes" have been achieved without any resistance whatsoever. Let's see how his tactics hold up once he actually has to negotiate with another country. Trump hasn't really been tested so far, but we already know how badly he reacts under pressure.

DXY Dollar Index 03/02/2017Finally, a quick afterthought relating to Peter Navarro's criticism of Germany: While it is true that German exporters benefit from a weak euro, it has been the ECB that weakened the common currency (indirectly, mind you, because it's not really within its mandate to do so). German politicians as well as Jens Weidmann, president of the Bundesbank, have openly opposed the ECB's lax monetary policy. Hence Navarro's statement that Germany manipulated "its currency" to gain an unfair competitive advantage is hardly justified - you might even go as far as saying it's utter nonsense. My original commentary here.

Open positions as of 03/02/2017 12:38pm CET:
EURTRY short from 4.0524, unrealized return: +1.27%
EURUSD short from 1.0795, unrealized return: +0.55%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +2.52% from 4 trades

BoJ holds stimulus, JPY little changed

The Bank of Japan kept its stimulus package unchanged and only marginally adjusted its inflation forecast. BoJ governor Haruhiko Kuroda (still enjoying himself in Davos) said it was "too early to discuss an exit strategy". Although inflation is still well below the central bank's 2% target, the recent bout of JPY weakness has taken pressure off Kuroda & Co. to do more. Uncertainty of the effects from Trump's policies may also have played a role in the BoJ's decision to take it slowly. The JPY is little changed. I expect more JPY weakness going forward, NZDJPY long being my favoured trade idea. Looking for breakout above 83.75.

NZDJPY Daily 31/01/2017Open positions as of 31/01/2017 8:52am CET:
EURTRY short from 4.0524, unrealized return: +0.36%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +1.06% from 3 trades

The dollar will be stronger going forward

My frequent readers know by now that I've been very vocal about US dollar strength throughout this year. It is true that there have been many a times during the past 12 months when the dollar depreciated against the euro and, in particular, against the Japanese yen. That was usually the case when the Federal Reserve kept the market guessing about its future policy moves, including the timing of its first interest rate hike, or when the European Central Bank could not persuade the market of its capability to sustainably increase inflation through its monetary policies, such as negative interest rates and extensive quantitative easing programmes. However, no matter how tenacious the dollar's sideways range has been (just look at EURUSD, which had been stagnating since April 2015), I've always stuck with my conviction that the US dollar would ultimately emerge from this inconvenient bout of range trading as the stronger currency in comparison to the rest of the G10 currency basket.

The main reason being that the US economy has been able to put its economic recession behind itself earlier than European economies managed to do. This time gap of perhaps one to two years was a strong indicator of increasingly divergent fiscal and monetary policies in the US and throughout the euro zone that would help strengthen the US dollar and, on the other hand, devalue the euro. Although this did indeed happen to some degree up until March 2015 when the EURUSD exchange rate came close to reaching $1.05 but instead came to a halt at the intersection of two long-term trend lines and entered the aforementioned sideways market. I must admit that I greatly underestimated the amount of time it would take for the US dollar to resume its appreciation, and that it would be the election of Donald Trump as the next President of the United States that would trigger the dollar's renewed vigor is still somewhat beyond me.

Anyway, the time has finally come that we're seeing a strong trend in EURUSD again. The only thing that worries me at this time is the pace at which it unfolded. Within merely 10 trading days we went from the election night high of $1.13 to today's low of $1.0568 -- that's almost an eight big figure move without noteworthy backlash! The daily RSI currently reads 22 and other oscillators confirm that the pair is oversold. While I appreciate the fact that such moves often extend even beyond these levels, I must also acknowledge that the previously favourable risk-return profile of the EURUSD short trade has worsened significantly, which is exactly why I closed my USD long trades yesterday. Traders thinking about selling the euro versus the US dollar should think thoroughly before doing so. Personally, I expect a bit of profit taking to begin soon, but I will stand ready to buy the US dollar again once the extreme momentum has abated. The US dollar still has the majority of arguments on its side, and that is not going to change unless the ECB and, more importantly, the Fed will disappoint in December. Next month will be at least as interesting (or should I say, challenging?) as this month turned out to be.

New Normal: Strong NFP, weak USD

According to today's NFP release, 288k jobs were added in April, a lot more than the Bloomberg consensus forecast of 218k. In addition, the March number was revised upwards and the unemployment rate declined to 6.3%. Still, USD strength was only temporary with volatile price action immediately after the release and profit-taking in the hour that followed. For example, USDJPY soared up to 103 but quickly fell back to earlier intraday levels in the 102.30/.50 range:

USDJPY Tick Chart 02 May 2014

Decreasing volatility is still a hot topic for USD pairs. After a few swings on Wednesday, EURUSD 1m implied vol is back below the 5% mark, slowly approaching its 2007 low of 4.65%. Central banks, most notably the Fed, have swamped markets with liquidity leading to artificial USD weakness but also purchases of European equities, which arguably continue to support the EUR.

Speaking of equities, the NFP release was also notable because the S&P 500 mini-future <ESA Index> actually fell after traders realized that this was in fact positive news, which, in today's perverted market can only mean negative news for equities. After all, chances are that the Fed will continue tapering if the economy does relatively well. Bad for equities, right? Following this erratic ESA move, prices recovered (see chart), apparently supported by disappointing NY ISM data and a lower-than-expected 1.1% MoM change in new factory orders. As of this writing, however, the SPX is trading relatively unchanged around 1,880, rendering today's data releases a factual non-event. In the meantime, the VIX is slowly approaching the 10% level. Back to (the new?) normal.

ESA Index 30m 02 May 2014