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Trader thoughts - the long and short of it

The risk was certainly elevated yesterday, but the trading session has been marked by a covering of USD shorts, with the USD index gaining 0.5% and EUR/USD really leading the charge lower.

Market data
Source: Bloomberg

We flagged the risk yesterday that speculative FX players had ramped up EUR/USD longs last week to sit at 128,000 contracts and the highest ever. Perhaps the four-hour chart shows the move in the USD index on the session best, and we can see a break of what is effectively a double bottom neckline at 9193, which in theory argues now for a move up to 9240 (price is currently pushing through the 9200 level). EUR/USD, itself has traded below the 4 January low and is trending lower on most timeframes, which is just so ironic. One questions whether this could be another year where the big consensus trade, that is being long EUR, actually fails literally a few days into the New Year. I am out of my EUR/USD longs, with little support seen in the pair at the 27 November high, and the move could easily extend into the former September downtrend at $1.1890.

It is a EUR move though, as EUR/GBP has been offered and has closed through the five-day exponential moving average. EUR/AUD looks like a great short idea here, with price looking like it wants to close through A$1.5278 and the December low, which in theory takes the pair in to $1.51. Certainly, it looks like a EUR position adjustment at this stage, although interest rate markets (euribor) seems to be at the helm and driving this move lower and mostly taking some of the sentiment from last Friday's miss to European core CPI. There is some focus on German politics too, where Angela Merkel is making positive noises about forming a government.

The weaker EUR has supported the German DAX (closing up 0.4%), but there is increased indecision here in the price and the break of the December high is less than convincing. One to watch, but the lack of any real follow-through buying in the S&P 500 is weighing a touch, where price (in the S&P 500) is perhaps a touch extended here and gives us some scope roll over in the sessions ahead. Naturally the bulls will want to see the 5-day exponential moving average (EMA) hold in the short-term, as this is trending higher and generally when a market goes on a positive run, which is what we have seen in the S&P 500 on so many occasions. When price trades into this average, the buyers support and we subsequently get new highs in the period ahead. A close through 2726 then and we may see a touch more downside, although pullbacks remain a buying opportunity on the current news flow.

There certainly has been little reaction in either the equity market or the USD to either Fed member John Williams, who detailed that central banks have less room to cut in the next crisis. That should be fairly clear-cut and known anyhow. Atlanta Fed president, Raphael Bostic (voter) suggested the Fed did not need to hike 3-4 times in 2018, which gives us real scope to understand he was one of those in the two-dot camp.

Certainly one has to believe the banks will come through with some solid earnings when Q4 earnings season gets underway this week, which is perfectly feasible and the XLF ETF (US financial sector ETF) is still holding its break out high and five-day EMA. So shareholders remain optimistic. There also seems little reason at this stage to believe that US core CPI, which is the mac-daddy of US data points, should move aggressively higher than 1.7% and the fixed income market seems to share these views in the lead up, with little moves across the Treasury curve and inflation expectations remain largely unchanged too. Recall, one of the key reasons why equities have been so strong is that inflation has given central banks few reasons to tighten.

Aussie SPI futures are basically unchanged since 4:10pm AEDT and the official close of the ASX 200 and subsequently our opening call mirror this, with an open of 6132 eyed. The market has looked heavy into 6150, so this will need to give way if we are to see 6200, but there is certainly little in the daily chart to suggest adopting short positions with any great conviction. It feels as though we are in a for a few days where price action is messy and lacking any real direction, where the buyers and sellers battle it out for some sort of dominance to re-establish a more discernable trend; be it higher or lower. Either way, it promises to be a day where the open, at least, will be somewhat uneventful and if we look at US markets by way of a guide we can see no clear trends in the sectors, although energy has pushed a touch higher, helped by a small 0.3% gain in US crude.

There has been mixed trade in materials, with gold miners under a touch of pressure with gold consolidating, but still holding the 5-day EMA and the playbook looks fairly straightforward with gold. That is, either it breaks higher through the recent highs of $1326, in which case jump on board as this is the trigger for a move into $1350 and would largely be a result of EUR/USD re-establishing its bullish trend. Or we see further USD short covering, where gold trades through last Thursday's low of $1306 and this would damage a lot of the recent good-will towards the yellow metal. One to watch, although USD remains the clear driver.

The event risk in the day ahead is hardly going to promote big moves as well, with Japan cash earnings unlikely to affect either the Nikkei 225, which continues to work nicely after the break of 23,050 or USD/JPY, which is only really affected by USD flows. In Australia, we get November building approvals, which are expected to fall 1% month-on-month or gain 5% year-on-year. This won’t be an equity story, and unless we get a huge miss or beat it is unlikely to cause any ripples in the interest rate market either. That said, poor numbers could be a tailwind for the AUD/USD where the buyers have lost the momentum and the sellers seem to have established a better say of late and would want to see a more progressive move through $0.7826. As I say, EUR/AUD is perhaps the pair to watch here, with German industrial production and trade and current account data all due at 6:00pm AEDT.

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