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Trader thoughts - the long and short of it

The FX markets have again shown the biggest move across financial markets, specifically USD/JPY, which had already been reacting through Asia yesterday.

USD
Source: Bloomberg

The USD index (DXY) is down 0.6% on the session, largely as a result of good buying in the US fixed income market (the ten-year treasury is currently down six basis points at 2.40%) and for the technical-minded folk out there, we can see that it looks set to complete a fairly well-pronounced head and shoulders pattern. The wash-up is that pattern suggests the USD is going lower in the short-term.

This good news for emerging market is no doubt seeing the iShares MSCI Emerging Market ETF (EEM ETF) gaining 1.4% and breaking out. One for the radar, but it seems this ETF is going higher in the short-term.

USD/JPY is interesting as we have seen price under pressure and eyeing a break of the 18 January swing low, which sits at ¥112.57, and a break here takes us to ¥109.90. AUD/USD has not really pushed higher despite the broad USD weakness, with price trading in a range of $0.7588 to $0.7550. We can see price holding the five-day moving average at $0.7555 and one suspects we will need to see tomorrow's core inflation print at, or above, 0.7% to push price through the recent highs and into $0.7700 to $0.7750 - where things get very interesting.

GBP/USD has seen good buyers, with price breaking through $1.2500 ahead of tonight’s (8.30pm AEDT) UK Supreme Court ruling on parliament's involvement in the Brexit process. Long positions are preferred here for $1.2700. Short EUR/GBP looks interesting here as well. I would try for a move into GBP0.8500, with a stop above GBP0.8663.

The buying seen in US fixed income has been noted, with some re-pricing of interest rate expectations, and the probability of a Federal Reserve (Fed) hike in June falling from 72% (on Friday) to currently sit at 69%. There has been some degree of concern from interest rate traders about protectionist measures under Trump’s trade team of Peter Navarro, Robert Lighthizer and Wilbur Ross, although we are still yet to hear about trade tariffs, which of course is the big issue. Politically, the overnight focus has been on the US formally withdrawing from the Trans-Pacific Partnership (TPP), among other executive orders. There is also speculation of a formal renegotiation of the 24-year old North American Free Trade Agreement (NAFTA) agreement. 

On the equity front, US markets continue to trend sideways and my view yesterday of trading the range still feels right. The US volatility index (VIX) has moved 5% higher to 12.12 but remains at very subdued levels. No one is really expecting or positioned for a pick-up in volatility in the coming 30 days or so. I am keeping an eye on support through 2260, where the buyers have been very active in 2017, so a close through here takes the index towards the 30 December low of 2232. A break below here would be a big development and I would expect a strong move higher in the VIX as traders buy volatility, with the cost to hedge portfolios increasing.

Q4 earnings ramp up tonight with Johnson and Johnson, Verizon, 3M and DR Horton out with numbers.

The wash-up of the overnight leads is that we should see modest strength in the ASX 200, with a flat open in Japan. Market-moving data is thin on the ground, but it really ramps up tomorrow with Aussie Q4 inflation at 11.30am AEDT. For now, the big question is whether this early strength in the ASX 200 will be sold from around 10.15am AEDT. Literally every day from 9 January early strength has been used by money managers to increase cash levels and by more aggressive traders to put on short positions. Short selling the market after the open and buying back before the official close has worked well of late, so will we see it work today? I suspect it might.

Looking at the various ADRs, we can see BHP potentially opening 0.8%, CBA +0.6%, with NCM +1%. Commodities are largely supportive, with good gains in bulk commodities. Gold is interesting, and while we have seen clear indecision from market participants, a break of the 17 January high of $1218.98 would cause a fairly quick move up to $1241. It seems the bulls are just missing the emphasis to break this ceiling for now. One for the radar, though.  

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