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The wheels falling off the Trump reflation trade

The Trump trade of being long the USD and financials, short US fixed income and precious metals is being unwound fairly rapidly and I suspect there is more juice in this trade.

New York
Source: Bloomberg

The Federal Reserve (Fed) has suggested upside risks to their forecasts from yesterday’s set of released minutes, but the checklist of things that genuinely need to go right to achieve the strong inflation forces many had positioned for is being fully assessed. Traders are banking profits and with it, one can look at ways to join the growing trend.

I have been looking at long platinum trades of late, predominantly based on strong seasonal factors we see in January (platinum is up 15 of the last 17 January’s) and price is now pushing into my initial target of $1000 to $1020 and the November highs. I wouldn’t be overly surprised if price pushes even higher. Gold clearly has its eye on a move into $1200 and gold stocks should find some love in Australia today and names like NCM look really bullish on the daily chart.

The USD has been sold aggressively overnight, falling 1.2% and breaking the bottom of its recent consolidation range. This has largely been driven by fairly strong buying in the US fixed income market with five and ten-year treasury yields falling six basis points apiece. Put the TLT ETF (iShares 20+ Treasury bond) on the radar as this is a good way for traders to trade the US fixed income market. An upside break through 122.33 (the 50-day moving average) takes price into 125.00 and potentially even as high as 129.71, although that would require the wheels to really fall off the Trumponomics reflation trade.

The yield premium demanded to hold US ten-year treasuries over German bunds has fallen from 235 basis points (bp) to sit at 213bp. It’s no surprise then to see EUR/USD rally into $1.0600 and it could be headed for $1.0800 on this move. USD/JPY looks more interesting though to me (from a trading perspective), having broken through the December double top neckline at ¥116.04. I wouldn’t rule out a move into ¥113.50 from here and feel short positions for now are the way to go. I am happy to close the trade on a move back above ¥116.85.

AUD/USD has not seen as big a percentage change on the day relative to the USD’s move relative to the JPY, EUR and Scandinavian currencies, but there has been reasonable positive range expansion (the day’s range $0.7277 to $0.7356). The pair has rallied above the 21 November pivot low of $0.7311 and almost recouped 50% of the losses seen in the 5% fall during mid-December.

On the commodity side, aside from precious metals it’s been a fairly lacklustre day, although we have seen some volatility (we generally always do) in crude. Spot iron ore has gained 2.1%, although iron ore and rebar futures are only modestly higher and I would focus more intently at this markets. Copper has dropped 0.9%. Oil traders have had to deal with a massive (albeit largely predictable after yesterday’s API inventory report lead in) 7.051 million draw in the Department of Energy’s oil inventory report, but with price dropping 2.5% on the data release it’s clear that traders chose to look at the massive 8.3 million build in gasoline inventories. Support to the oil market has been seen though on views that the Saudi’s are complying with their new production quotas.

On the equity front and we have seen tepid selling in US markets and we are facing another subdued open in Australia. BHP’s ADR is up 5c, while some support should be seen in the financials space. The Nikkei 225 is still holding the recent highs, which is surprising, but if USD/JPY continues to move lower then we will see better downside to this much loved market. One for the radar and specifically if we see a close below the 29 December swing of 18,941 then one could look at short positions here. China remains a key focus, but not so much for moves in the equity market; all eyes have been on huge short covering in CNH (China’s offshore yuan) – sell rallies in USD/CNH from here. One suspects with the broad weakness seen in the USD we should see a far stronger CNY when the People’s Bank of China ‘fix’ the USD/CNY mid-point at 12.15pm AEDT today.

In terms of event risk, we have Aussie trade data at 11.30am AEDT with the market expecting a strong narrowing in the trade deficit to $550m. I wouldn’t expect too much of a reaction in the AUD from this print. The bigger issue is the US non-farm payrolls at 12.30am AEDT. Overnight we have seen a below-expectations ADP payrolls report at 153,000 jobs and this seen the consensus for tonight’s payrolls taken down modestly to 175,000 jobs (the range sits at 221,000 to 125,000). The unemployment rate should remain at 4.7%, with earnings expected to grow around 2.8%. The risks for markets or more specifically the USD and US fixed income (again put the TLT on the radar) is we get a poor number and we see a further unwinding of USD longs. A strong number will unlikely alter sentiment too much given the lack of reaction to last night’s strong ISM services data point at 57.2.

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