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Trader thoughts - the long and short of it

The market has started the new week selling USD’s and seemingly adding to what is the largest short position held on the greenback since 2013.

Market data
Source: Bloomberg

There is obviously much event risk that needs to be discounted into markets through the week, but in the early stage of the week, we can see EUR/USD pushing above $1.1800 and breaking out of the bull flag continuation pattern (prominent on the four-hour chart).

This pattern technically argues for a retest of the recent highs of $1.1900, but let’s not forget ECB head Mario Draghi speaks on Saturday at 5:00am AEST and the market wants to be long EUR’s ahead of that, on the view he should confirm that he will announce a tapering of the central banks bond buying program in its September meeting. It genuinely feels as if the market setting itself up for a ‘buy the rumour, sell the fact’ scenario into this event. I certainly would be looking to cut back EUR exposure before he speaks, as the risk of disappointment is certainly growing.

Let’s also not forget Janet Yellen, who has seemingly only has six months before she is replaced by National Economic Director, Gary Cohn, as is the widely held view by economists, speaks on Saturday morning (12:00am AEST) and just prior to Mario Draghi.

The Fed Chair speaks on ‘Financial Stability’ and if she keeps the focus away from low inflation and economic issues and focusses on the risks posed by the financial system then, in theory, the USD shouldn’t move to any great degree. The fact AUD/USD is somewhat higher at $0.7937 and potentially eyeing a weekly close above the 200-week moving average at $0.7979. While USD/JPY is dangerously close to a daily close below the 14 June low of ¥108.82, this shows the disdain for USD’s today, but also a view that Ms. Yellen isn’t a huge USD catalyst.

The USD/JPY set-up is certainly key here and the ‘must-watch’ chart of the day. While we have only seen only a very modest net change in USD fixed income, with the US 5-year and 10-year treasury sitting at 1.75% and 2.18% respectively. A daily close in USD/JPY below ¥108.82 would be a strong bearish development, as we can see the buyers supporting this level in the last two consecutive Friday’s. A break here could indeed even take the pair into the June 2016 uptrend at ¥104.30.

One also has to point out the moves in the USD and small change in both nominal and ‘real’ US bond yields have been another positive for gold. Gold is one of the talking points of the morning, with a bullish engulfing candle on the daily chart and the eyes of the market wanting to see if we can see, either today or tomorrow, a daily close above the double top at $1295/96.

The high thus far has been $1293.93, so the commodity is a fraction away from achieving this. If your preference is ETF’s, then keep an eye on the GLD ETF (SPDR gold miners), which is up 0.4% and is also threatening to make a clean breakout. Fundamentally, if the US debt ceiling becomes a major market worry, which it has all the hallmarks of becoming if Congress can’t agree on a plan by 29 September, then gold is a great short-term hedge against the impending anxiety.

Staying on the commodity theme, and despite USD weakness, we have seen some selling of crude and the commodity trading just over 2% lower on the day. Importantly, the bulls want to see the 17 August lows hold or the pair heads back into $45.00, but for now that looks likely and we eye this week’s API and Department of Energy inventory reports as a source of inspiring and adding fuel to the five rig reduction in the weekly US oil rig count.

Iron ore futures are where the real momentum is though and the bulls have given this a solid workout, with price breaking above the 7 August high and trading to the strongest levels since 24 March. Clearly, if you bought into FMG after their defiant message to the market about the levels of expected cash flow and balance sheet flexibility yesterday, then you should be fairly happy with how today’s open is shaping up.

In equity land, we have seen very little change in the S&P 500 (closing +0.1%), Dow (+0.1%), Russell 2000 or NASDAQ 100, and SPI futures are sitting up 2 points from 4:10pm AEST and the official close of the ASX 200. An unchanged read is firmly in play, although the event risk comes in the shape of earnings reports from BHP (consensus expectations for revenue -$38.725b +25.2% yoy, underlying earnings $7.334b, dividend 88c, and net debt 30% to $18.07b), SYD, AMC, MND, ACX, OSH, VRT and WSA.

BHP obviously get the limelight here and the market was happy to buy into this name yesterday, although BHP will have to come out with some solid earnings and a rosy outlook for the market to push this one through the recent highs of $26.50. After FMG’s news one suspect’s capital management is going to be a strong driver of price action too.

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