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Trader thoughts - the long and short of it

It was certainly a livelier day of trade in the US on Friday. Judging by the pop we have seen in the USD, specifically USD/JPY this morning, we could see S&P 500 futures push higher on open too.

Market data
Source: Bloomberg

USD/JPY traded 0.8% higher at ¥112.97 (in interbank trade). Any moves in the S&P 500 futures should naturally support sentiment, not just towards Asian markets, but lift sentiment across a range of risk assets too. The six point lower close in Aussie SPI futures seems largely redundant if USD/JPY is any indication and our opening call for the ASX 200 should gravitate higher for test of 6000 on open. All the stars seem to be aligning for a positive day, although the early moves in FX markets have often been poor indicators, which is testament to the exaggerated nature of price moves thanks largely to liquidity.

Speaking of liquidity, and we have to touch on Bitcoin as the crypto currency is firing ahead and honing in on 12000. Perhaps the trade of the day (or decade) goes to the Winklevoss brothers, where there has been focus on the fact at today’s prices they have turned their initial $11 million investment (or 1% of the world supply) into a staggering $1 billion.

On the flip side, the Telegraph is running an article about James Howells, a Welsh IT technician who accidently threw away a hard drive he was using for mining Bitcoin in 2013 in a house cleanout. That hard drive sits in a landfill site in Wales and has reportedly over $100 million in coins stored on it. It sounds remarkably like the guy who sold out of Apple too early. We also have confirmation of the CME’s launch data for Bitcoin futures, which has been confirmed at 18 December and just in time for Christmas, with margins set at 35%.

Back in more traditional markets and there are a few traders still catching their breath after US markets actually showed some life on Friday. Granted, the moves were premised on fake news, with the ABC incorrectly detailing that Michael Flynn, who pleaded guilty for lying to the FBI, was to testify against President Trump in a bid for leniency. As the market saw the news and the talk of impeachment made its way round the floors, we saw the US 10-year Treasury head 10bp lower to 2.31%, USD/JPY collapsed 140 points (on staggering volumes) and the Dow fell 383 points. Calmer heads did prevail and we saw relief buying as traders saw headlines that any meetings Michael Flynn suggested didn’t happen were not actually about the US election and taken fully out of context. One can also throw in a strong US ISM manufacturing report and we saw equities move progressively higher, while selling came back into the fixed income market.

The weekend news has centred firmly on the Flynn investigation and also on the Senate passing its tax bill by two votes (at 51-49). Although most felt this outcome was expected and thus largely in the price, it is the reason why USD/JPY is higher this morning. So the chances of tax cuts being placed onto Trump’s desk to sign through have increased markedly, and we start this week with the process of reconciliation between both the House and Senate plan, while Congress is also trying to pass a continuous resolution (CR) to avoid a government shutdown on 8 December. Both issues should keep risk supported, and one questions what is going to really derail sentiment, as we head into the final month and one that is traditionally a great breeding ground for equity appreciation.

Turning to Asia trade, and the focus for local traders is also on the event risk stemming from Australia, although, of course, the themes out of the US and also the UK this week, with the Brexit debate heating up in a big way will require close attention. Specifically, Theresa May’s meeting with Jean Claude-Junker and Michael Barnier to discuss a number of key Brexit-related issues will garner attention from GBP and FTSE traders. This is without a doubt the most important week in the Brexit negotiations, ahead of the European Council meeting on 14-15 December. SPI futures fell 1% on the Flynn headlines but came back (in-line with the S&P 500) to close down six points, but this obviously doesn’t take into account the Senate vote, which apparently isn’t priced in.

Commodity markets give us a more optimistic view on the open too, with spot iron ore closing up 2.9% and back above $70. However, in the Dalian futures markets iron ore, steel and coking coal closed up an impressive 5.5%, 0.7% and 2.6% respectively. Oil has had a strong bid, with US crude closing up 1.7% at $58.36 and the ASX 200 energy space won’t mind that.

The focus of the day though also turns to FX and Aussie rates markets, with Q3 inventory (consensus expecting this at 12.00am AEDT) and Q3 Company operating profits (+ 0.1%) at 11:30am AEDT. Both play a role in forming Wednesdays Q3 GDP print, which at present is expected to show growth of 0.7% qoq and 3% yoy, and although the year-on-year print looks strong, one should take it into context that base effects make it far more compelling than it is.

AUD/USD was actually looking far more constructive on Friday, although the pair failed to close above the October downtrend at $0.7617 and is trading below 76c in early trade today. Happy to sit out until the market provides more colour on direction and that means either waiting for a daily close through $0.7646 or below $0.7551. The better short though (for those wanting to be short AUD) is seemingly against the CAD, as the CAD is flying and by far the strongest G10 currency on Friday, thanks to come cracking growth and jobs numbers on Friday.

Add to GBP/CAD fell 2% on Friday, in turn printing punchy bearish outside day reversal and this is a great pair to watch ahead of any narrative from tonight’s Brexit showdown. Of course GBP/USD and EUR/GBP will get the more dominant flow but a progressively bearish looking chart.

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