Trader thoughts - the long and short of it

Anarchy reigns over the Oval Office, although you have to feel for ‘The Mooch’ as he has had as bad a week as anyone could ever imagine. (If we also include missing the birth of his child and his wife filing for divorce).

Still, Trump may have had to take a further step back to push forward, and the message has resonated loud and clear new Chief of Staff Head John Kelly is the boss. He is going to start to forge a team of his choice and he has the President’s full support in doing so. Perhaps this is the start of more stable times ahead, we shall see, but it has been a fascinating few days for those following US political circles. Reality TV for all to see.

The news of further personnel changes in the White House caused some buying in US fixed income and subsequently selling of USD’s, with USD/JPY falling a touch to ¥110.21. Price continues to work lower within the bearish channel (that started on 10 July).

I had been looking at the potential for upside in this pair, but specifically on a close through ¥112.08, but this clearly hasn’t eventuated and the trend, seemingly, is your friends. EUR/USD has been the pair to be long though, with price trading further higher to $1.1845. This seems more fitting with signs of further stability in Eurozone data, with core inflation just beating expectations at 1.2%.

The ECB’s Lautenschlager also talked up the need for a deeper discussion on an exit strategy, although this is thematic of just how complicated and strenuous the discussions will be.

With the strength in EUR in mind and the key event risk today being the RBA meeting (at 2:30pm AEST) put EUR/AUD on the radar, as price has traded through and could close above a$1.4777. This level has been a ceiling on the pair since mid-July and the move through here could open up an extension into A$1.5000 over time.

Of course, AUD/USD will get the lion’s share of attention from clients today and we see the pair trading just above the 80 handle going into the RBA meeting, having found buyers easy to come by thanks to the Scaramucci news and also the lazy 7.2% gain in the spot iron price. Iron ore futures are on fire at the moment and the retail trader momentum juggernaut is alive and well.

The old fear of missing out (FOMO) trade is driving new money into iron ore futures seemingly every day and if you are not long you’re wrong. Expect FMG and AGO to find strong buyers again on open.

A number of traders I’ve spoken to are somewhat concerned of holding AUD longs ahead of today’s RBA meeting.  The idea that the statement could show increased disdain around the level of the AUD, resulting in perhaps a tweak from its current language of ‘an appreciating exchange rate would complicate this adjustment’ to something a touch more punchy.

Personally, I’m not sure we do see a change here and there is also a good chance the weaker headline inflation read will be dismissed as transitory, so this in theory could disappoint those positioned on the bearish side of the ledger. How the AUD reacts is unclear here and the risks are symmetrical, but I sense traders will need to see a far stronger level of concern for the market to materially mark down the AUD here.

Recall, the communication of late has really centred on trying to convince the market that while other G10 central banks may be moving away from an ultra-accommodative policy stance (as their economies don’t require it any longer), the RBA never had to go to that level.

These central banks are merely moving in line with the level of stimulus seen in Australia. We are not them and these nations moving on rates does not imply we will move - a separation speech of sorts.

In equity land, we have seen the S&P 500 closing on a flat note, with signs of increased indecision from market participants. There doesn’t seem to be the conviction here to push the market into new highs, but the bears are just too frustrated because the market doesn’t want to go down and every pullback is bought.

The ASX 200 will feed off this US lead and an unchanged call is our base case here with SPI futures closing up two points and trading in a meagre 19 point range in the night session. A new month though for the local market, and of course new opportunities and the key questions on my radar at an index level are:

• Will the ASX 200 then break the 5850 to 5650 trading range? Moves in the S&P 500 and Aussie earnings will dictate.
• The monthly chart of the ASX 200 has seen two months of indecision (best seen as a ‘doji’ candle), with price closing close to where it opened the month, although there has been a strong contraction in the trading range in July, relative to June.
• Will SPI futures hold 5600, as this has been huge support since 21 June? A break below would be bearish development.

I suspect we will actually see some answer to these questions and they will resolve themselves far more clearly. How these issues play out only price will tell, but on what information we know now I would still be a very willing seller of the market into 5850 and a seller if SPI futures close through 5600.

Keep an eye on the energy sector as well today, as US crude (closed at $50.29 +1.1%) has broken into and closed through the $50 level. I had been a willing buyer of oil of late and happily held a long bias and see no reason to be short the barrel here. Just focus on the daily chart of crude.

Price did have a modest dip through trade, but found buyers at the five-day exponential moving average, which is what I’d expect in the trending market. The ASX 200 energy sector remains a ‘buy’ here given the strong underperformance relative to the crude price, really since mid-June.