August is traditionally a go slow month with most market professionals taking time out for their vacation. Nonetheless its usual to see price volatility step up even if volumes step down. Its enticing to imagine these price moves are very trade-able but all to often they are not as they are algo driven and usual cross asset correlations are unreliable for market timing during the holiday period. Its also rare indeed for new price trends to emerge conclusively in August. Having said this the US$ does appear to have confirmed a new bull trend vs almost all and this could meaningful in itself unless the euro is to become a funding currency which, in the near term, appears unlikely.
Regardless of the false August price signals here below are a selection of recent reports.
Firstly up here an update from Fitzpatrick at Citi.
Instruments are finally moving in the direction of his trades. Issues like the USDJPY pair that is a large allocation for him are at least showing a profit and have scored a price breakout of trend but he is far from there yet. A quick reminder, his macro stance has been strong US$, alongside a renewed wave for the commodity secular bull. The two are usually inversely correlated so this was always a non consensus call from Fitzpatrick. Lets see how this plays out. He is also a believer in the secular gold story but has no position on this instrument at present.
Next up the AG report from Friday last week:
AG have stuck relentlessly to their bearish guns. Finally price appears to be moving their way though they expect much more weakness to come.
Here below a very insightful technical report this week from GS.
To me what catches my eye here, (aside from the usdjpy – jury out, weakness in the nik225, breakdown dax and weakness spx) are the UST comments.
GS on one hand discusses and is trading short some equity markets (and risk in general) alongside us$ strength, which fits. But GS is a bear on US$ fixed income in general and is targeting a 3% yield on the UST. This is a meaningful call as its not the usual correlation and sits at odds with the bull call on the bunds. This needs some digestion.
Moving to FX clearly the big consensus move is the strong US$ trend. The euro which for so many years has retained her value appears to cracking vs the US$. As the US$ is usually the world’s funding currency this is usually a sign of tighter liquidity which is usually bad for risk markets as credit tightens. This is the recent post Bretton woods history but the new wild card is whether the Ecb is finally prepared to flood the world with freshly created euros. If she does the euro will become a global funding currency and, in this case, risk prices can continue their march northward.
For this ECB move to occur a few macro ducks need to align inc domestic German economic weakness (some signs!). And also the German constitutional court needs to conclude the legality of OMT, post the EU court hearing. Also the ECB must conclude their bank stress tests and finally the EU must conclude their banking union discussions. 2015 appears more likely for OMT than 2014 therefore unless a crisis forces the ECB’s hand more quickly.
Here a couple more bullish report to counter the above on equities from ML
And here from CS
Here MS on FX
Here jp
Finally lets conclude this technical update with the Swiss team’s regular update.
Another great report from the team and corrective bounce aside they put their hands up and proclaim the emergence of the US$ trend higher and a euro top is in. This is bearish risk as they point out. They are jury out on the aud. So long as the .92 level holds they still expect one more commodity bounce into q4 which i am also holding out for on my own book which holds commodities and their producers as well as AUDs, for now. My conviction on this is not as high as it was but the case is still there and will see capital inflows to the position if the UST does not get price support as equities struggle. Lets see on this one. The other asset class calls are stop on the money as correlating to my own practice. Ie counter trend rebounds for equities and the euro most likely. We are in August recall so low volume confusing counter trend rallies are very seasonal and therefore to be expected.
Here their latest:
Finally, on a personal note, whether you are hiking, sailing, or sitting on a beach with a beer, have a great August holiday. I’ve wasted plenty of time over the years trying to squeeze out August gains on the account to bump up my average. I’ve more often than not regretted doing this so this year i’m taking time out. Where i am trading i’m trading light and mainly on FX.
The best to all
Rich