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Wednesday, April 5, 2017


The dollar index was firm yesterday and put in a two-week high, but crashed overnight near the end of the Asian session, only to rebound after Europe came in. We don’t see a comparable move in the yield chart, so we can guess that Asia was more concerned about N. Korea shooting off another missile into the sea, only days before the Trump-Xi meeting.

Yield action is marginally dollar-supportive. The 10-year closed at 2.350%, the same as the day before, and is quoted at 2.365% this morning. But the low yesterday at 2.316% was the lowest since Feb 27 and there is talk of a drop to well under 2.25% instead of the rise to 3% by year-end that underpins the dollar.

In the US, yesterday’s data included the Feb trade deficit at $43.6 billion ($48.2 billion in Jan), with nobody caring much that rising exports get the credit for the deficit contraction. The deficit with China fell to $23 b from $31.3 in Jan. Bloomberg points out the drop in the deficit with China is the biggest on record, due to Lunar New Year on not. Eight states have a surplus with China—we seldom see trade expressed on a state-by-state basis. (It’s usually California that likes to do it). And finally, China is the top buyer of US crude oil exports.

Other News:

Improvement in trade inspired the Atlanta Fed forecast for Q1 GDP to edge up to 1.2% from 0.9% last week. Note that trade is less of a drag but is still a negative.

In France, a televised debate last night with 11 candidates saw LePen outfoxed by one guy who is more serious about Frexit (the Commie) and others who pointed out she has no real policy slate. LePen came in 4th in two snap polls afterwards.

In Japan, the March PMI services index rose to 52.9, a 19-month high, from 51.3 in Feb. In the UK, the services PMI rose to 55 from 53.5 in Feb, setting off a sterling mini-rally.

In the eurozone, the services PMI rose to 56.5 when 56.0 was forecast. German services PMI rose to 55.6, matching the forecast. It’s the best quarter in six years.

FX Oultlook:

The FX market continues to tread water, in large part on data coming in lower than expected (PMI’s, auto sales) but the June rate hike still seemingly on the table. The CME FedWatch tool gives the June hike a probability of 58.9%, the same as the day before. And yet the bond gang is not on board. The 10-year yield low yesterday was 2.316%, the lowest in over a month (Feb 27).

These two things are not consistent with one another and signal some deep differences on the outlook. We can have some hope that today’s Fed minutes might clarify matters (but don’t count on it). The Fed will introduce “confidence cones” around forecasts. Also, the Fed may address the subject of reducing the balance sheet, something that probably won’t actually get implemented until next year and not before lengthy and tedious talk. Like “crowding out” a couple of generations ago, the academics can have a field day and the fruitcakes will come out of the shadows. We are not looking forward to it.

And in the end, reducing the Fed’s balance sheet will almost certainly take a backseat to the upcoming changes in the composition of the Fed, with three vacancies by the end of this month and only seven persons on the Board to begin with. One Fed (Richmond Fed Lacker) has resigned for leaking information—what is it about Medley? This is the second time for them. Both Yellen and Fischer have terms ending early next year. One ray of light—so far cabinet appointments seem to sober up dramatically once in office, even the wildly inappropriate and unqualified. Too bad Kushner is too busy to join the Fed Board.

The independence of the Fed is at risk. This may inspire the current occupants to get on with it and try to ram through their program, even if it’s ahead of the curve this time. Normally the market complains about the Fed being behind the curve. But tepid data and Trump’s failure to achieve anything might be ringing an alarm bell. One player who sees yields falling instead of rising is Doubleline’s Gundlach, featured by Bloomberg. Gundlach sees a rally in the 10-year, meaning yields lower—far lower, at least in the short run and to a shocking sub-2.25%. Yields will come back, but he dismisses the idea of 3% this year. Gundlach sees the Trump tax cuts are “really hard to get done,” although infrastructure has a better chance.

This is a political judgment rather than an economic one but nobody can say it’s the wrong emphasis. Market News notes the 10-year has closed over 2% since the Nov 10 low at 1.991%. Support lies around 2.29-2.32%. A break of that level would target the Nov lows at 2.187 and 2.184% and perhaps even the Nov low under 2%. “It would take a move above the 10-year yield's 55-day moving average, currently near 2.447%, to allay fears about still lower Treasury yields and target a move to 2.50%.” Let’s just mention one little factor that might shake things up—oil is back on the upswing, in part on a cut in the North Sea Buzzard field (you have to love these names). We get the API inventory data later today and the EIA on Wednesday.

We also get the service sector PMIs from ISM and Market today, plus the ADP jobs estimate ahead of payrolls on Friday. As numerous analysts point out, March was a bad weather month that should suppress jobs. Lowered expectations, when met, are not necessarily dollar-negative. But they have to be fully built-in. If we are going to get a shock from payrolls, it might even be a positive one. But so far it looks like tepid data will be affirmed by payrolls and the overall bouncy dollar outlook will take another hit.

Contributing to gloom is Jamie Dimon saying plenty of things are okay in the US economy but “there is something wrong.” This is exemplified by low labor market participation, failing schools, anemic infrastructure spending and onerous corporate taxes and regulations. This sounds like the usual Trump talk but Dimon goes further: “It is understandable why so many are angry at the leaders of America’s institutions, including businesses, schools and governments. This can understandably lead to disenchantment with trade, globalization and even our free enterprise system, which for so many people seems not to have worked.” The US is paying the price for bad decisions, and “something has gone awry in the public’s understanding of business and free enterprise. We need trust and confidence in our institutions. Confidence is the ‘secret sauce’ that, without spending any money, helps the economy grow.”

This might be a backdoor message to Trump that his tearing down of trust in institutions (“rigged elections”) is counter-productive. So far what Trump has “achieved” is to pander to special interests, like giving guns to the dangerously mentally ill, and to throw handful after handful of dust into the eyes of the press and public to distract attention from the unhappy fact that the FBI is conducting a national security and criminal investigation into the Trump gang’s association with Russia. We are getting suckered by Trump but Trump himself may be suckered by fake news. There is no solid ground, just shifting sands, quagmire and sinkholes in public life.

If the Fed minutes, PMI’s, payrolls and oil prices are not enough, there’s the meeting on Thursday/ Friday of Trump and Xi. Trump has already caved to China twice by not naming it a currency manipulator on Day One as promised and by retreating to the One China policy after entertaining a phone call with Taiwan. As with Japan, Trump may be aiming for an actual trade deal, but at the cost of a showdown over North Korea. We say this is far too complex for Trump and can’t end well.

Something else that can’t end well is Syria. The US just sent another 500 troops to Syria after Trump spent several years screaming we need to stay out. He blames Obama for wussiness over the first chemical attack on civilians bringing about the second one. But to be fair, Obama asked Congress for a declaration on US military action in Syria and Congress declined even to debate it. If Obama had gone ahead anyway, he would have been accused of excessive use of privilege. Syria was a no-win for Obama and will be a no-win for Trump, too.

A third geo-political thing that is turning into a Trump loss is Mexico. Mexico’s Markit PMI may have bottomed. See the chart. The manufacturing PMI for March is 51.50 from 50.60 when a dip to 50.0 was forecast. New orders are up and input inflation, which reached a 5-year high in Jan, is lower.

Bloomberg had a splendid story yesterday on the “Hacienda Trade,” gigantic options-based hedges on the price of oil. The government team correctly saw the bubble about to burst in 2008 and wrote billions in puts, earning $5.1 billion in 2009. In 2015, it made $6.4 billion and last year, $2.7 billion. The reporter is impressed by the sophistication and market savvy of the hedging group, which even lobbied Congress against Dodd-Frank because it would constrain its American bank counterparties. Lesson: Can Trump do this? He has had to declare bankruptcy more than once. Let’s get Mexico to put the oil hedge guys on the trade panel. As we wrote yesterday, at least some Americans are rooting for Mexico vs. Trump.

Meanwhile, the dollar/peso has given back nearly all the gains it made on the Trump election. On the one-week chart, the dollar had broken out of the linear regression channel to the upside after the election. This is “abnormal.” Now it has broken to the downside, equally abnormal. Believe it or not, traders know the usual daily, weekly and monthly high-low trading ranges and they don’t need a channel to tell them when a price has gone “too far.” What this chart is telling us is that inflation, central bank actions and trade talks aside, the chart is sending a message that the dollar had gotten oversold against the peso and “should” correct upward to get it back inside the channel. Never mind that against other currencies, the dollar is faltering. The peso is its own special case.

 And the Commitments of Traders report from last week may vindicate this view, although we worry about reading COT data correctly. The material here comes from a site named tradingster.com. It shows non-commercials (the speculators) getting less short the peso and the commercials getting a lot less long (from 92,841 contracts in Sept 2016 to a net short of 1811 contract last week). In futures, for every buyer there must be a seller, so of course we see a mirror image here. Contraction of positions to really small numbers may suggest a pending change in sentiment.

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