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Wednesday, July 12, 2017


Market Recap: The dollar index is off the overnight lows but still lower than last week as US yields continue to fall. Below is a chart of the Reuters 10-year yield index showing a failed upside breakout. Some analysts blame the wobbly dollar on the Trump political scandal, but we say yields trump politics. Besides, while Baby Trump may have broken federal election law seeking “something of value” from the Russian government, Daddy Trump can just pardon him. It’s awful, but it’s noise.

In other markets, oil is marginally firmer after the API reported a giant draw of 8.1 million barrels in the latest week. We await confirmation form the Energy Information Administration later today. This is a temporary factor, though. Overall, traders are not forgetting the shifting supply environment, or OPEC’s inability to cut production by enough (or reliably) to push prices up.

• In the UK, wage earnings rose 2% and unemployment fell to 4.5%, a funny combination. Inflation is running at 2.9% so the real wage rise is actually a drop. are negative. Bloomberg reports S&P Ratings complained that bad wage growth will restrain overall growth, Golly. BoE Vice-Gov Broadbent said yesterday it’s not time to hike yet and sterling tanked, but then (mostly) recovered.

• In the eurozone, industrial output rose 1.3% m/m for a y/y of 4.0%, zowie. The forecast was 3.6% and the previous month was 1.4%, revised from 1.2%.

The Bank of Canada is expected to raise rates by 25 bp today after officials spoke relentlessly for the past three weeks about the need for a hike. This is very like NY Fed Pres Dudley getting behind Yellen for the March rate hike in the US. It took 2-3 weeks of steady official support to turn the sentiment around. Up to now, the CAD has been the top performer against the dollar and we expect a retreat once the deed is done, but it’s not proven just yet. So far, the USD/CAD has retraced 50% of the last downmove on the 60-minute chart. We are not sure how much farther it will go.

The euro blasted through former resistance to a new high of 1.1487 overnight after a wild, one-way move yesterday afternoon. It’s the highest since May 2016.

 The Main Event The Reuters 10-year yield index closed at 2.362% from 2.371%, down from the high Friday at 2.396%. It’s quoted at 2.345% this morning, vs. 2.386% yesterday morning. We are still twiddling our thumbs waiting for the last high, 2.400% from May 11.

The Bund yield is lower at 0.534% from 0.548% yesterday morning and the 18-month high Friday at 0.58%.

Market Outlook:

Today we will find out if the BoC meets market expectations of a rate hike. As for the UK, yesterday BoE Deputy Gov Broadbent dashed cold water on the rate hike gang with the comment that “There is reason to see the committee moving in that direction, but there are still a lot of imponderables. It is a bit tricky at the moment to make a decision.” The next MPC meeting is Aug 3. As noted above, inflation is running at a rate of 2.9% but wage growth was only 2% in the latest month, an unhealthy combination.

Talk of the US leading a new cohort of central banks into tightening mode is probably premature. We may have a “global tightening bias,” as Bloomberg puts it, but bias is not action. This is not to say Canada doesn’t count. But Canada is heavily dependent on conditions in the US (and suffered recession after the 2008-09 financial crisis even though its banking sector remained in rosy good health).

The BoE is not immune to political considerations. Normally central banks try to avoid politics, but the UK is in a unique pickle because of Brexit. Yesterday Liberal leader and ex-Business Secretary Cable said “A whole generation of people with debts who’ve never had to deal with rising interest rates are going to find this hitting them. There’s something here which is not sustainable and it’s going to hit us very hard.” A rate hike would bring economics “back to center stage,” and this could lead voters to reconsider a range of issues, including Brexit. “People didn’t vote to be poorer. I think the possibility of this just not getting any further is now becoming very real.”

In contrast, yesterday the Daily Shot had a chart of the Bloomberg GDP tracker showing the eurozone growing at a rate of 3%, faster than the US. It not a stretch to say this implies the ECB will be on a faster track to ending QE.

More than one FX analyst (including Bloomberg) blames the dollar’s downtick yesterday to the realization that the Trump campaign really did collude with Russia to influence the US election, which is probably a violation of the election law as well as a shocking sign of amorality. At the least, Trump officials having to spend so much time with their personal lawyers distracts from getting the economic agenda on the move. Politics at this level is not, typically, an FX factor.

Besides, the health care bill is being revised yet again and Congress is delaying its summer vacation to deal with it, implying TreasSec Mnuchin’s promise of a tax bill in early September is not just hot air. That should be a favorable offset to the negative political scandal. Besides, the real core factor is the yield trajectory. Yesterday the 10-year yield slipped down to 2.362% from 2.396% at the high on Friday. The yield had broken the channel to the upside but is not maintaining momentum and is becoming another failed breakout. This morning it’s 2.345%. See the chart below. A return to the central linear regression would take it back to 2.171%, a level not seen since June.

Bond traders don’t have to talk to FX traders. They send their message in the yield. And the message is uncertainty about the time of the third rate hike. The un-sustained yield rise should presumably be interpreted as meaning the bond gang does not believe the hike will come in September, or if it does, it won’t be warranted by the data. The CME FedWatch Tool gives the Sept hike a 13.3% probability. Dec gets 47.3%.

The failed breakout may also mean that the bond gang does not expect Yellen to give up any hot news in Congressional testimony that starts today. She is likely to repeat the same-old justification for the hike in the absence of inflation on the Phillips Curve and to repeat that contracting the balance sheet is the normal thing to get started, albeit carefully and gradually. There is some speculation that Fed Brainard’s dovish stance dampens the probability of the third hike. Poppycock. She is one Fed. Yellen rules.

For the moment, at least, we have to expect yields to drop back after too-aggressive a sell-off. It’s a natural cycle of boom-bust in miniature. We may get a surprise in the inflation report on Friday that will bring this phase to an end, but it’s not likely. Unless Yellen surprises, and Yellen works hard not to surprise, the downward correction in yields should lead to a downward move in the dollar, too. We will need new data or a fresh perspective to change that—for a few days, anyway. May hay while the sun shines.



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SELL EURO/USD- recommended entry @ 11430 ( DAY TRADING)) STOP- 11467, TAKE PROFIT- 11390
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SELL USD/JPY- recommended entry @ 11369 ( DAY TRADING)) STOP- 11401, TAKE PROFIT- 11326
BUY USD/CHF- recommended entry @ 9640 ( DAY TRADING)) STOP- 9611, TAKE PROFIT- 9671
SELL USD/CADrecommended entry @ 12764 ( DAY TRADING)) STOP- 12792, TAKE PROFIT- 12734

CME/Globex FUTURES--SEP 2017 Contract: BUY MEX PESO- ENTRY @ 5555, STOP- 5528, TAKE PROFIT- 5583


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Make FB Stock Like You Back

Another  trade suggestion for Facebook’s upcoming earnings announcement slated for July 26. With earnings season kicking off in earnest over the next few weeks, this is really a concern for most any trade ideas pitched over the coming days. Keep in mind that the binary nature of these events and their tendency to deliver breakneck overnight volatility.
That said, if you think FB stock can gain enough ground between now and then, or if you’re simply willing to bet with the bulls into earnings, sell the Aug $145/$140 bull put spread for 71 cents.
To lose, FB would have to fall below a pair of support levels, so consider the $145 level well-defended and unlikely to be reached unless Facebook bungles earnings.
The max reward is capped at the initial 71 cent premium received. The max risk is limited to $4.29.

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