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January 30, 2018 | Trading Desk Notes – Jan 27th

Senior Vice President and Derivatives Portfolio Manager. Victor began trading financial markets over 45 years ago and has held a number of senior executive positions during his career as a commodity and stockbroker. Over the years he has provided considerable market analysis via radio and television and at financial conferences. His primary brokerage business is providing corporate accounts with risk management services using exchange traded derivatives. He actively trades currencies, interest rates, precious metals, stock indices and commodities for his own accounts.

From the Desk of Drew Zimmerman

The USD was the talk of the town this week, if you were in Davos that is. Treasury Secretary Mnuchin gave a “weak dollar” statement that the market jumped on, pushing the USD index down to lows we haven’t seen since the end of 2014. Trump has since tried to “walk back” the statement saying they USD is based on the strength of the economy and will therefore get much, much stronger. Trumps headline was enough to push the USD a full point higher before it faded again on Friday.

So what did we learn from the USD action this week? 1) Get ready for a little more volatility this year. I think that means in the amount of “chop” and the willingness for trends to persist. 2) Momentum is like a train, it is a lot easier to jump on than stand in front of. Even with the President out to talk up the USD, it is finishing the weak on a soft note. The USD is now down for its 5th quarter in a row, 3rd month in a row and 6th week in a row. It has been very weak. Given that so many markets are priced in, or looked at relative to the USD we have seen this impact across markets.

The key date on this USD move is the middle of December in which I can look across markets and see that they started to diverge from what I call their typical “drivers” or what moves that particular market. And from that date the one common theme is that many markets have had the majority of their moves from that date because of excessive weakness in the USD. I had originally attributed this divergence to light holiday, however when it became more exacerbated through the start of this year I had to spend more time looking around for a better reason.  David Rosenberg argued that the Fed meeting mid-December was when Yellen gave the “green light” to markets in her final Fed Chair press conference. Since we have had a weak USD (no Fed tightness??), strong commodities and a very strong stock market (up over 8% from mid Dec!). So while this wasn’t as implicit as the Bernanke Put, the market seems to have gotten the message.

So with the momentum surging across markets, do we have a catalyst for a turn? We have a Fed meeting this week on the 30-31st, but as it is Yellen’s last meeting and only a FOMC statement, not much is expected. However, as this is the end of the Yellen era, will we start to see a different tone out of the Fed? What if we start to see Jay Powell offer a different view from what Yellen has been saying?? Especially with speed of the recent market moves.

The trader in me thinks that this USD move is overdone and therefore many other markets that are “far off” their regular drivers are also mispriced. But this is in piano catching territory, so it makes sense to be patient!

 

CAD: while much higher than I think it should be, it is has also lagged behind many other currencies during this USD weakness. While NAFTA could be a key component of this, even the Mexican peso has outperformed CAD over the last several weeks. My view is that the Bank of Canada will be hold longer than the market is currently pricing in, especially after watching recent Poloz comments about the incremental interest rate hikes becoming more burdensome for indebted Canadians. The perception of this longer pause in rate hikes is also showing up in the interest rate spreads against the US. Oil prices have jumped higher with a weak USD, but the rise to $66 WTI has been “numbed” for CAD due to an over $28 discount for Western Canada Select, Canada’s oil benchmark. So given that I think the USD is oversold, I wanted to take a position in the weakest currency in the pack, it tends to be slightly less risky to go after the laggard rather than expecting a big move from the currency that is the strongest. I have initiated a small position short CAD this week after Mnuchin’s comments.

 

Interest Rates: While the USD has grabbed the headlines, US interest rates have continued to move higher with the US 10yr closing the week at 2.65% up over 30bps from the mid-December level. In my view the US 10yr is all about the run to 3%, will it get there?? Will it move through it? I think it will be this move in interest rates that finally pressures stock market prices, whether the rate rise is from the Fed or market driven. I’m continuing to hold my short position in 10yr treasuries.

 

Gold: Given the recent rise in interest rates and muted inflation picture, the rise in real rates is telling me that Gold should be trading much lower than it is right now. However, the excessive weakness of the USD has driven the momentum higher in the gold. But I think gold is set up for a scenario is which it is very vulnerable to any USD strength. There are some trade tensions mounting, however the current geopolitical picture does not justify the current excessive bid in gold.

PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option  or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position.  You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position.  If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results

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January 30th, 2018

Posted In: Victor Adair Blog

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