I'm currently sitting in a long USDCHF position from 0.9121 and a long EURCHF position from 1.2032 (net) - aside from that I'm flat.The markets have been disoriented the past few days, so this is a market I'd prefer to stay on the sidelines in. For now, with little attention to the market and waiting for some clearer technical patterns, there are some fundamental themes worth noting:
- Europe remains a critical issue: The ECB isn't going to extend more liquidity and now core governments are backing away from German austerity measures. The political situations in France and Holland are concerning, and are very much worth paying attention to. Italian and Spanish yields on the short-end remain capped uner the 4 percent threshold, which should cater to a risk-on environment in the short-term. Any upward pressure in bond yields - especially on the short-end given the ECB's LTROs - is a sign that the situation in Europe is getting worse. And it's going to get worse before it gets better.
- The market is high on hopium: In talking with other traders, we've all come to the same conclusion - nothing has happened the past few days that has warranted the strong bounce by US equity markets and commodity currencies alike. Did the Fed signal QE3 yesterday? No - quite the opposite in fact as outlined in the policy statement and the quarterly forecasts. But Chairman Bernanke's language that the Fed has the ability to do more has spurred another leg down by the US Dollar. Is QE3 coming? The Fed can't say yes or no, and like it has been since the financial crisis, the Fed remains prepared to step into the market. If the Fed is saying that they will offer more stimulus should the economy tank, and the market rises in response, it's essentially the market betting against itself. Nothing new came from the Fed, so I expect this US Dollar tumble to be retraced in short order.
- Ignore Apple's earnings: The company with the largest market cap in the world beat earnings big time (no surprise considering they typically low-ball the expected figures), sending jubiliation across market participants. Ignore these earnings. Apple's primary products are a cellphone and a tablet computer - hardly integral needs for global growth.
- Re-read Caterpillar's earnings: As the world's largest producer of mining and construction equipment, their data are more credible when trying to determine where the global growth picture is headed rather than paying attention to Apple. Caterpillar noted that Brazilian, Chinese, and European weakness was offset by strong demand in the United States. China and the Euro-zone are two of the United States' largest trading partners, so if growth is slowing in those regions, it will reverberate back to the United States. Caterpillar's assessment, again, as the world's largest producer of mining and construction equipment - not cellphones or tablets - should be take more seriously when analyzing future potential for the commodity currencies.
- To stimulate or not to stimulate, that is the Bank of Japan's question: The BoJ is widely expected to announce another stimulus program tomorrow, somewhere in the neighborhood of 5-10 trillion Yen (roughly $62 to $125 billion). After having numerous conversations throughout the day about this with other traders, I've come to the conclusion that the broad consensus is that this move is not fully priced in. It's also come to my attention, as Sara Eisen of Bloomberg News points out, that the BoJ tends to make policy changes if their announce their intentions after 05:30 GMT (01:30 EDT, 14:30 JST). Watch this deadline as Yen-crosses will be on the move.
Any other trade ideas and general macroeconomic musings can be found in the Real Time Newsfeed, or by following me on twitter @CVecchioFX.
