Two words can capture last week’s trade – RISK OFF – strong Yen, weak Dollar, weak commodities, VIX up, stock market down and US 10Y yield down. So why the bullish move in the treasury market? Well traders were getting out of the stock market and into bonds and safe haven currencies due to some nervousness with the Trump Administrations ability to pass the various bills Trump has been promising the market. This concern was confirmed on Friday when the Republicans waved the white flag and pulled the bill with Trump saying he will be moving onto tax cuts next while letting Obama Care fail. So why do we care about what’s going on in the White House? If you remember last November when Trump won the election he mentioned something that started a massive rally in the securities market which impacted the USDollar and Yen against all counterparts – Fiscal spend. Fiscal spend means higher inflation. Higher inflation means more rate hikes. More rate hikes means a higher yield in securities, strong Dollar and weak Yen. Now while smart mart money made some nice profit off the trade they were still aware that the reality of a democracy means implementing new bills and moving forward with tax cuts and fiscal spend takes time and is going to face resistance. While we have had two rate hikes since last year’s election a lot of the move was based on futures and not on any actual fiscal spend or tax cuts. Anything that causes the market to believe Trump can’t deliver is going to result in an unwind in that trade and that’s what we had last week. So with the bill failing what’s the next move? Is the securities market suddenly going to start selling treasuries and getting long Dollar or is this recently confirmed concern going to result in a further drop in yield, Dollar weakness and Yen strength? I can’t say – trading politics is difficult as it lacks fundamental tools and due to a lot of the moves being news based it is difficult to get an edge, though keeping an eye on price action on the 10Y, Dollar Index, VIX and equities is still very effective. Also a trader with a bias would still maintain their bias as it is most likely based on fundamentals and central banking policy. Therefore recent Dollar weakness does provide some opportunities for Dollar bulls and support is definitely worth paying attention to. There are a lot of Fed speakers coming up this week which include Yellen as well as GDP (Q4) and PCE for Feb.
As far as fundamentals from last week are concerned there are a few releases that you would want to read: BOJ meeting minutes, New Zealand monetary policy statement, ECB Economic Bulletin, various BOE speeches, RBA meeting minutes and various FOMC speeches. If you trade Aussie and Kiwi then you’ll want to go over the Westpac weekly report which is being released tomorrow.
I will provide a full analysis on the Dollar and Yen pairs once we have new weekly pivot points later today.