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The Trade Week Ahead – staying the course

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Want to review my Cable trade, for the past 2 months, I have been net long GBP moving in and out as need to remove event risks, the reason for the net long call was the chances of some sort of deal was always the most likely outcome.

Over the past week and a half that scenario is now looking like a certainly and Cable is pricing this idea.

Cable trade

(Source: Bloomberg)

There is a clear break out here and the move through the 200-day moving average is a positive sign. Suspect it will shift higher still on an actually deal. However, the market is clearly biased to this way of thinking and thus the shift higher is unlikely to be a ‘gapping’ movement as a ‘deal’ is starting to be baked in. Looking for 1.325/30

Next 2 weeks also sees the first central bank meetings of 2019, it starts this week with the FOMC later in the week.

Key points to the meeting:

  • Federal Funds rate will remain on hold – the question is, are we actually at the ‘neutral’ cash rate already?
  • Watch how many different members use ‘patient’ and ‘data dependent’ – the communication currently is ‘lock step’ with a very consistent message. This week’s meeting is also the first of eight press conference meetings for 2019. Will be listening out for clues about where the Board sees rates in the latter half of the year.
  • There are also signs that the Board is considering changes to its balance sheet policy, unlikely to be done at this week’s meeting. However, its plausible this could happen this year thus further to the FOMC rate calls expect Chairman Powell to reiterate that balance sheet policy is ‘flexible’ in principle.

All-in-all these are dovish stances, and the conformation of this call is likely moving the growth communication from ‘strong’ to ‘solid’.

Reiterate that the USD is likely to ease over the coming period.

 

15 and Counting: Inflation

AUD has been rather resilient of late. This is despite the fact Chinese data has been rather poor and political risk has increased. The movement back toward 71.60/70 was solid without show signs buyers are keen to break it out.

I believe this week’s inflation data should be a trigger for a move back toward mid to low 70cents. Australian inflation just hasn’t been firing on any level over the past 3 ½ years, come Wednesday it is likely that for the 15th consecutive quarter trimmed-mean (core) inflation, the RBA’s preferred measure of inflation, will be below its target band of 2% to 3%.

Housing had done most of the heavy lifting over the past four quarters however housing inflation is likely to have flat lined in the last quarter meaning other components will need to have pick up the slack and I can’t see this happening. The question that comes from this statement is at what point does the RBA admit this is becoming a consistent problem that causes them to act on rates?

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