The Week Ahead – Caution

Previous week: 26 December – 30 December 2016

PBoC Yuan Intervention—04.01.2017 Wednesday

The USD/CNY (Onshore) daily FX fix dropped from ~6.96 to ~6.87. It was done by increasing the cost of financing short Chinese yuan positions by increasing the overnight lending rate. This was done with the objective of squeezing short sellers of the Chinese yuan to cover their shorts. Probably (almost definitely) to defend the 7 handle.

http://www.zerohedge.com/news/2017-01-06/chinese-volatility-explodes-yuan-tumbles-most-one-year-after-biggest-2-day-rally-eve

The Chinese yuan has been losing quite a lot of value against the greenback since 2014. USD/CNY went from a low of 6.04 in January 2014 to the current high of 6.96. The government’s official GDP growth numbers always comes in in the ballpark of 7% (6.7%). However, I beg to differ. From the opinion of the FX market, it tells me that the Chinese economy had been deteriorating quite significantly. If their economic growth had been robust, there was not a need to devalue their currency to be maintain competitiveness.

When speaking about China, we tend not to mention  Hong Kong, its Special Administrative Region. With continuing depreciation, will the hard peg of USD/HKD since 1983 at 7.75 be undone? Interesting thoughts.

FOMC Meeting Minutes—5 January 2017 

The minutes showed that the Federal Open Market Committee was worried about the upside growth risks with President-elect Donald  Trump’s expansionary fiscal policies. They showed a willingness and need to increase interest rates at a faster pace so as to prevent the economy from growing too fast. The FOMC did mention that with expansionary fiscal policies, increased uncertainties would have to be taken into account when providing forward guidance on the Federal Funds rate. In summary, the Fed is now willing to take on a more hawkish stance to prevent Donald Trump and his GOP from growing the economy too fast.

Non-Farm Employment Change—6 January 2017 Friday

The number of jobs created in December was 156k which was below consensus expectations of 175k. November’s number was revised upwards from 178k to 204k. Unemployment rate ticked up by 0.1% from 4.6% to 4.7% on expectation of 4.7%. Average Hourly Earnings (m/m) came in at +0.4%, beating expectations of +0.3%. November’s figure was -0.1%. In its totality, the jobs report was lukewarm.

Coming week: 09 January – 13 January 2017

US Retail Sales (m/m)—13 January 2017 Friday

Consumption makes up about 70% of the US GDP. It is important to figure out whether the consumer is spending or not. Expectation for December’s number is at +0.5%. The previous month’s figure was +0.1%.

Trade Ideas

NZD/USD short

When looking at the weekly chart of NZD/USD, we see that NZD/USD is in a downtrend (lower highs and lower lows). The last week’s candlestick formed a bearish pinbar at resistance at 0.7000. With the current weakening of the Chinese yuan (and the Chinese economy) and a strong US dollar (because of the Fed tightening their monetary policy), selling NZD/USD at 0.7 and targeting the next support at ~0.67 seems attractive.

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WTI short

Whilst the OPEC nations agree to cut production which led to a rise in oil prices to $53 a barrel, the American opportunists decided to repay the compliments by restarting their oil rigs. This week, the Baker Hughes US rig count continued to increase. It increased by 4 from 525 to 529.

http://www.investing.com/economic-calendar/baker-hughes-u.s.-rig-count-1652

**By scrolling through the news feed, I noticed much bickering among OPEC nations and also among non-OPEC nations with regards to levels of production. Everyone wants higher oil prices (and reminiscences the good ol’ days of 100 dollar oil). Now that oil prices had halved in price, oil producing nations would still be interested in maintaining their old level of oil revenue and market share. They do this by pumping more oil out of the Earth’s crust. When the OPEC agreed on a cut in production, the non-OPEC nations, seeing a potential opportunity to chip away at OPEC’s (not too dominant) market share decided to crank up their oil production. This is called the “tragedy of the commons”. In the end, all the oil producing nations lose because no one wants to be worse off to benefit the rest.

https://www.youtube.com/watch?v=WYA1y405JW0

When looking at the weekly chart of WTI, we see that WTI had trouble breaking through the $53 resistance. When focusing at the last 4 weekly candlesticks as highlighted in a pink oval, the first candlestick is a large bearish pinbar with long upper wick at around $53. It is then followed by 2 small inside candlesticks which may indicate distribution. The last candlestick is a doji at resistance whereby the price of oil closed at where it opened for the week. When looking at the group of 4 candlesticks together, we can sense sellers of oil are preventing price from breaking above $53. Also we see that the upward bullish momentum has been easing up as seen by the decreasing size of the candlesticks.  Selling WTI at this resistance zone around $53 would be favorable.

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When looking at the daily chart of WTI, we do see that the upward gradient has been very gentle at $53 resistance. This look like a bull trap because there is a lack of bullish momentum to back the rally. Selling WTI at this resistance zone around $53 would be favorable.

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Silver

From the chart of silver, we see that it has been heavily sold from a high of $20.50 down to $16, mostly due to the strong US dollar in the second half of 2016. However, $16 seem to be an area of strong resistance in the past and may now turn to an area of support. When looking at the Friday’s candlestick, we see that silver has formed a bullish pinbar at $16.50 support which may indicate that this rally may have legs. Buying silver in the coming week at $16.50 may seem interesting. When comparing against its substitutes, it is observed that silver has been lagging behind and does have room to catch up to the upside.

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Gold, the closest substitute to silver, had also been selling off strongly for the past six months. However, gold seemed to have turned bullish in the last weeks. We have to see if this short term bullish momentum in gold will carry on into the new year.

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Bitcoin, just like precious metals (gold, silver), is a good barometer for the strength and confidence in fiat currencies (USD, EUR, JPY, GBP, etc). Bitcoin had proven the naysayers wrong and had been very strong ever since it bottomed out in the middle of 2015 at $200 and has tested the previous all time high. Well, after it tested the all time high, the bubble rally in bitcoin burst.

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When thinking about going long on silver, other than thinking about its under performance against its peers (gold, bitcoin, and even copper), we would also have to grapple with the argument about the current strength of the US dollar. When looking at the daily chart of EUR/USD, I noticed that it may not be that bearish after all. More price action is needed to determine the direction of EUR/USD.

 

 

 

 

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