The Week Ahead – Bitcoin and Tulips

The Week Ahead – Bitcoin and Tulips

Previous week: 22 May 2017 – 26 May 2017

US Crude oil inventories—10.30pm 10 May 2017 Wednesday

US crude inventories dropped -4.43 million barrels on the expectation of -2 million drop. Baker Hughes US oil rig count rose another 2 from 720 to 722.

http://www.zerohedge.com/news/2017-05-24/wtirbob-stumble-after-mixed-inventory-data-16th-straight-week-increased-crude-produc

http://www.zerohedge.com/news/2017-05-26/us-crude-production-hits-21-month-highs-rig-count-rises-19th-straight-week

Bank of Canada Overnight Rate—10.00 pm 24 May 2017 Wednesday

Expectation for no change in overnight rate (+0.50%) was indeed on the mark. The Bank of Canada left interest rate unchanged at +0.50% in the meeting they had last week. However when reading the statement they issued, a pivot towards a bullish/hawkish stance was pretty clear. Case in point is the following example.

Current (May): The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment.

Previous (April): Global economic growth is strengthening and becoming more broadly-based than the Bank had expected in its January Monetary Policy Report (MPR), although there is still considerable uncertainty about the outlook.

Implying from the language the Bank of Canada issued in its most recent statement, it seem to suggest that the BOC does not think that “lower oil prices” will continue to be a drag on the economy. The BOC had not made such an assertion before and this pivot towards increased confidence in its economy is something to take note. Will the BOC start to tighten its monetary policy just like what the Fed in USA had been doing? The probability of an increase in interest rates in the next meeting has definitely risen.

http://www.bankofcanada.ca/2017/04/fad-press-release-2017-04-12/

http://www.bankofcanada.ca/2017/05/fad-press-release-2017-05-24/

http://www.zerohedge.com/news/2017-05-24/loonie-surges-5-week-high-after-boc-surprises-hawkish-statement

FOMC Meeting Minutes—2am 25 May 2017 

The main points from the minutes are as follows:

1) MOST FED OFFICIALS SAW TIGHTENING LIKELY APPROPRIATE `SOON’

2) FED BALANCE-SHEET PLAN WOULD RAISE ROLL OFF CAPS EVERY 3 MONTHS

3) FOMC VOTERS: PRUDENT TO AWAIT EVIDENCE SLOWDOWN IS TRANSITORY

The Fed, through its May statement, is posturing a high probability of a June rate hike.

A clear piece of evidence of the Fed’s willingness to continue increasing interest rates is as follows. “Although the data on aggregate spending and inflation received over the inter meeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate.”

The Fed attributed the poor Q1 GDP growth to it being “transitory” which in plain English means outlier or non-consequential. “The staff judged that the weakness in first-quarter real GDP was probably not attributable to residual seasonality and that it instead reflected transitory soft consumer expenditures and inventory investment.”

Overall, a pretty hawkish statement by the Fed (during a period of time when the macroeconomic data out of USA had been poor).

http://www.businessinsider.sg/fed-minutes-may-2017-meeting-2017-5/?r=US&IR=T#T0KKDg0ZD4hkA0lC.97

http://www.zerohedge.com/news/2017-05-24/fomc-minutes-signal-rate-hike-soon-economic-weakness-transitory

Coming week: 29 May 2017 – 02 June 2017

US Crude oil inventories—11pm 01 June 2017 Wednesday

Another draw down in crude oil inventories?

US non-farm employment change + unemployment rate + average hourly earnings m/ m—02 June 2017 Friday 8.30 pm

It is the first Friday of the new month and that means NFP day. 186k jobs are expected to be created in May (211k in April) and unemployment rate to remain unchanged at 4.4%. Average hourly earnings is expected to increase by +0.2% in May vs +0.3% in April.

Trade Ideas

USD/JPY short

For the past 6 months, USD/JPY had been in a downtrend as seen from the series of lower highs and lower lows. On the daily chart, it is observed that the 120 support zone was broken to the downside on Wednesday. US Dollar weakness was due to increased probability of a Trump impeachment and weakening US macroeconomic data. 1) According to Predict It, betting markets currently puts a Trump impeachment at around 19%. At the start of May, the odds was residing at around 9%. 2) Poor US Q1 GDP at 1.2% 3) CPI continued to trend downwards in April 4) Poor retail sales in April.

http://www.zerohedge.com/news/2017-05-12/core-cpi-slumps-19-month-lows-below-fed-mandate

http://www.zerohedge.com/news/2017-05-12/retail-sales-miss-across-board-grow-slowest-pace-2017

Selling USD/JPY at around 120 when it retraces back up to that zone would be favourable for a target at 109.50.

The Japanese economy is growing at a steady pace (+2.2% annualized in Q1 and fifth consecutive quarter of positive growth) and this has made the Japanese Yen stronger these past months.

Counterargument to short USD/JPY will be as follows. 1) Labour market in US remains robust. 2) Language out of the Fed had been hawkish and market is now placing the odds of a June rate hike at 77.6%.

Final thoughts on short USD/JPY idea: The Fed monetary policy announcement is in 2 weeks and 4 days. The tenet the Federal Open Market Committee seemed to concern itself most in recent times had been the weak economic growth in the US in Q1. They think that the weak growth rate in Q1 was transitory and not something to really mull over. What will the FOMC do when macroeconomic data out of US continues to under perform their expectations? Will they become “data-dependent” and not hike in June? When looking at the June Fed rate hike odds, it seemed to have hit a resistance at 80%.

Long S&P 500

The bull run in stock market continues. S&P 500 is currently taking support at 2360 zone off the bullish trend line. The big drop in the stock market was primarily attributed to increased probability of a Trump impeachment and hence that made the market jittery. Buying at 2400 when it retests that support would be a good opportunity to go long the index.

Food for Thought

Here comes Corbyn.

ig.ft.com/elections/uk/2017/polls

Bitcoin bubble?

I am of the opinion that bitcoin is a bubble.

https://en.wikipedia.org/wiki/Tulip_mania

 

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