The Week Ahead – Shorting the Euro

The Week Ahead – Shorting the Euro

Previous week: 10 July 2017 – 14 July 2017

Bank of Canada Overnight Rate + Rate Statement + Monetary Policy Report + Press Conference—10pm Wednesday 12 July 2017

The Bank of Canada after keeping overnight rates at 0.50% since July 2015 decided to raise it by 25 basis points to 0.75%. USD/CAD sold off significantly after the rate hike announcement. This was surprising because hard data from Canada leading up to the meeting had been positive and members of BOC had dropped many hints of their intentions. Hence rate hike was a foregone conclusion.

Topic sentences from BOC statement:

  1. The Bank of Canada is raising its target for the overnight rate to 3/4 per cent.
  2. The global economy continues to strengthen and growth is broadening across countries and regions.
  3. Canada’s economy has been robust, fuelled by household spending.
  4. The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019.
  5. CPI inflation has eased in recent months and the Bank’s three measures of core inflation all remain below 2 per cent.

Janet Yellen Testifies

The most noteworthy point that Janet Yellen said in her statement was that federal funds rate would not have to rise much to get to a neutral policy stance. With this one point, her stance is now leaning dovish.

Key points from Janet Yellen’s statement to Congress:

The Committee continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices. That expectation is based on our view that the federal funds rate remains somewhat below its neutral level–that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance. But because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal. Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades.

In this regard, as we noted in the FOMC statement last month, inflation continues to run below our 2 percent objective and has declined recently; the Committee will be monitoring inflation developments closely in the months ahead.

Regarding Balance Sheet Normalisation……The Committee currently expects that, provided the economy evolves broadly as anticipated, it will likely begin to implement the program this year.

US Crude oil inventories—11pm 06 July 2017 Wednesday

US crude inventories decreased by a whopping -7.564 million barrels on the expectation of -2.3 million drop. Baker Hughes US oil rig count increased by 2 from 753 to 765. Oil production was 9397k barrels per day for week ending 07/07/2017, an increase from 9338k barrels per day in the previous week.

The question now is whether the rig count will start to decline in lagged response to the drop in oil price from $55 to $44 a barrel. The next question is whether this reduction in rig count will depress the rate of oil production in These United States.

US CPI m/m—8.30pm Friday 14 July 2017

Actual Expectation Last
Core CPI m/m +0.1% +0.2% +0.1%
Core CPI y/y +1.7% +1.7%
Headline CPI m/m +0.0% +0.1% -0.1%
Headline CPI y/y +1.6% +1.9%

“Transitory” and “idiosyncratic factors” were the justifications that the Federal Reserve gave for weak inflation. Both core and headline inflation had been under 2% target for 3 and 2 months respectively. Well, not to worry, it is just transitory.

US Retail Sales m/m—8.30pm Friday 14 July 2017

Actual Expectation Last
Core Retail Sales m/m -0.2% +0.2% -0.3%
Headline Retail Sales m/m -0.2% +0.1% -0.1%
Headline Retail Sales y/y +2.8% +3.8%

Headline retail sales was +5.6% year on year in January 2017. In June, it had dropped down to 2.8%. Maybe retail sales are transitory as well.

Coming week: 10 July 2017 – 14 July 2017

RBA Monetary Policy Meeting Minutes—9.30am 18 July 2017 Tuesday

US Crude oil inventories—10.30 pm 19 July 2017 Wednesday

Another draw in inventories and rise in production?

BOJ Outlook Report, Policy Rate, Press Conference, Monetary Policy Statement—20 July 2017 Thursday

No change in policy is expected out of the Bank of Japan. At +0.4%, Japanese y/y core and headline inflation are both 1.6% away from the BOJ 2% target. However as a consolation, it could be seen that core inflation had been trending upwards and making steady progress in the past 12 months. This steady uptrend seen in core inflation was not confirmed by headline inflation. Headline inflation had been steady at around +0.4% for the last 7 months and had not been making positive progress towards the 2% target.

With that said, I still expect more expansionary monetary policy rather than contractionary to be implemented because Governor Kuroda said that he will do “whatever it takes” to attain the 2% core inflation target. Despite already being so loose with monetary policy, Governor Kuroda could only move the needle on core inflation from -0.5% to +0.4%.

Quoting the BOJ in their latest “Statement on Monetary Policy” dated 16th June 2017:

The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. The Bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.


The next problem with the BOJ after attaining inflation rate of 2% is to “stay above the target in a stable manner.” Looking back at core inflation in Japan for the past 10 years showed how difficult this task will be. Every time it rises to 2-3%, it collapses back down to its resting heart rate of 0%. It’s tough being Kuroda.

Trade Ideas

EUR/USD to watch

EUR/USD is now testing the resistance level of the channel formation. Possible shorting opportunity if resistance holds.

USD/JPY to watch

USD/JPY is declining towards 120 level. 120 acted as both support and resistance several times in the past.

AUD/USD to watch

AUD/USD just recently broke above the long standing resistance at 0.7700 and closed near the high of the week. This indicates that buying pressure/momentum is present and chances of it being a fake out is diminished. Waiting for a retracement back down to 0.7700 zone would give a good opportunity to go long this currency pair. Next resistance zone will come in at around 0.9000 and 0.9600.

Food for thought

I have been reading Sun Tzu’s book “The Art of War” and have been very much been captivated by it. This documentary puts his principles into practice.

Personal insight from our analyst in Singapore

Nanyang Technological University, Singapore (NTU) was ranked the world best young university (Top 50 under 50 years old) for the fourth straight year by QS. Currently NTU is ranked 11th globally by QS. Maybe it is time for Singapore universities to gain some recognition at the world stage. Hopefully the day will come when multi-century old Ivy Leagues and Oxbridge will be overtaken / overshadowed by Singapore / Asian universities. Maybe the new President of NTU (ex-President of Carnegie Mellon University) will get us there. Credits to The Straits Times for the image.



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