Calendar Week 39-2022

 

We note that 8 central banks raised rates this week and now global recession is inevitable after this very volatile week. Even JayPow used the dreaded R word in his presser as he flipped from hawkish and dovish commentary.

 

Japan decided to intervene on their currency for the first time since the 90’s, drawing a line in the sand of 145 on the USDJPY.

 

But the biggest party was in London on Friday. With Liz Truss’s new budget, sending UK 10-year gilts to the biggest one day move on record, up 33 basis points. Tax cuts and large-scale borrowing slammed the Pound and Footsie, as the UK wound the clock back to the Thatcher era which some have said is more like emerging market policy than a leading economy. It is a huge inflationary budget, which is kind of crazy to consider doing when inflation is already running at +10%.

 

The list of countries just this week raising rates are: USA, UK, Switzerland, Norway, Indonesia, Philippines, South Africa, Taiwan and you can add Japan’s yen defence in there too.

 

This rate party is far from over. But if you listen to “PLower” from Australia’s RBA you’d think he has won the battle already. He is already behind the curve and publicly announcing rate rises will slow down shows how out of touch he is.

 

Currency Guidance

 

This week was a lesson in why technical charts are only a part of the investment strategy. A week ago the technical picture was turning, only to have fundamentals and sentiment blow all charting reasons away. Trading should incorporate a basic understanding of what (is) driving price and then use technical indicators to pin point entries to go in the direction of price action.

 

USD – Safe haven anyone? This is the place to be and investors bailed out of stocks as cash becomes king in a recession. The dollar was already on the rise post FOMC but it was the UK budget and Euro data that really kicked the Greenback higher. Technically it is too far gone to buy at these levels and we will be waiting for it to take a breath, retrace somewhat so we can buy the dip. A dip will happen, just need to be patient for it.

 

AUD – Commodities were relatively calm compared to stocks, currency, and interest rate movements, but they were still weaker as the global recession kicks in. Therefore, the position to be on the Aussie is short. The question is to short it against what now, this week? The USD is too hot to trade out here, would prefer to short at 0.67 resistance level but it will be a while before (or if) it gets there. The other choice is against the Yen and the BOJ’s buying, but it too posits a difficult entry right now.

 

EUR – Similar story here too, too far gone to trade out at these levels but want to be short the Euro. Again the only currencies that will show strength ahead is the Yen and USD, so patience is required to find the right entry.

 

GBP – With the budget taking the UK back to the 80’s it is significant that the Pound has not been at these prices since 1985. The Cable bottomed at 1.06 in Feb 1985 and I expect it to go through that by the end of this year. Its only 250 pips away and the Sterling dropped 400 pips on Friday alone. Sometimes you have to close your eyes and pull the trigger.

 

JPY – Now we have reasons to be buying the Yen as it benefits from BOJs interference and a renewed vigour of Safe Haven flow. Like the other majors it is a matter of getting the timing right and having patience to find the right trade.