Calendar Week 50-2022

 

The week ahead is pretty much the last for the year with next week being quiet and then the festive week being silent too. Today will be the last post from us for the year as well.

 

We are often asked, should we trade over the Christmas/New Year period? Whilst liquidity is thin, i.e. not much volume or trading being done, there can often be golden opportunities. I would advise not trying to scalp during this period, but the longer time frames can find entries worth noting. Realistically though, you might as well take a well-earned break too.

 

This week is a cracker for news and as a by-product, volatility. Too much to list here, so check your calendar, but everyday there is a major release. The biggest ones will be US Inflation (Tuesday) and US interest rates at FOMC meeting and conference (Thursday morning Australian time). “Super” Thursday also sees NZ GDP, Aussie jobs, Swiss Central Bank, UK Central Bank, EU Central Bank and US Retail sales.

 

With the Christmas rally under pressure last week, the US inflation and FOMC meeting will be key for stocks, not only for Santa but also for 2023. A lot rides on whether or not inflation will tick lower or higher. The US Fed will have a day to work out what to do or say based on that number. If it is higher, Powell is unlikely to come out a day later and say they are slowing the pace of rate rises. Although that has bee the indication, that a 75 point move will slow down to 50 basis point moves going forward. If inflation is higher expect 75% and then the rhetoric to be a lets halt for a few months and see how things are. If inflation is lower, than I suspect a 50 basis point rise and the same rhetoric, we will hold up here until inflation is back under the level they want. So a drop from the current 8% to 2%. That will take most of 2023 to do. The Fed would dearly love a “soft landing” and not a deep recession from the higher rates, and so they do not want to overshoot the upside, hence the pause is coming.

 

All other Central Banks are in a similar situation, so read the same for UK and EU.

 

Stocks though, will love the pause, as they will see it as a pivot and that the next move on rates will be lower. Fools will jump in to buy, wiser heads will look for value, which is none up here once Santa has come and gone.

 

For commodities, that hinges on China and lockdowns. Will they ever end? If China does allow the population freedom, then maybe their industrial engine can kick along and drag commodities higher with it. If not, then the upside for commodities and commodity currencies is limited.

 

Then there is the energy crisis in Europe. With Russian pipelines closed off, for now, how will Europe keep warm in the coming colder months? At what point will the frozen population rise up and demand more energy, forcing politicians to re-think their position on Russian sanctions. Maybe Putin is relying on this? Maybe Europe goes further into debt by getting more expensive energy elsewhere like Australian LNG. Either scenario is not great and for that reason, I would hesitate on buying European assets.

 

Currency Guidance

 

USD – From Jan 2022 lows to Sep ’22 highs, the 50% retracement is 104.59. The dollar index spent last week frothing either side of it. With key news coming out later in the week I suspect more froth to come with an upside tendency. Where to post the news will depend on the outcome of course, but clearly the downtrend is in place. Looking into the future though, recession is coming, and that means a weaker stock market and therefore the demand for US dollars will rise again. I expect to return next year as a bull for Greenbacks.

 

AUD – Has been choppy in a 100 pip range, lacking direction locally it is driven by US dollar. With commodity markets waiting to see what China and Europe are doing and a negative interest rate differential against most economies I have no reason to buy Aussie dollars.

 

EUR – Similar story, no reason to be bullish the Euro but cannot deny it is in an uptrend. Bit of a ceiling here at 1.06 handle and I see it retracing back to 1.04 until FOMC lands.

 

GBP – Also no reason to buy British and see it tagging 1.21 this week, with the double whammy of BoE and FOMC to then set it’s direction.

 

JPY – Like Australia, Japan needs China to open up to trade. I suspect a new wave of Yen sellers to push this higher to 138 in the short term and even test Kuroda’s 145 in the longer term.