Weekly Review
I began the week starting Monday 19 May with an 'underlying risk on' bias. And ended it with a 'risk off' bias.
The warning signs where there with the downgrade to the US credit rating, which hit the US dollar in particular. But initially, the downgrade didn't dent overall sentiment, stocks remained bouyed and the VIX stayed below 20, perhaps helped by news from the UK of a potential BREXIT renegotiation.
By Wednesday, YIELDS were the talk of the town, it's been building for a while, but the combination of tariffs potentially causing a rise in inflation, plus the US administrations fiscal policies causing deficit concerns, added to the credit downgrade. It all started to cause concern and the JPY and CHF spent most of the week strong as the market grapples with a YIELDS level it feels comfortable with. At the moment, the US 10 year, in the region of 4.7, gets the market worried. And we see the yields up / stocks down = risk off correlation.
Historically, a 5% 10 year yield would not cause any concern. But in the modern world, with a high percentage of consumers relying on credit, the prospect of rising interest payments leads to default concerns.
As the week passed by, I grew less and less confident in any 'risk on bounces'. And although I'm still of the view 'risk on' trades will be the mainstay strategy moving forward, it would currently take a solid 'fresh narrative' for me to feel confident. And for now, I feel more confident 'fading' any positive moves.
In other news, the RBA cut rates by 0.25bp, but discussed cutting by 0.5bp, which caught the market (and me) by surprise and was seen as a 'dovish cut'.
Aside from the BREXIT news, positive data from the UK ensures the BOE won't be in a hurry to cut rates again. And GBP USD long would have been a very good trade this week.
Data from Canada also sees sentiment slowly turning positive for the CAD, as forecasts for the next BOC cut are pushed further out.
But at the moment, it all boils down to the 'risk environment' and the president's comments on Friday, putting tariff pressure on EUROPE and putting pressure on APPLE to relocate manufacturing to the US, will, (I think), ensure sentiment remains cautious, meaning I'll start the new week with a mind for 'fading risk on bounces' (for example, the current AUD JPY chart). But also a mind for USD short trades as sentiment and price action for the USD remains subdued. (It still feels strange suggesting USD short trades in a risk off environment).
On a personal note, it was a week of two trades. I missed Monday's initial USD short 'downgrade based' opportunity. I opted not to get involved in the initial short AUD momentum following the rate decision, because it was against my underlying AUD long bias at the time.
Eventually placing a EUR JPY short trade post PMI data. It was a leftfield trade according to price action, but it aligned with my thoughts of shorting 'risk bounces'.
The trade hit profit, but I was perhaps emboldened a little too much a few hours later as the chart pulled back again and thinking I knew best, I decided to enter the same trade again. I maintain my logic of buying JPY weakness, but it was a very bold trade which stopped out. In general, I don't recommend placing two trades in one day. And we move forward into the new week. Monday is a US Holiday, but we could see liquidity during the Asian and European sessions.
Results:
Trade 1: EUR JPY +1.5
Trade 2: EUR JPY -1
Total = + 0.5%
Total since start of blog = +40% (risking 1% per trade)