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Trader Thoughts - consolidation for now but the event risk is building

Chris Weston
Head of Research
Jan 20, 2023
A calm may have descended on markets, where we see volatility (vol) reads pulling back, but the set-ups are still there, and we see many interesting flows that offer trading opportunities.

On the factor of vol, the prospect of further consolidation and vol suppression in the coming days is elevated as China goes offline for the Lunar New Year, the Fed blackout period starts, and we’re treated to limited tier 1 data. We do see 26% of the S&P500 market cap report next week, with names like Microsoft, IBM, and Tesla likely to get a solid run by clients. Perhaps most noticeably, there will be a growing buzz about the following week when we get the Fed, ECB and BoE hitting us with respective meetings and further rate hikes.

Rates pricing suggests the Fed will hike by 25bp, while the BoE and ECB will likely both hike by 50bp. Again, it’s the terminal pricing of where rates could head that is most closely focused on – in fact, I’d argue the market has moved on, feeling confident we’re close to an end in the hiking cycle and the debate – certainly in the US – is whether the Fed will start to cut from Q3, where we see 56bp of cuts priced from June to December, and 150bp of cuts priced for 2024.

The RBA will not be meeting until 7 Feb, but we get Q4 CPI (Wed 11:30 AEDT) next week and the market expects headline inflation at 1.5% QoQ / 7.5% YoY (from 7.3%) and the trimmed mean measure at 6.3% - after the weak (December) employment report Q4 CPI should be the final influence on rates pricing before the RBA meeting, where we see 18bp of hikes priced, suggesting a 72% chance of a 25bp hike. A weak CPI print and market pricing could head to 50%, making the RBA meeting potentially very lively for the AUD – the AUS200 would some further boost from a weaker CPI print, where we’re already seeing a strong bullish trend and many eyeing 7500 as a near-term target.

We also see RBA terminal pricing at 3.5%, so essentially one and done.

Into markets and the USD remains heavy, with the DXY looking to crack the consolidation lows. Clients are not convinced and the skew in positioning is for the USD to bounce. ECB president Lagarde continues to push a hawkish line, but for now, EURUSD holds a range of 1.0875 and 1.0750 and speaks to a market seeing limited catalysts in the week ahead – as always, keep an open mind and respect the break, when it comes – I see the higher risk of an upside break.

GBP is surprising many with the recent bullish trend, and there is good momentum in price, with price eyeing a test of the 14 Dec high of 1.2446 – expect sellers to work that level – one for the scalpers. GBPAUD is another on the move, where 1.8000 is in the mix.

The JPY crosses consolidate after some big vol this week – CADJPY has been well traded to the downside but has found support, courtesy of a better read in crude - while I have been eyeing shorts here, if SpotCrude breaks above $82.23 resistance then tactically there may be better trades to look at.

The downtrend strikes again


With US earnings in play, equity markets require close inspection – for the technicians, the world is fixated on the US500 and Jan 22 downtrend resistance – it seems a gift to fade the index into the trend, but trends don’t last forever, and should we see a bullish reversal then I see risks it breaks. On the downside, the 100-day MA kicks in at 3864, where a break could accelerate the losses, with CTA funds flipping to short futures positions. With the 5-day EMA headed lower I’m reluctant to trade this from the long side at this point, but then more work is needed to compel shorts.

Gold to $2k?


With the weakness in the USD and grind lower in US real rates we’re seeing new cycle highs in gold. A range break in the DXY would certainly be helpful in the quest to push price to $2000, which is the big target for the bulls – given where XAU implied vols sit the market prices with about a 5% chance of a move to the big number this coming week, so one for another time. Slower US growth is gold’s friend here and a hedge against a recession means long USTs, and gold appreciation.

Are we sufficiently overbought? We see price now 6.7% premium to the 50-day MA which is lofty, but we typically see a far higher probability of mean reversion when price holds a 10% premium to the average. The elastic band hasn’t been sufficiently pulled yet.

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