A traders weekly playbook - Inflation to drive markets

How well did you follow and execute on your trading plan or process through the volatility?

• Headlines on the effectiveness of current vaccines on Omicron
• Geo-political headlines, specifically around Russia-Ukraine and China-Taiwan
• US CPI (Sat 00:30 AEDT) – consensus 6.7% YoY headline / 4.9% YoY core
• University of Michigan consumer sentiment & inflation expectations (Sat 2am AEDT)
• China trade balance (no set date)
• China CPI / PPI (Wed 12:30 AEDT) – consensus 2.5% and 12% respectively
• China new loans (no set date) – RMB 1590b
• German ZEW survey (Monday 21:00 AEDT)
• RBA meeting (Tuesday 14:30 AEDT) – Gov Lowe speaks (Thursday 09:00 AEDT)
• Bank of Canada meeting (Wednesday -2:00 AEDT)

These are turbulent markets and with such huge event risk this week, and the market unlikely to get a genuine understanding of the efficacy of the vaccines towards Omicron it doesn’t feel like we’re in for a period of calm. This means staying vigilant and alert to the risks and nailing the risk exposure and position sizing.

US Payrolls likely added to hawkish FOMC risks

Looking back, Friday’s US non-farm payrolls was good enough to keep the upcoming FOMC meeting as the big marquee vol event risk through what’s left of the year. The aggregate hours worked, solid hourly earnings, increased participation rate and job growth (in the household survey) have solidified calls for a further increase in the pace of tapering its QE program. It adds weight that we’ll get big changes to their economic forecasts and dot plot projections too.

Interestingly, the market's interpretation of the high point in the Fed funds rate – the ‘terminal rate’ - is 1.45% and 100bp (or 1ppt) below the Fed’s median forecasts. This is a tough one to reconcile and trade given the incredible divergence – in principle, it suggests the market see’s the Fed stopping hiking after five hikes, well short of the Fed’s median forecasts. The small degree of cuts priced into the US interest rate markets in 2025 suggests a growing possibility of a policy error, or perhaps late-cycle conditions is a better way to look at it.

Now we know the Fed no longer see inflation as transitory and with a potentially reduced pace of liquidity, it is clear the liquidity benefices have been savaged – Crypto is one I see in this camp, but everyone is focused on ARK Innovation ETF which has lost 26% in the past 20 days. There’s some $24.6m in short interest in this name and they’d be eyeing Tesla given its 9.15% weight on the ARK fund – a break of $1000-$981 in Tesla and ARKK is going one way. One for the radar.

US CPI is the big data point this week

While Omicron headlines will guide sentiment this week, it’s the US CPI print that could really get the party started. 7 of the past 9 US inflation prints have beaten the consensus forecast, so the odds are stacked for a print hotter than 6.7%. The question to ask is what is the number that will really promote movement across the bond curve, and then into the USD and second derivatives such as the NAS100 and XAUUSD? For me, inflation with a 7 as the big number would get the USD higher.

Top-down, I remain a USD bull – however, holding the move back and suppressing USD flow - flatter US rates and bond curves, USDCNH is at range lows, and US real rates are also moving back to August and November lows. In fact, a bullish break in EURUSD above 1.1382 should see the 50-day MA come into play, but that would be quite extreme and 1.1420/30 would be more realistic – But I do sit in the camp that USD dips will be bought.

GBPUSD looks vulnerably and may kick lower and again this is another which the market has built up a higher conviction on shorts – oversold, but if this heads south then I am on it as a momentum play.

AUD – the weakest currency in G10 FX

Short AUD was the play last week, especially for momentum players – with AUDCHF and AUDJPY losing 2.4% and 2.3% respectively on the week. AUDCAD could be an interesting one, with both respective central banks staging meetings this week and the set-up on the daily showing the cross is in freefall. AUDUSD closed below the 70-handle and is trending with real vigour – the risks of a short-covering bounce have obviously increased as so many indicators are grossly oversold, but the RBA shouldn’t be the catalyst for AUD counter traders and there's few reasons for the bank to change its stance.

AUDCAD daily

(Source: TradingView - Past performance is not indicative of future performance.)

AUDUSD weekly implied volatility has pushed above 10% and sits at the highs of the recent range. More tape in the Hang Seng would be a start for AUD longs, while any good news on Omicron would also cause shorts to cover but moves into 0.7090 should cap gains.

XAUUSD will be sensitive to moves in the US bond market and has had a reasonable history of performing well on CPI days. Big support is seen into $1760, if this goes then look for 1721 and 1700 to come into play. Topside, we see the former trend coming in at 1793, where a break here and 1812 comes back into play.

Eyes on equity markets

In equities, I watch 4520 and 4500 in the S&P 500 futures, but making a near-term call is tough – I favour the downside but reacting to price moves is clearly preferred over prophesying. With flow in mind, we start to eye options expiry next Friday where the open interest is clearly skewed for downside structures. This means if we head through 4500 then dealers and options market makers will have to hedge their exposure and that means shorting the S&P 500.

Of course, it means once we get to the Monday session (20 December) dealers would potentially have a ton of short inventory, potentially resulting in a solid swing as dealers buy back positions. It seems too obvious now though, but there will be a trade here if we see some of these strikes taken out.

Crypto showing us it’s the vol king

Again, it’s hard to go past Crypto given the monster moves seen on Saturday. Our flow was centred on Bitcoin and Ethereum and it certainly came alive – perhaps not surprising in a 20.3% high-low range – the third 20% daily range this year. Calm has descended on the space after the fireworks though, but if anyone needed convincing that Crypto is an incredible trading vehicle then this move reminded us. If you like movement, have a grip on position size and are happy to trade long and short then this is one where the movement for the cost is comparable to EURUSD and SpotCrude.

ETH daily

(Source: TradingView - Past performance is not indicative of future performance.)

Ethereum gets my attention with price coming back into the 4800 to 4000 range – I like this into 4400, potentially square and reverse on a close through 4000. Position sizing would need to be minimal given the vol.