Recap
There were a number of news events that did little to move the pair around last week. As stated, every major FX analyst or firm predicted a rate cut by the ECB following dismal German PMIs, specifically the services PMI, slowing to a contraction vs an expected marginal expansion. Also, typically staunch German monetary hawks have been going public with dovish statements, specifically noting the recent disinflation in most PIs.
The other side of the pair had a similarly lackluster week. The US real estate market looks to be cooling, the QoQ GDP print was solidly below the predicted 3% figure and the volatile monthly durable goods orders missed, showing a decrease of 5.8% vs an expected decrease of 2.8%. This is an extension of the less than exciting macro data that's been printing in the last two weeks. Mix this with lower than expected inflation via lower CPIs, and it looks like some cloudiness is forming around the Fed's QE tapering/halting forecast.
Outlook
Mon-Tue
Monday will have price indices in both the EZ and the US. Tuesday will be German unemployment numbers. Incidentally, most of Europe is closed Tuesday for Labor Day. I'd expect the inflation indicators to continue show subdued inflation. That said, these events will only be minor blips - the main events are the central bank meetings on Wednesday and Thursday. I'd look to fade any move on reaction to these numbers unless there is a drastic miss. Keep positions relatively small and be mindful of dealers moving the market around outside of the London and NY sessions.
Wed
The Federal Reserve's interest rate decision will be posted at 2pm EST, with the press conference scheduled for shortly thereafter. We can be pretty assured that the interest rate target will not change. However, Ben will surely be providing lots of clues as to where the FOMC is on QE. Last month he talked up ratcheting down QE in light of the improving labor market . However, since then we've seen slow job growth and (according to "official" government price indices) inflation reversing and nearly heading into deflation. Since the Fed's dual mandate is on price stability and employment, I'm guessing this will be enough for Ben to give the green light on full $85 billion QE through the end of 2013.
Strategy (in order of probability):
- In lieu of any major talk of extending QE, load up on the EUR short trade towards the conclusion of the conference. Since everyone is expecting the ECB's rate cut on Thursday, an all clear on the USD will be the right time to sell EUR. Be wary of selling anything over 1.32.
- If Ben guides QE into 2014 with conviction, stay away from this trade and watch the market reaction post conference. This could be the beginning of increased volatility in the pair, so best to wait it out and see what levels the market establishes
- If Ben + committee commit to increasing QE and/or rule out any QE end dates, get ready to sell USD across the board. Stay away from EUR, but buy anything with a decent yield that is not massively overbought already - I personally favor RUB, MXN, SEK and CAD. Stay away from AUD as it is looking too risky given the marked slowdown in China and precious metals.
- If the Fed comes out gangbusters talking up the dollar citing the massive risks monetary easing proves to the real economy, short GBP, EUR aggressively and buy JPY in anticipation of a massive carry trade unwind. Also, short mid-long term US treasuries. Well, one can dream I suppose...
Thur
ECB rate decision at 7:45am EST followed by Draghi presser at 8:45am EST. Assuming EURUSD is trading in the low 1.30s this is screaming for a short setup. I'm still not sure how to interpret last week's market non-reaction to all the rate cut telegraphing - could all market participants be missing the signal here? Will follow up on the strategy for this event as the week unfolds.
Fri
Go sailing! (weather permitting)
