currencywatchlist1.pdf

8/9/2019 currencywatchlist1.pdf

1/22


2/22

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Currenc

yWatchList

ECB summary

The ECB are still very focused on ination because it is

way below their 2% target

ECB members have become increasingly dovish over

recent weeks

ECB sources revealed that the ECB could reveal details

of a QE programme in January 2015

The latest TLTRO uptake was generally disappointing

because it shows the ECB are not really making great

progress with their current policies

Key Economic Indicators

watched by ECB:

EU Inflation(Target 2%)

Next update

23 January 2015

EUR EURO Sell
http://www.jarrattdavis.com/blog/http://www.jarrattdavis.com/blog/http://www.jarrattdavis.com/blog/http://www.jarrattdavis.com/blog/http://www.jarrattdavis.com/blog/


3/22

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Currenc

yWatchList

Central Bank Analysis

The ECB seem to be trying to convince German people that QE isgood and that holding off from it is bad in the medium term. If they can

win the Germans over, there are literally no obstacles to the full blown QE

programme that the market is demanding.

That all points to some type of action imminently with many traders

eyeing the next meeting of the council as a possible launching point for a

new programme.

If this occurs some traders expect parity on EURUSD over the coming

year, and possibly lower.

This now brings that January 2015 meeting into sharp focus, as the

market will build huge anticipation around a potential announcement from

the ECB. We expect the market to be aggressively selling the Euro against

the stronger currencies as that meeting approaches, despite any rallies

that occur in the meantime (Assuming this view remains intact)

The easiest way to trade the Euro right now is to sell it

against the stronger currencies on any rallies that occur

from short term sentiment

Ination ticks lower andthe rhetoric coming

from the bank becomes

increasingly dovish,

with a curious battle

commencing on the pages

of German newspapers.


4/22

real trader.


CurrencyWatchList

BOJ summary

BOJ unexpectedly increased the amount of stimulus it

injects into the economy

The bank revised their growth and ination forecasts

lower Markets were expecting further measures but these

came much sooner

The bank have now demonstrated that they will do

whatever it takes to hit its 2% ination target by end of

2015


watched by BOJ:

Inflation(Target 2%)

Next update

16 January 2015

JPY Japanese Yen Sell


5/22

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CurrencyWatchList


All eyes are now on the CPI data from Japan, because as this shows

improvement the bank will look to withdraw stimulus thus reversing

the recent weakening. As it stands we expect the currency to continue

weakening into 2015 and any pullbacks being seen as opportunities to get

back into the market at a better price.

After disappointing GDP growth the market anticipates that the stimulus

programme will continue and expand before being reversed, continuing

our view that JPY is one of the weakest currencies around.

Governor Kuroda has also stated that the bank will not revise their

inflation forecast either, because it risks the banks credibility with the

markets and further dents any impact that their programmes will have.

At the latest bank of

Japans meeting they

revised down their 2014

ination forecast to 1.2%

from 1.3% showing that

they now recognize that

there are still challenges

ahead for them to hit their

ination target.


6/22

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CurrencyWatchList

This is extremely dovish as it represents a real possibility that the bank

may add even further stimulus in the New Year, and that it will need to

come pretty soon if it is going to have any material impact on their inflationtarget within their pre-set timeframe. Look out for more speculation around

this topic and signals via the data that the bank may act again.

The JPY is still prone to safe haven flows which mean that investors

flock to buy it during times of market panic or uncertainty. We currently

have the situation in Ukraine worsening and creeping back into the

headlines, so if you are buying JPY pairs please be aware of this risk to

your positions. Safe haven flows can cause moves of several hundred pips

in just a few days.Look for JPY to be one of the weakest currencies over

the coming months and try and sell it against stronger

currencies, especially those that are going in the opposite

direction I terms of monetary policy.


7/22

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CurrencyWatchList


watched by the RBNZ:

Inflation(Target 2 3%),

Exchange rate of NZDUSD(Do not want it to reach 0.9000 levels)

they in fact want to see it at 0.6500

Global Milk Prices(Dairy trade accounts for 7% of New

Zealands GDP)

Next update

23 January 2015

RBNZ summary

New Zealand has one of the most attractive investment

yields and the NZD is a very attractive carry trade,

especially against currencies with very low interest rates

The bank reinstated references to a coming rate hikewhich was a major hawkish surprise to the markets

The Finance minister stated that 0.74 -0.79 was

sustainable on NZDUSD

NZD New Zealand Dollar Buy


8/22

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CurrencyWatchList


The bank are also determined to weaken the currency at any

opportunity they get after stating that they would like to see the NZDUSD

rate at around 0.6500. They will wait for opportune moments when thepair is already under pressure, to jump in with further selling.

At their last meeting they reintroduced references to coming rate hikes,

which was a major surprise given how much effort they have recently put

into weakening their currency.

They see the economy expanding faster and inflation eventually

recovering sufficiently to need to raise rates within the next 12 months.

The easiest way to trade the currency right now is to buy itagainst weaker currencies with low interest rates, because

despite the bank being so dovish it remains a very attractive

carry trade, for traders looking for yield.

Do not buy this currency against stronger currencies that

are expecting a rate hike in 2015, and instead look for

opportunities to sell it on the rallies.

The market is now pricing

in a rate hike from the

RBNZ towards the tail endof 2015, possibly at some

point during Q3.


9/22

real trader.


CurrencyWatchList


watched by SNB:

Inflation(SNB want to monitor adverse effects

of this on the economy)

Next update23 January 2015

SNB summary

SNB shock markets by ending their defence of the

1.2000 oor on EURCHF.

They also introduce a negative interest rate of -0.75%

CHF is naturally a safe haven investment and traderstend to buy it as a reserve, causing it to strengthen

during volatile times and market crashes

CHF Swiss Franc Sell


10/22

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CurrencyWatchList


This was most likely in response to the imminent arrival of ECB

quantitative easing which is expected within the coming weeks. This

downward pressure on the Euro would most likely cause the defence of

the floor to be prohibitively expensive for the bank.

They also introduced a negative interest rate of -0.75% to help counter

the moves that will result from the removal of the floor.

In reaction to this the CHF immediately strengthened across the boardand significantly against the Euro and USD. With the EUR/CHF pair falling

over 20% at one point.

This will now allow investors to see the CHF as a safe haven currency

again and buy into it without the risk of the bank actively selling against

them. Remember, the bank could print unlimited CHFs to weaken it when

the floor was in place.

Now, the main deterrent is the negative rate, which is much more

acceptable to an investor seeking short term safety.

The SNB completely

shocked the markets by

removing the 1.2000 oor

on the EUR/CHF currency

pair with no notice, after

stating that the oor

will be in place for the

foreseeable future only acouple of weeks ago.


11/22

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CurrencyWatchList

The overall analysis remains to sell the CHF because of the fact that

they have imposed a negative rate and this should deter too manyspeculators from buying it but at the same time we do need to be very

aware that the CHF has a much higher potential to be a safe haven play.

As such during times of uncertainty the currency could see a surge of

buyers in the short term.

The best way to trade the CHF now is to look for selling

opportunities against those currencies that are actively

raising interest rates, or are going to within the next 12

months. CHF could also be a good currency for long termcarry trades, once the volatility of these shock SNB moves

have subsided.


12/22

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CurrencyWatchList


watched by the Fed:


All employment figures(Looking for sustained improvement)

Next update

23 January 2015

Fed summary

Concerns include weaker than expected ination data

and quality of labour market recovery

Employment gures continue to surprise to the upside

Implied ination rates over the next 5 years have fallen to

1.28%

The markets are now hotly debating whether or not the

Fed can still hike with the outlook for ination falling

USD US Dollar Buy


13/22

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CurrencyWatchList

Central Bank AnalysisThis initially gives cause for a bullish view of the USD but then later in the

week we saw that the 5 year implied inflation level fell to 1.28% which gives

weight to the argument against hiking rates any time soon.

The bank dismissed any concerns of falling inflation at their last meeting,

by stating that it was temporary and down to the falling oil prices, which

ultimately will likely recover.

This gave the market the green light to plan for hikes to begin at somepoint around mid-2015.

Our personal view is that the Fed could even hike sooner with Q2 being

a distinct possibility, given their recent tone and lack of concern regarding

lower inflation.

We are anticipating the Fed will stand pat and continue to state that they

are pleased with the progress so far but that any move in the interest rate

will be purely dependent on the data (Which has generally been good) which

in turn will support the USD strength.

The December NFP

gures showed a huge

increase in the amount

of jobs being created

and the quality of those

jobs increased also as

average earnings came

in at double the amountexpected by the market.


14/22

real trader.


CurrencyWatchList

The next key signal is to look out for a change in language from the Fed,which indicates a rate hike is next. Look for them to remove any reference

or wording that states the first hike is some way off in the future, as they

prepare to hike.

Historically the Fed has changed its language and then hiked at either the

next meeting or within the following two meetings.

The simplest way to trade the USD right now is to buy it

against the weaker currencies, every time these pairs pull

back


15/22

real trader.


CurrencyWatchList


watched by RBA:

Australian Inflation(Target 2- 3%)

Employment data(unemployment rate)

RBA comments and

speeches(looking for less neutral comments)


RBA summary

Growth is sluggish while the property market risks

overheating presenting a dilemma of hold or hike on

rates

Speculation continues to build regarding a possible ratecut at some point during 2015

RBA updated their price target for AUDUSD to 0.7500

The main debate now is which way the bank will move on

rates will move and the argument for a cut is gathering

pace

AUD Australian Dollar Neutral


16/22

real trader.


CurrencyWatchList


Expectations on the ground in Australia however seem to suggestthat most Australians are expecting a rate cut during 2015, in an effort to

stimulate the economy.

We have cut our forecast for AUD from a cautious buy to a neutral

position and this could change to a cautious sell in the Q1 of 2015,

depending on several key things.

If we see a drop off in the data, particularly inflation (I.E the bank lowers

its 2015 forecast down towards 2%) unemployment is still at or above

6.5% near Q2 of 2015, and there is a notable fall in consumer spending,then this could strengthen the case for a rate cut at some point during the

middle of 2015.

As it stands these things are not the case, but we do need to keep a

close on any deterioration of these core indicators.

The RBA really do notwant to cut their rate

however if they can battle

the housing bubble using

macro prudential controls

that effectively limit the

ability of people to expand

their mortgage debt

articially then this could

solve that issue withoutany need for a hike.


17/22

real trader.


CurrencyWatchList

Overall these figures have raised the calls from analysts for the RBA to

at least look at the possibility of cutting rates which now makes it a distinct

possibility.

At this point we need to watch the data and most importantly the RBA,

especially in the New Year which is when they will most likely re-assess the

economic outlook and consider their options.

We are currently on high alert for a possible change in tone on the AUD

in general, because if they move closer to cutting rates then this could

create an outlook where we are generally selling the currency rather than

the current stance of buying.

In either scenario the AUD is still a clear sell against the USD and GBP

and the current risk is only that these sell offs will get harder over the

coming weeks.

The safest way to trade AUD right now is to simply sell it

against the stronger currencies, think GBP and USD while

staying away from entering any new positions on weaker

currencies until we get further clarication of which way the

RBA will go next with rates.


18/22

real trader.


CurrencyWatchList


watched by BOE:


Employment data(Looking for quality, particularly in areas

such as wages and average earnings)


BOE summary

Headline Ination has fallen to just 0.5% but core

improved to 1.3%

General market expectations are now for a hike in

around November 2015

The bank stated that even if there is a long term issue

with ination, leaving rates low will be enough to combat

it

The rst half of 2015 represents a very high risk trading

environment for traders buying the currency

GBP Great Britain Pound Buy


19/22

real trader.


CurrencyWatchList


Carney also said that if there is an issue with inflation remaining low,

the bank will likely not introduce more QE and simply leave rates lower for

longer.

Overall the banks stance has not changed and we keep our view thatthey will be one of the very first banks to hike their rate, and this hike should

come at some point towards the end of 2015.

However, we are in a period of high risk for GBP with events including,

ECBs QE programme announcement, threat of a Greek exit from the EU

and UK elections in which anti EU parties stand a strong chance of winning

the votes.

This means that buying GBP against any currency is higher risk than

normal, including carry trades because there is large downside risk overall.

The reason that the GBP is still marked as a buy is because the long

term fundamentals continue to point to a bullish GBP and the UK are still

expected to hike sooner than most other G8 nations.

After these initial risks have passed the GBP will once again become an

attractive buy across the board.

The simplest way to trade GBP right now is to sell it against

the USD as the fundamentals point to USD being strongerthan GBP regardless of short term sentiment. If you wish to

buy the currency look to do so only when sentiment clearly

gives an opportunity against a weaker currency

The BoE remain focused

on data and have clearly

stated that the recent

down turn in CPI (0.5%)

is mainly down to therecent slump in oil prices

and that in the short term

it may even fall lower,

but that ultimately will be

a temporary blip in the

overall recovery.


20/22


21/22

real trader.


CurrencyWatchList


Oil has also weakened CAD significantly which has reinforced our view

that it is a weak currency to be sold into over the coming weeks.

The BoC have used all of this to continue to justify their stance and

remind markets that interest rates will likely be low for a sustained period

of time. On the other had they have also stated that they will not be issuing

any forward guidance as to when and which direction they will adjust rates

in the future.

This makes it imperative to monitor the price of oil and the ongoing

saga with that market but also comments from the BoC and all data points

relating to growth and inflation for clues about how the Canadian economy

is fairing over the coming weeks, because this will give clues about if and

when the BoC will adjust rates and in what direction.

Focus on selling CAD against currencies that either have

strong sentiment or a very strong possibility for a rate hike

within the next six months

Recent data has remained

weak and we also have

the impact of falling oil

prices keeping ination

lower and generally

impacting the recovery in

the country.


22/22

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