The Week Ahead
I will make this post a little longer than usual as we exit summer and are about to experience a busy period. I want to touch base on the week ahead and my general thoughts on markets and further out.
A small recap of last week’s trades and posts… I didn’t really do a lot. The weekly index spread was just OTM at Friday’s close. I put on two earnings trades: an MRVL 69 straddle for 09/06 and a DELL 110/115 call spread expiring Friday. I still hold both, but I trimmed DELL on Friday.
From last week’s post
“This week, it all comes down to NVDA earnings; until then, I expect markets to trade in this 5600-50 range.”
Lol, how right was this (give or take a few points)? NVDA earnings didn’t even matter and we continued to trade in range until MOC on Friday.
“With the election nearing, what else supports my cable short is that one would expect DXY to find support at that key psychological level of 100 as one uncertainty for USD is policy.”
DXY +1.05% for the week after finding solid support at 100.5.
“For lots, they were forced to de-gross as rVol spiked, but as it melts down, they are forced to re-risk…”
TBC…
FX - No change in view for cable and USD/JPY, time to start focussing on the election…
USD remains one big rate play. One could argue that the dollar has been in a range since early 2023, and with positioning being cleaner down here, it should get a bid >104. But that won’t come without its hurdles. We enter September with an expected 25bp cut to be delivered. Considering that USD remains a rate play, Dixie has held above 100 and is trading in what I would call a range, showing that the dollar won’t come off unless there’s a change in growth. Regardless of a cut, the dollar will still offer attractive carry. As long as the US outperforms the RoW, the longer the dollar should continue to be the currency of choice. For all of you seasonality lovers, September and October are usually positive in US election years.
“For USD, the focus is on real rates, which is why DXY has sunk. Powell confirmed a cut is coming, and now the concern is that the Fed could (if deemed necessary) adjust real rates quicker than other major CBs. I highly doubt the Fed will cut as quickly as other major CBs - purely because of the speed of transmission that, say, the UK has vs the US. The CBs will, I am sure, try to stay somewhat in sync with their peer's cuts, but they must stick to their own scripts. With the election nearing, what else supports my cable short is that one would expect DXY to find support at that key psychological level of 100 as one uncertainty for USD is policy.” (Last week’s comments)
I’d expect the Bank of Canada to cut 25bps next week, putting rates at 4.25%. Unemployment continues to rise, and growth remains weak. How things are going, one would expect year-end to see Canadian rates at 3.75%. This week’s 25bp cut is widely expected, so expect little to no movement… (unless oil is on the move), but saying that you could look at buying a call spread for the week. Unless the US has a hard landing or Canada slows down faster than it is, BoC should stick to 25bps cuts.
Given that the market has priced most of what I have mentioned for CAD, USD/CAD can be bought here. From a technical point of view, I am not THAT mad about it; it’s mid-range…
USD/CAD long
1.332 STOP, 1.375 TARGET
My GBP view has not changed much, but I will say that the main focus for the EUR this week will be US jobs data. If NFP came in stronger than expected, the euro could give back some of its recent gains and continue with its pullback. As I said earlier in the year, EUR vol (FX vol as a whole is cheap) with what events will come into year-end is worth owning, a 6m straddle works here.
Chinese commodity demand is holding the AUD back, but with a hawkish RBA outlook, AUD/NZD is worth considering long. If 1.07 trades, I’d be a buyer.
Possible USD/JPY gets off to the races early in the week… USDJPY vol for NFP is the richest versus peers, and with the recent positioning clear-up/carry unwind, a spike in the cross would/could/should stop-in the trend followers and send the cross >150 in the next month… NFP will be a catalyst…
On the topic of the sexier USD crosses…
I like USD/ZAR long tactically here at 17.815, nothing huge…
17.4 STOP, 18.5 TARGET
A brief note on CTAs… from what I have seen, it appears CTAs have built large short USD positions vs G10 FX, usually something you see at the end of a trend…
Anyway… time for equities with a few ideas…
Single stocks, Index & Vol
So, after all that… how did stocks do in August? SPX +2.4% (~530pt range), NDX +1.1%, IWM -1.69%