Week Ahead – Fundamentally 20 June 2015

Posted On 20 Jun 2015
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Last week was all about the FED and as expected the news is that even though it is still not brilliant and that an interest rate increase “should” come sometime later this year. In the FED’s defense, when the IMF publicly asks the Fed not to raise because of potential contagion effects to other financial markets, and Greek citizens are portrayed en masse on CNN demonstrating against austerity, the FED does not have much of a choice.
The FED wants to normalize, but the US is not an insular economy. If economic data continues to improve,  a September hike if it comes, is now more likely. When traders saw the hesitation on the rate front, they focused on the current escalating Greek debt negotiations. The question now becomes one of momentum, which will be tied to the Greek issue.
Having said that the bond markets have already priced in a 0.25% hike. As long as the FED does not aggressively raise rates faster than inflation then the US$ will suffer, the major currencies and commodities will benefit. Remember the market has already moved 2 year Treasury yields from 0.25% to 0.75%.

This week is overwhelmingly Greece driven sprinkled with a few PMI numbers.

We have begun analyzing the currency pairs by using COT data. For those readers who may not be familiar with COT here follows a short description:
COT illustrates the directions in which three different categories of investors believe a given financial product is headed. These three categories (Commercials, Large Speculators and Small Speculators) are based on the following definitions:
  • Commercials (aka hedgers) are people or companies that deal with actual commodities as part of doing business. They trade in those futures as a hedge against the risks they run in the course of that business. Commercials are exempt from position limits and post smaller margins than speculators.
  • Large Speculators are traders whose trading levels are high enough that they require reporting to the CFTC (Commodity Futures Trading Commission). These trading levels vary from one commodity to another, and often from one year to another.
  • Small Speculators are the traders remaining after the Commercials and Large Speculators have been subtracted from the total open interests.
These three divisions are not quite so well-defined in reality as shown above. Successful small traders become large traders while unsuccessful large traders become small traders, and commercial ‘hedgers’ often trade on speculation.
Though there are no set rules about the success of each of these divisions, it is generally assumed that the Commercials are the most successful. The large speculators used to be successful as well but in recent years have done poorly as a group. The small investors are often looked at as the example of what not to do in futures trading.
The motivating factor of a given group should also be taken into account. It should be remembered that the commercials are often short because they are hedging while the small investors are often long due to unflagging optimism.
The actual values are less important than the current trend. Are commercial traders reducing their position or increasing it? Also comparisons to past years gives a good idea of typical holdings particularly for the commercials.
► USD: On Monday we have Existing Home sales expected at 5.29M.
On Tuesday FOMC member Powell speaks. He is expected to speak about the FED’s first potential interest rate increase in a decade. Also on Tuesday we have Core Durable Goods though to show an increase of 0.6%.
Wednesday has GDP data expected to contract by 0.2%.
On Thursday the customary Unemplyment Claims number estimated at 271,000.
COT data shows that the large commercials slightly decreased their USD Index short position from -76,035 to -65,003. CONTINUED BEARISH.
► EURO: A massive week for the EURO starting on Monday when we have both the Euro Summit and Eurogroup Meetings. Only one item on the agenda and that is Greece.
On Tuesday we have both French and German PMI. The former is expected at 50.1 and the latter at 51.5. A figure above 50 indicates growth and below contraction.
On Wednesday we have German IFO Business Climate data expected at 108.2.
COT data shows that large commercials decreased their net long position from last week’s 176,715 to 122.971. CONTINUED NEUTRAL.
GBP: Only one data point of note for the GBP on Friday when BOE Governor Carney speaks.
COT data shows large commercials decreased their net long position from 30,440 to 25,547. NEUTRAL WITH A SLIGHT BULLISH BIAS.
► YEN: Three data points of note for the YEN.
On Tuesday we have the Monetary Policy Meeting Minutes.
On Thursday we have both Household Spending expected at 3.5% and Tokyo Core CPI thought to be 0.1%.
Of most importance is the COT data which shows that large commercials decreased their net long position in the YEN from 174,477 to 130,620. They got the week right and have now reduced. This figure is still far closer to their rolling 52 week high than to its low and therefore continues to be VERY BULLISH.
► AUD: There is no important data for the AUD this week.
COT data has turned neutral as large commercials reduced their net long position from 34,010 to 19,713. SLIGHTLY BULLISH.
►CNY: Only one item of note for the CNY with the release of the HSBC Flash Manufacturing PMI number on Monday. This is expected to come in at 49.4.
There is no COT data for the CNY.
Only Greece this week. A positive outcome will be Euro positive in the short term. As the largest component of the $ Index the $ will/should suffer. This will be positive for the majors as well as commodities.
Stay nimble. Good luck trading.



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