Views and a Trade Update
Fears of another recession continue to grow.
But first off we’re going to take intermediate profit on our short Aussie dollar recommendation, entered Wednesday at 1.0690 and exited today at 1.0458 indicative (10:34am in Sydney), for a 2.15% profit inclusive of the carry we were paying away.
We still believe our back-to-parity target against the greenback is reasonable in a global slowdown, and the long Aussie dollar trade remains crowded even after the recent sell-off we’d guess.
Nonetheless yesterday’s global selloff means there’s now a lot of fear in markets so for up to a few days, we would not be surprised to see some sort of technical rally [full disclosure: yesterday we nibbled by buying a very small long position in the MSCI EAFE index]. Consensus expectations for US July nonfarm payrolls is reportedly +89k, but after the mood-altering gyrations of this week we’d bet it’s lower. Even a significantly negative print (say, -100k) may not be all that different from where markets have priced, and a small positive print (but below +89k) could even be taken as good news.
We mentioned Wednesday the main risk to our trade would be the Fed undertaking QE3, and near-term romancing of this also distorts the very short-term (ie, the next 2-3 days) risk-reward for the Aussie trade. But – despite the Wall Street Journal’s manufactured story Wednesday quoting three well-respected but former Fed officials (Fed policy is still made by the living the last time we checked) – we still think the FOMC is hardly lined up for a shift just yet. We think it’s possible some provocative academic might make the QE3 suggestion at the Jackson Hole conference but don’t think the FOMC will quickly make up its mind.
Two Days Hence
Another light economic data day Monday but we’ll examine Japanese June current account data for more clues about the extent of Japan’s external supply recovery. In the five months since the Tohoku Earthquake, we think Japan has stabilized but the pace of recovery is slower than what the most bullish prognosticators had expected. The key challenge is to understand why?
We also suspect that July foreign reserve figures released by various EM countries at the start of the month will show a slowdown in capital flows to the developing world.
