“Global shares stepped back on Wednesday as soft U.S. retail sales fueled worries that rising coronavirus cases could stifle a still-fragile economic recovery, dampening the euphoria from vaccine trial breakthroughs.” (Reuters)
Stock markets have rallied hard on a V-shaped global recovery and of course, vaccine hopes have given this view a boost but after the spike tail high made last week on the SP500 chart, we are still trading below the level. We are looking for a correction to the downside (See yesterday’s post) Any corrective action could lead to an unwinding of the large USD short position…
USD V Major Currencies Low Volatility for Now
The USD is trading in low volatility against most other major currencies and we think the downside is limited from here and a short-covering rally on higher volatility will unfold. In terms of Hedge fund positioning in the USD, the enclosed pic shows we are at an extreme. USD pairs are boring at present but be alert for a rally on higher volatility shortly.
EUR/USD Moves to Top of the Channel in Low Volatility
EUR/USD has moved to the top of the recent channel 1.1950 – 1.1600 and is a sell on weakness. It will be hard in our view to breakout to the upside as we know the ECB at their December meeting are considering more stimulus and rate cuts could be on the table. The market has been looking for a strong recovery in the zone but the recent lockdowns which might be extended are making a big impact on growth as the chart below clearly shows. With a dovish central bank, weak economic growth, and speculators heavily long the euro upside is limited in our view and we should see a move back to at least the 1.1600 level
The major currency pairs lack volatility but in terms of USD/TRY it’s been very volatile, and we expect a big day tomorrow with a high impact news event:
USD/TRY Central Bank Meeting
We have the Central Bank Meeting tomorrow and expect plenty of volatility: “We think that a combination of the consensus expectations – i.e. a policy rate hike of around 500bps and a simplification of the central bank’s interest rate structure – would be perceived as a positive outcome for the lira.” (CREDIT SWISSE)
A 500bps hike is priced in and for the reasons in our previous blog we think they could well disappoint the market. After such a heavy fall in USD/TRY, we view downside as limited and the USD a buy – If we firm up after the meeting, we expect follow-through back to recent highs. See Weekly and daily charts below.
USD/TRY Daily Chart: After selling off hard last week we have found support – we expect level 1 to hold and level 2 is major support in our view see the Weekly chart. If the Central bank Disappoint tomorrow, we expect a major USD rally. A close below 7.500 will negate our bullish view.
USD/TRY Weekly Chart: We had a big sell off last week and we have reverted to the mean ( Green Line 20 day MA ) Which has held pullbacks since September – Any stop protection should be behind this level IE 7.500.
US Hedge Fund Positioning
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