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Trading Expectable Words More Than Actions

Published 04/26/2016, 04:12 AM
Updated 04/25/2018, 04:40 AM

In yet another week of central bank meetings, traders are supposed to place their bets based on expectable words and their effects, more than actions.

With the Federal Reserve being expected to leave its interest rates unchanged on Wednesday, and with the Bank of Japan being expected to expand its easing measures even further on Thursday, four things are obvious:

  • The markets are more complacent than ever, relying on a Fed that seems to want to keep away from raising rates for now, on a BOJ which doesn’t take its fingers from the printing press trigger, and on an ECB that has said, again and again, that its balance sheet can only expand and not contract
  • This complacency is being increasingly marked by a strange twist: the BOJ and the ECB ease, but their currencies appreciate, and, while the Fed doesn’t ease, the USD depreciates
  • This complacency with a counterintuitive twist means that, should the Fed suddenly announce a rate hike, or speak something in that sense, the markets would tank dramatically and a lot of longs would be literally smashed by an unexpected move
  • While the US markets are only a few points away from all-time highs, the truth is that markets are being solely fueled by central banker words (more than actions), and are absolutely unbacked by any fundamentals – the world economy is not doing nearly as well as markets approaching all-time highs would suggest

So, while this is sure to be another week of conflicting central bank statements, we believe that paying attention to particularly disturbing facts can pay off handsomely. In practical terms, Ridge Capital Markets believes that the currently impressive net short position of hedge funds against the USD and the current net long position of hedge funds for crude oil is about to face a mean reversion.

While this week may still keep the USD more or less underwater (in case Yellen does make dovish statements, since a rate hike is clearly not within anyone’s expectations), we nevertheless see the USD showing a very resilient pause in the DXY, and we see oil losing its steam and production-freeze-headline-fueled position.

That’s why we believe going long USD/NOK is a profitable trade: the USD seems to be in a relatively stable pause of its bull market, which can be reignited by many events, namely by an expectable correction in crude oil, whereas the NOK is competing against the EUR to stay as low as possible, and is likely to see a lot of pain as soon as the crude oil meets reality once again.

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