Goldilocks economy warrants a Goldilocks Federal Reserve chairperson.

Goldilocks economy warrants a Goldilocks Federal Reserve chairperson.

U.S. stocks closed higher on Tuesday, extending a recent upswing after Federal Reserve Chairman Jerome Powell, appearing before the Senate Banking Committee offered up a sanguine view of the U.S. economy while suggesting the Fed is in no rush to raise interest rates  but remains data dependent. Indeed, a Goldilocks economy warrants a Goldilocks Federal Reserve chairperson.

Powell’s testimony was music to investor’s ears as the Dow gained for the 4th consecutive day while the Nasdaq hit a new high-water mark supported by a combination of Goldilocks effects and a dash of earnings. Also, Netflix managed to get off the canvas as it has done so many times in the past which contributed to a highlight reel type of day in US equities.

Indeed, the hush in trade war banter has provided breathing space for investors to focus on earnings.

Oil Markets

Oil prices are breaking another leg lower. Price action was brutally unrelenting with the ~4.5% sell-off attributed to a plethora of bearish headlines which included tapping SPR supplies, a more clement US point of view on sanctions against Iranian exports as well as news of restarting Libyan oil fields. While reports suggestion production and exports were higher in the first half of July from Saudi Arabia, Russia, and Iraq are adding more weight to the downside momentum. But perhaps the nail in the coffin was the US believes China will import Iranian oil after the sanction, which is forewarning traders that sanctions on Iran oil imports are not nearly as bullish as anticipated.

And adding insult to injury, the American Petroleum Institute reported a surprise crude oil build of 629,000 barrels versus expectations of 3.622 million barrels draw.

Based on price action alone we’re moving beyond the long liquidation phase and entering a period where new shorts are likely getting cemented.

Gold Markets

Gold slid through $1240 like a hot knife through butter but indeed December 2017 low of $ 1,236.68 proved to be the real melting point for gold as prices fell like an anvil after a wave of stop losses were triggered as USDJPY surged above 112.85 prompting that cruel, strong USD to sell gold signal. Given the break of these critical support level, it’s safe to say we’re in a full-blown bear market as stocks continue to trade well there are zeor defensive allocations into Gold as Gold based  ETF flows have dried up. With the USD on solid footing, gold prices should stay pressured lower for the foreseeable future as gold has wholly lost its glittering appeal in this enduringly bullish equity and USD environment.

Currency Markets

Another day another Brexit squabble and of course all sort of long GBPUSD portfolio positions stopped out on last night GBP collapse as he crowded trade phenomena make Brexit driven corrections on Sterling a harrowing experience. Of course, its back to the drawing board again where the street will undoubtedly fashion some reason to pull that long position lever again. Kind of similar to the classic psychological principles discovered by B.F. Skinner in the 1960s. Skinner is famous for an experiment in which he put pigeons in a box that gave them a pellet of food when they pressed a lever. But when Skinner altered the box so that pellets came out on random presses — a system dubbed variable ratio enforcement — the pigeons pressed the lever more often.

But getting back to the issue at hand,  diving into the interest matrix for clarity yesterday in what was a directionless market certainly paid dividend, at least for the short term as the three primary targets AUD, JPY and EUR certainly hit a small rough patch overnight. Recall this short-term trade set up was predicated on little more thought than what specific  Central Bank is raising interest rates and what Central bank is not.

AS for the dollar in general, The Powell testimony, was perhaps not as dovish as the markets lean and the Greenback has made substantial advances overnight.

JPY: Trading at a six month high supported by strong US equity markets and interest rate differentials. Last week USDJPY signalled the most significant break out in years, and the long USDJPY still under-owned suggesting there is more room for this rally to extend even more so if chatter that Japanese institutional investors are increasingly looking outward for investment particularly in the US proved to be true.

AUD: Increased concern in the RBA minutes about Household Debt minutes merely adds to the laundry list of dovish narratives while the RBA shifting language around China should sound a few alarm bells given that the mainland’s growth metrics have been sliding since May.

EUR: This is the least exciting trade of the three differential trades given the constant uncertainty around ECB policy

MYR: A stronger USD dollar in the face of significantly lower oil prices suggests the MYR should struggle to gain tractions and the USDMYR will gravitate to the top side of the current ranges. ON the positive side, however, regional equity markets should remain buoyant given the lull in trade ware rhetoric and positive handover for US markets with the Nasdaq closing at an all-time high.

Dog Days of Summer? (OANDA Trading Podcast Money FM 89.3)

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes