The U.S.dollar, euro and the U.K. pound will come under close scrutiny, due to political issues, over the coming weeks

Nov 20 • Morning Roll Call • 66 Views • No Comments

Last week ended with the main SPX falling for the second week in series and the U.S. dollar also falling for the fourth day in series. Investors appear to be concerned that; despite earnings season proving to be encouraging for U.S. stocks and the Republicans’ tax proposals passing through their first hurdle in The Senate, the record high equity valuations witnessed during 2017 and measured on a year to day basis, have very little to support their sustained valuations.

Considering that a FANG stock such as Amazon quoted on the NASDAQ, has a market valuation of circa $580b, has risen by circa 48% YoY and has a P/E ratio of 280 (the earnings versus its price), it’s understandable how investors may have become increasingly nervous, when in previous eras a P/E ratio of 20 was regarded as optimistic. Many will be asking what room and reason many stocks have to increase during 2018, particularly if the FOMC/Fed increase interest rates to normalcy of 3% in the coming year, thereby encouraging many investors to rotate out of stocks into the relative safe haven of domestic currency savings. The dollar sold off sharply on Friday versus two traditional safe havens; yen and gold. XAU/USD (gold/dollar) rose by circa 1.6% on the day to $1293 per ounce, crashing through R3 and finally breaking away from the 100 DMA. This represents the biggest gain witnessed in over two months, with XAU/USD threatening to (once again) break up through the crucial $1,300 handle over the coming weeks.

European news is still dominated by the U.K. and it’s Brexit issue, which may come to a head this week if the ultimatum issued by Michel Barnier approx. ten days back, remains in place. During a previous meeting with the U.K. negotiation team, he insisted that unless the U.K. makes serious progress within such time on three key issues; E.U. citizens’ rights after Brexit, the final invoice due and the Irish border, then moving onto trade talks during the next few weeks/months will be impossible. The U.K. has now run out of road to swerve around it’s self imposed obstacles, it’s time to put up, or shut up; provide the answers the remaining E.U. 27 member countries require, or accept a hard Brexit. GBP/USD has recovered significantly from its fall in early November, ending the week on a high due to some positive economic calendar news and apparent Brexit progress. However, traders would be advised to monitor all sterling currency pairs carefully and exercise caution when trading all pound currency pairs this week, whilst keeping aware of any breaking news relating to exit negotiations.

Key European equities indices sold off sharply early last week (despite extremely favourable hard data for the Eurozone and Germany) to then recover, whilst EUR/USD continued the significant gains made since the recent November 7th lows, the currency pair has now broken up through the 100 DMA. After falling through the critical 200 DMA on November 1st EUR/GBP appeared to have rejected the level to recover strongly eventually breaking up through the 100 DMA to the upside on November 14th whilst heading to the critical psyche handle of 90.00, since which the currency pair has reverted back to the mean. The euro, particularly in relation to the U.K. pound and U.S. dollar, should be carefully judged when making trading decisions given how the next FOMC rate in December is likely to result in a rise of the key interest rate to 1.5% and the ongoing Brexit issues.

CFTC COT REPORT HIGHLIGHTS FOR THE TRADING WEEK ENDING NOVEMBER 17th

The commitment of traders report provides a snapshot as to where large traders, such as: institutional investors, banks and hedge funds have positioned themselves in relation to several of the major currencies, equities and precious metals.

• Traders marginally decreased their overall net long positions on the euro.
• Traders marginally decreased their overall net short positions on the U.K. pound.
• Traders marginally increased their overall net short positions on the yen.
• Traders marginally increased their overall net short positions on the Swiss franc.
• Traders marginally decreased their overall net long position on gold.
• Traders marginally increased their overall net long positions on the SPX.

KEY ECONOMIC CALENDAR EVENTS FOR NOVEMBER 20th

• EUR German Producer Price Index (YoY) (OCT).

• CHF Total Sight Deposits CHF (NOV 17).

• EUR ECB’s President Draghi speaks in Brussels.

• USD Leading Index (OCT).

• EUR Draghi speaks in Brussels in his capacity as ESRB Chair.

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