am/FX: Consolidate

November 14, 2022

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Consolidate

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The huge EURUSD pivot was in play last night as we touched a high of 1.0368. The short EURUSD at 1.0365 idea from Friday’s am/FX has triggered. As discussed in Friday’s piece, huge moves up in EURUSD like the one we saw Thursday are generally followed by consolidation and pullbacks, not aggressive follow through.

The major support at 1.0365 in May and June became major resistance in mid-August and remains major resistance now. Meanwhile, the 200-day is coming down to greet us at 1.0430. Here’s the visual:

EURUSD with old support now resistance and 200-day MA

On the other side of the ledger, I have cut my USDBRL view. The idea was bad, from start to finish, with the election coming and going and USDBRL never really playing ball. BRL performed terribly despite a cratering USD, raging SPX, and a few solid efforts by the market to buy Brazil in size.

As I run the post-mortem in my head, I am not honestly sure where my analysis went wrong. It’s possible that the trade was already crowded when I got back from Brazil. Or those that were considering the trade just never got enough of an all-clear from Lula to get aggressive. Anyway, the view is dead. The idea was to own the resolution of uncertainty post-election and that uncertainty is gone and USDBRL is 5.30 and I am wrong.

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Inflation

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Inflation has gone from 7.7% in February 2022 to 7.7% in November 2022 but obviously the direction of travel is what matters, not the level. Waller tried to bat things back a bit with his comments last night but it has always been about momentum, not levels.

The simplest lead indicators for supply chain and commodity inflation have been about a year ahead of CPI and PCE and economists have underestimated the speed of change in both directions as they anchor on past prints instead of extrapolating the rapid changes in commodity prices and improvements in the supply chain. Auto prices are a good proxy for supply chains because cars are complicated machines that include many components that have been directly impacted by COVID shutdowns. Here is a chart:

CPI, Core CPI, PCE, Used Car Prices (Manheim) and CRB YoY changes

Yes, we need more data, but so far the obvious leaders are showing the way. After ripping higher about a year before official data, the used car and CRB have now been dropping for about a year and official data looks to be flicking lower with a similar lag in both directions. The jury is still out but last week’s optimism on peak inflation is reasonable. Worth keeping an open mind, though, as nobody fully understands all the factors driving inflation this cycle.

We get Brainard at 11:30 am NY today. Everyone expects her to be dovish so the only surprise would be something hawkish, but I find that almost impossible to imagine.

Inflation is toppy and Brainard should be dovish, which are two factors that go against my short EURUSD idea. On the other side of the ledger is Friday’s analysis (which suggests consolidation with a bias lower) and another important factoid: The mutant USD selling from CTAs, which began well before CPI, seems to have stopped for now. CTAs were massive USD sellers as the dollar turned under pressure from MOF intervention, PBoC intervention, dissipation of tail risks in the EU and UK, and massive profit-taking by hedge funds. Here is time of day performance for EURUSD since November 1.

EURUSD performance by time of day since November 1

And here’s the data from that chart, just so you can see it more easily. Note the big up days in EURUSD 03NOV, 04NOV, 08NOV and now two days in a row of nothing major from the CTAs.

Bigger picture, buy dips in EURUSD and sell USD rallies, but for now I’m bearish EURUSD expecting a multi-day 1.01/1.04 consolidation. It’s a tactical trade.

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Final thoughts

Michael Lewis: Right place at the right time again! What a legend.

Bruce Mehlman, who I find to be a must read on US political and socioeconomic themes, is out with his analysis of the 2022 midterms: http://mehlmancastagnetti.com/wp-content/uploads/Candidates-Matter-2022Midterms-Mehlman.pdf

His takeaways (direct quotes):

• This is the least-change-y change-election since 2002: Incumbents won 27/28 Governorships (AZ uncalled), 28/28 Senators (GA runoff, AK uncalled), & ~355/365 Members of the House (may fall slightly).
• Voters sought stability at a time of heightened disruption, & many first-time GOP challengers scared them more than they disapproved of the President / economy.
• We’re in for two years of confrontation, competition & uneasy cooperation, with the (likely) smallest GOP House majority since 1932.

Have an appropriately long day.

good luck ⇅ be nimble

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Sentence length in English follows a gamma distribution

From a nice thread with some simple and effective writing tips.

HT Gitt

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