Putting my ECB and Retail Sales view together for a tactical EURJPY short.
Migingo Island, population 131
Located on Lake Victoria in Africa.
Includes four pubs, a number of brothels, a pharmacy, and a hair salon.
https://www.theurbandetective.com/blogs/karibu-migingo-the-most-crowded-island-on-the-planet
One trade, 50% each tactic
Short EURJPY @ 158.40
Stop loss 160.26
Take profit 155.11
Buy Friday 157.70 EURJPY put
for ~21bps
September 13, 2023
We got the slightly stronger than expected US CPI, and now we move on almost immediately to tomorrow’s Retail Sales release in the US and the ECB meeting. US 10-year yields are still lurking at the top of the range with 4.35%/4.36% the key pivot but they micro-rejected the spike after CPI.
Starting with Retail Sales, the asymmetry looks to be on the weak side. First, the massive uptick in student loan repayments ahead of the resumption of interest charges will take a bite out of August discretionary income and consumer sentiment. The absolute dollar numbers of the repayments are not that big (a few billion vs. Retail Sales of 600B per month) but the impact is not zero if it changes attitudes and behaviors for the 45 million Americans who live with student loans.
Second, this article highlights a bit of a trend. Consumers are tired after the revenge spending bacchanal of consumption in 2021 and 2022.
Reuters: US holiday sales set for slowest year since 2018 as consumers turn frugal – report
Third, credit card trackers show spending has dropped. Citi’s showed August was the weakest month of 2023 and this chart from JPM has been going around.
Putting it all together, I see Retail Sales skewed 70/30 to the weak side.
An ECB sources story yesterday has planted the idea of a hike in the mind of the market and while I don’t have a strong view on hike vs. no hike, I don’t think it matters that much. A dovish hike is the base case in my mind as we are very late cycle here with Germany back in recession and inflation measures falling fast in Europe. The 2024 inflation forecast has close to zero credibility, just like the Fed’s dots. It’s finger in the air stuff and inflation could bounce or crash.
I was wondering how the EUR performs after the last ECB hike. Looking at the past two cycles, we get two exactly opposite outcomes. In 2001, the last ECB hike was the bottom for EUR. In 2008, it was the top. The chart is not useful, but here it is anyway for your viewing pleasure.
The last five ECB meetings have defined the sine wave and if we had no other information, I suppose we would use simple pattern recognition to say that the meeting will be bullish EUR and mark the bottom of the range. That’s not my view, but that’s the first thing that pops out of this chart.
On the other hand, most of the recent ECB hikes have seen EURUSD lower, not higher. The March meeting saw a tiny rally and the June meeting saw a big rally while the meetings in February, May and July saw large selloffs.
With economic data weak to very weak in Europe, and a somewhat sus ECB sources story yesterday putting the hawks in control one day before the meeting, I think the main market asymmetry is down. Either the ECB surprises by not hiking, or they deliver a very dovish late cycle hike. Either way, it’s not bullish EUR. This is random, but related:
https://www.bnnbloomberg.ca/bank-of-france-says-price-hike-pressure-at-pre-covid-level-1.1970441
Putting those two views together (weak Retail Sales, dovish ECB), I like EURJPY down from here. We have made a series of four tops now near 160.00 and thus the stop loss and risk management are simple enough.
Short here (158.40) with a stop loss at 160.26 and take profit at 155.11. Risk 186 to make 329. And/or buy 2-day 157.70 EURJPY put for around 21bps off 40 spot (ballpark price).
I am putting this as one trade, with 50% to each tactic (half spot, half option) in the sidebar. You could also consider CHFJPY as we approach the SNB meeting, and the market will probably want to sell CHF going in on the chance that the SNB declares mission accomplished on inflation and backs off on its CHF buying program. The equivalent stop in CHFJPY is 167.26.
I removed the USDMXN idea from the sidebar as it’s not rallying on CPI and therefore the opportunity has passed.
Have a jam-packed day.
Migingo Island is one of the most densely-populated places on earth.
Landing on the rocky tail of Migingo it is hard to see it as a place where fortunes are made. It has the rough edges of a frontier town, with tiny pathways separating bars, brothels and doss houses; prostitutes and their young children rub shoulders with shopkeepers, fishermen and police in the scant space in between. The welcoming committee is a muscular man in combat trousers and a striped shirt, open to the waist, who introduces himself only as Victor.
https://www.independent.co.uk/news/world/africa/migingo-big-trouble-on-small-island-1651736.html
This piece is mostly for people who are interested in backtesting
