Bloomberg reports that hedge funds are accumulating large short positions in the CBOE Volatility Index or VIX at “rates not seen in at least 15 years!”
I was thinking over the week-end that I might just take the opposite stance and go long the VIX. This week has too many meaningful data releases and the possibility therefore of a shock, for me at least, is quite real.
I ask myself whether last week’s 1 st quarter US GDP print of 3.2% Y/Y just put a spanner in the works? It was only about 6 months ago, just before the October equity market correction, that analysts, experts and broadcasters were penciling in 3 Federal Reserve rate hikes for 2019, despite projections for lower 1 st quarter 2019 US GDP.
I acknowledge the fact that World-wide inflation is low, but I see a strong labour market in the US, I understand that the Fed now looks at markets-of which US equity indices have exploded upwards by 17% this year (actually since the Fed said it will monitor markets) and so I’m expecting a slightly more hawkish tune from the Fed this week when they announce their interest rate decision on Wednesday.
I won’t go so far as to say that I think they will hike (because I don’t think that), but I do believe that if we have a strong US Consumer Confidence print on Tuesday and robust ADP employment figures on Wednesday coupled with strong Non-farm payrolls on Friday, and strong ISM manufacturing and Non-Manufacturing reports this week, then if the Fed has any integrity left, it will have to stick to the economic facts and Fed Chair Jerome Powell will have to display courage and stand up to the President.
That means he and the Fed will have to take measures to cool down the market melt-up, which for me means they need to return to their tightening schedule.
The fact that the Fed put the brakes on hiking interest rates has made it easy for other Central Banks to follow suit. Hence the Central Banks of Australia, Canada, and the UK have all kept interest rates around record low levels.
According to the National Institute of Economic and Social Research the Bank of England will keep UK rates at 0.75% until at least the summer of 2020, so don’t expect any fireworks on Thursday when The BOE announces its latest decision.
There are plenty of other key data announcements this week, notably in the Eurozone which releases 1 st quarter GDP on Tuesday (exp 1.1% Y/Y) and CPI on Friday (exp 1.6% Y/Y April), and in Canada which releases February GDP (exp 1.4% Y/Y) and also Manufacturing PMI on Wednesday. New Zealand employment figures are out late Wednesday evening with the unemployment rate expected to have fallen to 4.2%.
Despite trading towards the lower band of its broad 0.7000-0.7300 range against the US dollar, the Australian dollar has done quite well regionally of late against the Kiwi (NZD) dollar. One reason for this may have been stronger GDP and Retail sales numbers out of China.
This week China releases Manufacturing and Non-Manufacturing PMIs for April which may print slightly higher than the March figures. If these numbers are in-line or stronger than expected, we may see a slight boost in the AUD. Gold rallied somewhat towards the end of last week, coincidentally with the huge US GDP number. Along with the VIX and AUD it is the pick of my potential long trades for the week.
Good luck and good trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders
Made Their Fortune Trading Forex And How You can Too.