EUR/USD: Fed Will Prepare Markets For December Hike
- U.S. housing starts fell more than expected in August as building activity declined broadly after two straight months of solid increases, but a rebound in permits for single-family dwellings suggested demand for housing remained intact. Demand for housing is being driven by a tightening labor market, which is lifting wages. A survey of homebuilders published on Monday showed confidence hitting an 11-month high in September, with builders bullish about current sales now and over the next six months, as well as prospective buyer traffic
- Groundbreaking decreased 5.8% to a seasonally adjusted annual pace of 1.14 million units, the Commerce Department said on Tuesday. July's starts were unrevised at a 1.21 million-unit pace. Last month's decline in starts was largely anticipated as groundbreaking activity has been running well ahead of permits approvals over the past several months, especially in the single-family housing segment. The drop left starts just below their second-quarter average.
- Permits for future construction slipped 0.4% to a 1.14 million-unit rate last month as approvals for the volatile multi-family homes segment tumbled 7.2% to a 402,000 unit-rate. Permits for single-family homes, the largest segment of the market, surged 3.7% to a 737,000-unit pace.
- Investors will be focused on today’s FOMC meeting outcome. In one of the last speeches ahead of the black-out period, Atlanta Fed President Dennis Lockhart on Monday urged a “serious discussion” about raising interest rates at the upcoming FOMC meeting. We anticipate a serious discussion amid a split Committee. Given the lack of consensus, however, we think the compromise outcome will be that the Fed leaves its target rate unchanged for now, but uses the post-meeting statement, and Chair Yellen’s press conference to send a strong signal for an upcoming hike at the end of the year.
- Already back in late July, there were eight out of twelve regional Fed banks calling for a rise in the discount rate – arguably a proxy for the fed funds target rate. And more recently, many regional Fed presidents have stepped up the rhetoric for an earlier rate hike even further: "In the context of a strong economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later. Let me be clear: In arguing for an increase in interest rates, I’m not trying to stall the economic expansion. It’s just the opposite: My aim is to keep it on a sound footing so it can be sustained for a long time. […] A gradual process of raising rates […] allows a smoother, more calibrated process of normalization that gives us space to adjust our responses to any surprise changes in economic conditions. If we wait too long to remove monetary accommodation, we hazard allowing imbalances to grow, requiring us to play catch-up, and not leaving much room to maneuver. Not to mention, a sudden reversal of policy could be disruptive and slow the economy in unintended ways." (John Williams). “Delays in tightening earlier in the cycle could lead to conditions that require more rapid increases in interest rates later in the cycle, risking a more pronounced slowing in growth and rise in unemployment." (Eric Rosengren).
- But Governor Lael Brainard, who has become increasingly influential over the past several months, poured some cold water over the prospects of immediate rate hikes, when she argued last week that "the case to tighten policy preemptively is less compelling", given the inflation situation, and reiterated that prudence is warranted in removing accommodation. Her comments were echoed earlier by fellow Governor Dan Tarullo. The composition of the voting members is heavily skewed in favor of the more dovish FOMC members. At most three of the ten voters (Esther George for sure, and potentially Loretta Mester and Eric Rosengren) will support an immediate rate hike, while the other seven are all willing to wait a bit longer.
- There is much more agreement among FOMC members about the fact that the neutral Fed funds target rate is even lower than previously thought. As a result, many members will again cut their estimate for the longer run natural rate; the median dot, however, may stay at an unchanged 3% for now, after having been lowered by 50 bp over the past six months. In addition, the median dot for year-end 2016 will come down by 25 bp, as the Fed will raise rates only once this year (regardless of whether this hike occurs in September or December). A lower 2016 dot and a lower neutral rate inevitably mean that the medium-term rate hike path will also be more shallow. The median dots for year-end 2017 and 2018 will thus be cut as well, presumably both by 50bp, which would bring the Fed in line with our own forecasts.
- Fed chair Janet Yellen will likely send a strong signal for an upcoming hike in December. This may cause some bumps on the road to USD correction. However, a December hike is unlikely to provide sustainable support. In our opinion the long-term direction of the USD is downwards.
- We stay EUR/USD long in the long-term part of our portfolio. We are looking to buy the EUR/USD at 1.1050 in the speculative part of our portfolio.
USD/JPY: BOJ Sets Yield Curve Target
- The Bank of Japan overhauled its monetary policy framework today, switching to targeting interest rates and sidelining more than three years of massive money printing that did little to jolt the economy out of a decades-long funk.
- But the BOJ held off on deepening negative interest rates or expanding its asset purchase target, saying the modification was aimed at resetting its stimulus programme for a protracted battle to hit and then keep to its 2% inflation goal. The BOJ will continue to buy long-term government bonds at a pace that ensures its holdings increase by JPY 80 trillion yen per year, and maintained the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.
- Kuroda said directly targeting interest rates could work more effectively to raise inflation expectations than focusing on base money. "It's very effective in the long-term perspective. But in the short term, there isn't a clear link between the base money target and inflation expectations," Kuroda told a news conference. "That's why the new policy framework can respond to changes in the economy and prices more flexibly."
- Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE) regime, the BOJ could deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision.
- Japanese stocks rose and the yen fell in an initial reaction to the BOJ statement. But the JPY recovered from lows soon, with investors sceptical about whether the Japanese central bank latest measures will be enough to generate inflation, with many also cautious about the dollar before the Federal Reserve's policy announcement.
- Our USD/JPY strategy is to sell at 102.40 with the short-term target at 99.50, and long-term target at 96.00.
FOREX - MAJOR PAIRS: 
FOREX - MAJOR CROSSES: 
PRECIOUS METALS: 
It is usually reasonable to divide your portfolio into two parts: the core investment part and the satellite speculative part. The core part is the one you would want to make profit with in the long term thanks to the long-term trend in price changes. Such an approach is a clear investment as you are bound to keep your position opened for a considerable amount of time in order to realize the profit.
The speculative part is quite the contrary. You would open a speculative position with short-term gains in your mind and with the awareness that even though potentially more profitable than investments, speculation is also way more risky. In typical circumstances investments should account for 60-90% of your portfolio, the rest being speculative positions. This way, you may enjoy a possibly higher rate of return than in the case of putting all of your money into investment positions and at the same time you may not have to be afraid of severe losses in the short-term.
How to read these tables?
1. Support/Resistance - three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL - It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT - It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In - Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor - green "*" means high level of confidence (low level of uncertainty), grey "**" means medium level of confidence, red "***" means low level of confidence (high level of uncertainty)
5. Position Size (forex)- position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
Position size (precious metals) - position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).
6. Profit/Loss on recently closed position (forex) - is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Profit/Loss on recently closed position (precious metals) - is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Source: GrowthAces.com - Daily Forex Trading Strategies