Last week I suggesting playing Canada dollar from the long side, looking at CDH 71/73 call spread for 22 ref 68.64. Yesterday, CDH6 settled 71.01 and the call spread settled 68. So far so good. Though not quite at ultimate target, I might take partial profit on this play.
No recommendations today, just a general summary of some larger themes. Oil is making an attempt to bottom and the precious metals are starting to perk up. As noted before, the extraordinary break down in commodities relative to equities was ripe for a turn, which has started to occur with the selloff in stocks since the beginning of the year.
Today we get the January FOMC. There is no press conference. However, market based measures of future inflation have been declining, exactly what the Fed does NOT want to see. For example, the ten year Treasury note yield vs the inflation indexed ten year has fallen from 1.62% in the beginning of December to 1.36% now. The 5 year/5 year inflation forward swap was 2.20% in the beginning of December and is 1.96% now. My expectation is that the Fed will signal that it’s dialing back its tightening stance. In turn, risk assets should firm up, and commodities such as crude oil and metals should find additional support.
However, I think a big looming risk is the possibility that China officially devalues the yuan again. I would place the highest odds for this event over the next week, prior to the Chinese New Year on February 8. I am sure the Chinese authorities have learned from their ham-handed market mistakes over the past six months, and devaluation will likely be followed by a rock solid peg against the USD. The recent warning to Soros not to bet against the currency is likely a precursor to the move.
This idea, of course, is highly speculative. However, I think the outcome would NOT be good for the US equity market, as it would signal another round of global currency weakness against the dollar, and would be seen as deflationary. The point is that economic and geopolitical risks are still heightened, and the next couple of weeks could see fireworks. Use extreme caution.
Alex Manzara
