Top Trade Ideas - July 29th

The pain trade continues.

The S&P and Nasdaq resumed their declines lower after a short bounce higher on Monday last week did not hold. That meant a continuation of the pain trade. The spread between RTY and NQ is now up 20% from the beginning of this move.

In G10 FX, things were a lot more sanguine than elsewhere, even with US PCE coming in above expectations. The exception was the Yen, which saw large inflows in a key week for the currency.

The Week Ahead

An interest-rate decision by the US Federal Reserve is set to take center stage, where policymakers could flag that interest-rate cuts will begin as early as September, followed by the latest monthly US jobs data.

We do not feel that July will see a rate cut, as some speculated about last week. We feel that Powell would have flagged this up in his interview the other week with David Rubenstein. The same goes for the speeches from Waller and Williams or even through other sources like Nick Timiraos.

In Europe, focus turns to the UK where it is seen as a coin toss whether the Bank of England begins reducing rates or whether it waits, and in Asia a highly-anticipated meeting by the Bank of Japan takes center stage.

FX

A lot was made of the break lower in various xJPY pairs last week. While it’s true that some unwinding of carry trades and general risk off mood contributed to the move lower, we don’t agree with the chat this is the start of a longer-term mean reversion.

We stick to our structural House View forecasts of 165 over the coming 3-6 months and flag up the potential double bottom around the 152 barrier (shown in blue below) from Thursday.

Therefore, we look to go long here with a stop below 152 and a take profit back towards the trend line support (now acting as resistance). We do acknowledge risk associated with the both the BoJ and the US Fed meeting Wednesday.

TRADE IDEA - LONG USD/JPY

Entry: 153.70

Take Profit: 158.00

Stop Loss: 151.70

Aussie CPI out early Wednesday morning is going to be one to watch. Not only for the fact that it’s a quarterly release, but also due to the implication on rate pricing for the RBA.

At the moment, there are no cuts priced in for the RBA this year, but 49bps priced for 2025. There’s growing concern around the fact that we could even see another rate hike here due to inflation. The tax cuts certainly aren’t helping to ease the problem, and although this could turn out to be a medium-term Aussie negative, an inflation print above 3.6% likely sees AUD bid this week.

We avoid US Fed noise and buy vs EUR via a limit order at the 1.6600 level:

TRADE IDEA - PLAY FOR A HOT NUMBER ON EUR/AUD

Limit Order: 1.6600

Take Profit: 1.6300

Stop Loss: 1.6725

Finally, we turn to the Bank of England meeting on Thursday. We outlined last week a nice way to play this via the options space on EUR/GBP, having bought a 2-week EUR/GBP call at 0.8450 for 0.22%, citing a potential 5:1 RR should we head north of 0.8550.