Top Trade Ideas - October 16th
Another week starts, and fresh ideas begin. We share the best names in FX, equities and indices for you this week.
Gold and the Swiss Franc have climbed this month as safe-haven assets, while the Yen is little changed. Japan’s currency has shown a tendency to gain modestly at those times when markets get most concerned about the conflict, but those rallies fade pretty rapidly.
US equities were a mixed bag, returning some gains from the beginning of the last week on Thursday and Friday.
In FX, it was a tale of two halves. Risk traded well in the early part, causing a sell-off in the DXY and allowing higher beta currencies to outperform. Yet on Thursday and Friday, we saw a reversal. Part of this was fuelled by the beat in US inflation on Thursday, followed by escalating tensions in the Israel conflict on Friday.
We offer a slightly contrarian bearish short term USD view as our first idea. The DXY appears to be forming a head and shoulders pattern, with the inability to break above the previous shoulder around 106.80 (even with a risk off environment) potentially quite telling.
From a fundamental perspective, we struggle to see US yields moving higher unless we get a fresh catalyst (eg. something to push the 30yr above 5%) so don’t see this as a major support in the coming few weeks.
Given the extent of the jump in the DXY over the past two months, we feel the move could be running out of steam.
TRADE IDEA - SHORT DXY
Take Profit: 105.60
Stop Loss: 107.10
The last test of 150 on USD/JPY a couple of weeks back saw a very sharp move lower. We’ve crept back close to that level again, and next week could likely see another test of 150.
Given the flush out of positions from last time, we’re unsure of the reaction for this second test. Either 150 breaks, in which case you’ll see momentum swiftly drive the price back to the highs of last year towards 152. Or it holds again, and you see a sharp move towards 147.
To position for either eventuality, we like to buy a Strangle, which would pay off nicely if either event happens.
TRADE IDEA - USD/JPY STRANGLE FOR A TEST OF 150
Buy a 1 week 150 Call option and a 149 Put option for 0.5%
Just under a 3:1 risk/reward if we touch 152 or 147.
The risk aversion late last week saw the Swiss Franc bought up in volume. This can be noted by the large fall in EUR/CHF, with the pair closing down 0.90% on Friday.
As a risk-off hedge for the new week, we think CHF buying could continue, so we aren’t keen to buy the dip just yet. But when we look at the trend channel, if the pair continues to fall to the trend low, then this could be a smart buy.
As a result, we leave an order to get filled for a medium-term reversal. A side note is that for short-term tactical traders, there is probably room to make a few pips on the short side (0.9477 > 0.9410) before flipping long.
We continue our ideas below with more FX ideas, then move on to US equity longs and shorts for this week, as well as some index ideas to share with you.
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