Vapourware and vapour trades
FX Consultant / IFXA Ltd
· US Retail Sales and PPI data close enough to expectations not to matter
· Theresa May’s Brexit speech on January17 could convert the pound into ounces
· ECB and BoC meetings will be quickly forgotten
All eyes on Tuesday will be on London and specifically, Theresa May. Photo: iStock
By Michael O’Neill
The term “vapourware” was coined by a Microsoft engineer in 1982. It evolved to encompass all computer hardware or software products that are announced to the general public but do not really exist.
Vapourware (or in FX terms, vapour trade) accurately describes the USD dollar move since the election. President-elect Donald Trump’s election platform contained provisions for a trillion dollar infrastructure spending programme, tax cuts and trade protectionism. Traders reacted to his win by driving bond yields higher, pushing equity indices to record highs and aggressively buying US dollars.
Chart: US dollar performance since election
Source: Saxo Bank/IFXA
Those trades were vapour trades. Nothing he said, promised or even hinted at exists.
Does anyone remember Ovation Technologies? This software company promised to deliver a suite of word processing products in 1983, attracting $7 million in investment. That money evaporated along with the company and there is little evidence to prove the product actually existed.
Another vapourware developer was Infinium Labs. It promised that its new gaming console, Phantom, would outperform the X-box, Playstation2 and Game Cube. The console never saw the light of day and it is likely that it never existed at all. Bre-X anyone? How about Bernie Madoff?
The world is rife with examples of vapourware or just plain fraud.
The vapour trade was on full display this week. Traders bought US dollars ahead of Trump’s press conference on Wednesday, not because of any hard intelligence or data, but because someone, somewhere convinced them that the president-elect would provide hard details for his promised programmes.
He didn’t. Those bullish dollar trades disappeared quicker than a cold beer on a hot day.
Trump has made many promises during his campaign including these, as tabulated by the Washington Post. a) building a wall along the southern border and make Mexico pay for it; b) have the Environmental Protection Agency disappear c) rebuild the countries ageing infrastructure, d) aggressively challenge China’s power in the world e) replace free trade with “fair” trade.
For now, Trump’s promises are merely hot air, not hard policy.
The week ahead
Hillary who? The week ahead will be dominated by Trump and his inauguration on Friday and anticipation around UK Prime Minister Theresa May’s Tuesday press conference. How low will sterling go?
Monday is Martin Luther King Day in the US which will put a damper on FX trading.
The annual “Meet and Greet for the Ellite” kicks off in Davos, on Tuesday. At best the sound bites from Switzerland will be a distraction because, this year, in Washington, Trump is the show and he is no longer a presidential apprentice. UK CPI, Retail Sales, and PPI data are all due Tuesday but they are likely to overshadowed by politics, specifically, by May.
The Bank of Canada and European Central Bank hold policy meetings on Wednesday and Thursday, respectively. They are not expected to announce any policy changes, making them a non-event. The same day, Fed chair Janet Yellen delivers a speech “The goals of Monetary Policy and How We Pursue Them” which sounds absolutely riveting.
The week will end with a lot of important data from China, UK and Canada as well as another Yellen speech.
The week that was
There was a distinct lack of top tier data releases available this week which should have meant currencies would take relatively tame walkabouts, within fairly narrow ranges. That wasn’t the case.
Monday was a holiday in Japan and a whippy FX market everywhere else. In Asia, USDJPY opened with a bid after the previous Friday’s US nonfarm payrolls report appeared to affirm the three rate-hike scenario. It peaked at 117.52 as Europe started.
Sterling got beat up early, falling from 1.2270 in early Asia trading to 1.2122 just as New York started. That was because UK PM May hinted, in a weekend interview, that she would unleash her inner pitbull when the Brexit negotiations begin. The antipodeans gained with AUD rising on strong buildings data and Kiwi going along for the ride.
Whatever reasons that Asia and Europe had to buy US dollars weren’t apparent to New York traders and by the end of the day the dollar was weaker than where it had opened. Sterling was almost unchanged. Fed speakers suggesting a fast pace of rate hikes, were ignored.
Tuesday’s Asia session was a tad choppy and continued with the bearish dollar bias. Trading got a little more intense with the release of China CPI and PPI data just as Europe was starting its day. EURUSD drifted lower and found a bottom at 1.0558 when New York came to work.
A brief flurry of activity took it back to 1.0605 but nervousness ahead of president-elect Trump’s Wednesday press conference weighed on the single currency. Trump press conference concerns dominated the New York session as well, and the dollar finished the day with a mixed tone against the majors.
Oil sprang a leak. WTI dropped from $52.36/barrel to $50.69/b. Questions (but no facts) as to production cut compliance by Opec had traders whacking bids.
Wednesday’s Asia and European sessions were pretty quiet. The US dollar gained against EUR, JPY, GBP and CHF while the antipodeans managed to squeeze out small gains. GBPUSD was drifting lower in Asia, still suffering the effects from renewed “hard Brexit” fears when a weaker-than-expected UK trade deficit report ignited additional selling.
Then there was the sound of trumpets. Actually, it was Trump. His highly anticipated press conference was entertaining but those looking for deep insight into his infrastructure spending plans, taxes or any other major issues were sorely disappointed. Traders took their unhappiness out on the dollar and the greenback got flayed. Oil prices dipped then soared, bolstered by the weak US dollar.
Thursday’s Asia session started the way New York’s Wednesday session ended. They sold dollars across the board. The antipodeans hit one-month highs and Asia stock markets rallied. Europe picked up where Asia left off and happily extend the dollar selling spree.
Sterling was feeling rather smug following Bank of England Governor Mark Carney’s comments the day before that with regards to Brexit, that the EU had more to lose than the UK. GBPUSD had risen to 1.2315 from 1.2037 following Trumps press conference.
News that UK PM May would be delivering a major speech on Brexit on January 17, knocked the stiff out of the lip of sterling bulls.
GBPUSD plunged from 1.2287 to 1.2140 by day’s end. Oil prices rallied when Saudi Arabia reported larger production cuts than what had been expected. Various Fed speakers were mostly ignored as for the time being as it is Trump’s World.
Trumpets might sound like a Donald fan club, but in this case, it’s just a trumpet. Photo: iStock
— Edited by Martin O’Rourke