The Daily Edge - A Complete Cross Asset Analysis

Quick Take

The anticipated transition into calmer waters in financial markets as the PBOC relaxes its approach towards a weaker Yuan has so far played in favor of risk trades to be revitalized, as reflected by the weakness seen in funding currencies, especially the Euro and the Swissy, while the Yen keeps a more combative stance. The USD traded lower as US President Trump engaged in a series of tweets looking to jawbone the USD lower, leading to an unwinding of longs. In an environment of higher US stock valuations as the S&P 500 extends its impressive bounce, even if the bond markets are sending us the complete opposite signal, commodity currencies the likes of the AUD, NZD, CAD did better. On the flip side, both European currencies (EUR, GBP) went through similar poor performances as the chatter of elections in Italy and the UK gets some air time.

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Quick Take

In the last 24h, we’ve learned that the appetite to keep a bid on funding currencies continues to be the most profitable way of expressing the fluid risk-averse environment, as the market comes to grips that the weaponization of the Yuan is a sign of a fresh new chapter in the escalation of US-China trade tensions. It implies that as the flooding of capital back into bonds, gold, bitcoin, and funding currencies (JPY, CHF, EUR) keeps pouring in, the global growth slowdown (risk of recessions) may intensify as supply chains get disrupted and trade activity affected in large scales, just as corporates mull to overhaul decades of an infrastructure intended to capitalize on a globalized world as opposed to an era of deglobalization. Even if one can rest assured that Central Banks will be watching closely from their fences to act as volatility suppressors, the market is walking a tight rope if it buys into the perpetual notion of Central Banks acting as price stabilizers. Should markets start to envision with higher certainty that even the US faces solid chances of suffering a major bump in its economic growth, we may quickly transition into a stage where the Fed must step up to the plate by shifting its message to ‘aggressive dovishness’, hence injecting further vol into the market. It will, therefore, be the combination of recessionary woes, which cements risk aversion dynamics, alongside the caving by the Fed to ease much more aggressively, that may hopefully guarantee the steady pick up in volatility that we are seeing. As August reaches its midpoint, with US-China further apart in trade relationships, the Fed will, before we know it, be caught between a rock and a hard place, having to make up its mind between a much higher USD or an aggressive easing cycle. In either outcome, looks like higher volatility prospects should continue on the rise.

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Quick Take

A classic ‘risk-off’ day took hold in market dynamics as manifested via the relentless appreciation in funding currencies the likes of the CHF, JPY and the EUR to a lesser extent. With the S&P 500 falling by more than 1%, accompanied by similar weakness in the DJIA and the Nasdaq, coupled with the US 30-year bond yield about to break into an all-time low, it was logical to expect commodity currencies (AUD, NZD, CAD) to suffer the consequences too as seeking high-beta options under risk aversion barely ever go hand-in-hand. Meanwhile, the Sterling was given a bit of a boost in demand today, closely following the solid performance of the funding currency complex. Remember, the signals being sent by Mr. Market are still quite worrisome, with the current ebbs and flows seeking out protection via safe-haven assets the unquestionable trend to support. It’s hard to see how, unless a US-China breakthrough occurs (highly unlikely), the ‘risk-off’ profile can be altered in any meaningful way during the month of August.

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Quick Take

The last 48 hours of trading since Trump partially blinked on tariffs to China have provided an important revelation in terms of the opinion the market has formed about the new all-time low in trust between the US and China, even if both sides stick to the pretense of further trade talks by early Sept. The market is essentially not buying into the latest concession and instead it has swiftly returned into a ‘risk-off’ tone. The Japanese Yen, the Swiss Franc and the US Dollar drew the most interest, while high beta G 10 FX (AUD, NZD, CAD) had a miserable day. Another type of record low, this time on the long-dated US 30y bond yield, was also seen, which represents a watershed mainstream moment as a headline grabber to raise the awareness of how bleak the outlook for inflation and growth in the US look. This measure of projected financial conditions, via bond valuations, was further cemented after the US yield curve 2y-10y inverted for the first time since 2017. Add into the mix the negative growth in Germany for Q2, alongside the lowest industrial output by the latter, and one can find even more logic why markets can’t find lasting enthusiasm.

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Quick Take

Two of the currencies most punished in recent times, the Aussie and the Pound, kept finding buying interest as the market adjusts expectations over the timing of the next RBA rate-cutting decision given the strong Aus jobs, while a no-deal Brexit is marginally priced out as labor leader Corbyn looks to join forces aiming for a no-confidence vote. In stark contrast, the market was alienated against the Euro this time, as ECB’s Governing Council member Rehn hinted that an overshooting of the upcoming QE2 is preferable. On the contrary, the market kept finding solid reasons to keep a bid in the USD as domestic economic data dump out of the US came upbeat on aggregate. In an environment where the relentless sell-off in global bond yields simply doesn’t abate, the Japanese Yen kept finding buyers while the Swissy appeared to be drag by the Euro this time, amid a better tone in the equity market in the US as the market corrects Wednesday’s down day in the S&P 500, which was one of the sharpest falls this year. Lastly, the Canadian Dollar and the New Zealand Dollar remain technically bearish as the market now starts to suspect the BOC is the next CB to bite the bullet with a rate cut later this year.

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Quick Take

It hasn’t really made much of a difference whether the pendulum in risk swung left (risk-off) or right (risk-on), the steadiness of the US Dollar to hold its ground speaks volumes of the broad-based interest to accumulate the world’s reserve currency at a time with little to no alternatives. Besides, the US Dollar index (equally-weighted vs G8 FX) is starting to look awfully dangerous for an upside macro resolution as larger flows pile in to join the bid. All the insights can be found in the charts section. Currencies, unlike the USD, that have been negatively affected by the recouping of gains in risk-sensitive assets such as bonds or equities include the Swissy and the Yen. The Sterling and the Canadian Dollar, amid the increase in the risk tone and political maneuverings to block a no-deal Brexit, start the week in a bullish mode, even if as I elaborate on the charts outlook, the Sterling may find it much harder to keep up its upward march at the current levels. The Euro, the Kiwi remain the most fragile currencies as the market keeps pricing in aggressive easing policy actions by the respective Central Banks, while the Aussie holds its ground slightly firmer after last week’s upbeat Australian jobs report.

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Quick Take

The US Dollar continues to attract the most buy-side flows in the Forex market as the thematic of ‘no alternatives’ to put one’s capital to work in the currency space makes, by default, the world’s reserve currency still the best destination to obtain a bit of a yield rolling in. The dominance is clearly reflected by the breakout of a key resistance in the prop US Dollar index (equally-weighted vs G8 FX) that we follow here at Global Prime. The fact that a slightly less hawkish Fed’s Rosengren made no difference to dethrone the victorious parade of the USD speaks volume of the bullish sentiment at play. By the same token, the commodity currencies (AUD, NZD, CAD) saw opposite dynamics, with an improved risk tone in equities and bonds not sufficient to attract buying flows, which is a clear troubling signal going forward. The Euro held steady as evidence mounts that Germany readies a stimulus plan for its ailing economy coupled with renewed hopes that Italy may form a new government after all. The Sterling had an uneventful day. Last but not least, the Yen and the Swissy have traded quietly despite the rebound in risk, which by itself should be a fairly positive sign, as it tells us the interest by the large capital to de-risk its protection by diversifying away from the favorite safe haven vehicles remains quite low, which should read as the uncertainty still at too elevated levels.

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Quick Take

The Sterling was the main winner, and even the move occurred in the blink of an eye, in an otherwise lackluster Tuesday. The light calendar and low market participation as the summer doldrums settle in were certainly not helping the proceedings to get some directional inspiration. The currency market remains confined in tight ranges this week as we await today’s FOMC minutes, but most importantly, the Central Banks’ Jackson Hole Symposium, in order to clarify where Fed’s Chair Powell (due to speak on Friday) stands in terms of monetary policy. The chart below clearly shows how dead vol has been in the last 48h. But the compression, one would think, is set to be followed by fresh directional movements as the market gets a much-needed update about the intentions of the Fed, which as of now, is expected to cut rates by another 25bp in September.

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Quick Take

The Fed minutes dominated the proceedings in the US session, with a message largely in line with the ambiguous/conditional dovish expectations they aimed for back in July. However, the minutes no longer reflects the new lay of the land as vol picked up aggressively in August, which is why to really get a more accurate picture of where the Fed’s thinking process stance, the market needs Fed’s Chair Powell to disentangle this horrendous low vol activity we’ve had this week. On aggregate, the USD trades firmer, as does the Aussie and the Canadian Dollar, the latter boosted by an inflation report that overwhelmed expectations. The safe-haven currencies keep edging lower, more so the Swissy, as the bid tone in equities and the pause of the bloodbath in fixed-income allows for the pullback to stay its course. Out of all the currencies, the pinnacle of tranquility could be found in the Euro, which attracted very little interest to move in either direction as we await today’s ECB minutes and a bunch of European PMIs. Lastly, the Sterling gave up part of Tuesday’s gains as the market re-adjusts expectations about the impossibility of the Brexit backstop renegotiated following the latest comments by Merkel and Macron.

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Quick Take

It’s been a long wait for those trading USD-centric pairs but the event of the week set to revitalize volatility is almost upon us. All the eyes will be fixated on Fed’s Chair Powell this Friday at 14:00 GMT, scheduled to speak at the Jackson Hole Economic Policy Symposium in a speech billed “Challenges for Monetary Policy”. The title is apt to the times we live in and an opportunity for the market to re-adjust its outlook towards the Fed’s Sept policy decision and forward guidance. Aside from Powell, we definitely saw a fair share of action in the Sterling, by far the best performer, after optimistic comments by German Chancellor Merkel in finding a backstop solution by the Brexit deadline. One should really take this rhetoric with a major pinch of salt as the position by the EU has been unshakeable in terms of the backstop not being negotiated. The Kiwi is another currency that suffered from solid sell-side flows until RBNZ Governor Orr spooked an overly committed short market by implying that the RBNZ may not have as much urgency to keep lowering its rate as previously thought. Meanwhile, the Euro, even if the Eurozone PMIs came a tad better, could not sustain the early gains as the index shows. The Swissy was a notable loser on Thursday as the risk tone was kept relatively stable. Again, a better performance was seen by the Yen, rather neutral for the day. Lastly, the Aussie and the Canadian Dollar traded under more selling pressure in the last 24h, the former influenced by a weaker offshore Yuan.

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QUICK TAKE

As the gloves go off in the trade war between the two economic superpowers, the predictable nature of how funding currencies would react when ‘true risk-off’ hits the market has resulted in a very strong appreciation of the Yen, the Swiss Franc, and also the Euro. The equity market is on free-fall as capital also flocks off to Gold and Bonds.

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QUICK TAKE

US President Trump, in yet another attempt to manipulate stock valuations, managed to single-handily engineer a major disruption to the ‘risk-off’ conditions that had engulfed the market since last Friday’s ramp-up in the trade war escalation. Whether Trump hallucinated (manipulated) the market when saying China wants to return to the negotiating table after receiving a call or not, what’s clear is that he still holds the power and has the ability to move the markets by acting as a circuit breaker. The round trip in the Aussie as the primary G10 FX proxy for China left many scratching their head but that’s the dicey environment we live in as the volatility of Trump’s tweets also ramps up. The Canadian Dollar was another great performer, while the Kiwi lagged way behind. The pullback in funding currencies was especially notable in the Euro as the currency got hit from both angles (‘risk-on recovery’ + poor German IFO). The Sterling continues its low vol correction after the strong appreciation following Merkel’s optimism around a potential backstop solution before the Brexit deadline by end of Oct. Lastly, the USD has traded much more stable, attracting fresh demand flows, sandwiched between the outperformance of high-beta currencies and the underperformance of the funding currencies. We are far from being out of the woods as the sense is that Monday’s risk recovery has little for one to latch on as trade war discrepancies worsen. However, as manifested via price action on Monday, the risks of greater two-way street erratic vol are on the rise as Trump becomes fixated with keeping equity valuations afloat, even if his claims start being highly questionable.

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QUICK TAKE

The Sterling, after a couple of days of retracing from its hefty levels, ended as the top performer again in a move that clearly manifests the market is pricing greater chances of the UK may averting a no-deal Brexit, even if betting markets still assign around a 40% chance of a no-deal Brexit this year. Funding currencies, with the exception of the Swiss Franc, did quite well in an environment where risk is dialing back after the trade optimism that Trump wanted the market to buy into has run out of juice. The USD index continues on a steady path of recovery after the aggressive sell-off from last week when the escalation in the trade war broke into new highs. Meanwhile, as one would expect when financial conditions tighten and investors decide to go ‘cash’ in equities and bonds keep the stubborn bid, high-beta currencies (AUD, NZD, CAD, EM FX) performed poorly on Tuesday, and after going through the technicals in a bunch of risk-sensitive instruments, the risk environment remains on shaky ground.

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Quick Take

The Sterling was the main mover, this time hammered lower, after a bold move by UK PM Johnson to prorogue (suspend) the British Parliament after it returns from recess for five weeks until Oct 14th, essentially leaving very little room for MPs to block any potential no-deal scenario ahead of the Oct 31 Brexit deadline. The Speaker of the Commons Bercow described the move by Johnson as a “constitutional outrage", quite a symbolic expression to tell you how heated the proceedings are in UK politics ahead of what’s expected to be an incredibly turbulent time for volatility to hit the GBP from Sept onwards. Amid the angst around Brexit and China’s trade, risk dynamics remain poor, which has undoubtedly contributed to keeping the bid tone in funding currencies, especially on the EUR after Italian Prime Minister Conte will finally be given the mandate to form a new government in Italy, which makes the prospects of a snap election dissipate a tad for now. The selloff in Italian yields relaxed the selling pressure on the Euro. A currency that attracted most of the demand on Wed was the USD index, on the verge of breaking a key resistance. Lastly, the hight-beta currency complex the likes of the AUD, NZD, CAD remain with a bearish outlook overall, with the NZD the worst performer after another terrible business confidence reading out this Thursday morning in NZ.

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QUICK TAKE

The back and forth in the trade war keeps the market guessing, which is causing, as highlighted in yesterday’s webinar, an erratic two-way vol in the market. It took only one headline via the Chinese Commerce Ministry stating that discussions are still underway to keep the pretense of further trade talks going for risk appetite to be back in vogue. China also implied that a walk back in its retaliatory actions cannot be ruled out if the US creates the environment to do so. The US Dollar and the Canadian Dollar were the main beneficiaries, even if the performance of the rest of G8 FX leaves the impression that the push up in risk, which was quite aggressive in the S&P 500, is a half-baked type with participants applying caution, with the likes of the Aussie and Kiwi, which you would expect to do well under this environment, lagging behind. Even the Japanese Yen, in particular its equally-weighted index that I monitor every day, is not yet communicating any trend reversal. Same applies to fixed-income, little reaction with the US30y hovering around an all-time low. The Sterling remains in a wait-and-see mode, while the Euro is in no man’s land as I elaborate in the currencies’ section.

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Quick Take

The US Dollar has been the undisputable leader of the Forex board, especially during the last week of trading, in what became a rather eventful month of August, characterized by the escalation of the US-China trade war, with the latest announcements to hike tariffs coming into effect this last Sunday. The market remains unphased by the structural issues in the US but instead, the currency keeps drawing major demand flows from the lack of pre-commitment by the Fed to ease to the extent the market is pricing, also assisted by the generalized risk-averse sentiment, but even a more compelling case is the ongoing shrinkage in US dollar liquidity as I will explain in today’s report. The Japanese Yen and the Pound are the only two currencies that have been able to keep up from distance with the bullish pace from the world’s reserve currency. On the opposite side, the Euro opens a new month of trading below the psychological 1.10 at its lowest level since May 2017, with the high-beta AUD, CAD, NZD finding tepid demand.

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QUICK TAKE

It was a quiet Monday for most of the currencies as the US and Canadian markets were closed due to Labor day, essentially clearing the landscape to make the GBP the absolute focal point as volatility, once again to the downside, hit the currency as the risk of a snap election in the UK is on the rise. GBP traders must be aware that trading the currency in the coming weeks and months is going to be a minefield of headline-charged price fluctuations, which increases the risks considerably. Meanwhile, the close of markets in the Western hemisphere didn’t make any difference to alter the steady uptrend in the USD, with the JPY and the CAD following from distance. The markets that appear most at vulnerable to further downside pressure remain the AUD, NZD, EUR, and to a lesser extent the CHF, which trades at fairly cheap levels based on the risk profile.

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QUICK TAKE

After 2 years and a half above the boom-boost line of 50.00, the first contraction in one of the benchmark bellwether indicators of the US economic health (ISM PMI) has been confirmed, sending the USD lower, even if still under the context of a strong uptrend, as the odds of a 50bp rate cut by the Fed in 2 weeks go up to around 20%. The bullish steepening of the yield curve also sends a troublesome signal as any under-delivery of policies by the Fed will only exacerbate the disconnect between the Fed stance and the market verdict of where interest rate ought to be. A currency that continues to trade at the rhythm of its own drums is the GBP, with the juggernaut of two-way vol dominant as the UK appears headed towards a general election by mid-October as the Parliament is about to take away the Brexit negotiating powers from PM Johnson. The risk environment, when looking at the whole spectrum of sensitive assets (JPY, VIX, US 30y yields, SP500, USDCNH…) continues to communicate the market is acting rather complacent by keeping the AUD so well bid. The opposite is true when analyzing the low levels of the CHF. We know when trading the EUR, expectations over the beefed-up easing package by the ECB has been on the driving seat, but the divergence with the risk profile makes the soon-to-be-tested key support in the EUR index a highly anticipated area where a response to revert the momentum may ensue. Meanwhile, the CAD was taken to the woodshed ahead of what looks like a Wed’s BoC meeting with dovish risks.

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QUICK TAKE

A quadfecta, which in horse racing refers to picking the first four winners, could be extrapolated to the order of positive news hitting financial markets as risk-seeking strategies thrive after four consecutive risk-friendly developments occurred on Wednesday. The withdrawal of the extradition bill by HK set the ball rolling, which considering is what sparked the beginning of demonstrations, it definitely was a good omen to start the day in Europe. We then must throw into the mix the delay of a no-deal Brexit as the UK Parliament took control of the process, only to see a new Italian government formed with Conte back as PM and former EU economic and monetary affairs chair Gualtieri as Finance Minister. The icing on the cake came after the Chinese Ministry of Commerce issued a statement that China and the US agreed to meet in October for trade talks. Needless to day, amid the rampant risk appetite in equities (not in bond yields though), risk-sensitive currencies (USD, JPY, CHF) were taken to the woodshed, while GBP, AUD, and CAD buyers blare the trumpets by riding the bullish momentum as key tail risk events (Brexit, HK, Italy, US-China trade) are all in recess.

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QUICK TAKE

There is no doubt that the revitalization of the carry trade is back in vogue as high-beta currencies thrive at the expense of plummeting funding currencies, especially the JPY and the CHF, while the EUR is also under pressure even if trading dynamics in the latter will be determined by adjustments ahead of next week’s ECB meeting on Sept 12. Even the jaw-dropping pool of negative-yielding global bonds has come down significantly as we see the flourishing environment lift both stocks and fixed-income, which is a clear testament that the quadfecta of positive developments all compressed within the last 24h has shaken the grounds of the market in what has the risk of turning into a major reckoning moment in the re-adjustment of positions this Sept. You don’t often see that the underlying risks having worried markets the most in recent memory, without exception, get systematically reduced in seamless synchronicity. The market is currently undergoing an aggressive repricing as the perception is that through the course of Sept, there will be a relaxation of the chaos seen in HK, the political instability in Italy, the prospects of a hard Brexit, or a full-blown trade war with no intention to talk. It should be, therefore, not surprising that the market is coming to grips that as valuations stand, reversals back to the mean in risk instruments must eventuate to adjust to the new reality.

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