The Daily Edge - A Complete Cross Asset Analysis

Quick Take

The mass exodus of long-held positions in global equity markets amid an increase in margin calls, the disjointed movements in currencies, the sky-high volatility form part of the daily harrowing script the market has sadly settled into as the total loss of trust in policy actions flare up. The latest measures by US President Trump, the Fed or the ECB have not moved the needle and are a cruel reality check that the dire situation due to COVID-19 won’t be overcome through the type of policy actions we’ve been so accustomed since the GFC (liquidity injections). Don’t get me wrong, the Fed stepping in with more cheap money thrown into the system is still needed amid major stresses in the credit/funding channels to get US Dollars (explains the scramble to long the world’s reserve currency into fresh 2020 highs) but the market’s verdict is still turning a deaf ear and one wonders what’s the ultimate circuit breaker? The market is screaming that an even bolder response from the Fed must come, and I am not talking about rock-bottom rates or the confirmed QE resumption (that’s backfiring) but a clear commitment that they may be pondering to dip their toes into buying corporate credit and even equities outright, essentially a ‘Japanification’ of the US monetary policy, even if the blessing of Congress is needed for these extraordinary measures to see the light. The markets, with a VIX around the 60.00 market, at a level of panic not seen since the GFC, however, unlike that period, this time what will revert the treacherous and fluid situation is a vaccine and containment/mitigation measures by governments/health system, which is why this black swan event is so hard to cope with from a monetary/fiscal policy standpoint alone. The net result when aggregating the flows in the last 24h through G8 FX, illustrates a reigning USD, with the usual suspects (EUR, CHF, JPY) following miles away but still net positive. On the contrary, the AUD, NZD, CAD and GBP are the currencies most punished by the brutality of these markets.

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Quick Take

There is no respite in financial markets as equity futures in the US (S&P 500) hit a limit-down just minutes after the open of markets in Asia as forced-selling and liquidation from those trapped long appears to still play out. Remember, selling originated from the longest bull market in history! That’s important to understand in order to put into perspective the sheer magnitude of positioning unwind going on.

This reaction in equities is certainly not what Central Banks would have wished for after yet another round of coordinated intervention to enhance the provision of global U.S Dollar liquidity and soften the economic blow. The Fed and the RBNZ, both cutting rates to the lowest bound, are the latest to step in (second time for the Fed), even if the market keeps telling us loud and clear such measures are insufficient.

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Quick Take

If as a trader you are still baffled by the speed at which Forex market dynamics have morphed from bottom-rock depression by any historic volatility standards to the insane wild swings witnessed, this article will be a breeze of fresh air to help you navigate the new paradigm shifts taking place in the currency market.

By the end of it, you will have a better understanding of the total massacre by EUR shorts as carry trade unwound, but most importantly, why by drawing parallels with the last liquidity event from back in 2008 (Global Financial Crisis), going forward, we should be expecting the US Dollar to keep appreciating.

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Quick Take

As authorities around the world continue in an unprecedented race against the clock to resuscitate battered stock indices, and laboratories ramp up resources to come up with a vaccine unlikely to see the light for distribution this year, there is a bigger problem at play. Governments simply can’t bring back to life an economy in comatose mode as global lockdowns are still in phase 1 and getting worse by the day. It’s a simple equation: No movement of people, no economic activity. So, what’s left? Governments must keep taking draconian measures on the fiscal front to mitigate the social unrest that is to come as the job is now to assert minimal decent living conditions as the ramifications in terms of job losses and bankruptcy is very ugly as the black swan of COVID-19 engulfing the whole world in a state of fear plays out. What does this backdrop mean for currencies? Well, same old dynamics, with a massive run towards the USD, which keeps its status as King of Forex. The JPY, CHF, and EUR, are also part of this group of beneficiaries, even if none is able to keep up with the fortitude in the USD. In stark contrast, Oceanic currencies and the Pound are being punished severely as the market behavior so far appears to be in strict resonance with movements in currencies from the last ‘liquidity event’ from back in 2008 when the GFC unraveled. Lastly, the CAD has been holding up firmer, but with such a perfect bearish storm in the background, still remains relatively expensive.

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Quick Take

The same old story of US equities hitting a limit down has rapidly eventuated at the open of markets in Asia. So far, the relative calm in the form of short-term equity rallies as seen in the early stages of last Friday has been deceptive and continues to serve the purpose to offload the next round of further selling actions by a market mentally shifted to ‘sell the rally’. If all the mammoth-size actions by Central Banks, from rate cuts, new QE programs, swap lines, new funding facilities, has barely achieved a short lived 1 day rally in equities, there is clearly a statement by Mr. Market that the measures are not enough. Nobody knows where the bottom is as we are still in phase one where countries are busy shutting down cities. This week, the focus will shift towards more COVID-19 headlines, which are set to depress sentiment further as scientists predict that soon the US and UK, the two main financial centers, are the countries set to follow Italy in experiencing a creeping wave of COVID-19 cases and deaths. Traders should also brace themselves as we are in for another rollercoaster week. Be prepared not to be taken aback as the US is about to announce a staggering weekly surge in jobless claims the likes we’ve never seen in history (over 2 million eyed). Amid this unfolding negative backdrop, and with more economies to enter a state of semi-paralysis (Australia last one to join), the market can’t cling to any positive development, as the political brinkmanship in the US causes further delays for the multi-trillion fiscal package in the US to pass the Senate. As a final note, the performance in currencies remains quite predictable based on the central themes of a USD liquidity crunch and risk averse dynamics, which results in the world’s reserve currency as the undisputable king, followed by the JPY, CHF, EUR. The AUD, NZD, GBP are the three currencies most punished, while CAD remains surprisingly stable.

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Quick Take

The Fed has gone all in with QE infinity and yet stocks, despite a short-term spell of strength, are largely unfazed, with the S&P 500 closing down near the 3% mark. In a world where demand and supply have been decimated amid the fastest descent into a bear market in history, week after week, we have further evidence that the Fed’s old tricks are no longer working. Still, they are necessary to provide a backstop in the avalanche of bankruptcies that would eventuate otherwise in a global economy that is imploding for desperate measures. It’s precisely this state of despair that is forcing Germany to break its own long-held rules of a balanced budget by signing off a €750 billion economic package to combat the virus fallout, the US soon to approve the release of $2 trillion in fiscal stimulus, RBA/RBNZ testing the waters of QE, etc. The last country to cave in and go into lockdown is the UK, which only reinforces the notion that since the countries where the main financial centers exist (NY, London) are just getting started to toughen the rules, we should be expecting worsening virus stats before they turn the corner. In the currency market, even if QE infinity has done little to lift the equity valuations, the US Dollar has seen a temporary pause in its macro bull phase after recently breaking into all-time highs at an index level. The Oceanic currencies benefited from the Fed announcement, as did the Euro and the Swiss Franc. The worst performers included the GBP, CAD, and JPY.

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Quick Take

Risk continues to be buoyed as the market keeps pricing in what appears to be an imminent approval by the US Senate of a huge $2 trn covid-19 relief bill. The equities in the US, which acts as a barometer of risk, recorded back to back gains, even if the rally was far from impressive as after a 5%+ rally, the S&P gave up over 80% of the gains. In the currency market, with volatility stabilizing between 4 to 5 times what we were used to pre-COVID19, the Canadian Dollar was the outperformer, the Sterling went nuts by trading in a wild 300 pips range all over the place, while the USD continues to weaken from grossly overextended levels. The gap in performance between the world’s reserve currency and any other currency since the onset of the ‘liquidity event’ has been impressive to say the least. The dislocations in the market, forced selling on margin calls amid sky-high vols led to an epic scramble towards cash. The Oceanic currencies, especially the AUD, were once again pressured and much of the ability to find a stronger footing lies on risk sentiment and the US bill to pass the Senate without further delays. This is precisely the next driver today, whether or not risk can be thrown another lifeline or instead politicians decide to throw a curveball with further delays in this much-needed action.

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Quick Take

https://insights.globalprime.com/featured/usd-has-huge-weekly-decline/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

Shorting the US Dollar has been without a doubt the best play over the last week as the Fed inundated the market with a new level of liquidity/funding capacity. The signing of the $2trn stimulus package by Trump, while not aiding stocks in the last 24h, has nonetheless alleviated the near-term economic stresses in the US. But it’s month-end books’ re-balancing that the Global FX Committee (GFXS) is warning us to be vigilant for the next 2 days, as “FX market participants may execute larger than usual FX volumes during end-of-month benchmark fixings.” The late weakness in the USD out of the blue in the last US session after a promising start shows how it all can turn on a dime in the blink of an eye. The currencies are flows’ driven, especially as Q1 ends, and prove of that is the out-performance of a Pound despite in the UK, PM Boris Johnson and Health Secretary Matt Hancock both tested positive for COVID-19, while at the same time, Fitch downgraded the UK’s credit rating to AA- with the outlook negative. The Oceanic currencies also did well last Friday even as equities and bond yields dropped. The CAD was a big mover last Friday too, as the BOC exhausts its ammunition by announcing an extra 5-bp rate cut and the introduction of QE as part of another emergency meeting. The Yen, Euro and Swiss Franc, the 3 funding currencies and poster children of the now terminated era of ‘long carry structures’ went through balanced flows on Friday.

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Quick Take

http://insights.globalprime.com/featured/fx-vol-set-to-increase-on-quarter-end-rebalancing/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

The ebbs and flows in the Forex market were rather subdued on Monday, with volatility measures dropping to the lowest in the last month as the progressive decrease in vol stays the course. Nonetheless, the new normal is for currency swings of a much larger magnitude than we were used to before all hell broke loose. Besides, with a VIX index still above 50.00 and month/quarter end to kick in, there is a real potential for increased activity in equity/bond and FX today.

As an aperitif, we’ve seen sudden spikes in the Yen, US Dollar and Aussie crosses during Tuesday’s final fiscal day in the Tokyo fix. At the risk of sounding too reiterative, it’s worth emphasizing that while the short–term picture has worsened for the US Dollar amid the flooding of dollars into the system by the Fed and a better tone in equities, do not underestimate the phase where we are at, in which based on the bullish breakout in the USD index, further upside is still justified.

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Quick Take

https://insights.globalprime.com/featured/usd-funding-crunch-eases-quater-end-flows-behind/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

The outperformance of the Pound continues to standout in the forex market, with the Yen joining the party as we leave behind the month/quarter-end rebalancing flows. In contrast, the US Dollar still trades on a rather soft note despite the latest ebbs and flows kept the currency better bid. A special mention goes to the Canadian $ on Tuesday, as it saw an impressive spell of buy-side pressure as hedges and benchmark fixings kicked in through early hours of US trading.

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Quick Take

https://insights.globalprime.com/featured/yen-strength-risk-off-prevail/#quick?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

As risk-off returns wit a vengeance, the Japanese Yen and the US Dollar were the best performers in a day that saw US equities down to the tune of around 4% while bond yields also imploded. With the Western world, especially the US, in the eye of the storm, playing catch up due to the slow response it had, a somber Trump warned of up to 240k deaths estimated with the worst yet to come, so it’s no wonder that the sentiment was shot to pieces. Trump said “this could be a hell a bad two weeks and maybe three weeks”.

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Quick Take

https://insights.globalprime.com/featured/oil-at-the-epicenter-of-market-volatility/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

It was all about the blockbuster move in Oil on Thursday, with the energy instrument right at the epicenter of the moves that unfolded in currencies, bonds, equities, credit and volatility (VIX, MOVE indices).

The President tipped CNBC that he was about to tweet a market-moving announcement in which he took pride of ‘brokering’ a potential re-conciliation between the Saudis and Russians for an eventual 10-15 mbpd oil productions cut. It was a wild ride from there, with Brent almost 50% up at one stage before the dust settled.

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Quick Take

https://insights.globalprime.com/featured/the-usd-takes-the-front-seat-again/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

The out sized price swings continue to relax, as clearly seen by the normalization of volatility measures across financial markets, be it via currencies as depicted by implied vol in options and/or simple ATR calculations based on new higher ‘means’, equity indices as expressed by the VIX (reduction of 50% from its peak) or the US money markets (bond yields in the front and long-end of the curve).

One could argue that the expectations building up for a promising outcome out of the emergency OPEC+ meeting later this week (tentatively scheduled for Thursday) are partly to blame, as the price of Crude Oil, while severely marked down at the open of markets in Asia after a delay of the meeting first thought to be today, is still seen as a stepping stone but not a canceler of the hypothetical scenario in which the big players are able to reach a consensus. With Russian/Saudi tensions still flaring up, the bar has been set quite high I must say.

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Quick Take.

https://insights.globalprime.com/featured/covid-19-hot-spots-leveling-off-lifts-markets/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

It’s a big day for the optimistic-type, as equities in the US, represented through the S&P 500 as the bellwether, broke into higher territory, confirming the first breakout of daily structure to bullish since the whole COVID-19 saga started to unfold out of control.

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Quick Take

https://insights.globalprime.com/featured/broad-based-usd-weakness-the-main-play/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

There is no doubt that the flattening of the COVID-19 curve in many countries has been a trending narratives to explain the recovery in equities. This positive dynamics, in turn, have led to the broad-based depreciation of the USD as the relaxation of stress in the system, combined with the ultra accomodative policies by the Fed, lessens the need to tap into the currency as the liquidity strains ease a tad. The Yen suffered the consequences of the groovy vibes for most of the day too.

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Quick Take

http://insights.globalprime.com/featured/usd-weakness-key-thematic-as-us-stocks-soar/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

The buy-side campaign in the US equity space continues to reverberate in the broader spectrum of FX via a weaker US Dollar across the board, even if this time a poorer performance was observed in the likes of the Euro, Swissy and Yen. In Europe, the market was disappointed to learn that EU ministers failed to agree on a virus rescue plan.

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Quick Take

https://insights.globalprime.com/featured/usd-succumbs-to-feds-unprecedented-measures/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

We certainty had a high flurry of activity in the currency market, with weakness in the US Dollar at the epicenter of the wild moves as the Fed unleashed yet again another monster-size lending program.

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Quick Take

Case To Sell USD On Rallies Warranted

https://insights.globalprime.com/featured/case-to-sell-usd-on-rallies-warranted/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

It’s been a one-way street for the US Dollar since the technical inflection point back on April 7th. Clients following the daily video analysis I make available every day can attest the directional calls have been accurate and it does not look like the tide will turn yet.

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Quick Take

USD Weakness: Steady As She Goes…

https://insights.globalprime.com/featured/usd-weakness-steady-as-she-goes/?utm_source=forums.babypips&utm_medium=post&utm_campaign=de

Equities keep roaring ahead, with the calls made to keep buying the S&P 500 on weakness coming to fruition. The USD vulnerabilities keep flaring up left and right too as the Goldilocks scenario for sellers stays the course…

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The USD & Risk-Off Come Back To Life

Quick Take

What have we learned in the last 24h? Firstly, while some are busy looking for all types of narratives to justify the turnaround in the equity market, those following my daily updates would know how crucial it was the level of resistance reached in the S&P 500. The 2,700.00 holds now they key. A breakout is a key pre-conditions to keep calling for higher levels in the USD index.

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