In what was a low key affair, the Pound was the biggest mover. The Sterling tops the gainers’ leaderboard as UK PM May secured further concessions from the EU, while a ‘true risk on’ microenvironment led to a major deterioration in the pricing of the Japanese Yen as well as the US Dollar. Despite the renewed optimism on Brexit, the buying flows in the Euro were very limited in comparison. The Australian Dollar and the Kiwi did relatively well while the Canadian Dollar fell somewhere in the middle.
The currency that stands out above any other is the Kiwi with the pricing out of rate cuts since the last RBNZ policy meeting having set out the currency for a distinctive short-term trend at a time when the rest of Central Banks have been sounding unambiguously more bearish. The rest of the currency fluctuations make for a more complicated jigsaw to solve, as the USD and the JPY still enjoy macro bullish trends due to the spells of risk aversion from last week, although this week’s abrupt reversal towards appetite to seek out riskier bets has sunk the currencies as the 2nd chart shows. But no currency shows more variable and irregular gyrations than the GBP, taken hostage by the never-ending Brexit quandary. The Canadian Dollar starts to show signs of life again, with the onset of its solid performance originated off last Friday’s back-to-back blockbuster Canadian jobs report. The Aussie has also been faring quite well despite the recent blow in yet another Australian data (consumer confidence). In short, continue to pay much more attention to the developing micro trends to increase the odds of being on the right side of the flows. This is not a time to take much guidance from the macro-developing trends as the irregularity of the risk swings coupled with the absence of central bank policy divergences create an environment where flows remain king vs macro positions.
JPY and USD supply flows were the common denominator as the environment turned ‘true risk on’ once again. Further diversification into riskier assets, including beta currencies, has clearly transpired, as the micro and macro slopes of the SP500 vindicate. Interestingly, global yields, taking the US 30-yr as a reference, while marginally higher, continue to exhibit a rather sluggish behavior. Short-term, the environment remains very positive for risk trades, especially for the Canadian Dollar, as it takes up the slack from a heavier Aussie, weighted by constant negative fundamentals in Australia (Westpac’s consumer confidence the last disappointment). Meanwhile, the dynamics around the Euro have been relatively benign, while the Sterling is flying as the UK secures, in theory, the rejection of a ‘no deal’ Brexit after Wednesday’s vote in the Commons.
Brexit, Brexit and more Brexit. This week, the dynamics in the currency markets were almost exclusively dominated by the topsy-turvy state of affairs in the Brexit front. After all said and done, the market has found sufficient consolation in the anticipation of a delayed Brexit, which is seen in the market’s playbook as a temporary GBP positive as it removes an immediate tail risk. The ball seems to be moving to the EU courtyard, which means that the European Council meeting next week (21/22 March) should be the platform where an extension is agreed, in theory. As a pre-condition, the UK needs all 27 member states to agree to the delay.
In the USD and JPY markets, sellers have swayed the price dynamics as the delayed Brexit scenario firmed up the notion of ‘risk-seeking’ strategies. Running their own races, the Kiwi and the Canadian Dollar were off to a great start of the week, but only the latter has been able to sustain enough momentum to preserve most of its weekly progress. The Kiwi, as a stronger by-product version of the Aussie, has faltered as US President Trump warned us that there is no rush for the US and China to ink a deal just yet, just as more reports seem to suggest that any meeting between Trump and Xi won’t happen until April, at least. Amid the crossfire of GBP vol, the Euro has found enough buying interest for the market to apparently interpret that the fair value in the exchange rate vs the US Dollar should be back to the pre ECB selloff-led episode.
The USD, JPY, and the CAD have been the main laggards in the last 24h. On the flip side, the GBP, AUD, NZD keep attracting solid bids, leading to demand imbalances even if the environment remains extremely dicey ahead of crucial pending developments such as Brexit or the US-China trade negotiations. The Euro is sandwiched in the middle, with the currency largely conditioned to Brexit developments and Wed’s FOMC to find its next catalyst in either direction.
The Aussie and to a lesser extent the New Zealand Dollar, were the best performers, followed closely by the Euro. It was a bit of a disjointed affair, as even the JPY performed relatively well against its peers despite the persistent rise in equities, taking the S&P 500 as our barometer (up 0.6%). The Sterling succumbed to the lack of progress between the UK government and the DUP to be able to re-table the divorce deal. Meanwhile, the Canadian Dollar remains under clear sell-side pressure amid a substantial deterioration in the Canadian bond yields, now inverted up to 10y. The USD traded mixed for the day awaiting further stimulants.
The market remains is a state of contained activity until the FOMC policy statement + press conference by its Chairman Jerome Powell later on Wednesday. Equities in the US, with our attention always on the S&P 500 as the bellwether, failed to keep the bullish tendencies going amid the resisting tactics by China as part of the trade negotiations. It has been reported by Bloomberg that the Big Panda (China) keeps playing hardball, and that based on accounts from some US negotiators, concerns are starting to emerge about the stubbornness of China to apply changes to their data protection and intellectual property policies amid the lack of assurances that existing tariffs will be lifted. There is the camp arguing that China is backtracking its initial commitments for a deal to transpire, while others involved in the negotiations believe this is the normal process of any negotiations. By the end of business in NY, the S&P 500 closed down by just under 0.3%.
The USD also continues broadly softer, stripping out a significant spike in US bond yields, which saw about a 50% retracement as the day went by, not helped by a poor print in US factory orders (0.1% m/m vs 0.3% expected). The US 10y yield stands at 2.61% while the 30y exchanges hands at 3.02%. A currency where one could anticipate greater vol, even if it never materialized was the British Pound as the inconclusive state of the Brexit conundrum continues. The latest we learned is that UK PM May is mulling the possibility of requesting for an extension of Article 50 to June 30, even if rumor has it that the extension could be way beyond this time horizon and all of us stuck reporting the Brexit mess for another year or two, which is the timeframe the BBC speculates in a report on Tuesday. Even if a sideshow due to Brexit, the UK published surprisingly solid employment numbers. As the Economics Team at ING notes, “the UK labor data looks astonishingly strong for an economy that is supposedly slowing on most other measures. If the government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer.”
The JPY and the Euro were the major beneficiaries from the crossfire of vol so badly needed in the Forex market. On the flip side, a battered USD, courtesy of a surprisingly dovish Fed, alongside a hammered GBP, were by a country mile the two clear outperformers, especially the USD. Putting on a very solid performance we find the Oceanic currencies, the Australian Dollar and the New Zealand Dollar, which not only found ample amounts of demand but follow up buying was noted following the releases of the Australian jobs report and the New Zealand’s GDP figures. Backpedaling its recent strength from earlier in the week is the CAD.
To start with, it’s worth pointing out that even if the low vol environment is suppressing directional biases from a higher timeframe perspective, it doesn’t mean there is a deficit of opportunities if you know where to look for. For instance, ever since the FOMC meeting, there has been 2 currencies (GBP, CAD) which have exhibited strong directional moves intraday as our currency meter shows. The same can not be said about the USD, as one of the key factors behind the attractiveness towards the currency, even after a clearly dovish FOMC, is that it continues to act as the pick of choice when it comes to carry trading (borrow low yielding currencies and play long high yielding). It is on the basis on this market dynamics of capitalizing on low vol through carry trades, coupled with overextended nature of the moves post FOMC, that led the Euro to give back its gains. On the flip side, the JPY showed a more combative spirit amid the ‘weak risk off’ environment given the falls in US yields yet the rise in the DXY (equities higher as well). Somewhere in the middle, still showing signs of decent demand we find the Aussie and the Kiwi, backed by the recent economic data (Aus jobs, NZ Q4 GDP).
The agitation in financial markets, triggered by a shocking miss in the German PMI last Friday, is evident across a wide spectrum of instruments. The rampant Yen is the manifestation of a phase, spearheaded by European & US yields, in which the proverbial has finally hit the fan, as we finally see the German 10y Bund trading sub 10% or the inversion of the US yield curve in the 10y-3m. The dramatic fall in yields had immediate spillover effects into equities, vol measures (VIX), credit markets (junk bonds down big), and as mentioned, the Yen is the clear winner. In yet another demonstration of the disjointed dynamics between the Sterling and the rest of FX, even under such risk-averse fluctuations, the currency managed to follow the Yen in almost lockstep as the market prices in the positives of an extension of Article 50 for all of us to contend with more weeks of Brexit. Just wonderful! The next pack of currencies displaying a decent performance includes the USD, underpinned by the risk-off diversification flows, while the Kiwi is more of a fundamental play I reckon, with the RBNZ one of the only Central Banks not blinking to further easing just yet. The Aussie and the Loonie follow next, as part of a group trading on the backfoot vs most peers. However, no currency is under more intense pressure than the Euro as the market re-adjusts to levels more congruent with the possibility that Germany goes through a prolonged recessionary period.
The compression of the micro slopes back to the mean portrays a currency market with a deficit of committed capital to support macro trends (EUR the exception?). Instead, the recent strength in the likes of the Yen has abated while other currencies such as the Sterling have failed to shift into higher gears even if sufficient pockets of demand have been maintained to keep it elevated by G10 FX standards. The Aussie has been the main beneficiary of the recovery in equities, even if it’s found a wave of selling pressure during the ongoing Asian session in response to the sharp selloff in the Kiwi, as the RBNZ joins the rest of G10 Central Banks in explicitly shifting its forward guidance to lower rates. We shouldn’t forget about the Euro, which alongside the Yen, has seen the most supply imbalances, in what still appears to be the lingering effects of a fundamentally-adjusted deterioration in its value on the basis of mounting fears that Germany is set to go through a prolonged recessionary period.
If you wonder why the Japanese Yen keeps performing so solidly this week, look no further than the behavior in fixed income markets around the globe, where bond yields are getting absolutely destroyed. Not only the US yield curve has inverted, but other milestones are also happening before our eyes, such as the German 10y anchored in negative territory, the Aussie 3-yr bond yields making historic lows, and the list goes on. Amid such an aberration, especially when it gets compared with the high valuations in equities (an epic departure from normal correlations), many are starting to question that such divergence between bonds yields and equities can’t last forever. So, this week, and without setting precedent, it looks as though the disorderly movements in bonds (remember historically low vol tends to lead to expansions in vol), equities traders are finally taking notice. Economics 101 suggests that when yields are this low, aside from the eternal debate of whether or not the US yield curve will lead to a domestic economic recession, it’s a clear communication that the market is not buying into the rhetoric that the future is bright but the opposite, it’s telling us that a gloomy outlook is being discounted by the high concentration of long-dated bond maturities as a good enough yield that acts as a safe-haven vehicle.
The US Dollar has been the absolute dominator, attracting the most buying flows in the currency market in the last 24h. Amid the absence of fundamental drivers this week, to understand what’s been the catalyst of its ascendancy this week, we need to resort to the information I am getting from various institutional sources. The buying interest back into the USD appears to be a function of US investors running to the exits in their foreign holdings, which has led to strong flows of currency repatriation into USD-denominated assets, which also helps to explain why the demand towards US fixed income has been so savage as of late. On the opposite side, we find the NZD, still lagging way behind the rest of the G10 FX pack in response to the new easing bias adopted by the RBNZ, while the GBP miseries are still present, with the currency finally giving in and adjusting its value lower as investors keep losing their patience amid the lack of any meaningful progress in Brexit. Talking about meaningful, another vote for UK PM May’s Brexit deal is scheduled this Friday. Then we have the Loonie, the Yen, as a group of currencies having shown strength as of yet, the former inspired by the recent gains in Oil prices, while the latter still acts as a harbor to protect one’s profile after the recent episodes of risk-off. I would then classify the Euro and the Aussie as the 2 currencies caught in the middle of the cross-current, with an outlook that keeps worsening for both of them. In the case of the Aussie, the move by the RBNZ may force the RBA to act more aggressively by shifting to a more dovish forward guidance, while the Euro still pays the consequences of the disastrous German PMI sub 45 from last Friday.
As the chart below shows, to start the week, we have two clear outliers. Firstly, the Canadian Dollar has seen its valuation adjusted significantly higher on the back of a strong Canadian GDP for the month of January. The slope of the micro trend, which looks at 24h worth of price action through the 25-HMA, has been steadily bullish. Another currency currently embraced as part of the improved ‘risk on’ conditions is the Aussie, further boosted by the positive news out of China over the weekend, where the March PMI came upbeat. In today’s selection of the best markets to trade, I’ve focused on the Aussie due to precisely the alignment of these crosscurrents, with the constructive rhetoric around the US-China trade talks the icing on the cake, even if one must be aware that the RBA monetary policy statement tomorrow is a time for a reset of technicals. The Sterling, battered by the Brexit circus, alongside the Japanese Yen, sold after the recovery in risk, are the worst performers. I must state, despite the risk appetite, it looks as though the repatriation flows back into the USD, as I explained last week, are still playing a role to keep the USD at very stable levels.
The Canadian Dollar, still fueled by the impressive Canadian growth figures from last Friday, and backed up by ‘risk on’ and the rise in Oil, keeps finding the most demand. Following at a certain distance is the US Dollar, making solid gains across the board except vs the CAD as noted. A strong US ISM is the reason behind the surge in USD demand, with the upthrust day in US yields, no longer in negative yield curve (10y-3m), underpinning the move. The Japanese Yen was the clear underperformer in a day where the promising US ISM came combined with back-to-back positive Chinese PMI readings (official and Caixin). The S&P 500 broke its previous swing high, and it’s looking increasingly likely that the record high from last year will, at some point in Q2, be retested again, in what would be one of the fastest recoveries from an officialized bear market (after a 20% down last year) in the history of the S&P 500. The V-shape type of bounce is a very rare occurrence. A currency that is trading at the beat of its own drummers is the Sterling, with moves currently 100% dependable on the Brexit saga, as we navigate through the peak noise stages. The Euro remains under pressure on the back of yet more disappointing data out of Germany (PMI) and low inflation readings in the EU. Lastly, the Aussie awaits the RBA…
The Yo-Yo type movements in the Sterling continue, this time what we saw was a spontaneous reversal back to the upside as algos and fast money piling into the GBP after news broke out that UK PM May is open for a dialogue with the Labour party to unlock the Brexit conundrum. If only it was as easy as it sounds! I continue to reiterate, as a warning to intraday traders, the GBP remains completely taken hostage by a market entirely driven on a Brexit headline-by-headline basis. The Japanese Yen exhibited a combatant profile through Wednesday, despite in the grand scheme of things, it continues to be the main underperformer as ‘risk on’ has recently taken over vividly. The Aussie was sold on the back of a more dovish RBA, even if the trappy nature of the currency due to its low vol and a stellar Aus retail sales, alongside positive news on the US-China trade talks, have now reverted a large part of the losses incurred in the last 24h. The Kiwi is still piggybacking the Aussie amid the lack of individual drivers. The CAD and the USD continue to attract steady flows, even if it’s looking as though the EUR/USD and as a consequence, the DXY, may be at an inflection point as the cycle reaches full maturity.
The AUD has been the kink of the currency market in the last 24h, spurred by a notable beat in Australian retail sales, with the added fuel (demand) via the positive rhetoric in what appears to be the very last stages of negotiations in the US-China trade talks. Risk appetite is still well sustained across the board, even if equities in the US, unlike in Europe, failed to keep the overnight gains. A reflection of the recovery in the desire to join the bid on the risk tone is the fall in the USD or JPY indexes. The Sterling remains steady, keeping most of its Tuesday’s gains, as hopes keep building up over the UK averting a hard Brexit. The inflows into European equities and the overall risk-induced swings seems to have finally played a role in the Euro, which has found demand once again after retesting this year’s low. The economic agenda is very quiet today, as the market liquidity dries up ahead of Friday’s US Non-Farm Payrolls, set to inject the usual volatility at the start of every month.
What did we learn after the US NFP? In my opinion, it essentially reinforces existing trends in the market such as a Fed that finds it well justified to stay on the sidelines for the remainder of 2019 and beyond, while it also provides a Goldilocks scenario for equities, as US growth remains relatively high despite little to no inflation. US bond vigilantes came back roaring ahead by joining the bid in bonds last Friday, pushing US yields aggressively down, which can partly explain the rise of the Yen even as equities stay bullish. The Euro is another currency that remains very stable doing its own thing in a very confined range vs the US Dollar. Meanwhile, the antipodean currencies, especially the Kiwi, find no respite on its bearish trend as the market keeps discounting a more dovish RBNZ, while the AUD shows the first signs of weakness after a solid 3day bull run. In the last 2 days, I must say that the movements in the Sterling have resembled a lot to those seen in the Kiwi, both the clear underperformers in the G8 FX space. Somewhere sandwiched in between we find the Canadian Dollar, which remains supported as a commodity currency, in a context of bullish Oil prices.
The CAD was the star currency as a new week gets underway. There were a limited number of talking points, with the movements more technical in nature. Portraying this dynamic, for example, we saw the EUR accelerate its appreciation as a 4-day long range was finally broken, leading to further selling of the USD across the board. The recovery in risk, as reflected in the pick up of US yields, which moved up in tandem with equities, this time didn’t play that much of a role to stimulate demand into the Greenback. The Japanese Yen continues to put up a decent fight post-US NFP, even if the risk rally in equities and the snap back in yields defies its prolonged strength logic. Meanwhile, the Kiwi continues to be the absolute main outlier, still paying the consequences of the dovish RBNZ outcome from earlier this month. The Sterling follows as the second most vulnerable currency not far behind, while the Aussie has managed to attract further demand to turn the micro trend to positive.
In today’s report, I am shifting gears by focusing on the latest technical developments in the most relevant G8 FX charts to investigate not only the established biases but what are the critical decision points one must pay attention today. Before I get into the nitty and gritty, be aware that the rise in the Yen index, alongside the sharp selloff in both US equities and a more moderate decline in US30-year bond yields, puts us in a ‘true risk off’ microenvironment as market participants prepare for the EU Summit on Brexit and the ECB policy statement. It’s going to be a busy day ahead, especially for the EUR and the GBP, even if the USD and the JPY are also poised to move quite vividly in light of the fast transition into ‘risk off’ conditions as well as the fact that we get the inflation numbers out of the US at the same time as ECB Draghi takes the stage.