Currency Strength Meter
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.
Quick Take
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.
Quick Take
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.”
Quick Take
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.
Quick Take
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).
Quick Take
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.
Quick Take
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.
Quick Take
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.
Quick Take
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.
Quick Take
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.
Quick Take
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…
Quick Take
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.
Quick Take
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.
Quick Take
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.
Quick Take
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.
Quick Take
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.
Quick Take
While it’s fair to say that the EUR and the USD experienced its fair share of intraday volatility, the net change by the end of business in NY sees the Aussie as the absolute dominator. It is being followed by the Sterling and the Kiwi, two currencies that have recently suffered, as the chart below illustrates, from its own hardships as it is the stuckness in the Brexit saga and the clear dovish tilt by the RBNZ earlier this month and subsequent re-pricing of the market. Meanwhile, the Euro and the US Dollar, both were hit by supply imbalances as the countries’ respective Central Bank left little doubt that more accommodative policies are coming. In the case of the ECB, in the form of a new round of TLTROs while the Fed is on its way to relax its policy by terminating QT even if we still need to clarify the future composition of the balance sheet. One thing is obvious, equity markets keep loving the prolonged patience the Fed has embarked upon. Somehow mixed in the middle we find the Yen, unable to hold onto its gains as one would expect when you have such a rampant S&P 500, retesting its year highs. Lastly, the Loonie keeps retracing its strong gains from 24h ago.
Quick Take
In terms of relevant news to account for, the last 24h should be defined as a low key affair, which is why I will afford to take a step back and look at the big picture for April. After all the chat about the Euro being fundamentally weak, which is a reality I agree on, the market is not yet convinced that the currency deserves to be overly supplied even if the ECB remains firmly dovish and ready to go through another round of TLTRO mid this year. The net effect, however, considering the rest of Central Banks are headed in the same dovish direction, is a market that lacks the incentives to develop macro trends and its volatility is a reflection of it, with carry trade back in vogue.
The performance of G8 FX through the first 2 weeks of April is the proof in the pudding if you were wondering the true rotational nature of these markets. It makes the interpretation of intermarket flows, especially episodes of ‘risk on & risk off’ to gauge the direction of the AUD, CAD, NZD, JPY, USD all more important, while the GBP keeps trading to the tune of its own drummers (Brexit-related news) & the EUR accurately respecting technicals. The depreciation by the NZD and the trends that have developed as a result of the dovish surprise by the RBNZ earlier this month encourages us to think that once Central Bank policy divergences become a bigger theme in the future, trends will return, even if we shouldn’t hold our breath but instead adapt to the present circumstances.
One really needs to contend with the diminutive moves witnessed day-to-day by being much more nimble to take profits, be aware of the relevances that proj target has in such a multi-year low environment and get better at deconstructing the granular directional biases still developing intraday. As the chart below shows, long EURs or USDs against the likes of the Japanese Yen have paid off handsomely in the last 24h, which judging by the RORO conditionsI analyze every day, you were definitely warned.
Quick Take
Market participants are certainly blaring the trumpets as a whole legion of newly found buyers go full throttle buying risk-related assets in response to the upbeat Chinese economic figures in trade (mainly exports) and credit growth, which implies better reads should lie ahead. The massive rally in the AUD/JPY portrays like no other pair the ebullient mood in financial markets, as both global equities and bond yields move up in tandem in what should be understood as a reflection of renewed optimism towards a global recovery. The fuel engineering this rebound is thrown by China alone, but let’s not forget, it accounted for half the global growth since the GFC. The Euro, as highlighted in my last report, is another currency defying gravity by putting on its best performing month YTD, capitalizing on the rather neutral outlook by the USD this month. The outlook for EM should definitely improve from here on out, which retro-feeds in a bullish AUD as a proxy to play CNY longs, while at the same time, it suggests the recent pattern of foreign-invested USD repatriation may see a turnaround with negative USD implications as more capital gets interested in the EM growth story if China keeps it up. The Kiwi has also been spurred by its correlation dynamics with the AUD, while CAD, GBP were the two most uneventful pairs in terms of daily movements.
Quick Take
The 20ish pips ranges in the EUR/USD or AUD/USD should speak volumes of the absolute vegetable state of the forex market on Monday, with a flash news-led selloff in the Canadian Dollar on the back of a disappointing BoC business survey the only real move to take note of. As I elaborate in today’s report, whenever a strong movement in any asset class, the likes of what we saw in the Japanese Yen or other risk-sensitive assets such as the Aussie or stocks is followed by a day of consolidation, this is what we understand in institutional terms as an auction with acceptance of value. In other words, the ‘true risk on’ movements from Friday as optimism around China’s growth picks up is not being responded with rejections from what one could consider overdone levels. Instead, the market is finding equilibrium, which is encouraging for the build-up of further momentum or else you wouldn’t see 24h of buyers and sellers agreeing to exchange bids and offers at these lofty levels by 2019 standards (mainly on JPY terms).