Demand towards the Aussie keeps on going, even if the struggle to break through USD 0.72c is real. The fact that the market failed to fill out resting offers just pips ahead of the round number in spite of a very strong Australian employment report not only reveals the macro relevance of the level but it also demonstrates how important it is to gauge Intermarket flows, as, by the time of the test, both the DXY and Yuan were moving in the opposite directions. When it comes to the New Zealand Dollar, as I elaborate in today’s report, it looks set to struggle vs G10 FX as negative news keep mounting (dovish RBNZ, poor NZ CPI). The bull flattening of its yield curve is a reflection of it. The Japanese Yen is a currency that faces a more benign outlook heading into Thursday, not based on technicals, but on the deterioration of risk flows. Meanwhile, the Euro has been able to maintain its fortitude, even if within the context of a compressed range against the Greenback. The Canadian Dollar was initially bolstered by a decent Canadian core CPI print, but null conviction to hold onto the gains followed in what has become a very erratic market to trade the USD/CAD. What to say of the Sterling? A paltry 35 pip range it’s all we could manage to contend with on UK CPI day. That’s the ultimate reflection of how Brexit and the low vol regime means for a historically volatile currency.
The most noticeable changes as part of the latest changes in the commitment of traders report can be found in the Euro, the Pound, and the Yen. In terms of the Euro, the poor German PMI reading from last Thursday has caused renewed committed sell-side interest as the volume and open interest readings indicate. On the British Pound, despite the latest slide through an area of support, large specs are just a few contracts away from crossing above the 0 line, as commercials are also about to turn negative. This should translate into a positive event in terms of positioning, something that had not occurred since June 2018. However, the clearest shift in positioning is found in the Yen, where large specs piled into new short positions on an increase of both volumes and open interest, communicating that the JPY bear trend may find further legs down.
As the long-weekend Easter holidays come to an end, we find the CAD as one of the top performers alongside the Japanese Yen. The former benefited from a spike in the price of Crude Oil after a surprise announcement by US President Trump, flexing his muscle against Iran by ending the waivers for all those nations buying Iranian oil. The Japanese Yen has seen an intraday tsunami of buy orders come through the books in the early hours of Tokyo, taking the currency index to its best level in weeks. The Euro also found steady bids through the stagnant holidays period, even if occurs on the back of an aggressive sell-off last week after yet another raft of EU PMI misses. The Aussie, ahead of Wednesday’s critical Australian CPI release for Q1, is trading on the backfoot, not finding enough buying interest despite higher equities and a stable DXY. The Pound and the Kiwi, meanwhile, have treaded water without any impetus whatsoever ahead of a return of flows to minimal levels in today’s European session.
The USD is on a tear, rising against all its G10 FX peers, while the Japanese Yen, surprisingly, follows the former in locksteps, disregarding the new record high on the S&P 500 (on a closing basis). Another currency that is defying Intermarket logic, at least on Tuesday, is the Canadian Dollar, initially boosted by Oil prices right off the bat post-Easter, but unable to hold onto its most recent gains as commodity take a beating. Talking about the commodity complex, the Aussie, and to a much lesser extent the Kiwi, was knocked down aggressively after we learned that Australian inflationary pressures are nowhere to be found; the annual CPI reading was the weakest on record! Lastly, we find a rather stable EUR and GBP currency indices, even if it’d be hard to believe by checking the EUR/USD or EUR/JPY charts. The demand flows towards the USD and JPY have been so strong (resumption of repatriation flows?), that the rest of G10 FX currencies, even if showing stability on an equally-weighted basis, were overwhelmed against the formers.
The exuberant mood to buy the US Dollar post-Easter just keeps on going, reflected by the topside resolution in the DXY, where a close above the 97.60-70 key daily resistance has finally transpired. If we can find acceptance above this level on a weekly close, it could send shockwaves across the market as it would have negative repercussions for emerging markets at a time when the global growth recovery is still quite fragile even if China has shown signs of life even if very domestically localized. The Japanese Yen, while unable to keep up the rapid pace of appreciation by the USD, is nonetheless one of the top performers too alongside the Sterling. The EUR remains on the backfoot, finally re-imploding in what should be interpreted as a resumption of its bearish trend, with the close sub 1.12 technically damaging. The Canadian Dollar, on an equally weighted scale, ended up mixed despite weakness was obviously manifested against the USD, GBP, JPY. The worst performer by a country mile though was the Australian Dollar, hammered by the major miss on Wednesday’s Australian CPI readings as players now anticipate rate cuts by the RBA in coming months.
Ahead of today’s preliminary Q1 GDP in the US, the Greenback failed to hold onto its recent gains, even if its ascendancy this week remains undeniably impressive. The whole FX universe will orbit around today’s US growth data, as a strong number would most likely seal a weekly close above a massive technical level in the DXY. If the scenario materializes, when combined with a EUR/USD closing sub 1.12 critical support and a USD/CNH above its respective 6.74 resistance, it could really send shockwaves across financial markets, as the notion of a period dominated by broad-based USD strength may gather steam quite rapidly as technicals align. In the meantime, as we wait for the US Q1 GDP, and Japanese Yen has been the outperformer, aided by a reported unwinding of elevated Yen short positions ahead of the Japanese 10-day Golden week holidays. The drop in global yields, including the US 30Y as our bellwether, alongside a rejection of levels near the all-time high in the S&P 500 have fueled the Yen momentum. The Euro, on the heels of yet another negative economic release out of Germany (IFO survey), remains on the backfoot. The same applies to the Sterling, with no Brexit breakthroughs. The Aussie has been under follow-through pressure by briefly breaking below the 0.70 level before a decent rejection. Alongside the Yen, the Kiwi was the other outperformer.
Granted, the thematic of USD strength does not look like it’s going to go away anytime soon if one judges by the weekly closes achieved in the DXY and EUR/USD. It was such a pity that the bullish close outside a well -defined 6.70-75 range could not be replicated in the USD/CNH in order to up to a whole new level the prospects of vol in FX. The positive US GDP Q1 headline number, while it hides underlying softness in the details (lots of temporary factors led to the boost), in my view, should suffice to keep the common theme of USD buying flows at steady levels heading into May as the gap between US growth and the RoW widens. Near term though, there is enough evidence through the hourly price action in FX majors to be cautiously bearish the USD, after some technical cracks in the structures, especially in the Sterling, Canadian Dollar, and the Yen. The former may experience episodes of ultra-low liquidity at certain times of the day this week, as Japan goes offline until next Tuesday in celebration of the Golden Week. To start the week, we are seeing further buying pressure on the Oceanic currencies (AUD, NZD) as China’s industrial profits published over the weekend printed a 10 month high. The Euro must be included in the pack of currencies with the prospects to print short-term gains vs the USD, even if remains one of the most vulnerable.
As we head into Tuesday’s busy European session, the lead to be taken from Asia is one where caution is warranted, not only because of the miss in the Chinese PMIs (both official and Caixin), which has led to some spells of ‘risk off’ and a timid return of JPY buying but also due to the upcoming Fed’s SOMA day. What this means is that as part of the Fed’s QT program, April 30th marks the day when the Central Bank will shrink USD liquidity by 28.1bn in its balance sheet. Whenever liquidity is withdrawn via these redemptions, there is a patter of US Dollar strength, which more often than not, is accompanied by a greater apprehension towards risk-seeking strategies. The miss on revenue by Google does not help the case either, even if by the close of business in NY the conditions look rosier than the picture I am painting. The Aussie is the worst performer after a rapid decline on the back of the underwhelming Chinese data, while the Euro, Pound, and Yen, in this order, are performing with a firmer footing. The Canadian and the New Zealand Dollar, as part of the commodity bloc, were dragged down by the negative news out of China.
The Sterling was on an absolute tear on Wednesday, even as breakthroughs in Brexit are yet to transpire (don’t hold your breath). It’s always going to be a harder task to find a clear attribution to the movements seen during the last day of the month, as portfolio re-balancing on unhedged FX positions tend to rule the movements. In the case of the Euro, which climbed at a steady pace against the majority of its peers (exc GBP), we can clearly pin down the improved European data as the main reason behind the rally. However, it still feels like the data samples need to be expanded not to think that the solid German CPI or higher EU, Spanish GDPs are mere paybacks for weaker previous data. Nonetheless, if more evidence of a minor recovery in Europe pans out, the ECB will feel in no rush to design further stimulatory policies (EUR positive). Another currency where we can clearly link its weakness to a particular event is the Aussie, unloved as a China proxy play after the country fell short of expectations in its PMI releases on Tuesday. The Japanese Yen did fairly well for half of the day, emboldened by the Chinese poor data, only to revert its buy-side flows as US equities were bought strongly off the lows. The Canadian Dollar, notwithstanding a negative GDP for Feb, exploited the slack by the Yen demand deficit late on the day, as BoC Poloz struck a constructive tone on the Canadian economy. Lastly, the two currencies suffering the most included the US Dollar and the Kiwi, the latter battered by a miss in NZ jobs. The focus is now shifting in its entirety towards the US ISM release as a barometer of US economic conditions, followed by the FOMC and Chairman Powell presser.|
As the market adopts a ‘true risk-off’ mood on the back of Fed’s Powell less dovish remarks on inflation, the USD reigns in the forex firmament while commodity-linked currencies see the greatest supply imbalances, especially the Aussie and the Kiwi, both recently hit by negative fundamentals (low CPI in Aus last week & bad NZ jobs on Wed). The Canadian Dollar is holding up firmer as BOC Governor Poloz dials down his dovishness by making the case for a stronger economic recovery from Q2, in which case, considerations for another round of tightening may be justified. Too early to tell but expectations towards Canadian rate cuts have taken a step back. The Japanese Yen, emboldened by the deleveraging flows in equities and global yields, has benefited once again, while the Sterling, driven by tentative progress in the talks between the UK Labour and May’s government on Brexit, continues to follow the Yen in locksteps. Lastly, weakness in the Euro has made its way back as a function of USD strength mainly.
The US is set to release the change in the number of people employed during the month of April, in what should be seen as yet another critical piece of information about the US economy. What’s interesting about today’s set of numbers is that after the volatile range observed from Jan to March, primarily due to the US government shutdown, the data should start to normalize again, so whatever number comes out today, should give us a more accurate picture of the state of affairs in the US labor market.
It’s worth noting that the US jobs market has unquestionably reached levels considered to be at full capacity, with little to no slack to account for. It’s not that workers are not in demand by employers, but the real issue, whenever an economy reaches full capacity utilization of its labor force, is to find the qualified employees due to constrained supply, which paradoxically, tends to pose an increase in downside risk in the headline number, today expected at 175-180k.
What this means is, rather than taking at face value the breakdown of the US jobs number and the unemployment rate, the debate has been gradually shifting towards whether or not employers are forced to increase the average hourly wages paid in order to attract the shortage of qualified labor force. Therefore, the reaction in the USD comes as a function of not simply fixated on the breakdown of the change in the labor force, but it must come accompanied with an encouraging pick up in earnings too.
Let’s now deconstruct the event, category by category, before coming up with some conclusions that could help prepare for the volatile event.
Today’s explosion in volatility in the Forex market right off the gates comes after an incendiary tweet by US President Trump, taking the whole market by surprise at a time when based on the price action across various asset classes since the beginning of the year, a trade deal between the US and China had been fully discounted. The 180-degree turn by Trump, now formally threatening China to hike tariffs to 25% on $200bn by this very Friday, it gives a market with highly committed capital into equities sufficient reasons for a macro re-think, which is currently being manifested by a serious unwinding of positions in the S&P 500 futures, the Shanghai Composite and the rest of equity indexes. The rampant buying on the Japanese Yen or the aggressive selloffs in the Aussie reflects the new state of concerns about the outlook for global growth if China doesn’t buy into Trump’s threats. The fate of the market hinges on whether or nor China confirms the rumors circulating around about the cancelation of this week’s trade talks by Liu He and his team of representatives. Be prepared for a tumultuous week as each unfolding scenario will have ramifications with one common theme to be expected, a volatility pickup.
There is no doubt that the fluid state of affairs in the US-China trade negotiations after Trump’s aggressive tactics is casting a long shadow in financial markets, one that is leading to a major re-evaluation of capital allocations as reflected by the punchy jump in vol on Monday. But before I dive into this new potential conundrum for markets, today’s RBA monetary policy decision, has caused quite a spike in the Aussie after the policy rate was left unchanged at 1.50% amid split market expectations of circa 50% chances of a cut today. The status quo by the RBA acts as a positive near-term input for the Aussie, even if the ability to sustain today’s gains must be reconciled with the new chapter we’ve entered in the US-China trade negotiations. The depreciation of the CNH towards 6.80 after breaking a multi-month stable range is a red flag that poses the following question: Are we really at the end of proceedings of a US-China trade deal or is the market preparing for a new beginning characterized by a break away from the trade truce? If the latter, it will likely lead to a potential new regime of a lower Yuan valuation to offset the increase in tariffs and with it, higher vol in FX. But this scenario still comes with some big IFs, so we should for now, keep monitoring the news. Acting as a circuit breaker is the positive development that China’s trade representatives are still headed to Washington this week to resume the trade talks with their US counterparts as the threat of tariffs hangs over if they don’t agree to the US demands of not re-negotiating laws of IP and proprietary technology. In terms of currency performance, the Japanese Yen has been the major beneficiary of the shift in risk flows, while the USD trades steady even if its performance on the face of ‘true risk off’ is underwhelming, and to make matters worse, the analysis of USD pairs is not painting a great picture either.
The Yen has had no rival this week as the deleveraging in financial markets continues to follow its course at a rapid pace. The psyche of the market has clearly permuted from Trump’s tweet just a premeditated tactic to real fears of a no deal or at least a prolonged delay in an eventual agreement. The sizeable loss of value in Chinese equities or the steady depreciation in the Chinese Yuan are bad augurs for a market filled with renewed uncertainty over the outlook for global growth if the US hikes tariffs to 25% on $200bn of Chinese imported goods by this Friday. In the meantime, on the other side of the spectrum, we find the Kiwi, battered by a surprise 25 bp rate cut by the RBNZ, and the Sterling, pressured as optimism around a Conservative-Labour agreement on Brexit fades away. The USD is another currency that despite the usual promotion of buy-side flows on the back of a pick up in risk aversion, the unwinding of carry trades as the VIX flies above 20.00 is proving to be a major hindrance to attract enough demand. The Aussie is finding demand, spurred by the decision of the RBA to maintain rates unchanged and failing to express a stronger easing bias yesterday; the currency is still faced with the China trade issues, which put pressure on the Yuan, but short-term, the adjustment higher in the AUD is also a fundamental play predicated on the RBA inaction.
There is a huge bump in the road that must be overcome by both the US and China’s trade representative this week, following the discontent by the Trump administration over China looking to backtrack on the majority of conditions pre-agreed as part of the grand trade deal being negotiated.
The modifications in many of the agreed aspects of a deal led President Trump to tweet of an imminent hike in tariffs to 25% on $200bn by this Friday unless China makes good its end of the deal by reverting back to the US demands. These include changes of domestic laws that will look to mitigate familiar issues orchestrated by the Chinese, including the steal of U.S. intellectual property and trade secrets, forced proprietary technology transfers, exchange rate advantage via a manipulated Yuan.
Secretary of the Treasury Mnuchin and top trade representative Lighthizer have reaffirmed the hard-line stance by the Trump administration to enact the planned hiking in tariffs to China’s imports this coming Friday, further exasperating markets, which have been in a state of ‘true risk off’. There was no mention of Trump’s retaliation with regards to yet another increase in tariffs of 25% on other Chinese imports of USD325bn, which Trump has mentioned via Twitter to add further pressure onto China.
The risk sentiment is on the mend as the market awaits further clarification on where we stand in the US-China trade negotiations conundrum. The Japanese Yen, which has been by a country mile the currency to flock off to amid the de-risking of financial markets throughout the week, is on the backfoot. Reports of a phone call between US President Trump and President Xi due shortly has further appeased the nerves. While the increase in tariffs on Chinese imports comes to effect in a few hours at 14h Sydney time, it should be interpreted as a ‘soft deadline’, as exports that have already left Chinese ports before May 10 won’t be subject to the increase. Interestingly, despite the risk on/risk off pendulum has swung in both sides, the end result for the interest of the USD has been identical, a net negative. The Euro is the currency to be in the last few hours, even strengthening against the Yen in times of true ‘risk off’ as seen in the early stages of the last US session. The commodity-linked currencies are also having a solid bid tone.
Last Friday’s inconclusive US-China trade talks kept the markets guessing, what’s next? However, that was not an impediment for a relief rally in risk assets to transpire, even if as I elaborate in today’s report, the sustainability of this movement looks a tall order at the current levels of uncertainty. The soft deadline that represents the hike in tariffs last Friday, as it essentially still gives the US-China an extra 2 weeks to further negotiate the potential removal, influenced the price action. But the market may play the ‘half full’ glass for so long, as will the Chinese the patient hand amid constant aggressive rhetoric by Trump. For now, though, the priority by China is to extend the period of negotiations, which has led to the settling of market nerves a tad. We were left with, I must admit, from a directional standpoint, inconsequential broad-based range-bound price action in FX markets last Friday, with the exception of a Canadian Dollar, re-invigorated by a 10:1 beat in last Friday’s Canadian job report. Further weakness in the Chinese Yuan at the open of markets this Monday, paired with downside gaps in the S&P 500 futures, is a reminder that the dynamics are far from ideal to support risk.
As China bites back by retaliating the US by imposing tariffs on US goods effective by June 1st, the markets are coming to grips that such actions, even if not tit-for-tat, it means that the market is discounting a prolonged rhetoric war between the two countries, with fears of escalating even further. As a result of the re-evaluation of the new dominant trade thematic, and judging by the punchy moves in the Yen or equities, the market seems to have still a lot to re-price. As I will elaborate in today’s report, the RORO model paints an ailing picture in risk assets, both from a micro and macro standpoint, finally re-invigorating vehicles of diversification such as Gold. Commodity-linked currencies, with the CAD no exception as Oil and risk off weights, are feeling the pain of the current dynamics of a battered Yuan, while the Sterling also take a hit as a function of the appeal to bid back the US Dollar across the board, excluding against the Yen. The Euro continues to find firm pockets of demand against most currencies.
Tuesday’s turnaround in risk dynamics should not send the false signal to think we are anywhere near from being out of the woods. The crosscurrents in equities, fixed income credit and currencies, specifically the performance of the USD, JPY, CNH suggest the dominant thematic of ‘risk off’ is not going away, or at least, there is no evidence yet. The disparity in performance between the Yen and the rest of G10 FX should be the first reminder every day one opens the charts to the degree in which financial conditions have deteriorated. The USD and CAD did well on Tuesday, the latter regaining its lost appeal after the best Canadian jobs report in recorded history last Friday. The Euro is starting to wane a tad as the German data remains underwhelming to say the least, with today’s European preliminary GDPs, including Germany, another major test. The AUD & NZD, amid the dicey US-China trade dispute, remain on the backfoot, while the Sterling keeps suffering pains of its own as the political stalemate on Brexit continues.
Risk sentiment was buoyed by reports that the US government is likely to delay auto tariffs to the EU and Japan up to 6 months. The Japanese Yen was the currency most punished by the news just as equities in the US turned around and never looked back. The fact that US President Trump plans to fight one trade dispute at a time rather than having too many fronts open, with his plate rather full having to deal with China and the revised NAFTA deal, was translated in an immediate spike in the Euro. Regardless of the renewed demand for the Euro, the DXY is not backing off, still trading quite firm across the board. The best performer currency was the CAD, supported by a rise in Oil, recently stellar fundamentals in the form of a huge increase in employment creation and risk appetite on the mend. On the flip side, the Sterling, with no Brexit breakthroughs even remotely close to happening, is lacking the love (demand) of markets. The Aussie is also on the backfoot after the market reacted negatively to an increase of 0.2% in the unemployment rate in Australia, despite the rest of the data was quite encouraging, from the total jobs created to the increase in the participation rate.