By analyzing today’s currency pairs, I am left with the impression that swing/day traders may be able to find some solid opportunities in markets that appear to be overstretched in the short-run such as the Aussie, the Canadian Dollar or Gold. The Aussie has been the main laggard in what appears to be just rumours of a coal import cap to China. If the denials by official continue, the divergence between macro bullish trends in the Yuan, bearish in the DXY, and still an overall benign outlook for equities, makes the Aussie quite cheap for some bottom picking. In terms of the Canadian Dollar, we’ve entered overbought terrain in the hourly even as Oil and the DXY macro trends (5-DMA slopes) suggest this market will find it rally hard to find sufficient flows to sustain the bullish momentum. If you are looking to enter with an established hourly trend, this might be a good selling opportunity if intermarket flow revert back in favor of the Loonie. A very similar picture in Gold, althugh the impulsiveness of the move with US yields exploding suggests it may take longer for flows to level off for an ultimate resumption of the uptrend, even if the trajectory of this market is undeniably bullish.
As the US-China trade negotiations drag on, and with the official tariffs deadline of March 1st likely to be extended, there is no denying that last Friday’s price action in the currency space reflects optimism about the outlook for a positive resolution. As a result, the beta currency complex (AUD, NZD, CAD) enjoyed a field day last Friday, with the adjustment in valuations also a clear function of the discounted prices these currencies, especially the Aussie and the Loonie, traded at. The characteristics of the market remain dominated by risk appetite macro wise, with both the Yen and the US Dollar on the back foot as a result.
Further evidence that the US and China are bridging the gaps in structural differences via a multitude of headlines, alongside a tweet from US President Trump that the March 1st tariff increase will be delayed as he plans a summit with China’s President Xi, was at the epicenter reinvigorating ‘true risk on’ microflows. This leaves an environment where exploitable sell-side opportunities against the likes of the Japanese Yen and the US Dollar should still be found.
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As the currency strength table above shows, the Pound ended the NY session as the strongest of the pack, with the Euro playing catch up yet lagging considerable behind. The Aussie and the Kiwi did well due to their beta profile at a time of risk-seeking strategies with ‘true risk on’ dominant. The DXY traded fairly neutral, with the Canadian Dollar taking up the slack amid the collapse in Oil. In an environment where optimism is prevalent, the Yen was understandably the other laggard.
In terms of macro flows (5DMA slopes), we can make the distinction of 3 different camps. The Yen and the US Dollar are the clear losers, especially the former. Then we have relatively neutral macro flows as per the flat slope of the 5DMA in the Aussie, Euro, the Kiwi, and the Canadian Dollar. The one market that registers an outlier’s profile is the Pound, as the slope of the 2nd chart reflects.
Anyway you slice it, be it from a day-to-day perspective or even stepping out from a weekly standpoint, the Sterling is by a country mile the outperformer in the FX arena as the ‘hot’ period of the Brexit deadline plays out and vol picks up. In the last 24h, only the likes of the Aussie has been able to keep up a similar upward pace, even if only in relative terms during the later stages of Tuesday (US session). On the flip side, the US Dollar is the main loser after the most recent crossflows activity on the back of a rather uneventful testimony by Fed’s Chairman Powell in front of the Senate Banking Committee, where he reiterated very familiar themes.
A bunch of other currencies such as the Loonie, the Kiwi, the Euro or the Yen traded more subdued. This latter basket of currencies, excluding the JPY (NZD, AUD, EUR, CAD) exhibit trendless dynamics from a weekly standpoint as the flat slopes of the 5-DMA on the 2nd window below reflects. Meanwhile, this same thick lines still portray a market that is overall negative on the JPY and USD, more so on the latter, as the JPY recovers from recent lows as the slope of the cross line (25-HMA) reflects.
The US Dollar recovered some ground intraday but continues in a macro downtrend alongside the Japanese Yen as overall cross assets performances indicate, still characterized by ‘true risk on’ conditions. The Pound continues on a tear while the Oceanic currencies were the worst performers even if the backdrop of risk appetite dynamics should result in decent interest to cap the downside as long as the mild deterioration in equity valuations is limited in nature. The Canadian Dollar is another currency that put on a fantastic performance on Wednesday in response to a sharp recovery in Oil prices. Trapped in a hiatus of low vol and a fairly neutral bias is the Euro as it navigates its lowest quarterly range since its existence.
As liquidity dries up and we transition from US trading into the Asian zone, the USD and the Euro were the best performing currencies in the last 24h, although it was the former that ended the US session in the strongest fashion after US growth figures came surprisingly upbeat. The Euro was supported through the first half of the day, with positive inflation readings out of Germany anchoring the buy-side bias. The Canadian Dollar followed the rise in the USD almost in locksteps.
The Sterling’s outperformance throughout the week came to a pause after back-to-back days of very solid gains as a Brexit delya looks baked in the cake, while the Oceanic currencies and the Yen were clearly unloved as the first chart below shows. From a macro perspective, when analyzing the 5DMA slope, the Euro and the Sterling remain the only 2 currencies with an uptrend in play, the CAD follows closely behind, while the AUD, NZD, JPY are starting to develop broad downtrends vs the strongest peers.
The USD is still not out of the woods, with a stellar run in the last session yet the 5-day performance is still largely bearish. From a daily view, the USD shows overbought conditions as per the 25-period slow stoch in the hourly but such an outlier as the US GDP was may see further buying momentum. That said, even from a 5-day standpoint, the slow stoch is entering overbought conditions. Interestingly, the Pound has entered oversold territory within the context of a broad uptrend, watch it closely if you swing trade.
The bullish open in equities this week is a reflection of a market that still aims to be a bullish risk as the WSJ reports that the US and China are closer to a deal. It’s precisely this 2019 overarching theme that keeps providing support to US yields and the USD as a result. The Euro remains stubborn, as does the Sterling. The Aussie and the Kiwi have not gathered much attention as of late but that’s about to change with the RBA policy meeting tomorrow. The CAD and the JPY are the two most fragile currencies, but for different reasons, the former battered by poor data while the Yen acts as the perfect funding currency in an environment of low vol and risk appetite.
Traders were left scratching the heads after a late sell-off in the S&P 500 led to a ‘true risk-off’ tone on Monday. The breakout of the range in the EUR/USD, the broad-based temporary demand for the Japanese Yen were some of the highlights in the currency market. The market is paying an awful lot more attention to yields as of late, as the correlation coefficient measurements in the Intermarket analysis section below shows. I also draw some parallels about the selling in stocks and the potential period we may be entering, in which the market reaches a period of climax optimism, having fully priced in the Sino-US trade deal, which according to a report by the WSJ over the weekend, looms near. As I remind the audience, it is precisely this ‘buy the rumor sell the fact’ dynamic what followed the first halt of tariff increases last year. Dejavu?
While it may be argued that there is still residual demand to be found once the US and China can ink a trade deal, the price action this week is quite revealing about a potential permutation in the rhetoric that has dominated flows.
Are we getting to a point where the market has priced in all there was to be discounted from the Sino-US story (assumption if a deal is almost baked in the cake) and the attention is swiftly shifting towards economic fundamental divergences?
Risk on risk off fluctuations, the growing influence of capital flows derived off yield spreads (US at the forefront of the recent divergences spotted) must simultaneously coexist with the immediate risk of politics in Europe (Brexit) as we enter a key period.
In the last week or so, the typical risk-on, risk-off gyration have started to decouple due to fundamentally-charged triggers in Canada, Australia to name a few. That’s why it’s been a fairly disjointed affair finding the connections between risk and sensitive currencies to deleveraging episodes in financial markets. This decoupling also applies to the USD, which by default tends to debilitate when risk thrives; it has not been the case as the currency keeps its appeal intact.
What we are seeing is a market that is increasing its correlations toward bond yield spreads, and that is evidence that more attention is being paid towards the prospects of growth and economic divergences on an individual merit basis. At the center of this new re-adjustment towards yield differentials we find the sell-off in US bonds, which keeps stubbornly high demand towards the US Dollar in a world with ultra-low interest rates.
If you are looking for that extra layer of conviction on your Forex trades, this is the time to factor in the bond yield spread to gauge the next flows while keeping an open mind about what currencies may or may not benefit from risk-on or risk-off as fundamentals and politics (EUR, GBP) play an increasing role.
It’s all about the Euro as Friday gets underway. The ECB was utterly and without any ambiguity much more dovish than the market had anticipated after it revealed a trifecta of EUR-negative measures (lower growth forecasts, push out of the forward guidance and a new TLTRO program).
One thing is to speculate on the ultimate outcome of what appears inevitable, that is, that sooner or later the ECB would fully cave in by recognizing there is no way in hell they can exit their unorthodox policies. Another thing very different, and that’s what makes trading financial market such a challenging endeavor, is timing when the domino pieces will start falling. Judging by the reaction of the Euro - lowest against the USD since mid-2017 -, the market was caught by surprise not expecting such boldness in the ECB rhetoric.
After the dust settled, we face a Euro battered, a Pound unable to find renewed demand on lack of Brexit breakthroughs, a USD and JPY being the safest houses as micro/macro ‘true risk off’ conditions settle in, while the commodity complex suffers fundamentally gloomy times, especially the AUD and CAD.
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.