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.
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.
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.
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.
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).
The Aussie seems to have no rival this April, as further evidence of green shoots in China, led to a new wave of buy-side pressure on the Oceanic currency. Each setback it had in the last 24h, be it via Tuesday’s dovish RBA minutes or a quick round trip on lower NZ CPI, has been met with incessant buying interest, which speaks loud and clear of the current bullish outlook, mainly anchored by the growth rebound story currently underway in China. It’s neighboring currency, the Kiwi, didn’t enjoy the same fortunes, as the miss in the NZ CPI adds further strains to the Kiwi as the NZ Central Bank finds yet another argument to eventually cut rates. In a similar misery, in terms of drawing short-term buying interest, is the Sterling, under sellers’ siege as UK Labour Leader Corbyn finds no compromise with UK PM May on a Customs Union as part of amending May’s Brexit deal. Looks like the extension of 6 months will give us now a time to trade the Sterling under much more contained vol. The one currency that still follows, to a certain distance, the Aussie’s stellar performance this April, is the Euro even if it’s starting to struggle above the USD 1.13 mark. Lastly, the USD and the JPY, have enjoyed a bit of a respite as stocks failed to sustain gains in the US (positive JPY) and US yields kept rising (positive USD). However, with China’s optimism governing price action, the JPY and to a lesser extend the USD, may continue to struggle finding enough interest to avoid further depreciation short term.
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.