Posted on: 21 Mar, 2019
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.
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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.
Short-term, the environment has turned strongly USD negative, but this time with the added caveat of lower equities for the second day in a row, as the micro bearish slope in the S&P 500 indicates. Under these dynamics, the Japanese Yen will always be the shelter that the market flocks off to for protection, and that’s precisely what transpired during Wednesday, with the Euro, in line with its low yielding status, which makes it a funding currency, also ripping the benefits of the deleveraging away for the US Dollar.
Either it is from a daily or from a weekly analysis, one trend is clear, and that’s the selling of the USD, what remains more uncertain is to convey the outlook for the overall risk, which has been left to equities as the ultimate arbitrare, as has been the case for most of 2019.
This matters, because if the sell-off sell off continues to gather steam on lower equities, the degree of strength to be expected in currencies such as the JPY can be largely magnified. If equities do recover their mojo in line with the macro bullish trend as per the slope of the 5-DMA, then expect currencies such as the AUD, NZD, CAD to perform better. Remember, you must always account for fundamentally-driven events that can also alter these scenarios.
EUR/USD: Strong Buy-Side Momentum, Resort To Intraday Levels
The surprisingly dovish FOMC has sent shockwaves which makes the market go through a period of macro re-evaluation towards the US Dollar. Real and fast money are likely to keep jumping onto the USD bear bandwagon, which means potential shallow pullbacks at intraday decision points for a further extension of the strong bullish momentum. The close at the highs of the day, with the volume profile forming a double distribution up strengthens the chances of a continuation higher. Besides, the fair valuation in the exchange rate based on the major narrowing of the German vs US bond yield spread (10y) is congruent with the spike in prices, further supporting the notion of buy on dips. In terms of market structure, the upthrust bar post FOMC has set into motion what looks to be the potential beginnings of a fresh bullish cycle judging by the magnitude and speed of the move. It’s worth noting, even if the majority of the vol may be concentrated in the GBP, that the EU-Brexit Summit get underway today, which becomes a sources of spontaneous vol events intraday on a headline by headline basis. The fact that the Euro was bought up to the boots even as the GBP fell sharply on Wed, is a positive sign, as it reflects less dependency on Brexit headlines.
GBP/USD: Choppy Moves As Both Currencies Unloved
An extension of the price action wrangling with clear characterizations of a directionless market, as the yo-yo type swings from Wednesday reflect. Both currencies were badly punished by the two hottest narratives market were fixated with (FOMC and ongoing Brexit developments). By the end of business in NY, the Sterling managed to recover most of its losses on the back of the dovish FOMC, and judging by the intermarket flows, we’ve now entered a period of buy-side bias based on the synchronicity of micro/macro slopes in the DXY (inverted) and the UK-US bond yield spread. However, be warned that we are at the peak of the Brexit pandemonium-led vol, which means that trading around potential times when headlines may arise (Brexit summit underway from today) makes any short-term trading engagement inherently riskier given the erratic headline-by--headline vol, which is going to make the GBP behave not necessarily in line with the cues obtained by the DXY, more so by the fluctuations in the bond yield spread as a barometer of optimism in the Brexit process. If you look to exploit movements in the currency market, there are way better currency alternatives to exploit the USD weakness than dipping one’s toes in the wildly unstable GBP and its price action.
USD/JPY: Ferociously Sold, Perfect Bearish Storm
Mark my words here. Whenever you see the DXY and US 30y bond yields move in the same direction, as shown in yesterday's YT video, the exchange rate in the USD/JPY is going to pay the consequences by adjusting lower in the vast majority of cases. Throw into the mix a predominantly bearish mood in equities for the last 2 days, and the downside risk is only going to be magnified, as it has eventuated. In the accompanying chart, I’ve drawn a series of horizontal levels of resistance, with each and every one of them potentially acting as an area to re-engage in sell-side action. The fact that as I am writing these lines the price has been struggling to recover even the very first level of the mentioned resistances around 110.75 is a clear testament of the depressed flows towards the US Dollar. As in the case of the EUR/USD, where shallow pullbacks before a resumption of the trend is a real possibility, the same can be said when it comes to the USD/JPY. However, be aware that if you are not trading to catch intraday movements but instead you are inclined to swing or day trading, the current levels are largely unattractive, with a retest towards 111.00 up to 111.20, at the bare minimum, a more sensible strategy to improve the prospects of a better risk reward (major assumption about your style!).
AUD/USD: Aus jobs, FOMC Send Rate To Highest in 7 Weeks
Not only the FOMC outcome vindicate the bullish movement in the Aussie, but the reduction in the unemployment rate in Australia from 5% to 4.9%, despite not accompanied by a beat in the jobs headline number, has sufficed to send the exchange rate above 0.7150. Note, the Aussie has not been able to gather as decisive buying flows as the Euro or the Yen, given that the US-Sino trade talks appear to have hit a wall that may see further delays to ink a deal, and as we all know, there is no better and more efficient way to trade China than through the Australian Dollar as a proxy. For now, judging by the intermarket flows in the hourly, I consider the market to be predominantly in buying mode only as well, with the flows in the DXY, Yuan (both inverted) as well as in the AU-US bond yield spread backing up the trend. The only downside that may act as a counterbalance effect is the short-term gloomy mood in stocks as the bearish micro slope in the S&P 500 reflects. The best course of action, until micro intermarket flows shift, is to support the buy-side bias.
USD/CAD: Prospects Of Further Selling Justified
As I ask myself, is the pair’s backdrop conducive for an extension of the losses seen on the back of the dovish FOMC? The unambiguous answer would be ‘Yes, it is’. The congruence is clear, with Oil on the rise, the DXY falling off a cliff and the US-CA bond yield spread revisiting its Feb lows. However, it’s not only a matter of deciphering intermarket flows, but also marrying that up with technicals, which as a caveat, are not yet as clear cut as intermarket is. The reason being is because the pair has failed to break into lower lows to instead find a cluster of bids circa 1.3260, as was the case on March 19th. What this means is that the market should still be potentially treated as being in the process of a potential range until we do see a breakout lower before. That said, there is no reason to think that buy-side attempts off 1.3260 or thereabouts will gather much momentum as things stand.
AUD/JPY: Trapped In A Range, Low Vol Trappy Pair
Trading the pair outside the Asian session (I can attest that), has been an exercise of patience and in the majority of times it feels like watching paint dry. Even since March 12th, the exchange rate has been moving in diminutive incremental bullish steps, forming range along the way, as the chart exhibits. The latest consolidation episode has market makers taking control of the 78.70-79.40 vicinity, creating an awful lot of noise in price action unless you trade at the extremes of the range. As the intermarket flows stand, we might be in the midst of a rather transient pass through the resistance level around 79.30-79.40 on the back of the Aus jobs before a reversal back down, contingent to the performance of equities. The reason can be found in the divergence between the pricing of the exchange rate and the micro slopes in the US 30y bond yield and the S&P 500, both pointing lower. Pay special attention to equities, as any resumption of the downtrend would reinforce the prospects of further range trading, while a rebond in equities, alongside USD weakness, make this market a clear contender to establish a renewed bullish momentum.
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