Posted on: 24 Apr, 2019
The Aussie has been knocked down aggressively after we learned that Australian inflationary pressures are nowhere to be found; the annual CPI reading was the weakest on record!
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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.
An anomaly is underway, one that involves a surging S&P 500 (closed on a new record high), yet the Yen and the DXY index both underperformed the rest of the G10 FX space. The strength in the latter can be predicated on the stubbornness of the US economy, on track to print a solid advance US GDP number later this week as evidence of its robust health mounts (last week’s strong increase in US retail sales, reduction in US trade deficit, upbeat earnings…). If we combined these US-centric positive catalysts with news that China may be setting the bar higher to ease further, alongside the fact that US equities are making headlines by breaking into new record highs, we might be going through yet another episode of aggressive repatriation of USDs back into the US economy. Remember, the gap between the US economy and the RoW (rest of the world) appears to be widening in favor of the latter. With the exception of China, the general perception is that global manufacturing and export growth remains weak, including key regions that act as barometers such as South Korea, Singapore, not to mention the depressed state in the EU. Shifting gears now, making sense of the spike in the Yen index is more complicated, and my view is that such strong gains are unsustainable much longer, in other words, the Yen is looking rather cheap at present levels. Be reminded, credit markets in the US have seen junk bonds aggressively bought, as well as the VIX coming down, both signaling congruences for the risk rally in equities to continue charging higher.
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EUR/USD: Sell-Side Confluence At 1.1225
The aggressive selloff in the exchange rate is likely to draw strong selling interest, starting from 1.1225, where an hourly horizontal resistance level meets a set of confluences. Not only the 50% fib retracement of the latest decline crosses at the same level but we also can spot the intersection of the 25-HMA, which keeps its slope with a pronounced downward angle, reflecting the decisive bearish momentum that exists in this market. Even in terms of market structure, Tuesday’s down leg represents the 2nd cycle down out of what’s expected to be a 3 push down given the magnitude and speed of the movements seen during the first and second bearish phases. Besides, notice that the EUR supply imbalance terminated, as I tend to always promote, at the 100% proj target.
GBP/USD: Sellers Reach Projected Target
The sell-side campaign initiated out of a head fake above 1.30 has reached its 100% proj target at 1.2928, an area where I am expecting market makers and a multitude of other account types to try to engineer a short-term reversal back to the mean. That mean, in my opinion, should find its ultimate limit up circa 1.2975-80, where the 50% fib retracement of the latest selloff comes at, aligning perfectly with an old area of support-turned-resistance. One wishes the Sterling would trade more often in line with technicals, but the reality of Brexit headlines will soon sink in again, even if the pressure to deliver a deal in the immediate future is now off the table, so one would think the risk of GBP moving headlines may have been downgraded a tad in coming weeks.
USD/JPY: Sellers Abound Around the 112.00 Area
For the Japanese Yen to be one of the outperformers as the S&P 500 closes at an all-time high, one has got to assume a high degree of interest to buy the currency around 112.00, a level that has been consistently rejected for over 2 weeks now. What this means is that a huge pool of liquidity is building up above market prices, and with the S&P 500 soaring and the US30y rather stable, the price discovery dynamics should continue to be skewed towards the upside, hence a strategy of buying on weakness seems to still be well justified for a retest of 112.00 and beyond. The way I interpret the 2-week long consolidation on the pair is a market in agreement to find equilibrium at higher prices, which tends to be the precursor for higher levels in line with the macro bullish trend.
AUD/USD: Hammered After Lowest Annual CPI On Record
The downbeat Australian CPI is likely to draw further selling interest towards the Australian Dollar in days to come, even if today's move appears to be quite overdone as the exchange rate has surpassed by a decent chunk its daily ATR. Expect a slow bleed lower for the rest of the day as the market ups the odds of a rate cut by the RBA in coming months. The June meeting has an implied pricing of -12bp, which essentially means a 50/50 show vs a mere -5bp prior to the event. The exchange rate is fast approaching a major macro level at 0.70c, which should attract buying interest. When the NZ CPI missed its CPI inflation expectations 2 weeks ago, the sell-side campaign by fast money, leveraged players and macro accounts went on for over a week. I wouldn't be surprised if the campaign to sell the Aussie were to perdure as long.
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