Posted on: 25 Feb, 2019
As the US-China trade negotiations drag on, and as the official tariffs deadline of March 1st is likely to be extended, there is no denial that last Friday’s price action in the currency space reflects optimism.
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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.
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Find below a list of the key news events that may act as a stimulant to move markets this week.
The microflows have reverted back to an environment of USD weakness in a context of rising equities. Such a backdrop is positive for beta currencies as seen by the robust recovery in the likes of the Canadian Dollar, the Kiwi and the Australian Dollar. If we add on top of the micro flows the macro ‘true risk on’ layer, we can start to rationalize with a higher degree of logic the move seen. Both the most short-term timeframes based off 1-day worth of price action (25-HMA slope), as well as the guidance based on 1-week worth of price information (125-HMA slope), both show the same direction as global equities remain well underpinned on the hopes of a US-China trade deal.
When it comes to the exchange of flows between the Euro and the US Dollar, it remains a market-makers territory. In other words, the lack of impetus and fundamental-driven stimulants to create enough demand/supply imbalances is keeping the pair range-bound, with the cluster of bids and offers at the extremities, for now, able to exploit the low engagement activity. A reflection of this low activity is the neutral measurements assigned to most of the technical/intermarket elements monitored in today’s forex outlook table above. Not a pretty market to trade unless range trading.
The V-shaped rebound in the Sterling should be perceived, to a certain degree, on the basis of a market in an overall bullish context which had entered oversold conditions. What’s most important, two critical pillars that have determined the pair’s value in recent weeks (DXY, Yield Spread) were still in a macro trend based on the 5-DMA, which represented an excellent price point to engage in buy-side action given the discrepancy in the pricing of the GBP/USD. The more adventurous, system-driven could have just been filled limit orders while the more discretionary type, could have drilled down to lower timeframes to find evidence that the market was ready to revert back up. The recovery in the DXY (inverted) depicted in blue is supportive going forward barring Brexit headlines.
If trading the EUR/USD has been such a low-key affair for the last 3 days, don’t get me started on the USD/JPY. It doesn’t mean trading opportunities are not existent, it just means that one must adapt to the present range-bound market conditions. With a backdrop dominated by risk appetite conditions, these two are the currencies the market is the least incentivized to resort to, which has led to a relatively low interest to find a resolution from its week-long range. Overall, with macro ‘true risk on’ conditions still the name of the game, while shorter-term we need to contend with USD weakness, this is a market not enjoying the right background to breakout in either direction this Monday.
The Aussie met all the prerequisites for an adjustment in value to the upside last Friday. Whenever we get a market so oversold as the Aussie was, with the added incongruence of a fundamental-driven catalyst (Australian coal imports ban to China) later denied by both sides, and on top of that, the macro scene (5-DMA slope) still look constructive based on the mood in the equity market coupled with a rising Yuan, lower US Dollar index, the risk of a significant rebound was evident. As we enter a new week of trading, the backdrop remains positive, hence even if the last sell-off created an impulsive movement that qualifies as a valid bearish cycle, the conditions are far from ideal to engage in sell-side action ‘hoping’ that a retest of the lows can occur unless the rampant dynamics in the S&P 500, the DXY or the Aussie-US yield spread exhibit spontaneous sharp reversals.
A similar bearish story setting up since Friday, which has also played out fantastically well in line with the discrepancies spotted in intermarket studies was the USD/CAD. Any swing or day trader with an interest to engage at relatively cheap prices with the trend would have probably been all over this short trade, as the conditions were just pristine. We saw a bullish trap during the Asian session, by price breaking up the descending trendline, only for the price to be smashed back down as the market re-anchored its support towards the Canadian Dollar in line with a macro positive backdrop in Oil prices and a gloomy one on the US Dollar, both exhibiting 5-DMA slopes supportive of a lower USD/CAD. Remember, if the slow stoch enter, in this case, overbought conditions, while intermarket signals argue to support the opposite direction, that’s what we understand as price offered at a discount and it makes for interesting exploitable trade opportunities.
In terms of Gold prices, the U-turn lower in the US yields alongside the matched downside movement in the DXY did suffice to see flows back into the appeal of Gold. At this stage, as the correlation coefficients demonstrate, gold continues to be treated as a function of USD weakness, with the correlation against the DXY in crescendo for the last 10 days or so, current just under 70%. Ever since the last FOMC minutes, when US yield received its last major catalyst, Gold has also been tracking in locksteps the inverted performance of the short-dated US yields as a proxy for Fed funds pricing.
The AUD/JPY, similarly to the AUD/USD, was a market that had written all over the wall clear signs of cheap prices being offered to engage in the buy-side activity if one judges the correction lower as being an abnormal event in disagreement with the rising slope of the intermarket macro trends. As a result, fast forward to Monday’s Asian trade, and the pair is trading over 80 pips from its recent low.
At the risk of repeating myself to death, I will argue that the vigorous rebound in the EUR/AUD also faced analogous bearish conditions to be unsustainable, this time simply predicated on the dominant 5-day trend (125-HMA slope) in the USD/CNH, alongside the uptrend in the S&P 500. Note, this is a market paying a lot more attention to the state of fundamentals in the Australian economy, that’s why we are seeing Aussie flows now tracking much more closely the AU-US bond yield spread, so that’s definitely, together with the VIX/SP500 and the Yuan, a third element to monitor.
Lastly, for those trading the Kiwi, as in the case of the Australian Dollar, this is a market that is starting to look a lot more inwards to determine the next directional bias. By inward, what I mean is that the flows in the NZD/USD are being determined by the trajectory of the NZ-US bond yield spread. So, with the micro slope having recovered to the bullish side in the last 24h, but with the macro outlook in terms of the yield spread not conclusive, breaking 69c will still prove a tall order.
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