Posted on: 14 May, 2019
As China bites back retaliating by imposing tariffs on US goods effective by June 1st, the markets are coming to grips that such actions, even if not tit-for-tat, it means that we are in the midst of discounting a prolonged rhetoric war period.
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As China bites back retaliating by imposing tariffs on US goods effective by June 1st, the markets are coming to grips that such actions, even if not tit-for-tat, it means that we are in the midst of discounting a prolonged rhetoric war period between the two countries, with fears of tensions escalating even further. As a result of the re-evaluation of the new dominant trade thematic, and judging by the punchy moves in the Yen or equities, the market seems to have still a lot to re-price. As I will elaborate in today's report, the RORO model paints an ailing picture in risk assets, both from a micro and macro standpoint, finally re-invigorating vehicles of diversification such as Gold. Commodity-linked currencies, with the CAD no exception as Oil and risk off weights, are feeling the pain of the current dynamics of a battered Yuan, while the Sterling also take a hit as a function of the appeal to bid back the US Dollar across the board, excluding against the Yen. The Euro continues to find firm pockets of demand against most currencies.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The risk environment keeps deteriorated further as the rampant movement in the JPY clearly indicates. The acceleration in the selling of US equities (S&P 500 as reference) or the buying of long-dated 30y US bonds as news broke out of the Chinese retaliation to the US triggered a sustained cascade of supply imbalances across risk-sensitive assets. The late-day recovery in the DXY, while the JPY holds onto its strong gains, is further evidence of investors truly moving past the diversification into any currencies other than the historically risk off choices such as JPY, USD. The ‘true risk off’ scenario is not only manifested through all the micro trends monitored in our RORO model, but these day-to-day fluctuations are in congruence with the macro tendencies too, as the sentiment and modeling are rapidly turning very bearish amongst bigger hedge fund managers. The Chinese Yuan keeps acting as one of the best barometers to evaluate the levels of fear by a protracted trade war between the US and China, with the speed of the Yuan depreciation not abating; the USD/CNH market is fast approaching the 7.00 handle, a massive psychological level to watch. Meanwhile, with a VIX snapped back above 20.00 and junk bonds in free-fall, it goes full circle in registering one of the most negative RORO model readings this year, in accordance with the level of surprise that signifies the US and China moving further away from what was seen as a deal baked in the cake just 2 weeks ago. The reality is that the market is discounting a scenario of a prolonged delay in the US-China trade negotiations/deal, which carries a severe adjustment in valuations as investors anticipate a major setback for global growth in the 2nd semester of 2019. One can read the scenarios I had considered as part of the US-China trade negotiations in the following link.
EUR/USD: PoC Keeps Acting As A Magnet
The rotational nature that comes with the printing of a single volume profile formation played out as anticipated as part of Monday’s price action, where an impulsive buy side campaign led to what eventually became a head fake through 1.1250. Notwithstanding the determination of sellers to kick the rate away from its highs all the way to levels near the lowest since May 9th, the conditions are still considered as range-bound with 1.1230-35 the most heavily traded area 2 days in a row. This signifies a very clear clue that the market is only finding value at a neutral level for buyers and sellers, hence why there has been a tendency to fade the edges as part of a single distribution playbook. It’s going to take a break and hold beyond the extremes of the range to shift the focus away from range trading.
GBP/USD: Range Breakout With Acceptance
The ferocious move away from Monday’s highs was in line with the rotational features of trading a single profile market structure as suggested in yesterday’s note. The regular selling that came through the books in this exchange rate has led to the onset of a new bearish cycle, one in which I’d expect any correction to be capped by the POC of the last 3 days just above the 1.30 round number. The shift to a bearish trend in the OBV (On Balance Volume) is a sign that the sell-side volume pressure carries significant committed capital, further reinforcing the case to sell on strength.
USD/JPY: Sell-Side Bias, Volume Builds At Trend Low
Whenever we see such a clean breakout of a prolonged range, with the volume profile that follows a double distribution down with most of the volume at the very lows of the trend, that’s a sign that as long as buyers fail to build a similar amount of acceptance at higher levels today, any correction should be perceived as a selling opportunities. The areas of most interest to engage in sell-side action where the most accentuated supply imbalanced could be found will be the usual levels I tend to promote (50% fib retrac, retest of the former range bottom, midpoint range). Intermarket flows, both the DXY and the risk profile (SP500 + US30Y) remain very restrictive for any sizeable upside correction, hence overextension that leads to a change of bias is not the base scenario.
AUD/USD: Bears In Control As Yuan Weakness Extends
The combination of ‘true risk off’ markets and the overextension in the Yuan downtrend were music to the ears of sell-side accounts, who managed to end the day with a victorious double distribution volume profile. As in the case of the USD/JPY, we’ve seen an awful lot of volume accepted at the bottom side of Monday’s full extension, which tells us more pain ahead. It really is the worst background possible for the Aussie, which has the extra negative of facing no economic indicators out of Australia or the US to potentially act as risk events that disturb the downtrend in place. In terms of intermarket flows, keep following the formula in the 3rd window as the number 1 leading indicator of the exchange rate, with so far no indications that the tide will turn bullish anytime soon.
Gold: Protection Against Pick Up In Risk
The price of gold has exploded straight into the 100% measured target as US-China trade escalations are expected to dampen the outlook for global growth and the appeal towards stocks takes a hit. Amid this environment, gold becomes a substitute and historically viable vehicle of diversification. The double distribution up day , with the price closing at the absolute maximum level with the POC left behind is a very solid indication that engaging in buy side business is the way to go. There is a genuine chance that the market may resume the uptrend on the retest of the POC or thereabouts, as it’s a rare occurrence to see such a n aggressive buy side volume profile pattern, which basically translate in a market where sellers have run to the exits in mass as buyers pile in.
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