Posted on: 05 Sep, 2019
Amid the rampant risk appetite in equities, risk-sensitive currencies (USD, JPY, CHF) were taken to the woodshed, while GBP, AUD, and CAD buyers blare the trumpets by riding the bullish momentum as key tail risk events (Brexit, HK, Italy, US-China trade) are all in recess.
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A quadfecta, which in horse racing refers to picking the first four winners, could be extrapolated to the order of positive news hitting financial markets as risk-seeking strategies thrive after four consecutive risk-friendly developments occurred on Wednesday. The withdrawal of the extradition bill by HK set the ball rolling, which considering is what sparked the beginning of demonstrations, it definitely was a good omen to start the day in Europe. We then must throw into the mix the delay of a no-deal Brexit as the UK Parliament took control of the process, only to see a new Italian government formed with Conte back as PM and former EU economic and monetary affairs chair Gualtieri as Finance Minister. The icing on the cake came after the Chinese Ministry of Commerce issued a statement that China and the US agreed to meet in October for trade talks. Needless to day, amid the rampant risk appetite in equities (not in bond yields though), risk-sensitive currencies (USD, JPY, CHF) were taken to the woodshed, while GBP, AUD, and CAD buyers blare the trumpets by riding the bullish momentum as key tail risk events (Brexit, HK, Italy, US-China trade) are all in recess.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Trifecta of positive news emboldens risk-seeking strategies: The risk appetite is back in full swing after a trifecta of positive-charged news, including the withdrawal of the extradition bill by HK, which was the trigger point that led to the disruptive protests in the first place, coupled with the UK votes to delay Brexit, and to top it off, a New Italian government has been formed with Conte back as PM and former EU economic and monetary affairs chair Gualtieri as Finance Minister. The US Dollar and the Japanese Yen were the clear victims of the ebullient mood in risk-seeking strategies.
Hong Kong a key element in the risk equation: One key aspect of maintaining the risk profile on high grounds remains the thorny issue of Hong Kong. On the surface, the headline is unambiguously a positive development but whether or not it dissuades protesters from ending the demonstrations it remains to be seen. The discontent is not gone, as protesters still want other issues to be addressed. The Chinese government mouthpiece the Global Times wrote: “Radical forces should not have any illusion of winning ground on matters related to the one country, two system principle that governs Hong Kong”.
China-US agree to meet in October (breaking news): The other major influencer is the China-US trade talks, which saw some encouraging news out of Asian trade on Thursday after the Chinese Ministry of Commerce issued a statement that China and the US agreed to meet in October for trade negotiations. This piece of news adds to the trifecta of positive news described above to make it a "quadfecta".
The Pound bought as UK PM loses control of Brexit: The Sterling has surged on the back of a relaxation in fears of an imminent no-deal Brexit outcome as the UK parliament approved to block no-deal Brexit by 327 votes to 299, with debate moving to the House of Lords. The official text read that “the Bill would require that unless the House of Commons approves a deal with the EU or the House of Commons agrees on a no-deal Brexit, the Government must by 19 October 2019 seek an extension to the Article 50 period until 31 January 2020.”
UK PM defeated in call for snap election: UK PM Boris Johnson completed today’s double whammy of bad news for his planned Brexit process aspirations by being defeated in a tabled motion to hold a general election. Johnson needed a two-thirds majority (434) out of 650 votes and only got 298. Meanwhile, the prospects of a near-term general election still loom despite UK Labour leader Corbyn is still not endorsing it until the threat of a no-deal Brexit has been removed, noting that "we will not fall for Boris Johnson's tricks". Either in October before the scheduled Brexit, or in late 4Q, after an extension, a snap election in the UK looks highly likely to resolve the gridlock.
NY Fed Williams doesn't sound overly dovish: New York Fed President Williams failed to provide any pre-emptive sign of supporting a 50bp rate cut, unlike the stance of perma-dove Bullard, even if Williams didn’t close the doors fully either as he pointed out that the economic momentum is less robust. Williams was especially concerned about the low inflation, noting he is ready to act as appropriate to support the economy and return to 2% inflation. Williams emphasized a familiar story about consumers data being robust but manufacturing data weakening. Lastly, a comment that unveils the uncertain outlook and how data-dependent this Fed is, Williams said “there are more economic data and geopolitical uncertainties before deciding on the next move.”
The Fed’s Beige book not painting picture of an economy in easing mode: The Fed's Beige Book left one with the impression that domestically speaking, the report does not highlight enough stresses to justify a rate cut, but again, the Fed’s decision to embark on a rate-cutting adjustment phase has always been rationalized as a pre-emptive insurance move to the external risks that exists (trade war, Brexit, global slowdown, etc). In an area where the Fed is most concerned about such as business capital investment, the report outlined that “most businesses remained optimistic about near-term outlook even though concerns about tariffs and trade policy uncertainty continued,'' while highlighting old news that manufacturing data is slowing down due to the trade dispute with China.
BoC fails to send dovish signal: The Bank of Canada left the interest rate unchanged at 1.75% as expected by all economists in a Bloomberg survey, sending no signals to prepare the market for a rate cut. The Bank reiterated that "the current degree of monetary policy stimulus remains appropriate", adding that the "Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation". What was interesting were the comments on the housing activity, noting that it had regained strength more quickly than expected, and this “could add to high household debt”, which implies the Bank might not want to re-inflate the housing bubble by cutting rates further in the short-run.
The EUR index trades in bearish territory, completely decoupled as a proxy of the risk profile to instead fluctuate with the anticipation of an aggressive dovish ECB outcome as the main driver. The index has found support around a key horizontal level, which was the onset of a major rebound back in late July, so one would expect this location to attract demand interest.
The GBP index, following the sizeable lower shadow candlestick formation on Tuesday, has garnered plenty of buying interest, allowing the index to retake its baseline to the upside. The breakout has been on low aggregate tick volume, which means a retracement to test lower levels before a trend resumption might be in store. The outlook for the Pound is positive heading into Thursday, even if the environment remains very dicey with the UK sooner or later headed towards a new general election. What matters for now, and the reason the Sterling has appreciated is because the market is pricing out the immediate risk of a no-deal Brexit.
The USD index has sold hard as the risk appetite sees capital flocking off the safety bets. The breakout below the baseline has occurred on low tick volume (removal of liquidity), which is a clear sign that the participation by sellers in this move lower is not highly committal, with the fall more a function of buyers taking profit off the table driving the price lower for the most part. The candle would not classify as a sell trigger to expect further selling follow through, especially since the market structure of the index is still clearly bullish (higher highs, higher lows).
The CAD index has re-taken the upper side of the baseline and the overall outlook looks now more constructive for an extension into its next key resistance level. The failure by the BOC to signal a dovish stance in rates has caused the upward adjustment in the currency, which sees the CAD stand out as one of the very few Central Banks not actively easing. There is a notable divergence with the risk-on weighted index but the BOC decision did override the proceedings.
The AUD index continues to charge higher after closing above a major line of resistance, which paves the way for the currency to extend its gains until the next resistance line located about 0.4% higher from Wednesday’s close. The outlook for the Aussie to keep its steady move up is dubious to say the least as the risk-on weighted line has clearly decoupled in a sign of divergence, which means key reference levels may act as reversal points.
The NZD index shows no indications that the bearish tide is turning. Even when risk appetite has been thriving, the index could not manage to make gains in an equally-distributed weight basis. The currency index faces a key level of resistance above in the form of the baseline, with the market structure still giving us no clues whatsoever that buyers are in control of the daily chart.
The JPY index has been smashed by the reinvigoration of the risk flows, leading to the very first breakout of the baseline since July. The index has now landed at a key level of support, with the sell-side candle from Wednesday lacking the sufficient participation by sellers judging by the tick volume, which is a precursor to potentially see a bounce back. However, the close at the very low of the day is also a major warning that there is no appetite to buy the currency for now. The risk-off weighted index remains at lofty levels, which is why the downside may be limited.
The CHF index is sandwiched between a key support level where buyers have been consistently found while the upside is so far capped by the baseline. The outlook is unclear with not enough clues to help define what side has the most control. If anything, the poor aggregate tick volume of the support level argues that the upside momentum may exhaust near-term.
A trade that stands out today is long the CAD/CHF off the H8 chart. There is a clear bullish structure in place, the candlestick printed on the back off the BOC is an outside pattern with high tick volume off a key support level on the daily (red line). To top it off, the candle that provides the bullish signal closed above the baseline on both the H8 and daily timeframes.
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