Posted on: 28 Aug, 2019
When financial conditions tighten and investors decide to go 'cash' in equities and bonds keep the stubborn bid, high-beta currencies (AUD, NZD, CAD, EM FX) performed poorly on Tuesday, and after going through the technicals in a bunch of risk-sensitive instruments, the risk environment remains on shaky ground.
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The Sterling, after a couple of days retracing from its hefty levels, ended as the top performer once again in a move that clearly manifests the market pricing greater chances that the UK may eventually avert a no-deal Brexit, even if betting markets still assign around a 40% chance of a no-deal Brexit this year. Funding currencies, with the exception of the Swiss Franc, did quite well in an environment where risk is dialing back after the trade talks optimism that Trump wanted the market to buy into has run out of juice. The USD index continues on a steady recovery path after the aggressive sell-off from last week when the escalation in the trade war broke into new highs. Meanwhile, as one would expect when financial conditions tighten and investors decide to go 'cash' in equities and bonds keep the stubborn bid, high-beta currencies (AUD, NZD, CAD, EM FX) performed poorly on Tuesday, and after going through the technicals in a bunch of risk-sensitive instruments, the risk environment remains on shaky ground.
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.
A shaky risk environment: The ‘risk-off’ dynamics returned even if the ugliest dynamics are still behind us (seen early Monday). Nonetheless, the constant slide in US bond yields, with the long-dated 30y about to make new all-time lows, the UST curve bull flattening to see again the 2y10y curve inverting by -4bps, coupled with falling stocks in the US, and a rising Yen and USD indices, all sets up a bleak backdrop going forward. The fact that the VIX index still trades above the 20 handle, that gold keeps building upward momentum, or copper keeps falling to reach a fresh 2-year low, is a clear statement of intent that the market is growing in pessimism about global growth.
China not playing along Trump's questionable optimism: The constructive mood in risk assets dissipated following claims that the US and China are in talks to return to the negotiating table, which as warned, carried a suspicious lack of substance as even China’s officials labeled Trump’s comments as false claims, with a Ministry of Finance spokesperson saying yesterday he had not heard of this taking place. Meanwhile, Hu Xijin, editor in chief of the Global Daily, who has close ties with the Chinese government, tweeted that China is now shifting its focus to boost internal demand as opposed to “putting so much emphasis on trade talks.” In the same tweet, Xijin added that “China’s economy is increasingly driven internally, it’s more and more difficult for the US to press China to make concessions.”
US consumers roar ahead: US August consumer confidence came out strong at 135.1 vs 129.0 expected, which is at the very upper end of economist estimates. Meanwhile, the sub-component present situation stood at 177.1vs 170.9 prior, which is the highest since 2000, while the 1-year inflation expectations were also upbeat at 5.0% vs 4.7% prior. It’s worth noting that the Fed’s lack of pre-commitment to endorse a more aggressive easing path is mainly as a result of the steady economic numbers domestically, especially in sectors such as consumers. On aggregate, it cements the prospects of the Fed staying the course with only a moderate easing bias. Note, it also tends to be a double-edged sword at times as these lofty levels in confidence suggest a late economic cycle.
Trump sticks to tactics of pressuring the Fed: Trump kept criticizing the Fed by tweeting “The Federal Reserve loves watching our manufacturers struggle with their exports to the benefit of other parts of the world. Has anyone looked at what almost all other countries are doing to take advantage of the good old USA? Our Fed has been calling it wrong for too long!” There is a growing school of thought that President Trump’s latest strategy, ever since the Fed cut rates by less than he expected back in July (has coincided with the ramp-up in criticism), is aimed at leveraging his ability to engineer volatility as an economic policy tool to get the Fed to act more dovish on interest rates in order to weaken the dollar and provide the economy with renewed impetus heading into the 2020 elections.
ECB members paddle in the same direction: There continues to be mounting evidence that the ECB is laying the ground for a set of bold measures as part of its upcoming QE II package set to be announced in its Sept 12 meeting. On Tuesday, ECB member De Guindos stated that the central bank 'has to act with determination' when asked about negative rates. With this hint, De Guindos joins recent dovish commentaries by other members the likes of Rehn or Weidmann. The price of Gold vs Euro is manifesting like no other instrument the prospects of a major easing program amid global growth concerns.
Over-optimism on a backstop solution? The GBP was again the outperformer after European commission Pres. Juncker, following a meeting with UK PM Johnson, said he would look at any concrete proposals PM Johnson may have as long as they are compatible with the withdrawal agreement, adding that the EU will do everything it can to avoid a no-deal scenario. Finding a viable alternative to the Irish backstop is the crux of the matter even if it seems elusive to think what couldn't be done in the last 3y (solution to backstop) all of a sudden can be delivered now. On Johnson’s side, the politician stated that he had a positive and substantive conversation, reiterating to Juncker that unless the EU withdrawal agreement was reopened and the backstop abolished there is no prospect of a Brexit deal. Interestingly, the betting markets still assign around a 40% chance of a no-deal Brexit this year.
China announces further stimulatory measures: China is set to relax and remove car purchase limits while working in new policies to accommodate support for new-energy vehicle purchases, according to state media Xinhua, in an attempt to incentivize consumption activity in an industry that has been badly hit in recent years. The news helped to lift the risk mood during European hours, mainly in auto stocks.
German Q2 GDP confirms bleak outlook: Germany’s Q2 final GDP came at -0.1% vs -0.1% q/q preliminary and vindicates the fears that the economy is on the verge of falling into a technical recession as the struggles to get out of 1st gear in its economic indicators continue as a result of the global slowdown.
RBA Debelle sees rate floor near 0%: RBA Deputy Governor Debelle revealed as part of a speech in the balance of payments that the studies conducted by the central bank determine the floor for rates is likely around zero to 0.5%, adding that “it is our hope we never have to get down to those levels.” In the scenario that rates got to around 0.5%, Debelle said “would have to consider other options.”
Oil boosted by OPEC commentary: The price of Oil shrugged off the ‘risk-off’ dynamics to instead find a fundamental anchor to keep the buy-side pressure dominant. Comments from OPEC implying that oil stockpiles are set to decline sharply after recent actions to widen production cuts in order to prop up prices.
The EUR index has attacked a key level of support (lower end of its range) on tapering dynamics in the aggregated tick volume, which suggests that buying pressure may arise once again out of an area in the chart that has proven to act as a springboard to jolt sentiment. The currency still remains below the baseline, which warrants caution. The major forces driving the Euro can be divided into 1. Fundamentals (very poor) and 2. Risk Dynamics (the EUR as a funding currency tends to do well in times of risk aversion). The latter tends to override fundamentals unless the currency is excessively expensive which is not the case.
The USD index is starting to rebuild its upward momentum with the close above the baseline a warning sign that the double top may be retested again. The recovery of the baseline comes amid lower tick volume below the historical average and with the fisher transform indicator (helpful to assess market cycles) not yet trigger a long signal. All in all, it’s looking as though buyers have re-grouped to resume the uptrend but the daily still lacks the clarity to overly committing.
The GBP index is in a solid bullish trend well above its baseline. The currency closed by the end of NY business at the highs of the day in a move that looks overextended, meaning that it tends to first see a minor pullback before buyers pile in. The acceptance of higher levels reinforces the idea that the bullish momentum can find further follow-through, predicated on the logic that the structure is clearly building higher highs and higher lows now.
The CAD index has been trapped in a range for the entirety of August, with the latest rise once again capped by the resistance line that set the delimitation of the upper side of the range. Every single time that the currency index is rejected off resistance, the next target sellers have targeted over and over has been the area of support, which implies that the chances of seeing lower levels from here, especially if risk dynamics deteriorate, are quite decent.
The JPY index could be readying to set out a new bullish journey following the bullish day after support was again found off the baseline late last week. As noted in previous notes, the ability of the Yen index to stay above its 13-d ema baseline during the episodes of risk recovery has been quite revealing about the continuous interest of the market to seek protection via JPY longs. It will take now a worsening of financial conditions to give the JPY the final impetus amid the improvement in technicals, which are unambiguously bullish at this point.
The CHF index is trading below its baseline, which would be considered as a bearish event if it wasn’t because the aggregated tick volume causing the breakout is fairly low. Whenever volume is reduced, it tends to lead to an eventual exhaustion of price, hence prudence must be applied to support CHF shorts here, especially after the ‘risk-off’ day we had in stocks/bonds, which is yet to be manifested via an appreciation on the Swissy. Some upside catchup may be in store.
The AUD index looks bearish after the rebound off lows struggled to break above the baseline, resulting eventually in a retreat that has seen the AUD close near the lows. The structure and indicators are all pointing lower as well, which raises the risk of further downside ahead. There is no technical grounds to expect much buying interest at these levels. I am bearish today.
The NZD index is another market where I see follow-through bearish continuation for a retest of the recent lows and even further downside momentum in what’s become the most pristine trend in the forex market ever since mid-July. The index has gone for over 6 weeks without a single retest of the baseline, which communicates how perilous the environment remains for buyers.
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