Posted on: 01 Mar, 2019
As liquidity dries up and we transition from US trading into the Asian zone, the USD and the Euro were the best performing currencies, although it was the former that ended the US session in the strongest fashion after US growth figures came surprisingly strong.
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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
As liquidity dries up and we transition from US trading into the Asian zone, the USD and the Euro were the best performing currencies in the last 24h, although it was the former that ended the US session in the strongest fashion after US growth figures came surprisingly upbeat. The Euro was supported through the first half of the day, with positive inflation readings out of Germany anchoring the buy-side bias. The Canadian Dollar followed the rise in the USD almost in locksteps.
The Sterling’s outperformance throughout the week came to a pause after back-to-back days of very solid gains as a Brexit delya looks baked in the cake, while the Oceanic currencies and the Yen were clearly unloved as the first chart below shows. From a macro perspective, when analyzing the 5DMA slope, the Euro and the Sterling remain the only 2 currencies with an uptrend in play, the CAD follows closely behind, while the AUD, NZD, JPY are starting to develop broad downtrends vs the strongest peers.
The USD is still not out of the woods, with a stellar run in the last session yet the 5-day performance is still largely bearish. From a daily view, the USD shows overbought conditions as per the 25-period slow stoch in the hourly but such an outlier as the US GDP was may see further buying momentum. That said, even from a 5-day standpoint, the slow stoch is entering overbought conditions. Interestingly, the Pound has entered oversold territory within the context of a broad uptrend, watch it closely if you swing trade.
This week, we’ve transitioned into USD-centric dynamics in our RORO model, with the major spike in US yields driving the mood. What's still interesting is how poorly the DXY is lagging behind US yield from a macro standpoint. Anyhow, on the heels of the strong US growth numbers, the reinvigoration of the DXY bullish bias from a micro perspective is keeping beta currencies (mainly AUD, NZD) depressed, further supported by the absence of gains in equities.
So, in the very short-term, we must contend with a scenario #5 (USD strength) and keep our attention in equities, where interestingly, the compressed range this week has led to both the 25-HMA and 125-HMA both turning flat in a reflection of the lack of directional bias. In the macro scene, the ‘true risk on’ picture is not as clear cut given the hiatus of limited vol in the SP500, which keeps us in range. So, a resolution higher would take us back into ‘true risk on’ while a move lower.
Even a move lower in equities would still face the contradictory signals from higher yields and a lower DXY (macro wise), which means we wouldn’t yet be at a stage where we could claim a macro ‘risk off’ period, at least not on a week-by-week performance basis. This is a market to stay short-term oriented folks.
In terms of the EUR/USD, wherever the German vs US 10-yr yield spread is headed, so does the currency pair. The correlation is as high as it’s been for months, so you want to pay close attention to the re-anchoring of this historically reliable instrument to understand the next capital flows. As the outlook table indicates, the market is neutral short-term, although the macro dynamics still support higher prices, even if that’s going to be tightly dependable of the yield spread as mentioned.
In the short-term, the GBP/USD has come back to earth after a stellar run. The pressure lower in the DXY as well as in the UK vs US bond yield spreads have led to a setback that may be interpreted as a window to potentially engage in buy-side opportunities if you still count on this uptrend having further legs up. If that’s your view, a reversal of the cross-asset flows, as I always suggest, is the first pre-cursor to put yourself in a lower risk entry position.
In the USD/JPY, other than the bearish macro trend in the USD, the rest of signals indicate we’ve permuted into a healthy uptrend with technical and intermarket dynamics endorsing the impulsive move higher. Notice, the move is almost entirely driven by the spike in US yields given that equities and the DXY remain fairly subdued this week. What this means is that it is the US yields market that you must be paying the closest attention for this strong momentum to still find pockets of demand at such hefty levels.
In the AUD/USD, it’s all about the AU vs US bond yield spread that’s driving the fluctuations in the pair. The correlation coefficient runs at an incredible 80% (both micro and macro). Therefore, remain fixated on where this spread goes and you will put yourself in a better position to find opportunities. As of late, the influence of the DXY + Yuan has been abating as the key driver. My impression is that as long as the AU vs US yield spread can adjust higher, this is a market poised for a significant correction as we are still in an environment of an uptrend in the DXY+Yuan (inv) markets and equities are simply in consolidation mode rather than any panic selling. I can’t see lower AUD levels on this backdrop unless as I mentioned, the intermarket studies deteriorate more aggressively.
In the USD/CAD market, we are getting a mixed bag of signals, with the strength in the DXY and US yields capping the downside, while Oil (inv) both from a micro and macro limits the recoveries. During this week of trading, we’ve transitioned into a 1.3240-1.3120 range, so that should with the currency pair now trapped in a phase of rather noisy fluctuations with no clear bias.
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