Posted on: 16 May, 2019
Risk sentiment was buoyed by reports that the US government is likely to delay auto tariffs to the EU and Japan up to 6 months. The Japanese Yen was the currency most punished by the news just as equities in the US turned around and never looked back.
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Risk sentiment was buoyed by reports that the US government is likely to delay auto tariffs to the EU and Japan up to 6 months. The Japanese Yen was the currency most punished by the news just as equities in the US turned around and never looked back. The fact that US President Trump plans to fight one trade dispute at a time rather than having too many fronts open, with his plate rather full having to deal with China and the revised NAFTA deal, was translated in an immediate spike in the Euro. Regardless of the renewed demand for the Euro, the DXY is not backing off, still trading quite firm across the board. The best performer currency was the CAD, supported by a rise in Oil, recently stellar fundamentals in the form of a huge increase in employment creation and risk appetite on the mend. On the flip side, the Sterling, with no Brexit breakthroughs even remotely close to happening, is lacking the love (demand) of markets. The Aussie is also on the backfoot after the market reacted negatively to an increase of 0.2% in the unemployment rate in Australia, despite the rest of the data was quite encouraging, from the total jobs created to the increase in the participation rate.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
In such a headline-driven market, where certain Trump tweets have sadly become the cues that news-identifying algos pick on to set the directional bias, one must be aware that RORO dynamics are in a constant state of flux. We are not in an environment where linearity in one’s interpretation keep you often enough on the right side, but rather, you must be in constant adaptation.
Even if I claimed, rightfully so for the first half of Tuesday, that we were at a stage of a false sense of risk recovery, reports that the US is likely to delay the auto tariffs on the EU and Japan, has created a sudden change of behavior in equities that have persevered till the late stages of the NY session.
Unlike Tuesday, this time the S&P 500 has penetrated its previous high, which sets up a more encouraging outlook heading into Wednesday as the momentum and structure turns bullish intraday, leading the VIX to come down towards the 16.00 handle. However, that’s where the good augurs end.
The junk bonds performance is not tracking the positive price action in equities to the same degree. A further reason to take the potential nascent prospects in equities and the overall recovery of risk with a pinch of salt is the follow through demand seen in the fixed income market, as the US 30Y yield performance can attest, last at 2.82% even on the delay of auto-tariffs.
Surprisingly weak US/China data has strengthened the appeal to hold tight into US Treasuries too. Another note of caution emerges when analyzing the trend in the DXY and JPY index, both keeping a constructive outlook if using as a guide the structure and micro trend via the 25HMA.
What about the activity in Chinese assets? The acceptance by the USD/CNH above 6.90 continues to be a red flag for risk, even if China pledges to keep the Yuan at stable levels. The increase in HIBOR rates has made the borrowing to short the Yuan more expensive, which is a sign that the depreciation of the Yuan may experience a potential slow down from here on out. We shall see. When it comes to the Shanghai Composite, a tentative even if mild in nature recovery is underway, but remember, the Chinese government has been reportedly active buying stocks through state-owned entities to support valuations in order to relax the tightening of financial conditions.
EUR/USD: Bullish Structure Emerges, Not Backed By Volume
There has been a sudden withdrawal of liquidity in the Euro as reports emerge that the US auto-tariffs to the EU is not a trade war fighting for short-term for the Trump administration. As a result, the upthrust bar has damaged the bearish bias by creating a disruption in the price structure. The break of the prior swing high, alongside the support found at the right-hand side of the chart through the 1.12 round number, keeps the nascent bullish outlook rather constructive. As a caveat for bulls, notice that this recovery in the exchange rate is not backed by a positive bias in buy-side volume pressure via the OBV (thick orange line). The amount of USD buy side volume has been clearly dominant so it will take a significant change in volume activity to keep the rate supported past 1.1220. For now, this is not a market that lacks sufficient evidence of which side is in control. Patience for the price and the volume structure to align as was the case in the bearish run of the last 2 days is warranted.
GBP/USD: Meets Its Next Measured Move Target
The exchange rate saw a one-way street move up until the completion of its next 100% measured move target at the 1.2830 where market makers/dealers/profit-taking, coupled with improved risk appetite on the back of a potential delay in the auto-tariffs to the EU by the US re-ignited buyers. There is a lot of work that needs to be done for buyers to regain the upper hand given the badly suppressed demand towards the Sterling as Brexit breakthroughs are still an elusive outcome. If the resumption of the bearish trend transpires, the next projection is found at 1.2760, which judging by the sell side volume pressure, it’s an outcome that could eventuate, especially if risk off returns.
USD/JPY: En-Route To Retest 109.15 If Risk Worsens
The spike in JPY supply as risk appetite picked up through the US session was well defended by a cluster of offers around the POC of last Tuesday circa 109.65-70. As I type during the Tokyo morning, risk has been deteriorating again, encouraging demand towards the Japanese Yen. The RORO line in the 3rd window indicates valuation in the exchange rate looks rather expensive, partly supported by the rise in equities but the absence of traction by US 30y bond yields and the rolling over of the DXY is a reason to stay cautiously optimistic that the downside is not over yet. The OBV line in thick orange is starting to display a bearish slope again, reinforcing the risk of more losses. Remember, Tuesday’s P-shaped volume profile with a close below the POC is not the ideal structure to be a buyer. This scenario will be canceled only if buyers can muster strength above 109.75, but even if, 110.00 looms.
AUD/USD: Sell-Side Bias Set To Extend Post Aus jobs
The Australian Dollar sold off in response to a rise in the Australian unemployment rate to 5.2%, which appears to be the headline algos were programmed to act most aggressively on, even if the rest of labor data seems to suggest that the aggressive sell-off looks like a stretch. The initial movement made it all the way to the 100% measured move target, where the cluster of bids caused a sudden change of behavior once again, back towards the retest of 0.6915 breakout point. The absorption candle in the first 30m suggests the downside looks limited unless more value can be created, while the correction will see its greatest obstacle at 0.6930 POC is 0.6915 is cleared. Overall, the bias is clearly down, but the fundamentals argue against an overextension. Remember, the Australian Dollar will continue to be greatly influenced by the dynamics in the Yuan market.
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