Posted on: 28 Mar, 2019
If you wonder why the Japanese Yen keeps performing so solidly this week, look no further than the behavior in fixed income around the globe, where bond yields are getting absolutely destroyed.
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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 in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
If you wonder why the Japanese Yen keeps performing so solidly this week, look no further than the behavior in fixed income markets around the globe, where bond yields are getting absolutely destroyed. Not only the US yield curve has inverted, but other milestones are also happening before our eyes, such as the German 10y anchored in negative territory, the Aussie 3-yr bond yields making historic lows, and the list goes on. Amid such an aberration, especially when it gets compared with the high valuations in equities (an epic departure from normal correlations), many are starting to question that such divergence between bonds yields and equities can’t last forever. So, this week, and without setting precedent, it looks as though the disorderly movements in bonds (remember historically low vol tends to lead to expansions in vol), equities traders are finally taking notice. Economics 101 suggests that when yields are this low, aside from the eternal debate of whether or not the US yield curve will lead to a domestic economic recession, it’s a clear communication that the market is not buying into the rhetoric that the future is bright but the opposite, it’s telling us that a gloomy outlook is being discounted by the high concentration of long-dated bond maturities as a good enough yield that acts as a safe-haven vehicle.
As the charts above demonstrate, the risk-off conditions are well and alive. US equities are finding a new wave of committed sellers ever since the top found at 2,865.00, US yields are marching to the tune of its own drummers as the epic divergence with equities expands even further, while the DXY is still finding sufficient levels of interest to be bought even if the moves are far from earth-shattering. What’s interesting, however, is that amid such deterioration in the risk environment, gold has been sold off quite hard, if only by the low vol standards we’ve been used to for quite some time now.
EUR/USD: Finds Bottom Pickers Sub 1.1250
The rout in global bond yields has been pronounced, with US fixed income drawing the most interest, which has resulted in the yield spread advantage vs the Germans to take a hit. In yesterday’s thesis, I mentioned that the reduction in the US vs German yield spread was a key reason why it’d be difficult to sustain prolonged periods of selloff in this market. Looking at Wed’s price action, the formation of an L-shaped volume profile with up to 4 different failed attempts to break through 1.1250 reflects precisely this argument. That said, sellers are still in control as the price consolidates at the lows of the ongoing hourly trend, with a descending trendline still guiding us lower.
GBP/USD: Rotational Profile Remains The Norm
The state of trappy and directionless price action, if Wednesday serves as an indication, looks set to extend until we can clear up the Brexit situation. The parliament in the UK continues to find no consensus in what’s the way out of this mess and that’s translated in Yo-Yo type rotational conditions, with the GBP fading breakouts of the range in both directions. By the end of trading on Wed, the volume profile exhibits another single distribution day with little value being built at the extremes, which yet again, constitutes a recipe for erratic gyrations. Remember, this market remains headline driven now more than ever as we’ve entered the peak noise period in the Brexit saga. If we take the UK-US bond yield spread as our reference, buying weakness still makes a lot of sense given last week’s uptrend, while the DXY suggests the opposite. A complicated puzzle to resolve.
USD/JPY: ‘True Risk Off’ Adds Downward Pressure
The Japanese Yen is drawing the most buy-side interest amid the ‘true risk off’ conditions, where the hammering of US yields, alongside the weakness in US equities, is taking its toll on the appeal to stay involved in long-side business in this exchange rate. The fact that the DXY is failing to make much headway even in such a risk-averse environment, is only exacerbating the limited interest to be a buyer. With 110.00 within sight, expect the next target of 109.75 (trend lows) to be retested. Should the dynamics not revert back to a more constructive risk environment, the trend is your friend here.
AUD/USD: Range-Bound Conditions, Catalysts Needed
The selloff in the AUD on the aftermath of the dovish turnaround by the RBNZ was a precursor of a market that is getting nervous about the new easing outlook in New Zealand will add further pressure for the RBA to adopt a similar approach and eventually cut rates as the market is pricing. The selloff, however, continues to find stubborn buying interest sub 0.7070 since March 15th, and yesterday’s price action was no exception, leading to a rebound towards 71c and in the process, it reinforces the notion that this is an exchange rate with little life to see the light outside its compressed 7150-7070 tunnel (range) until new fundamental catalysts do stimulate a new narrative.
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