Posted on: 29 Apr, 2019
Granted, the thematic of USD strength does not look like it's going to go away anytime soon if one judges by the weekly closes achieved in the DXY and EUR/USD. It was such a pity that the bullish close outside a well -defined 6.70-75 range could not be replicated in the USD/CNH in order to up to a whole new level the prospects of vol in FX.
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Granted, the thematic of USD strength does not look like it's going to go away anytime soon if one judges by the weekly closes achieved in the DXY and EUR/USD. It was such a pity that the bullish close outside a well -defined 6.70-75 range could not be replicated in the USD/CNH in order to up to a whole new level the prospects of vol in FX. The positive US GDP Q1 headline number, while it hides underlying softness in the details (lots of temporary factors led to the boost), in my view, should suffice to keep the common theme of USD buying flows at steady levels heading into May as the gap between US growth and the RoW widens. Near term though, there is enough evidence through the hourly price action in FX majors to be cautiously bearish the USD, after some technical cracks in the structures, especially in the Sterling, Canadian Dollar, and the Yen. The former may experience episodes of ultra-low liquidity at certain times of the day this week, as Japan goes offline until next Tuesday in celebration of the Golden Week. To start the week, we are seeing further buying pressure on the Oceanic currencies (AUD, NZD) as China's industrial profits published over the weekend printed a 10 month high. The Euro must be included in the pack of currencies with the prospects to print short-term gains vs the USD, even if remains one of the most vulnerable.
The US equity market, with the S&P 500 at its epicenter, continues to be an island of stability in which share buybacks, low inflation prospects, comparatively higher growth vs G10, US asset repatriation, are all contributing factors to keep buyers in absolute control.
It is precisely the element of low price pressures which is keeping the downside pressure in the US and global yields for this matter; the drop in the US 30-year bond yield from the 3% markdown towards a cycle low of 2.92% can be understood as a return of the pessimism towards global low inflation and subpar growth.
This is a theme that never went away, but it has been somehow reinforced as of late with further easing pricing in Australia, Canada, Sweden, and even Japan, where ultra-low rates are likely to stay at present levels even longer. The depressed PCE deflator in the US last Friday was the ultimate evidence to be a bond buyer.
The higher risk appetite in the US equity space, where the S&P 500 is just a whisker away from culminating one of the most epic comebacks in history by reaching a new all-time high after last year’s 20% drop, has also been reflected in a lower VIX, where sellers rule the roost again.
In credit markets, junk bonds are back in strong demand vs investment-grade paper, another sign of reigning risk-seeking dynamics. In the currency space, it’s not all that rosy, as the rise in the DXY has negative implications for risk, especially when combined with dropping US yields.
In this environment, the JPY can still fair pretty well and find plenty of buying interest especially in a world where even more Central Banks the likes of the RBA, BOC, Riskbank in Sweden are priced to adopt a fresh easing bias cycle.
One of the disappointing notes that makes the prospects of higher vol far from a done deal despite the bullishness in the DXY is the inability of the USD/CNH to close above its 6.70-75 range and join the DXY and EUR/USD in what I’d call a trifecta of breakouts that can result in the re-emergence of a USD bullish trend at a macro level, and with it, higher levels of volatility in the FX arena, something I am sure many non-carry type or range trading players would absolutely love.
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EUR/USD: Bearish Dynamics Fading Near-Term
Short-term, the 3 legs tap formation breaking through the upside of a descending trendline is a technically bullish development to at least see a relaxation of the selling pressure. The vigorous rebound post the US GDP Q1 release has achieved the transition of bearish to neutral dynamics from an hourly perspective, as the slope of the 25-hourly moving average indicates. The range to use as a reference should be roughly 1.1165-70 down to 1.1120-25 with the midpoint of 1.1140-45. Besides, the pop in the exchange rate comes in the form of a counter-intuitive move following the headline beat in the US GDP, which in my view, makes the temporary bottom to potentially initiate a short-term buy-side campaign towards the next 100% proj target at 1.1180-85 all the more relevant.
GBP/USD: Bullish Structure With A 1.2960-65 Target
Even more obvious is the short-term bullish case in the Sterling, despite if it plays against a clear macro bearish context as the descending trendline drawn in the chart indicates. However, from a micro standpoint, the creation of higher highs following a double bottom at 1.2870-75 should be a precursor that topside risks are building up for a short-term buyside campaign towards the 100% proj target at 1.2960-65, where the confluence of the trendline, horizontal resistance, and proj target will pose a major challenge for buyers to make further headway. The current retest of 1.2915-20 old resistance-turned-support occurs amid the upward slope of the 25HMA, reinforcing the notion that the pullback has sufficient credence via momentum to attract further buying interest. As usual, the familiar caveats of Brexit headlines apply, even if the vol around headlines has dialed down for now.
USD/JPY: Technicals & Intermarket Bearish
The way sellers took control of the price action on the aftermath of the US GDP Q1 beat makes me think that any recoveries in the USD should be limited in nature, with 111.80 up to 112.00 the area where selling on strength offers the most value. Additionally, the depressed level of US yields, combined with short-term weakness in the USD expected, makes the rise in US equities as a standalone contributor of bullish tendencies in the USD/JPY exchange not sufficient. Granted, the area of support between 111.40-50 is proving formidably strong based on the failed 4 attempts, which coupled with the week-long holidays in Japan, it makes the prospects of a potential range play a realistic scenario ahead of Tuesday’s US data, including the consumer confidence.
AUD/USD: Ongoing Buying In Lower Timeframes
As manifested in the Aussie price action, the power of a 3 legs tap as a bottoming or topping formation, also referred to as compression, is quite powerful under the right set of circumstances. In the case of the Aussie, the test of the 70c macro support has marked the opportunity for buyers to emerge and initiate what’s until now an ongoing buyside campaign, even if the short-term relief rally could soon very running out of juice given the daily resistance faced, which comes at the exact same level as the completion of the 100% proj target, so expect a major cluster of offers. The first signs of rejection post the US GDP Q1 beat report is a red flag, granted, it hasn’t deterred the efforts by fast money to keep pushing higher as a new week gets underway, partly spurred by the positive economic data out of China, where Industrial profits in March surged to its highest in 10 months. Besides, higher US equities alongside a temporary reprieve in the USD strength is assisting the AUD.
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