Posted on: 29 Mar, 2019
The US Dollar has been the absolute dominator, attracting the most buying flows in the currency market in the last 24h. Amid the absence of fundamental drivers this week, to understand what's been the catalyst of its ascendancy this week, we need to resort to the information I am getting from various institutional source
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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.
The US Dollar has been the absolute dominator, attracting the most buying flows in the currency market in the last 24h. Amid the absence of fundamental drivers this week, to understand what's been the catalyst of its ascendancy this week, we need to resort to the information I am getting from various institutional sources. The buying interest back into the USD appears to be a function of US investors running to the exits in their foreign holdings, which has led to strong flows of currency repatriation into USD-denominated assets, which also helps to explain why the demand towards US fixed income has been so savage as of late. On the opposite side, we find the NZD, still lagging way behind the rest of the G10 FX pack in response to the new easing bias adopted by the RBNZ, while the GBP miseries are still present, with the currency finally giving in and adjusting its value lower as investors keep losing their patience amid the lack of any meaningful progress in Brexit. Talking about meaningful, another vote for UK PM May's Brexit deal is scheduled this Friday. Then we have the Loonie, the Yen, as a group of currencies having shown strength as of yet, the former inspired by the recent gains in Oil prices, while the latter still acts as a harbor to protect one's profile after the recent episodes of risk-off. I would then classify the Euro and the Aussie as the 2 currencies caught in the middle of the cross-current, with an outlook that keeps worsening for both of them. In the case of the Aussie, the move by the RBNZ may force the RBA to act more aggressively by shifting to a more dovish forward guidance, while the Euro still pays the consequences of the disastrous German PMI sub 45 from last Friday.
US equities found further buying interest sub 2,800, which raises the prospects of a potential double bottom if the market can achieve a successful rotation by breaking through the recent swing high of 2,835.00, with subsequent acceptance the final pre-condition to reinforce the buying dynamics and hence the micro bullish trend, which is already underway based on the slope of the 25HMA.
With regards to US yields, the mild recovery away from the multi-year low of 2.8% in the 30-yr appears to be driven by profit-taking of spec longs in US bonds than anything else. The downward slope of the 25HMA in the US30yr yield is still a clear reflection of a market still plagued with bearish sentiment, even if the fast and furious falls in global yields may now be entering a more balanced period.
Meanwhile, the strength in the DXY continues to be one of the main talking points, ongoing despite the dovish FOMC this month. But again, in the currency market, especially after the NZD selloff, which adds further pressure to ease by the RBA, it’s a race to the bottom, and amongst the basket of G10FX, the USD is still the least ugly.
Reflecting the sub-optimal state of the risk-averse flows, even based on Wednesday’s price action, was the inability of Gold to muster any gains despite we were still in a negative equity environment. What eventually transpired, amid the vigorous recovery in the USD, is a harsh selling of the metal.
According to Morgan Stanley, the decline of US sovereign bond yields and the advance of the USD has been predicated on the basis of US investors liquidating foreign asset holdings and investing these funds back into USD-denominated assets.
As the Strategy Team notes: “USD valuation swings are the result of net cross-border flows. While the appetite for foreign investment into the US is in a steep decline, US foreign asset holders have been repatriating at a faster pace, pushing net capital flows into the USD into positive territory. The message seems to be clear: as long as US-based investors repatriate at a faster pace than foreign investors reduce their investment flows into the US, the USD will remain bid.”
Overall, we seem to be transitioning into an environment of temporary USD strength across the board, in a context of rising equities, which tends to undermine the Japanese Yen as the clearest bet.
EUR/USD: USD Repatriation Keeps Sellers In Control
US funds invested abroad have accelerated the repatriation flows into US bonds, which has caused funds back into USD-denominated assets. It continues to occur at a faster pace than foreign investors reducing investment flows into the US, hence the USD is still broadly bid. The price action in the exchange rate portrays these pressure as the price remains under a trendline that originated off March 22nd, time of the shocking German PMI under 45.00. The volume profile has printed yet another double distribution down with the price closing right around the same level as the POC, suggesting that value keeps building to print lower prices heading into Friday all else being equal. The bearish trend still looks like the path of least resistance, even if the German-US bond yield spread argues for an adjustment of the exchange rate into higher territory based on the divergence seen.
GBP/USD: Double Whammy Of Brexit & DXY Strength
The Sterling has been hit by the largest supply imbalance ever since March 21st, with the combination of Brexit jitters and ongoing repatriation of US-based investments abroad into USD-denominated assets, mainly into fixed income, allowing the bearish pressures to transpire. The one-way street move from Thursday has created a P-shaped volume profile, with most of the volume transacted left out at much higher levels circa 1.3150, reinforcing the sell on rallies strategy as the most sensible, an approach also congruent with the downward slopes in the DXY and UK-US bond yield spread. Expect diminished vol around the UK PM May’s vote to pass fer withdrawal deal if, as expected, it fails to gather enough support as that’s the outcome being clearly discounted.
USD/JPY: Recovery In Risk Flows Lifts The Rate
Blink and you missed it, that’s what speculators may have felt after the rapid appreciation of the exchange rate through early US hours. The ongoing buying interest in the DXY, in conjunction with rising equities and consolidation in the US yields, was sufficient to catapult the rate through the previous swing high, creating a successful rotation and a P-shaped volume profile in the process. Holding above 110.50 (POC + horizontal support) will be critically important to maintain the bullish momentum. Failure to do so may lead to the prospects of range bond dynamics to end the week. The fact that the successful rotation broke the prior highs marginally, even if the structure has been indeed violated, it puts into question the conviction of buyers to build up gains right off the bat. Taking intermarket analysis as our reference, at the time of writing, buy on weakness is favored.
AUD/USD: Low Interest To Trade The Pair
It’s evident by the limited fluctuation of the exchange rate that one needs to adapt his strategy to trade the micro moves in the Aussie if you are a short-term trader, or arm yourself with sufficient patience to let the slow grinding movements to play out over a longer time span. For now, we need to content ourselves with what might be a 35 pip range as our reference heading into Friday. That’s the tepid price extension we saw on Thursday, which in light of the single distribution day, suggests balanced flows may lead to buy and sell the edges for an extension of the range. A very uninspiring low key affair trading the pair this week, which clearly reflects the lack of drivers in the AUD this week, other than the impulsive selloff on the back of the RBNZ, where AUD piggybacked the NZD rout as expectations are building up for the RBA to adopt an easing bias in line with G10 Central Banks. By analyzing intermarket flows, with a stronger DXY, which has lead to a weaker Yuan, and the momentum in the AU-US bond yield spread turning negative, this is a market that remains with the risks skewed slightly towards the downside, even if the buying of equities caps the incentives a tad.
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