Posted on: 27 Mar, 2019
The compression of the micro slopes back to the mean portrays a currency market with a deficit of committed money to support macro trends.
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The compression of the micro slopes back to the mean portrays a currency market with a deficit of committed capital to support macro trends (EUR the exception?). Instead, the recent strength in the likes of the Yen has abated while other currencies such as the Sterling have failed to shift into higher gears even if sufficient pockets of demand have been maintained to keep it elevated by G10 FX standards. The Aussie has been the main beneficiary of the recovery in equities, even if it’s found a wave of selling pressure during the ongoing Asian session in response to the sharp selloff in the Kiwi, as the RBNZ joins the rest of G10 Central Banks in explicitly shifting its forward guidance to lower rates. We shouldn’t forget about the Euro, which alongside the Yen, has seen the most supply imbalances, in what still appears to be the lingering effects of a fundamentally-adjusted deterioration in its value on the basis of mounting fears that Germany is set to go through a prolonged recessionary period.
The latest boost in risk assets appears to have more to do with a short squeeze than a genuine rally with sufficient substance as the pre-conditions of our RORO model are not met. The micro slopes, which essentially translates in the dominating flows from the last 24h, portray an environment where the rise in US equities (S&P 500 as the barometer) fails to be supported by depressed global yields (US 30y as the reference here), at a time when the US Dollar index is recovering its allure further. This is an environment that our model defines as ‘weak risk off’, even if we need to be cautious as the latest push up in the DXY appears to have been, for the most part, due to EUR weakness rather than domination of the US Dollar flows across the board. That said, the terrain is still quite muddy to get too excited in a risk recovery extension, as from a technical perspective, the S&P 500 still exhibits what up until now still represent the valid assumption of a new initiated sell-side campaign as depicted by the successful rotation of lower lows off March 22nd high. If we then account for the depressed state of US yields, while the DXY shows signs of life, we are not in an environment to be too complacent as the shadow of risk-off in financial markets still lurks on the background. By checking alternative measures to take the pulse of risk, we can observe the ratio of Oil vs Gold hovering around trend lows, which is a positive signal, while the VIX (vol index) has also managed to come back down from the highs 18.00 towards the 15.00 vicinity. However, if we look at credit markets, the fact that high-yielding corp debt ETFs aka junk bonds (HYG) have been overwhelmingly underperforming investment grade ETFs (IG) throughout March is a reason for concern as this ratio tends to be strongly correlated with stocks yet it shows a noticeable divergence at this stage.
EUR/USD: Building Lower Lows Despite Not Yield Backing
A resolution of the 20p price jam, what I usually refer to as a balance area, has finally transpired. Sellers came in with conviction to create an impulsive breakout which has resulted in a new bearish cycle low. The fall in the exchange rate allows us to draw a new descending trendline, while it proves that we are at a stage where the market seems more concerned on adjusting the EUR valuation lower on the back of recessionary fears in Germany, than taking as guidance the uptrending 10y German vs US bond yields spread, as the negative micro correlation clearly demonstrates. At the bare minimum, the disadvantageous position by the USD when it comes to capital flows should make it harder for the exchange rate to go through episodes of sustainable selloffs as the lower value is not justified. Still, make the technical your number 1 guidance here until evidence of yield spreads playing a greater role again. The double distribution down in the volume profile communicates any rebound represents potential sell side opportunities given the concentrated volume above 1.13 caught wrong-sided.
GBP/USD: Relatively Calm Water Ahead of The ‘Indicative Votes’
It is only fair not to bore you to death over analyzing an exchange rate that remains in a clear stagnation phase, with the range well defined between 1.3165 and 1.3250, an area where bids/offers have concentrated while we await some type of clarity in the Brexit front. The prolonged range this week is, to a certain extent, a communication that the whole Brexit mess has got the market tired of continuously second-guessing the repercussions of a political landscape that remains highly fluid. Wednesday’s “indicative votes” in the UK parliament should act as a driver to see a renewed injection of vol and hopefully the range broken. If any attempt to breakout the balance area were to occur ahead of the votes, it’d have to be a headline that by itself has enough merit to move the GBP, otherwise, the risk of rotational moves should be eyed.
USD/JPY: Proj Target Reached, P-shaped Volume Profile
The technical breakout and backside retest of a descending trendline originating off March 20th set into motion a cascade of bids that eventually saw the market meet its 100% proj target. There is still a palpable risk that a turnaround at the confluent resistance level cica 110.65-70 may be seen, judging by the sub-optimal risk conditions as I elaborate in today’s RORO model. One must be prudent when putting too much weight to Tuesday’s P-shaped volume profile formation, as the pattern occurs against a rather negative technical backdrop in which breaking through 110.80-85 area should prove quite challenging judging by the accumulation of volume as represented by back to back POCs. Similarly, as long as equities stay supported and/or we can avoid the double whammy effect of lower DXY, US yields, the area of support at 110.20-25 is a candidate to find an excess of buying interest.
AUD/USD: Weak-Handed Sellers Remain Trapped
Whenever we have technicals and intermarket aligning, it’s wise to support such a direction. This is the case in this exchange rate, where the buy-side flows emanating from rising equities and the uptrend in the mid to long term maturities in the Aus-US bond yield spread acts as our guide. Such intermarket crosscurrents have so far canceled the downward pressures via DXY+Yuan (inverted). The buying interest has manifested in the formation of a double distribution up volume profile with the highest concentration of volume trapped behind the closing of price in NY. Overall, this is a market that until the positive ratio of 2:1 in intermarket flows (determined by the micro slopes) turns around, you are likely to see greater rewards by leaning against key areas of support as the promotion of higher prices remains justified for the time being. Besides, for any seller, initiating a renewed sell-side campaign ahead of the most recent swing high of 7165 looks premature from a technical standpoint. Update: Selling noted driven by the correlation with the Kiwi, whih has been knocked down on the back of a dovish RBNZ. The view on the Aussie still stands.
USD/CAD: Conflicting Signals, Potential Trappy Market
The exchange rate shows the pre-conditions to experience trappy & rotational movements judging by the incongruous signals obtained via technicals vs intermarket. On one hand, it’s undeniable that the buying of USD has far overwhelmed the demand towards the Loonie for the last week, leading to a bullish structure on the hourly. However, we are not yet at a stage where intermarket flows give grounds for higher valuations as Oil remains in a recovery mode (micro slope down) while the US-CA yield spread shows analogous conditions near its trend low, which in theory implies less appeal for capital flows into the US vs Canada. The only driver that still promotes a higher exchange rate is the DXY, which should not be taken for granted (far from it), as it has proven to be a much more reliable ‘leading indicator’ than Oil in recent times. Amid the clashing of intermarket vs technical cues, we ended up printing a single distribution day in the volume profile on Tuesday, which essentially constitutes a precursor to potentially get trappy price action at the edges of the 1.3375-1.3410 range.
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