The macro backdrop remains unaltered (USD negative) even if the outcome of the FOMC minutes has served well to the world’s reserve currency in finding positive short-term flows.
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The Daily Edge is authored by Ivan Delgado, Head of Market Research 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, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The macro backdrop remains unaltered (USD negative) even if the outcome of the FOMC minutes has served well to the world’s reserve currency in finding positive short-term flows. There were two key messages by the Fed in its minutes, the one that reinforces the notion that the balance sheet runoff will most likely come to an abrupt halt sooner rather than later (risk positive). QE to infinity anyone? The other has to do with tentative signs that the Fed might not be done yet with tightening monetary policy, or at least that’s what they seem to suggest by noting that ‘if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as patient and might then use a different language’. In layman’s terms, the Fed still retains a vague tightening bias. That’s precisely what gave the USD a much needed short-term impulse. Although as I elaborate in the charts below, the Yuan strength story is a bigger one to drive markets these days, hence why the recently established weak macro trend in the DXY still faces the prospects of finding further legs down. Remember, whatever I compile as info, should be taken with the framework in mind of being open to daily changes in rhetoric flows, that’s why I always emphasize that the most I can do is to provide the general bias made available via charts by the time markets close for business in NY.
With the Australian jobs report out of the way, the focus now turns towards EU PMIs, the ECB monetary policy minutes and a raft of US data.
From a microflows perspective, using the slope of the 25-HMA as a handy reference to visually represent the latest dynamics, we’ve transitioned into a ‘true risk on’ environment as the long-dated US 30-yr bond yields make a bullish successful rotation post the FOMC minutes. The Fed sees to have implied that the tightening campaign is not dead and buried yet, and that’s played nicely as a bearish narrative to sell US bonds (higher yields), even if that still represent a drop in the ocean compared to the radical dovish shift since Powell’s Put. The more constructive outlook (only short-term) in the US yields, coupled with stable equity demand, and a US Dollar still not finding it mojo judging by the recently downward slope in the 25-HMA, results in a microenvironment still implying that beta currencies should do well vs the likes of safe havens (JPY, USD). From a 5-day view, a time horizon that I use as a reference to gauge the more macro flows in light of the current flow-driven state of affairs in currency markets, the characterization of dynamics falls under USD weakness in the context of rising equities, which is also a landscape supporting risk for now.
We find the Euro established in a balance area between 1.13 and 1.1370 in the last 24h with the spike in demand towards the single currency rejected off the highs on the aftermath of the FOMC minutes. We can see through the volume profile formation the absence of any volume build up between the 1.1350-70 interval, clear communication of the supply imbalance it existed. As long as the ascending trendline holds, this is a market that should still be perceived as fairly constructive for the likes of both the intraday and the swing/day trader as both the micro and macro trends align, alongside the increasingly strong correlation with the positive German-US bond yield spread.
A similar picture to contend with in the Sterling, where the strong bullish momentum appears to be receding amid the overstretched nature of the run originated off the last balance area (grey box). It will be interesting to see if buyers can defend the ascending trendline off Feb 15th low. Until the thesis is proven wrong, this is a market that remains with the backing of technicals as well as intermark-flows, both at a micro and at a more macro level (5-day as reference or 125-HMA).
Contradicting forces keep the USD/JPY in a moribund stage, with the whippy moves from earlier this year a long memory away as we now need to contend with paltry 50 pip days. Technically, enough arguments can still be made to stay bullish, especially predicated on the most recent market structure. However, there are quite a few warning signs of a topping formation carving out. The slope of the 125-HMA (5-DMA) is starting to roll over for the first time in February, which occurs at a time when both the DXY and US 30-yr bond yields have taken a downbeat in its macro slope too (5-DMA). What’s then keeping the market relatively sustained? The answer can be found on the rampant nature of the US equity market, with the recent upward acceleration in the last week capping the downside. Keep an eye on the ascending trendline. If acceptance in the price is found below, this may represent significant technical damage. In the very short-term though, the intermarket flows have turned rather benign to think that range bound conditions may expand further until the US data comes due.
When moving away from the Aussie jobs-led intraday vol noise, we can see that the market still portrays enough technical and intermarket merits to stay relatively constructive. We can observe that the key influencers in the price of the Aussie as of late include equities and the inverted DXY + inverted Yuan performance. When taking these assets as reference to gauge the next Aussie flows, one will be hard-pressed not to perceive intraday value as the slope of the correlated assets stand by the close of business in the last NY session. An ascending trendline is also keeping overall technical positive. At the most granular level, the last 24h, as depicted by the volume profile formation, we’ve entered a period of balance in flows between 0.7145-50 and 0.7180 (Aus jobs spike rejected off 72c).
Out of all the majors, the Canadian Dollar still looks like the best positioned to capitalize on the macro USD weakness. All the factors a seller would want to see in their favor such as micro and macro trend, technicals (lower lows and lower highs), intermarket support (Oil inverted + DXY) are present. With this backdrop in mind, the overall bias still remains one of selling strength as the main course of action with the intent to generate the most rewards vs risks taken. Remember, this is a market that remains extremely fixated towards the DXY and Oil as the key determiners of the next flows.
What about Gold? In the short-run, the elongated move is starting to falter as momentum traders bail from an active involvement on the back of the FOMC minutes, which caused a positive reaction in both the DXY and the 2-yr US yields (proxy Fed Funds). The macro outlook remains as bullish as it’s been for a long time, but at the most granular level, the market has further room to adjust lower if the sync movements in the DXY inverted and the US 2yr bond yields keep the southbound course.
With regards to the Yen crosses, the short-term outlook continues to be constructive as observed by the reversion back to an upward 25-HMA slope in both the SP500 and US/global bond yields. Conditioned to both correlated assets staying supported, dips in yen crosses (AUD/JPY, EUR/JPY, CAD/JPY, etc) should be seen as interesting propositions to consider longs. In terms of technicals, both the market structure and the micro trends are also buoyant components.
Similar to the AUD/USD, but removing the DXY as an influencer, the EUR/AUD still looks set to be a ‘sell on strength’ type of market judging by the signals from both equities, which is keeping implied volatility fairly low (VIX), and the Yuan strength, as the red line (Yuan) demonstrates. The spike higher in today’s Asian session should meet grateful sellers towards the 125-HMA (downward sloping).
Last, the Kiwi is a market that has gradually transitioned from an extreme bullish momentum after the surprisingly neutral RBNZ monetary policy outcome from last week, to then start consolidating within a 0.6820-0.69 range, only to form an even more granular balance area on Wed, which seems to be giving in as I type, placing the focus back down towards the 0.6820 bottom of the range. In the grand scheme of things, the market is supported in the macro picture by upward slopes in the 5-DMA derived from the currency pair pricing, the DXY inverted and the NZ-US bond yield spread, suggesting that is going to take considerable supply power at the micro flow level to break through 0.68-6820.
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