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Demand towards the Aussie keeps on going, even if the struggle to break through USD 0.72c is real. The fact that the market failed to fill out resting offers just pips ahead of the round number in spite of a very strong Australian employment report not only reveals the macro relevance of the level but it also demonstrates how important it is to gauge Intermarket flows, as, by the time of the test, both the DXY and Yuan were moving in the opposite directions. When it comes to the New Zealand Dollar, as I elaborate in today’s report, it looks set to struggle vs G10 FX as negative news keep mounting (dovish RBNZ, poor NZ CPI). The bull flattening of its yield curve is a reflection of it. The Japanese Yen is a currency that faces a more benign outlook heading into Thursday, not based on technicals, but on the deterioration of risk flows. Meanwhile, the Euro has been able to maintain its fortitude, even if within the context of a compressed range against the Greenback. The Canadian Dollar was initially bolstered by a decent Canadian core CPI print, but null conviction to hold onto the gains followed in what has become a very erratic market to trade the USD/CAD. What to say of the Sterling? A paltry 35 pip range it’s all we could manage to contend with on UK CPI day. That’s the ultimate reflection of how Brexit and the low vol regime means for a historically volatile currency.
From a microflows perspective, the bearish reversal day in the S&P 500, followed by a wave of buyers in US bonds, which has pushed the 30-year bond yield marginally below 3% again, implies the risk profile has tued ‘risk off’ in the very near term. In terms of the risk flows derived off currencies, our best barometer is our prop Japanese Yen index, which is start to apply further upward pressure against a level of daily resistance. The US Dollar index, and to a lesser extent the Yen index, has been extremely choppy as of late, with no particular bias developing off the H1 chart. Another red flag which communicates risk-seeking conditions are far from ideal is the spike towards 13.00 in the VIX (vol index for the S&P 500) or the aggressive sell-off in junk bonds as reflected by the HYG/IG ratio. The only encouraging signs can be found from the Copper/Gold ratio, in a firm uptrend, as is the case of Oil/Gold, both indicating the growth outlook has definitely improved. Further evidence that the reflation trade is back on as we gather mounting evidence that China’s economy is on the mend, is the fact that DM (developed markets) yield curves are exhibiting bear steepeners across the board, with the only exception being New Zealand, where the market is still not pricing growth but rate cuts there. In the rest of the economies outlined in the chart below, bear steepeners dominate, indicative of economies where inflation expectations start picking up due to higher growth prospects.
Interested about downloading today’s key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the following link.
EUR/USD: Chopfest Still In Context Of Bullish Structure
The successful rotation on the EUR/USD exchange through the early stages of Wednesday offers opportunities to play longs off 1.1290-95, even if one must be mindful that right overhead the 1.13 is an area where supply will most likely abound as we are starting to see on multiple rejections. This is a market that still exhibits sufficient merit to be treated as a range between 1.1325-11280/90 within the broader context of a bullish narrative in terms of market structure. Unless the area of support at 1.1280 gets violated with equilibrium found below, the outlook remains constructive even if the chopfest that we are seeing in recent days above 1.1290 should reinforce selectiveness on trades.
USD/JPY: Well Defined Tight Range Around 112.00
The area of 112.00 should act as the midpoint of the current tight range from which the pair will pivot around. Watch for intraday control of the mentioned round number from where to initiate buy/sell-side campaigns aiming for the extremes of the range. In the context of a bullish trend, the building of value circa 112.00 is a positive development as it communicates acceptance. However, with the risk conditions tuing uglier on Wednesday, don’t be surprised if upside breakouts fail.
AUD/USD: Retesting Offers at 0.72c On Strong Aus Jobs
The Australian Dollar keeps receiving further positive news, this time in the form of very solid Australian job numbers. A strong headline print, full-time employment showing another blockbuster read, unemployment rate at 5%, a very solid report indeed that should assist the bulls have more goes towards the 72c. If the Aussie is unable to break the level by the end of business in NY today, that should be quite worrisome. If we look at intermarket flows through the DXY and Yuan, they remain restrictive of a 72c breakout as it stands. Yellow line below is one of the most critical value lines on the Aussie -> 1/(FX:USDCNH/6.7+TVC:DXY/96.9). Correl is very consistent and it suggest caution.