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Market participants are certainly blaring the trumpets as a whole legion of newly found buyers go full throttle buying risk-related assets in response to the upbeat Chinese economic figures in trade (mainly exports) and credit growth, which implies better reads should lie ahead. The massive rally in the AUD/JPY portrays like no other pair the ebullient mood in financial markets, as both global equities and bond yields move up in tandem in what should be understood as a reflection of renewed optimism towards a global recovery. The fuel engineering this rebound is thrown by China alone, but let’s not forget, it accounted for half the global growth since the GFC. The Euro, as highlighted in my last report, is another currency defying gravity by putting on its best performing month YTD, capitalizing on the rather neutral outlook by the USD this month. The outlook for EM should definitely improve from here on out, which retro-feeds in a bullish AUD as a proxy to play CNY longs, while at the same time, it suggests the recent patte of foreign-invested USD repatriation may see a tuaround with negative USD implications as more capital gets interested in the EM growth story if China keeps it up. The Kiwi has also been spurred by its correlation dynamics with the AUD, while CAD, GBP were the two most uneventful pairs in terms of daily movements.
As the charts below illustrate, we’ve entered a period of absolute dominance by micro ‘true risk on’ flows, with all charts without exceptions flashing risk appetite is well and truly alive. Note, the moves from Friday, as portrayed by the major selloff in the Japanese Yen, should be a reminder that unless you are a momentum trader looking to trap weak-handed players for quick intraday trades, the overstretched nature of the movements suggest it becomes riskier to play the upside without some type of pullback, even if it occurs in a shallow fashion. The S&P 500 has hit its 100% proj target as has the US 30-year bond yield spread, therefore outlines the risks of a technical correction.
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EUR/USD: Pullback After 100% Proj Target Hit
With USD repatriation flows likely in reversal mode as China’s data strengthens the outlook towards EM economies, alongside risk appetite adding additional downside pressure to the USD, the Euro continues to find a better bidding tone. In this type of environment, and with technicals unambiguously positive as the 25HMA bullish slope reflects even as a pullback sub 1.13 took effect, the main bias remains to play longs for an extension of the recent gains. A break below the 1.1285-90 H4 horizontal line would be a first waing of the flows in the exchange rate shifting for potential damage of the uptrend, even if it won’t be until a breach of the ascending trendline off April 10th that buyers should really start questioning the underlying bias. The current bullish structure is one anchored by renewed impetus in its cycle dynamics, with the latest ramp up in the rate achieving a greater appreciation than any of the previous leg ups since the April bottom. This is not the type of market communicating that the bullish cycle is running out of steam anytime soon.
AUD/USD: Demand Found On Shallow Pullbacks
On the back of one of the most aggressive intraday demand imbalances in 2019 in a context of low vol in this exchange rate, you would expect buyers to continue pilling up, at least aiming for a potential level where a change of behavior may take effect above 0.72. That’s an area where existing longs would find plenty of liquidity to potentially close long-help positions. Should the 0.72 area be broken, it will most likely be driven by persisting USD weakness with a possible absence of stocks-derived flows as the S&P 500 looks overstretched at these levels. At this stage, I refuse to envision a spontaneous reversal of the dominant bullish trend after seeing the overwhelming demand imbalance that took place last Friday, one that should lead at least the filling out of offers thru 72c.
AUD/JPY: On A Tear As True Proxy Of Ebullient Sentiment
Without a doubt, long AUD/JPY on Friday was the best play. One that unraveled away of a congestive range-bound area that had lasted for most of April in a 60-pip range give or take. As positive news out of China’s economic activity hit the screens and the range broke out, it was off to the races. The consolidation above the 100% proj target signals a further squeeze of shorts is a possibility that has the technicals as the main backing, with 80.25-20 (proj target violated) now expected to act as a pocket of intraday demand. As a caveat, I don’t see much further upside potential on the 2 intermarket assets that fuel this pair as both the US30y and the SP500 reached key technical projection targets. If 80.20-25 is taken out, expect buyers’ next stronghold circa 80.00 ahead of 79.75, the latter being the origin source of the strong demand seen last Friday at the London open.
EUR/JPY: Stampede Of Buyers, Daily Resistance Reached
The bull run in the exchange rate, similar to what we’ve seen in the AUD/JPY, is nothing short of spectacular. Proof of that is that the exchange rate cut through the 100% proj target of 126.45 like a hot knife through butter and never looking back up until this point. Which leads me to think that opportunities to keep trapping sellers on the wrong side of the market will continue to be available, perhaps not so much pushed by a continuous ebullient move in the S&P 500 or US30y but more about the demand derived off the EUR/USD, which looks quite bullish to extend its gains. Any push above the daily resistance area currently tested may see 127.00 as the next logical target, even if one should be aware that any levels above 126.75 will represent an excellent opportunity for sellers to take further chips off the table, which may create added supply. It remains to be seen if enough to counterbalance the ongoing demand imbalance as China’s growth prospects brighten up near term.