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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.
Traders were left scratching the heads after a late sell-off in the S&P 500 led to a ‘true risk-off’ tone on Monday. The breakout of the range in the EUR/USD, the broad-based temporary demand for the Japanese Yen were some of the highlights in the currency market. The market is paying an awful lot more attention to yields as of late, as the correlation coefficient measurements in the Intermarket analysis section below shows. I also draw some parallels about the selling in stocks and the potential period we may be entering, in which the market reaches a period of climax optimism, having fully priced in the Sino-US trade deal, which according to a report by the WSJ over the weekend, looms near. As I remind the audience, it is precisely this ‘buy the rumor sell the fact’ dynamic what followed the first halt of tariff increases last year. Dejavu?
With the late NY ‘risk off’ twist came even more ample demand towards the Yen, which ended Monday as the best-performing currency. The currencies that followed by putting on a decent performance included the US Dollar as a ‘risk off’ currency, and surprisingly the Kiwi and to a lesser extent the Australian Dollar on hopes of an immediate Sino-US trade deal and one would think lack of interest to commit in either direction ahead of today’s RBA policy meeting. The Sterling, the Euro and a battered Canadian Dollar did poorly, the latter still dragging on its downward momentum since the big miss from Friday’s Canadian GDP numbers.
In the 2nd window below, we find 3 currencies (GBP, USD, EUR) still displaying a macro trend as per the slope of the 5-DMA (125-HMA), while commodity currencies (AUD, NZD, CAD) and the JPY are yet to find sufficient demand interest to shift the dynamics of its weekly trend (macro measurement). The latter is rapidly getting there and much of its outlook going forward will hinge on the performance of equities.
Micro conditions: The spontaneous setback in US equities late on the day has led to a tuaround lower in the 25-HMA, which when combined with the bearish move in US yields and the sustained demand in the DXY puts us in a short-term (micro) risk-off environment. What this means, as the table above explains, is that “the market is in fear mode, deleveraging off riskier bets. Traders will be looking to buy jpy, usd, keeping an offered tone in commodity currencies unless fundamentally driven events still promote demand flows. The eur and gbp tend to stay under pressure, but not as much as commodity-linked currencies. Any positive fundamentals on risk currencies likely to be faded as risk off dominate.”
Macro conditions: Even the macro picture has tued ugly, as the 125-HMA downward exhibits and finally carves out a bottom in the DXY. These two assets moving in such respective directions, independently of the moves of the US yields, makes for some poor dynamics to support risky currencies. If the long-dated US yields were to also confirm a macro bearish trend (for now only micro), we’d be entering a ‘true risk off’ scenario. Until then, the conditions are best classified as macro USD strength (risk cues from equities). As per the table above, “when the usd and US30 yr bond yield move higher, look for clues via the S&P 500 and potentially gold to determine risk. If the S&P 500 is higher, the risk may still be conducive unless gold rises too (rare as usd strength caps price). Under this context, the usd strength, indirectly, adds pressure to EMs and may keep aussie or kiwi under pressure vs eur, gbp, cad.”
EUR/USD: Breakout Of The Range Shifts Focus South
GBP/USD: Cluster of Bids Kept Selling Contained
USD/JPY: Risk-Off Hiccups Result In Range Establishment
USD/CAD: Firm Uptrend, Equilibrium Found At Hefty Levels