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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.
Markets have temporarily stripped out the gloomy macro outlook of decelerating growth and low inflation as G10 yield curves demonstrate, to instead revert back to positive microflows. It may last hours or days, but what’s clear is that there is still a major divergence between the macro risk profile, one that still keeps the pendulum on the caution side, while the short-term is more optimistic as US official continue to sound rather upbeat about an eventual US-China trade deal.
The USD dominance is undeniable, and even if the trend looks over-stretched, the price action seen does not provide any evidence that the bullish USD tide is receding. Flows keep favoring downward pressure in GBP/USD, AUD/USD, upside strength in USD/JPY, USD/CAD while Yen crosses should continue to have a hard time until the microflows re-align with the macro ‘weak risk-off’.
The calendar is light, with only Australian data to contend alongside US NFIB small business index and US jobs openings, all low-tier events that will hardly have an impact on price. In terms of speakers, we get German Buba President Weidmann and BoE Goveor Caey as the line-up for today.
The positive re-adjustment in the S&P 500 has resulted in short-term flows taking the 25-HMA slope pointing upwards again. Additionally, a flatter 125-HMA (5-DMA) slope is also a positive development for the risk outlook. Similarly, renewed demand has been found in the US 30-year bond yield (supply imbalances in US bonds), which has now allowed the US long-dated yields to experience the first positive short-term flows as per the upward slope of the 25-HMA sine Feb 5th. Unlike in equities, there is still significant room to crawl back up to tu this market macro positive, as the 125-HMA (5-DMA) still points at downward tendencies as the overall rhythm. Meanwhile, the USD continues to trade at the beat of its own drum, accelerating the gains to reach the highest levels in 2019 as both micro and macro flows are in complete synchronicity to keep powering the trend. Further proof that ‘risk on’ conditions are improving, Gold has come back down, re-coupling its negative correlation with the DXY, in a move that can also be interpreted as decreasing demand for safe-havens. Overall, the short-term microflows have transitioned into an environment characterized by USD strength with cues to be obtained via equities to determine the susceptibility of the market to risk. From a macro standpoint, the 5-DMA upward slope in the DXY, the downward one in the US 30-y yield and the flattish positioning in the S&P 500 leaves us with an environment that is still neutral to slightly risk-off inclined.
In the short-term, we find improvements in the yield structures of the US, Europe and the UK. The Canadian economy is the outlier in terms of recent progress in the curve even if the downward pressure in Oil prices may act as a cap. On the contrary, while there has been a pop up in both yields, the aggressive decline in the Oceanic yields (AUD, NZD) keep the short-term outlook (bull flatteners) unchanged. The macro outlook still remains a sea of red with bull flatteners all around, with the exception of the US and the Canadian economies, whose structure fall under bull steepeners. What this macro outlook equates to is a clear sign that the market is firm in its belief of decelerating growth and inflation.
Wonder what’s the yield curve in a bond? It’s really critical to understand what the market is pricing in terms of Central Bank policies going forward. Lea the basics in this article.
The consistency and conviction in buying the US Dollar across the board has been unlike anything seen since 2016, as gains extend for an 8th consecutive day. The latest sell-off gunning through daily horizontal support (100% proj target as well) has now landed at a strong weekly support area (red line). The printing of the POC at this precise level strengthens the notion that strong clusters of bids sit on this area as one would expect. Looking at the behaviour of price, it looks as though the economic miseries in Europe vs a relatively stable outlook in the US have been playing a greater role as depicted ever since the change of slope in the 25-HMA of the magenta line (German 10-yr bond yield), which has been tracking the price of EUR/USD very tightly.
Despite landing in a weekly area of support, the lack of any rebound off 1.1275 is very worrisome, even if the divergence against the German vs US yield spread is huge. However, one needs to find evidence via price action and not just blindly enter trades because a major divergence with a highly correlated asset exist as the market may be paying attention to a different narrative. Technicals have proven to be king to capitalize on this rally but one feels, such an elongated run is at a significant mature state, especially at such a huge weekly horizontal support + yield spread divergence + slope of German 10y yield is starting to pick up pace to the upside, suggesting that a case for a bounce can be made.
By following the short-term flows based on the slope of the inverted DXY and the UK-US yield spread would have kept one on the right side of this trend for a significant period of time. The market has rapidly evolved, amid the lack of Brexit headlines, into a more predictable affair with the DXY/YS. At this stage, even as the pair lands on a key support area, the clear market rhythm is to keep selling on strength with no indications that the short-term flows via the 25-HMA slopes may be reverting. The downward trendline off Feb 8th high acts as a visual representation of the latest order flows. Any retest back into this line with sync slopes represents an attractive sell proposition.
The resolution away from the 5-day long range box came as short-term microflows got re-alienated in favor of the US Dollar as depicted by the green box in the chart above. The rise was initially propelled by the positive flows via the DXY and equities, only to gain further momentum the moment the US 30-year bond yield and the rest of the US yield curve for this matter gathered steam. In the chart, one can clearly observe that the acceleration gathered steam as the slope of the DXY/US30Y re-anchored upwards. These are the times for one to exploit directional moves in the USD/JPY. I’ve marked in the chart other times when the slope of the 25-HMA was in sync. It’s a very repeatable patte that occurs over and over unless the SP500 has an ‘off the cuff’ contrarian move. As the slopes of the correlated instruments stand, this market remains a buy on dips.
What we’ve leaed trading the Aussie since the RBA blink is that the pair has grown its dependence on the Australian — US yield spread (blue line) as the market pays more attention to the monetary divergence between the Fed and the RBA. The correlation coefficient in blue confirms this prognosis. Similarly, the pair remains tightly correlated to the DXY + Yuan performance, in red as the correlation coefficient also demonstrates in the last window below. The one instrument the market is clearly placing on the backbuer, for the time being, is the relationship between equities and the Aussie. So, under this study of the narratives driving the Aussie, it’s fair to assume that as long as the microflows via the 25-HMA remain negative as it’s the case via the downward slope, this is a market that should mainly be approached from a sell on rallies perspective to capitalize on the larger moves. I’ve highlighted in a red box the negative backdrop in microflows and how maintaining a sell-side bias would have yielded far better results than trying to pick a bottom. Aim to sync correlated instrument slopes.
The path of least resistance for the pair should be higher if one takes as reference the slope of its two most correlated instruments (DXY + Oil). The DXY in magenta leaves no room for doubt. Even if the 25-HMA slope in Oil (thin red line) was to tu south, there is still a significant macro divergence in favor of the USD/CAD as the 125-HMA (5-DMA) demonstrates (thicker red line). The fact that the pair trades higher than its pre-blockbuster Canadian jobs report is a clear testament that even if an episode of selling pressure may occur due to economic data, the flows are in favor of the bulls here.
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