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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, 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.
Anyway you slice it, be it from a day-to-day perspective or even stepping out from a weekly standpoint, the Sterling is by a country mile the outperformer in the FX arena as the ‘hot’ period of the Brexit deadline plays out and vol picks up. In the last 24h, only the likes of the Aussie has been able to keep up a similar upward pace, even if only in relative terms during the later stages of Tuesday (US session). On the flip side, the US Dollar is the main loser after the most recent crossflows activity on the back of a rather uneventful testimony by Fed’s Chairman Powell in front of the Senate Banking Committee, where he reiterated very familiar themes.
A bunch of other currencies such as the Loonie, the Kiwi, the Euro or the Yen traded more subdued. This latter basket of currencies, excluding the JPY (NZD, AUD, EUR, CAD) exhibit trendless dynamics from a weekly standpoint as the flat slopes of the 5-DMA on the 2nd window below reflects. Meanwhile, this same thick lines still portray a market that is overall negative on the JPY and USD, more so on the latter, as the JPY recovers from recent lows as the slope of the cross line (25-HMA) reflects.
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In the last 24h, the common denominator in the ‘risk on, risk off’ model is market dynamics characterized by a debilitated USD in the broadest sense, as US yields from the short to the long end of the curve sell-off in tandem (bonds up), while gold prices also capitalize on the USD fragility. This USD weakness in the short-term is combined with mild negative flows in equities as reflected by the downward slope in the 25-HMA.
As a result, in the short-term, we find ourselves in scenario #6 of the RORO model, in which clues to gauge the risk directions should be obtained via equities. If the sp500 moves lower, the risk environment remains not friendly overall. However, under this context, the USD weakness, indirectly, eases pressure on emerging markets and may keep the likes of beta currencies underpinned, as long as the declines in the equity domain occur in a context of contained vol.
From a macro angle, the dynamics are still ‘true risk on’ as the slope of the 5-DMA (125-HMA) reflects. Overall, the dominant tendencies of a weaker JPY, USD against beta currencies are still the main play to be aware of according to the findings of the model.
A resolution of the week-long range has been found by the Euro finding enough of a demand imbalance to accept multiple hours of auctions in the pricing above 1.1370. The extension higher has been fairly limited in nature as the 1.14 round number has acted as reliable resistance for now. With technical and intermarket measures all pointing higher, at this stage looks like shorting this market carries higher risk as per the measures monitored in the table above. It’s worth noting that as the macro correlation coefficient shows, the 10y German-US yield spread has been a great leading indicator to guide us in the fair value of the pair. As such, with both micro/macro slopes derived off the mentioned yield spread pointing upwards, the buy-side pressure should remain solid.
The market that has manifested the greatest demand/supply imbalance in the last 24h is the Sterling vs the US Dollar. With the slopes of technicals and intermarket studies showing us the way higher, there is absolutely no reason to believe we shouldn’t be expecting higher valuations. If you are incorporating intermarket studies into your methodology of trading the markets, be reminded that in recent times, as the correlation coefficients show, the GBP/USD has become a function of two markets (DXY + UK vs US bond yield spreads), with the correlation as high as it can possibly get. Buying on dips strategy to capitalize on USD weakness seems a sensible strategy, with this approach obviously conditioned to Brexit headlines still being supportive for the Sterling (critical).
The recent supply of JPYs came to an abrupt halt against the US Dollar, as the combination of lower US yields and a higher EUR/USD (lower DXY), led to a major bearish outside day in USD/JPY. The aggressive tuaround has translated in all short-term measures (technicals _ intermarket) to tu negative. However, with the macro slope of the SP500 and the US 30y bond yields still exhibiting an acute upward angle, coupled with the oversold nature of the move in the hourly chart, this is a market that looks like it could end up being rotational as significant clusters of bids should still populate the books given the relatively high value thatexistst buying as oversold market when highly correlated assets, especially the SP500 these days, is still on a macro bullish trend. That said, as reiterated in several occasions, due to the broad-based USD weakness, there are better currencies to pick (AUD, GBP, NZD, EUR) if you wish to exploit a potential resumption of JPY supply imbalances.
On the Aussie, the short-term picture remains quite benign, with the micro technical trend endorsing the notion of higher levels ahead. On the intermarket front, the recent recovery in the AU-US bond yield spread also promotes the idea of an adjustment in valuation to the upside. If we see the Yuan picking up momentum in line with its dominant trend, this is a market that looks quite constructive for buy-side strategies to thrive amid the optimistic macro ‘true risk on’ environment. Be aware that if your style is more swing/day trading, we have entered overbought conditions as per the slow stochastic, which suggests setbacks would be most welcomed to increase risk reward prospects.
The synchronized movements lower in Oil (inverted) and DXY have led to what might potentially result in a full rotational move back to test the most recent trend lows. If this scenario eventuates, one should notice that at the present time, the pair enjoys sufficient near-term technical/intermarket factors to make a solid case for this hypothesis to play out. With the DXY so depressed at oversold levels, it’s really going to depend on whether or not Oil can continue to recover further ground. From a macro perspective, the 5-DMA slope is still supportive as well, which adds to the odds of the central scenario playing out.
A market that is in a temporary holding patte for the last 3 days is gold. If you pay attention to the most correlated instrument macro wise, you’ll notice it’s all about the direction of the US02Y bond yield (inverted), which is a proxy for the Fed Funds, in order to gauge the next direction. Judging by the spike in this instrument, alongside a battered USD as a logical consequence, Gold is a market that appears to be setting up for an eventual break higher. This is a market that so far has displayed an immaculate bullish trend, hence any period of balance area is probably serving the purpose of further long-side accumulation before the next markup in prices.
With the RORO model indicating a near-term environment dominated by USD weakness in a context of falling equities in the last 24h, we are going to need a tuaround in the SP500 futures to give us the confidence necessary to reinstate long positions in the AUD/JPY. Assuming the US30Y bond yield in the US remains pressure, if that occurs while the DXY sells-off, we can continue to temporarily dismiss yields and just keep our attention on the direction of equities to gauge the next direction. Remember, the macro outlook is still broadly supportive of higher prices. Be prudent as Asia opens, since the pair closed NY in overbought conditions. See setbacks as potential buying opportunities.
The EUR/UAD market has been much more contentious without displaying a clear direction. However, in the very near term, the dynamics are underpinning the Euro to a greater degree based on the strongly correlated German-Australian bond yield spread as well as lower equities. On the contrary, a strong Yuan, especially due to DXY demerits, keeps the upside capped. On top of that, the 5-DMA slopes, which gives us an idea of the tendencies in the last week, still show the SP500 and the Yuan promoting lower valuations, while the bond yield spread, which remains the strongest correlated instrument, hints that the path should be higher. Overall, this is not a market with an easy ready as there are conflicting elements contradicting each other. When that’s the case, a more erratic, rotational behaviour in price fluctuations is a real possibility. In other words, if you trade this market, be prepared to potentially expect range-bound conditions near term.
Last, the NZD/USD is looking strong amid shallow pullbacks in the currency pair. The market structure is bullish and so are the dynamics in the DXY and the NZ-US bond yield spread, even if the latter still shows a macro divergence as per the flattish macro slope. With the dominant theme being the weakness in the USD, the downside looks very limited near term, with buying on dips preferred.