Posted on: 25 Mar, 2019
The agitation in financial markets, triggered by a shocking miss in the German PMI last Friday, is evident across a wide spectrum of instruments. The rampant Yen is the manifestation of a phase, spearheaded by European & US yields, in which the proverbial has finally hit the fan...
To our Market Insights
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.
The agitation in financial markets, triggered by a shocking miss in the German PMI last Friday, is evident across a wide spectrum of instruments. The rampant Yen is the manifestation of a phase, spearheaded by European & US yields, in which the proverbial has finally hit the fan, as we finally see the German 10y Bund trading sub 10% or the inversion of the US yield curve in the 10y-3m. The dramatic fall in yields had immediate spillover effects into equities, vol measures (VIX), credit markets (junk bonds down big), and as mentioned, the Yen is the clear winner. In yet another demonstration of the disjointed dynamics between the Sterling and the rest of FX, even under such risk-averse fluctuations, the currency managed to follow the Yen in almost lockstep as the market prices in the positives of an extension of Article 50 for all of us to contend with more weeks of Brexit. Just wonderful! The next pack of currencies displaying a decent performance includes the USD, underpinned by the risk-off diversification flows, while the Kiwi is more of a fundamental play I reckon, with the RBNZ one of the only Central Banks not blinking to further easing just yet. The Aussie and the Loonie follow next, as part of a group trading on the backfoot vs most peers. However, no currency is under more intense pressure than the Euro as the market re-adjusts to levels more congruent with the possibility that Germany goes through a prolonged recessionary period.
As the template above demonstrates, the environment supports the notion of ‘true risk off’ flows being the dominant dynamics in the market, which is why we’ve seen the likes of the Japanese Yen, the Pound (Brexit-based) and to a lesser extent the USD the main beneficiaries. The harshness of the selloff in all JPY cross is in line with the synchronized one-street movements in US equities and the US yields, with the latter in absolute free-fall sub 2.90% in the 30-yr. Surprisingly, Gold is yet to catch a strong bid, suggesting that the market is currently paying more attention to the DXY as the main proxy to assess the precious metals intrinsic value as opposed to US yields. That said, under the current negative backdrop in risk, interest to flock into Gold should only rise. As the RORO model stands, not only microflows have permuted towards a textbook ‘risk off’ phase, but the macro flows, which depict the weekly trend, are also in agreement to play the ‘true risk off’ trade.
We can even look at alternative measures to analyze risk with ‘red flags’ all over. For instance, the VIX (vol index for the S&P 500) just saw its largest 1-day increase since Dec 24, around 16.5. Another sign of stress in financial markets can be observed off US credit, where the ratio HYG (US high yielding corporate bonds aka junk bonds) / LQD (ETF tracking US investment grade corporate bonds) dropped sharply to its lowest level since early January. The lower this ratio goes, the more yield the market demands to buy corporate debt perceived as the least safe with the poorest cash flow. If we shift our focus to emerging markets, the EEM / SP500 index is also edging lower towards a retest of it's yearly low, while emerging markets-based currency ETFs such as the CEW (Wisdom Tree Trust) show a triple top, with a break below the previous swing low to confirm the price formation.
EUR/USD: Sell-Side Bias Main Scenario
On the back of the dismal German PMI data, the market has adjusted EUR value in accordance. The volume profile exhibits a double distribution down on Friday, with most of the volume transacted around the 1.13 round number in what should be perceived as a sell-side continuation pattern. The endorsement of the short bias is only reinforced by the breakout of the ascending trendline, but also by the magnitude and speed of the removal of liquidity, which led to the 2nd down-leg in this ongoing hourly bearish cycle to surpass the previous downward extension on March 21. What’s more, the fact that the initial withdrawal of liquidity post German PMI was followed by another impulsive hourly bearish candle off 1.13 breaking into new lows, it translates in the round number acting as an area that sellers will be taking as a reference to extend the bearish momentum, hence the risk of shallow pullbacks. Interestingly, the German vs US 10yr bond yield spread still points to a buying bias, so at the bare minimum, it should act as a counterbalancing effect preventing major overextensions. Remember, by far, the best case is to align intermarket + technicals. Whenever there is a conflict of signals, a more cautionary approach reading price action as the ultimate truth is warranted.
GBP/USD: Critical Resistance Overhead Amid Brexit Mess
The Sterling has put on a stellar performance in the last 24h of trading, even challenging the aggressive buy-side flows going through the books in the Japanese Yen, on the basis that kicking the can down the road a few more weeks/months in the Brexit saga removes an immediate uncertainty. However, with Theresa May facing its toughest hours and her days as PM potentially numbered, this creates yet another source of uncertainty for markets, as the range of scenarios widens, even if judging by price action, the market seems to see a replacement for May as not increasing the tail risk. We are at peak noise in Brexit, which means, trading intraday price action becomes a more difficult exercise of reading the flow and be prepared for whipsawing price fluctuations on a headline by headline basis. Friday’s volume profile formation, despite it shows a P-shaped bullish structure, it is headed straight into the stickiest horizontal level of resistance in the chart, which carries the risk of the recent breakout of a descending trendline being a bull trapped. On the way down, there is now the extra support of a newly formed ascending trendline, making 1.3245-50 all the more relevant. The intermarket analysis is a mixed bag of conflicting signals for now, with DXY inverted heading lower and the UK-US bond yield spread looking to retest recent highs.
USD/JPY: ‘True Risk Off’ Invokes Concentration Of Offers
With the US yields and the VIX experiencing its sharpest moves this year, no wonder offers largely outnumbered any buy-side attempts as the pair continues to move in lockstep with the deteriorating risk profile in the markets. Regardless of the analytical measure utilized to get a pulse of the market, the end result is unambiguously bearish, and it could even get worse if the free-fall in US yields is accompanied by weakness in the DXY, which is not expected for now as the EUR implodes. From a volume profile showing a triple distribution down, the formation of a descending trendline, the intensity and extension of the 2nd led down, the actual leg count of the hourly cycle (missing one to complete a typical 3 legs move) or intermarket studies (‘true risk off’). What this translates into, is a market likely to lean on the obvious areas of resistance to keep selling unless flows revert. Also note, the breakout of the 110.00 round number is psychologically yet more technical damage inflicted.
AUD/USD: Ascending Trendline Breached, Negative Bias
Intermarket flows transitioned into a sell-side bias in the Aussie since March 22nd in the European session, as per the 2:1 ratio of lower DXY + Yuan (both inverted), accompanied by the collapse in European and US equities. The bullish turnaround in the AU-US bond yield spread plays little role to support this market as long as the rest of crosscurrents in intermarket remain negative. What this means is that any opportunity to sell on strength is expected to payoff in larger rewards vs buying. The breakout of the ascending trendline off March 14th manifests these worsening dynamics. The area highlighted in a black rectangle circa 0.7050 is definitely the next sticky support to challenge. A break below would most likely expose the critical 0.70 round number. On the way up, any shift in technicals hinges and is contingent to the ability of buyers to find acceptance above 0.71 POC.
USD/CAD: DXY + Oil Re-Invigorate The Uptrend
The recovery in the DXY alongside the sudden reversal in Oil prices as a response to the ‘true risk off’ environment has taken its toll on the exchange rate, which looks decisive to target 1.3460 resistance. The bullish momentum has the backing of last Friday’s volume profile double distribution up, an ascending trendline but as mentioned, also the intermarket flows (US-CA bond yield the exception). Any weakness in the rate before meeting the upside target should be considered, conditioned to a spontaneous setback in the constructive flows, a buy-side opportunity at advantageous prices.
Gold: Balance Area Within Bullish Context
Buyers are likely to circumvent the current state of stagnation in prices by pushing further up if we take the intermarket crosscurrents as our reference. Despite the rise in the DXY is attracting offers, the annihilation of US bond bulls via a collapse in US yields in music to the ears of buyers here. Add into the mix the weakness in the S&P 500, with the largest spike in the VIX this year, and we have a recipe for a buy-side bias, especially if the strength in the DXY moderates in the slightest. This prognosis can find its promotion via technicals, with market structure printing higher highs and higher lows since the week-long consolidation phase (accumulation) through the first week of March.
Feel free to get in touch with us to find out more about our service.