Posted on: 13 Aug, 2019
After the short-lived pullbacks, what stands out to start this week is the re-grouping of buyers in the funding currencies complex to make a statement of intent. The signal being sent is quite clear, the current ebbs and flows in the market are still seeking out protection via safe-haven assets as the dynamics turn ‘true risk-off’ again.
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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. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.
A classic 'risk-off' day took hold in market dynamics as manifested via the relentless appreciation in funding currencies the likes of the CHF, JPY and the EUR to a lesser extent. With the S&P 500 falling by more than 1%, accompanied by similar weakness in the DJIA and the Nasdaq, coupled with the US 30-year bond yield about to break into an all-time low, it was logical to expect commodity currencies (AUD, NZD, CAD) to suffer the consequences too as seeking high-beta options under risk aversion barely ever go hand-in-hand. Meanwhile, the Sterling was given a bit of a boost in demand today, closely following the solid performance of the funding currency complex. Remember, the signals being sent by Mr. Market are still quite worrisome, with the current ebbs and flows seeking out protection via safe-haven assets the unquestionable trend to support. It's hard to see how, unless a US-China breakthrough occurs (highly unlikely), the 'risk-off' profile can be altered in any meaningful way during the month of August.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
HK protests, Argentina, China's data re-ignite risk-off: The deterioration in risk dynamics has re-established a clear ‘true risk-off’ phase in the markets, even if this time it looks like the catalyst, for a change, was not US-China trade, Trump or yuan centric. The violence in HK, where protestors forced the closure of the Hong Kong International Airport, alongside poor Chinese credit numbers, and a collapse in the Argentinian Peso after a surprise defeat by Argentina’s President Macri in the primary elections, set the ball rolling.
Funding currencies reign as stocks, bond yields resume downside: The outside day continuation candle in the US 30-year bond yield is a clear statement of intent that the bond market is still a very attractive destination to park one’s capital in a world where the prospects of growth and inflation expectations keep waning. The long-dated yield in the US hit its lowest level since the mid-2016. US equities did not help to abate the risk-off flows with the S&P 500 coming under pressure right off the gate on Monday. The latest ebbs and flows have translated in the surge of funding currencies and gold as the favorite plays once again.
The PBOC keeps Yuan vol limited: The PBOC has continued to manage the USD/ CNY reference rate by setting the Yuan firmer than models were calling for, which is seen as a ‘risk-on’ move during early Asia, even if the latest PBOC-led risk swings have been consistently fading since last Friday. The weaker Yuan regime has represented a shift in market dynamics with the PBOC fixing having a greater weight in determining the type of market risk profile we may have in store for the coming session/s.
China's mouthpiece grabs the market's attention: A warning by the Daily Times editor and China’s sounding board Hu Xijin, that an article is coming up on Tuesday centered around how China can defeat and challenge the US, seems to have also contributed a tad in the weak demand for risk assets on Monday Hu Xjin tweeted: “People's Daily, CPC's official newspaper, will publish a long article Tuesday vowing China can defeat any challenge and pressure of the US. The signal sent by this kind of article is stronger than the signal of US senior officials' remarks. The US should not underestimate China's will.”
US-China trade talks in Sept still planned: US Security Advisor Bolton, despite not being one of the big shots actively involved in the trade negotiations with China, said that the US is expecting a Chinese trade delegation in September. What’s been quite surprising up to this point is that with the recent escalation in the trade war that led to the weaponization of the Yuan, official plans for further meetings still stand.
Germany's fiscal overspend not that clear: On the back of increasing chatter that Germany may break its own rules of a balanced budget by violating their fiscal spending limits on the basis of more resources to be destined towards climate, German finance minister, Olaf Scholz, has thrown a bit of cold water to the prospects by saying that Germany can manage tasks that need to be fulfilled without taking new debt.
Italian political risk premia on the rise: Italian politicians have been re-summoned from recess to set the date for a no-confidence vote on the Italian Prime Minister, which as a reminder, has been called by Deputy PM Salvini as part of an attempt to bank on his higher support after the European election results. What follows from here will be either a new Italian government or fresh elections. The no-confidence vote is likely to happen between August 14-20, with expectations for the current government to survive fairly low. It means that the Lega-Five Star Movement (5SM) coalition government will come to an end most likely, at which point, the possibilities are to form a government between 5SMa and the Democrats (unlikely), dissolve parliament or push for a technocrat government till year-end.
SNB intervention in the Swissy not enough: The latest data by the SNB total sight deposits clearly suggests that the Central Bank has been intervening in the Swiss Franc on an ‘ad hoc’ basis, which so far has proven to be largely insufficient to stem the huge safe-haven demand seen mid-June. Sight deposits at the Swiss National Bank rose by 2.77 billion Swiss francs in the week to Aug. 9, which adds to the rise by 1.6 billion francs in the week ending Aug. 2 and by 1.7 billion francs the week before.
NZ Treasury touches on negative rates as a viable option: The NZ Treasury issued a statement not endorsing a potential future QE policy but instead appear more open-minded to the idea of accepting the RBNZ cutting to negative rates in a crisis, even citing a projected level of -0.35% according to their models. The RBNZ said that asset purchases are a less appealing tool. The Kiwi got knocked down on the headlines.
After the short-lived pullbacks, what stands out to start this week is the re-grouping of buyers in the funding currencies complex to make a statement of intent. The signal being sent is quite clear, the current ebbs and flows in the market are still seeking out protection via safe-haven assets as the dynamics turn ‘true risk-off’ again with the summer so far not providing, in terms of Central Bank policy shifts or US-China trade rhetoric, a circuit breaker.
Firstly, we find the victorious low-yielding funding currencies, where the JPY and CHF stand out among the rest, with the breakout of its 100% proj targets in the charts below a red flag that safe-haven demand is not receding.
The Euro, also a funding currency, follows its tails at a fair distance away as the strength seen is mainly a function of the unwinding of carry trades rather than on its merits as a ‘safe haven’ status, which is part of the reason why flows are not as aggressive. Besides, the anticipation of further aggressive easing by the ECB also acts as a cap.
The next currency to highlight is the Sterling. Here, the familiar theme anchoring the bearish bias remains the perception that UK PM Johnson has managed to instill, through his tougher stance, to now make the threat of hard-Brexit a credible prospect. GBP should continue to face asymmetrical downside risks as the political risk premium keeps rising ahead of the return of the Parliament from its summer recess on the 3rd of September.
Alongside the GBP, two other currencies that are back under pressure following a similar weakening path include the AUD and NZD. The Canadian Dollar has also debilitated a tad through Monday’s auction process as part of the ‘risk-off’ flows to the point of having lost its daily baseline now. Lastly, the US Dollar continues to trade above its baseline under the context of a bullish market structure, making the prospects of further strength moving forward still a credible possibility judging by where technicals stand.
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