Posted on: 19 Aug, 2019
The USD index (equally-weighted vs G8 FX) deserves special consideration to start the week as it keeps finding equilibrium right underneath the most important line of resistance the index has faced during 2019. A breakout would be unwelcoming news as it creates deflationary pressures, puts a dent in the growth prospects globally, while it feeds into the inversion of yield curves as a central thematic.
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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.
It hasn't really made much of a difference whether the pendulum in risk swung left (risk-off) or right (risk-on), the steadiness of the US Dollar to hold its ground speaks volumes of the broad-based interest to accumulate the word's reserve currency in a currency world with little to no alternatives. Besides, the US Dollar index (equally-weighted vs G8 FX) is starting to look awfully dangerous for an upside macro resolution as larger flows pile in to join the bid. All the insights can be found in the charts section. Currencies, unlike the USD, that have been negatively affected by the recouping of gains in risk-sensitive assets such as bonds or equities include the Swissy and the Yen. The Sterling and the Canadian Dollar, amid the increase in the risk tone and political maneuverings to block a no-deal Brexit, start the week in a bullish mode, even if as I elaborate on the charts outlook, the Sterling may find it much harder to keep up its upward march at the current levels. The Euro, the Kiwi remain the most fragile currencies as the market keeps pricing in aggressive easing policy actions by the respective Central Banks, while the Aussie holds its ground slightly firmer after last week's upbeat Australian jobs report.
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.
Risk dynamics continue to improve: Both the S&P 500 futures and long-dated US bond yields moving up in sync. US President Trump tweeted 'doing very well and talking' with China, in what appears to be an attempt to keep propping up the recovery in equities. Trump reiterated that China wants to make a deal, but “we'll see what happens.”
German mulls boost in fiscal spending: There has been speculation in recent weeks that the German government is getting prepared to break its own rules by tapping into fiscal overspending in its budget to prevent a recession. Last Friday, the mainstream tabloid Der Spiegel reported that the German government is getting prepared for deficit spending in its budget. The appalling German has led to an increasing number of economists calling for an imminent recession in the country. Over the weekend, German Finance Minister reportedly said that up to 50bn EUR of extra spending could be deployed if needed, noting that the country is capable to counter future economic crisis "with full force". The German government could borrow to fund its investments while being paid given the broad-based negative-yielding curve in its domestic bond market.
GBP winning strike extends to 5 days: The Sterling keeps picking up bullish momentum as the London Evening Standard reports that a new cooperation front, led by Labour’s Corbyn and the SNP to stop a no-deal Brexit is gaining traction. Jeremy Corbyn and Iain Blackford, according to the source at the Evening Standard reporting on the news, had a phone conversation this morning on "how to work together to stop a no-deal and let the people decide the future of the country".
New insights into what global CB policy may look like: A new research paper published by Blackrock, written in conjunction with two former central bank governors, provides very interesting insights on what the next set of policy measures by Central Bankers may look like in the case of an intensity in recessionary pressures in a world where the tools available are near exhaustion. The white paper is titled “Dealing with the next downturn, using ‘unprecedented policy coordination’. It can be found here.
The Euro weekly close was the weakest since mid-2017: The Euro remains fragile as the market prices in the ECB going all in, to combat the economic downturn in the Eurozone. The comments last week by ECB member and Governor at the Bank of Finland Mr. Rehn, via an interview with the WSJ, have caused a rethink in the marketplace after he said it's better to overshoot on stimulus than undershoot. Rehn added that “it's key that we come up with a significant and impactful package in Sept.”
Jackson Hole Symposium key risk event: The key event this week comes on Friday at 14:00 GMT, when Fed Chair Powell is scheduled to speak at the Jackson Hole Economic Policy Symposium in a speech titled "Challenges for Monetary Policy". It’s likely to be a major market mover as the market will have an opportunity to re-adjust its outlook towards the Fed’s Sept policy decision. Before the event, though, the meeting minutes from the last FOMC meeting will be released on Wednesday at 18:00 GMT, which may also hold sufficient relevance to see market positioning altered as the market is in high alert and hypersensitive to gain new insights on the next policy move by the Fed now that an easing mode is finally underway. For now, there is a 100% chance for a 25bp rate cut, while a 50 bps rate cut is considered to be a scenario with ⅓ chances at present.
There are other key events this week, such as the RBA monetary policy meeting minutes on Tuesday, the Canadian CPI and the US FOMC meeting minutes on Wednesday, a bunch of Eurozone PMIs on Thursday, including Germany, France and the EU flash manufacturing/service PMI, while also the US flash manufacturing PMI, with the New Zealand and Canadian retail sales on Friday, alongside the mentioned Jackson Hole economic policy symposium (runs for 3 days).
The equally-weighted currency strength indices show the US Dollar as the currency best positioned to see further demand flows judging by the forming of a breakout pattern. The index has been confined in a very tight range at a key pivotal resistance as shown below, which is often signs of accumulation before an eventual imbalance in what would become a major macro breakout. The Euro index, meanwhile, remains bearish and offered, even if residual demand could be in store as the chart re-tests the origin of a key demand area (highlighted in green). The Sterling has been on an impressive 5-day run, even if I am expecting more gains to be a real challenge as a key resistance in the GBP index is encountered; the fact that the technical area is being tested on low volume in the context of a bearish market structure does not bode well either. The Swissy and the Japanese Yen remain in a bullish trend but the latest flows have been bearish as the risk profile in the market improves a tad. It would be premature to consider shorts on these risk-sensitive currencies based on the model I personally monitor. As per the commodity currencies complex, the Kiwi is the most vulnerable as it stays bearish and offered, followed by the Aussie, which remains bearish as the 13-d ema caps the upside. The Loonie looks best positioned as it regains its baseline to make the outlook more bullish.
The USD index (in equally-weighted terms vs G8 FX) deserves special consideration to start the week as it keeps finding equilibrium right underneath the most important line of resistance the index has faced during 2019. Even if this index is a proprietary one I personally built with the share of influence against G8 FX equally distributed, the rationale to capture the market's sentiment stand as valid as any other. A breakout would most likely lead to significant buy-side pressure as it will denote a major pivotal moment in the build-up of bullish sentiment with more than 2% of gains in store until the next 100% macro proj target.
The strengthening of the USD would be unwelcoming news for risk overall, as it creates deflationary pressures and puts a dent in the growth prospects globally, while it feeds into the inversion of yield curves as a central thematic. The outlook of emerging markets with high USD-denominated indebtedness would be the most negatively affected, as it would make debt burdens harder to cope with alongside fewer profit margins by corporations. It would also imply a higher USD/CNH as USD demand gets reinvigorates across the board, which would make the backdrop for the US and China to meet halfway in a trade deal even harder.
As the Research Team at Morgan Stanley notes: "The Fed has a global reflationary tool at its disposal: the USD. Insufficient dovishness in the midst of a global slowdown and trade tensions is keeping the USD too strong, in our view, exacerbating these economic challenges. As a result, more bonds are being bid into negative territory as rising global savings meets slowing investment and consumption. Robust US consumer and inflation data this week have reduced the odds that the Fed will ease proactively, keeping the themes of global yield curve inversion, EM outflows, and softer equities in place. In short, we think good news in US data is bad news for markets."
There are 3 markets that I find particularly exposed to the risk of an eventual USD breakout. These include the NZD, GBP, and EUR. Not only the technicals in each of the charts tell us that the clear path of least resistance remains down, but the macro backdrop is very weak. The NZD is faced with the prospects of further easing by its Central Bank (RBNZ), the Pound, after a stellar 5-day rise, is now set to find a lot more selling pressure at a key resistance area, all amid the uncertainty that reigns around Brexit, while the Euro is vulnerable to the renewed talk of the ECB about to embark on an aggressive QE II program as hinted by ECB member Rehn.
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