Intraday Market Thoughts Archives

The US dollar continues to strengthen and that leaves us with an opportunity to highlight the bull case. DXY is having its best month since July 2020. The US week wrapped with softer than expected core PCE price index at 1.4% y/y vs exp and prev 1.5%. Below are 2 charts: First is the extended analog with 2018 that deserves no further explanation. The second chart is that of the latest progress in USDJPY, where it was when we entered for the WhatsApp Broadcast Group.  

US 10-year yields made a big move higher on February 16 to break above the January top of 1.20%. That kicked off a round of risk aversion that continued this week. The second-worst performing currency in that period is the New Zealand dollar, something that would surprise few. However the worst performer is the Swiss franc, which is a traditional safe haven.

What's happening?

It's all about carry. Pledges from the Fed to keep ultra-low rates had made the US dollar into a funding currency but with Democrats taking over the Senate and passing a huge stimulus bill, it materially changed the outlook for US growth and inflation.

At the same time, the eurozone is struggling to roll out the covid vaccine and on Thursday the ECB's De Guindos said H1 growth will likely be negative.

There are plenty of cross-currents but there is a clear unwind in USD-funded carry trades ongoing and instead, the dollar is being bought on a carry trade of its own in a complete reversal. That also helps to explain how CAD is the only currency to outpace USD. Canadian bonds have narrowly traded alongside their US counterpart and as the Canadian housing market heats up, there's a strong argument that the BOC will taper and hike before the Fed.

Another factor that's boosting the US dollar is positioning. Short-USD was one of the most-crowded trades coming into the year.  As the dollar index climbs to the highest since November, that trade will thin out.

What could kick the dollar into overdrive is a shift in Fed communication. For now, the chorus about seeing through transitory inflation is a huge hurdle to overcome but it won't be done all at once, but it could be slowly chipped away.  We also do not think the chapter of oil selloff is over. 

As you get fixated on another Powell speech, another testimony by Tech giants to Congress and another vaccine spat, we remind you to keep an eye on the ongoing struggles in risk assets highlight two areas of the world that sending the strongest signals. SEE BELOW. Later today, the US sells 7-year Treasury notes for the first time since last months' market-roiling event. Meanwhile, DXY and USDCNH continue to push higher as warned by Ashraf in yesterday's Premium video, including the reverberations and implications for oil and tech. The video also covers the way SPX/OIL and crude are watched and traded.

Two of the least-affected areas in the world during the pandemic have been China and Australia and yet those two spots are currently sending troubling signals.

China walked back tightening talk recently but it hasn't done any good for the domestic stock market. The Hang Seng fell hard for a second day on Wednesday and is now down 11% from the February high. That's despite a weakening of the yuan over that period.

The Australian dollar also continues to struggle and is threatening the February low, falling more than 400 pips since the final trading day of February.

What's especially troubling is that both AUD/USD and the Hang Seng have traced out text book head-and-shoulders patterns with the Hang Seng neckline already broken and the Aussie barely hanging on. Recent Chinese data on trade, industrial production and retail sales has all been strong so these are tough moves to square.

The pandemic is clearly part of the problem. Variants are leading to another wave outside of the UK, US and a few other countries where vaccines have gotten ahead of the virus. Could it be as simple as virus fears? That's tough to believe given that markets have been so effective at looking through the pandemic for the past few months.

There is little else to fret about but the technical signals are unmistakable and need to be watched closely.

Another spot to keep a close eye on is bonds. A US 5-year sale was a touch soft on Wednesday and it will be 7s on Thursday. A month ago, a terrible reception at the 7-year sale set off all kinds of alarm bells in markets and we haven't recovered since. The results are due out just after 1700 GMT.

As the US dollar index (DXY) reaches its 200-DMA for the 1st time since May of last year and EURUSD breaks below its own 200-DMA, traders ought to watch these key levels for a possible breakout(down). That is expecially the case if oil makes a fresh descent under 58.00. Below is the latest Premium video, highlighting what to watch for in oil and how this market could assume leadership of influence from bond yields. 

Wednesday saw another divergence between DOW30 and NASDAQ as bond yields pushed back up. But DOW30 remains unabel to regain the 32780s just as NASDAQ remains supported near 12900s. How about Tuesday's action? Unlike recent risk selloffs, Tuesday's wasn't driven by higher Treasury yields. Instead, it was a classic flight to safety with 10-year yields down 7 bps and stock markets lower led by industrials and value. That points to some genuine jitters surrounding the virus. In particular, the new wave of the virus continues to harm the outlook in Europe, where H1 growth estimates continue to fall.

The Bank of Spain who lowered domestic GDP assumptions to 6% from 6.8%. Oil was particularly hard hit once again and it fell below the 50-day moving average for the first time since November. More coverage of oil and its potential repercussions on the rest of the market is explored in in the above Premium video. 

How much of the trade is genuinely fundamental and how much is repositioning or technically-driven is debatable. The moves since the US election have been one-way and whether it was virus concerns or something else, a retracement was overdue and could ultimately be healthy.

But is it over? Signs on Tuesday weren't great as oil broke below last week's lows and support gave way in a few dollar crosses, including NZD/USD and GBP/USD.

More specificaly, NZD went from correcting to plunging after PM Jacinda Ardern announced a set of new measures to confront surging price increases in the property market. Probability of a RBNZ rate hike has fallen to below 15% from over 25% last week.

We were going to cover the tailwinds to housing but the deepening selloff in oil is leaving no choice for FX traders but to buy USD. Oil is down 6% after Thursday's 7% plunge, which is triggering broad gains in USD, such as EURUSD 200-DMA and sub 1.3770s in cable. DOW30 currently breaking the all important 32600, calling 32330 and SPX sets sight to to 3893. Ashraf informed members of the Whatsapp Broadcast Group about the broken neckline in US crude oil, which merits close scrutiny in the days to come. The snapshots below are from Monday's NASDAQ-DOW-Yields calls to the Group based on a deepening triangularity. 

It's spring in the northern hemisphere and that's the busiest time of year for home sales. This year is a particular test because the market has been deeply inventory constrained. One side of the argument is that low rates and social shifts due to the pandemic have brough on a housing boom. The other is that high house prices have been brought on by a lack of inventory due to reluctant sellers during the pandemic.

If you dont own some cryptos, then we dont know what youve been waiting for. Below are what happened to STORJ and ADA weeks after Ashraf mentioned them to the Whatsapp Broadcast Group. Look it up for yourselves guys. 

With restrictions relaxed – particularly in the US – a moment of reckoning is coming. If a flood of homes undermines recent price rises then it could undermine the recovery. If prices continue to run, then it could supercharge the economy. Similar dynamics are playing out in a number of countries.

In February, existing home sales slowed to a pace of 6.22m from 6.66m and that was shy of the 6.50m consensus. Under the surface, prices were up 15.8% y/y and inventories shrank by a record 29.5% y/y. Reports about bidding wars are rampant, particularly in the suburbs and secondary cities.

 

Turkish Lira fireworks are back with a bang in the EM scene. TRY plunged at the start of Monday trading after Erdogan fired central bank governor Naci Agbal following a rate hike. EM currencies were pressured across the board, prompting USD higher and metals lower in early Asi trade. The week starts with a heavy dose of Powell appearances.  The chart below suggests volatility in EMFX may be showing a possible inv H&S formationm as its correlation reaffirms with DXY.

The market had only-recently began to give the lira some credibility after years of ill-fated meddling with the central bank. On Friday, The Economist wrote a glowing article on Agbal for restoring credibility and breathing new life into the currency, in part by raising rates by 675 bps since November.

Instead he was sacked. The market didn't see it coming at all with the lira posting a strong two-day rally on Thursday and Friday. With Erdogan installing an ally and proponent of lower rates, the lira fell 17% at the open before trimming its decline to 12%.

For non-TRY traders, the question is whether this will spread or kickoff larger problems in emerging market currencies.

There will certainly be some broader fallout in the day ahead but it's not likely to last. Turkey has its own set of problems and there's a certain financial ring-fence around the region. From Aug-Nov last year, USD/TRY rose 4% and there was little fallout elsewhere.

The larger problem is inflation, which was running at over 15% in Turkey. Emerging markets have also wracked up large debts during the pandemic but don't have the luxury of structural disinflation and QE. That problem isn't unique to Turkey and it's worth worrying about how other countries cope.

The good news is that huge US stimulus and high spending in other developed countries should spill over and allow governments to put budgets on track. Commodity inflation is a double-edge sword. It's a net-benefit to many emerging markets but importers like Turkey lose out on the growth and also suffer from the inflation.

Looking at the week ahead, the Fed will remain in focus with Powell speaking Mon, Tues and Wed at various events culminating with Senate testimony.