Intraday Market Thoughts ArchivesDisplaying results for week of May 16, 2021
On Friday May 7th, we sent out the long GBPUSD trade based on the lower left chart, which materialized 420 pips later. On Friday May 14th, the Gold video went out, asserting an upcoming breakout, followed by $45 rise the following. Spend the weekend going through the gold video, familiarizing yourself with the 5 schools of technical & quantitative analysis and how fractals are used in the GBPUSD trade and for the USD Index in our latest video.
Yesterday we wrote that “the high CPI print couldn't keep the dollar bid, neither will the minutes” and that was exactly what unfolded. The dollar gave back all its FOMC minutes gains and more in a broad slump.
US economic data is also beginning to draw some concern on signs of flagging reopening momentum. The Philly Fed was at 31.5 compared to 41.5 expected. To be fair, that's still an extremely strong reading but numbers are beginning to consistently undershoot economist forecasts. That dynamic has pushed the Citi US economic surprise index into negative territory for the first time since early in the pandemic.
Weekly initial jobless claims were very close to expectations at 444K versus the 450K consensus but that's still a stubbornly high level historically and will need to be much closer to pre-pandemic levels near 250K to signal a recovery.
In the crypto market there was a remarkable comeback. Bitcoin hit $42,500 which corresponds nicely with the early week lows that repeatedly provided support before breaking down in spectacular fashion. After touching that level it fell back to $38,500 before steadying around $40,000. Bitcoin continues to be a remarkable example of a chart following the technicals and that makes sense given the dearth of fundamentals news.The week closes with some important economic data points including the US services and manufacturing reports from Markit along with Canadiaan retail sales for March along with the advance April estimate. We'll mostly key on the Markit services report as we fear another substantial miss could quickly change the narrative towards US economic disappointment.
$43,000 in bitcoin was repeatedly tested this week and finally gave way in part due to Chinese officials reiterating warnings against commercial crypto transactions. It was a spectacular break that culminated with a fall to $30,000 (precisely) at the low as exchanges went down.
We've seen time and time again how exchange outages spark liquidation followed by strong bounces as word gets out and then they come back online. Bitcoin bounced all the way back to $40,000 afterwards.
Those moves were sharp, but it was even wilder elsewhere in crypto with ETH falling as low as $1850 – a 46% intraday drop.
For the first time in its clearest form, the rout in crypto spread to broader risk assets. Equities tailed the moves, albeit to a much smaller extent, bonds briefly caught a bid and yen crossed dipped. The broader market moves disappeared as crypto bounced but a second hit arrived when the Fed minutes offered the faintest whisper of tapering.
“A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace,” the Minutes said.
The swiftness at which markets reacted to that is worrying, with the US dollar strengthening 30-40 pips across the board and equities falling back to session lows. It underscores how difficult it will be for the Fed to pull off an actual taper, let alone a rate hike.
Looking ahead, if the high CPI print couldn't keep the dollar bid, neither will the minutes. They landed in a jittery market and by the end of day equities had nearly traded back to flat.Thursday's economic calendar features the Philly Fed and initial jobless claims.
Fed vice chair Clarida spoke at a web conference Monday and at first blush there was little change in his commentary but at one point he was asked about inflation. He responded by saying that because he expected it to rise due to transitory factors, he would be placing more emphasis on employment metrics in the coming months.
Few people picked up on the comment but it could be an important shift at the Fed as is revealing of their broader thinking. There are clearly worries about inflation but officials are nearly unanimous in believing that price rises will be transitory. Barring a change of heart, that makes incoming inflation data almost irrelevant in the Fed's thinking. So 'significant further progress' is really an employment metric.
Though that's a deliberately vague target, officials continue to cite 8 million missing jobs. By that measure, would 4 million jobs be a reasonable benchmark? If so, that would be 1.3 million per month ahead of Jackson Hole, where many expect a tapering announcement to come.
That's an extremely high bar and it raises the risk that the Fed waits longer. That's the kind of thing that would add further fuel to the precious metals rally that's boosted gold to the best since February 1.
It was also notable that the market reaction to inflationary metrics in the Empire Fed was nil. Both the 'prices paid' and 'prices received' indexes hit records (since 2000) and markets barely budged. On the whole, Monday's price action was modestly negative for the US dollar.
Is this an early sign that markets will begin to weigh employment more heavily than inflation? That will be something to watch closely. Keep in mind that even with the huge upside surprise in inflation last week, markets have recovered nicely. We may have seen the worst already.
Friday's data added to the murky economic situation in the US. Retail sales and consumer confidence were both on the soft side but inflation expectations in the UMich report soared with the one-year measure at 4.6% compared to 3.5% expected. That's the highest since 2008.
It's especially notable because last week several Fed officials specifically highlighted that they were watching inflation expectations very closely.
At the same time, the bond market continues to exhibit calm. On Friday, US 10-year yields fell 2.9 bps to 1.63%. We see both side of the inflation argument and expect it to continue for many months before there's any clarity.
Ultimately though, it's incredibly difficult to bet against both the Fed and the bond market.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +94K vs +85K prior GBP +28K vs +20K prior JPY -42K vs -41K prior CHF -3K vs 0K prior CAD +39K vs +26K prior AUD +2K vs +1K prior NZD +9K vs +9K prior
This is one of the larger one-week shifts in a year but it only encompasses the non-farm payrolls report, which was weak and USD-negative. The whipsaw from CPI likely unwound some of this month with some of those dollar sellers quickly finding themselves underwater. An ongoing trend in the past three weeks is aggressive CAD buying and given how strongly it bounced on Friday, expect more of that in the weeks ahead.