G8 Index Performance & Positioning:
USD had it’s worst week since the week of Nov-02 last year when the index sold off -1.97%. Antipodes AUD and NZD had a soft start to the week but finished at the top as risk-on sentiment in Equity and Commodity markets dominated.
Broad USD selling continued for the week ending May-04. Non-commercials net sold $1.9bln (vs $2.4bln in prior week). Asset managers net sold USDs while leveraged funds (mostly made up Hedge funds, CTA’s and various money managers) have turned net long USDs. Hedge funds seemed to have been bearish on risk for some time (and it appears wrongly) as they have been selling AUD in the past as well as seeing record selling of US equities.
Few comments on May seasonal
S&P500 and Dow Jones printed new record highs last week making it seem like the old Sell in May and Go away adage may not hold true this year. Value/growth rotation looks like it has more legs with bigger names looking to catch up with small/mid-caps that have outperformed on the Blue wave presidency. Going forward, US outlook will be fueled by the massive fiscal stimulus, recovering strength of US consumers, and vaccination progress - all of which should benefit household value names and therefore be a threat to the strong USD in May seasonal. One area I will be watching in terms of when we might be able to see sustained USD strength, is when this value rotation may be reaching an inflection point, like it did last March…
Would also add, that while this cyclical/value theme is a threat to USDs, I think the same arguments can be made in support of a stronger USD also on relative-value terms, but it does seem to soon to make a case for it now with the strong reflation momentum as well as Europe and EM’s playing catch-up in vaccinations and recovery.
The other factor to lookout for is rising bond yields of which the inflection point for stocks is much harder to ascertain. Rising bond yields tends to impact growth (tech) stocks who typically have high P/E ratios on the expectation of high growth in future cashflows/earnings, and therefore put downward pressure on valuations as interest (discount) rates rise. With yield curves expected to continue steepening, we could soon reach this point where it could impact stocks again. As was suggested to me by an astute trade I speak regularly with, 75-80bps in the 10/30 looks a good region to look out for.
Weekly G8 FX notes:
USD ~ Last week I was looking long USD on the strong data expectation and weekly reversal bar, but ended up giving back early week gains and then some as data misses (tough positive) proved expectations were too high in the lead-up to NFP. The main story has been the strong recovery momentum but data is starting to show this could be slowing while pushing back on early Fed tapering. Interestingly, market slashed rate hike bets on the NFP print but yields bounced aggressively soon after which suggests inflation expectations are still strong and backsliding yields may have found a floor and this keeps me looking at long USDCHF USDJPY short Gold/XAU ideas. However, with market sentiment on the upswing (for example: tradingview tickers UVOL/DVOL, S5TW S5FI, ADVDEC.NQ ADVDEC.DJ and various regional/emerging market ETF’s) as well as the points made about May seasonals, I will be cautious and selective with long USD trades and generally favour USD shorts — AUDUSD breaking above the HNS neckline ~0.7820 and other higher betas such as USDCAD USDEM pairs pushing lows.
EUR ~ Haven’t touched much of the EUR pairs recently, as I’ve not been thrown off by the price action signals. The theme of vaccination progress paving the way for European recovery gaining momentum makes EURJPY EURCHF EURUSD attractive, in particular EURCHF which has been lagging to the upside due to CHF strength. Early in the week we have Sentix and ZEW sentiment data which has been very resilient even in the face of the 3rd wave lockdowns. I don’t see why sentiment shouldn’t continue to stay strong to start the week with price looking a little more clearer and constructive.
JPY ~ Price action is looking dreadful and looks set for more losses with deeper targets exposed having traded back below recent support. Strong risk sentiment, trajectory of global yields is up, and until we see an inflection point in risk as I’ve touched on in the May seasonal comments, JPY shorts still seems the blatantly obvious side to be on.
CHF ~ CHF strength has really surprised me and I’ve not much idea why. Market was quite short on CHF so this could be in part a positioning move as well as improving expectations domestically. On similar theme to JPY, I’m quite keen on CHF as I expect US and EZ momentum to give USDCHF and EURCHF a lift. USDCHF is sitting on a key support area and potentially putting in a right shoulder while EURCHF is looking more compelling technially with bullish momentum divergence into the mid-1.09s.
GBP ~ I mentioned last week that I expect GBP to trade heavily and I still see limited upside for GBP arguing that a lot of the good news is priced. Seeing that EURUSD outperformed GBPUSD last week amid the USD selling, I still think there is some truth to this. BOE maintained its dovish stance and political uncertainty around Scotland, Brexit and trade relations remain. GDP data is expected to come in soft and with inflation and growth still low in the UK, I expect Bailey to reiterate BOE’s dovish stance. I’m therefore interested in GBP short ideas this week — GBPUSD has returned above the 1.40 level while GBPAUD GBPNZD crosses have pulled back to the upside and approaching some interesting and potential pivot levels.
CAD ~ a light calendar this week, the index is currently trading around the key pivot area but is looking rather overbought having rallied in such a short space of time. Canadian IVEY PMI and Employment data missed last week which may trigger some profit taking after a strong run, and oil price action is looking a little tired also. NZDCAD long piques my interest this week which also tends to perform well in a weaker USD environment.
AUD ~ helped by strong equity sentiment, the index is looking to hold the breakout, and will need a meaningul close above this key pivot area which it has still so far struggled to produce even as Iron ore continues to rip higher. I’ve also pointed out a potential AUDUSD head and shoulder top last week which has now been invalidated trading above the neckline at ~0.7820, longs is therefore favoured above this level. I still think there are some downside risks for AUD despite the reflation (cyclical/value) theme being alive and will be looking at short AUDNZD to express this as it approaches the 50 dma and 1.08 pivot level.
NZD ~ the index is attempting a breakout this week and threatening to invalidate the head and shoulder pattern I pointed out last week. Due to Australia’s diplomatic tensions with China and CAD being fairly overbought, NZD would be my preferred choice for risk-on trades. I will be watching NZDUSD and NZDJPY for a push to new highs, while NZDCAD long and GBPNZD short is also on my list for the week.
Wishing you a fruitful trading week!