G8 Index Performance & Positioning:
GBP the strongest rallying into Brexit highs while AUD the worst reversing prior week gains with risk assets under pressure last week. USD had a strong start but reversed as high beta currencies rebounded at the end of week.
Positioning for the week ending 11th May: USD selling the prevailing theme mostly against EUR CAD GBP, some modest USD buying against MXN and low-yielders JPY CHF.
The most notable positioning change is the increasing momentum in USDCAD (-1.085bln vs -0.839 the week prior), now the most net short since Nov’2019. Positioning is a contrarian indicator at extremes and some would start to argue we are just about into extreme territory...
MARKET OVERVIEW
Market heading into consolidation? I’ve mentioned this potential scenario of rising US inflation expectations to cause markets to trade nervously sideways: https://doejistar.medium.com/return-of-the-king-usd-386da5052da2.
Last week I was in equities buy-the-dip mode as I saw very little reason for a continued sell off after a decent correction, especially with Fed reasserting ‘transitory inflation’ and need for evidence of labour market recovery before tightening.
Technical break in global equities reversed back to the inflection point but weekly momentum has turned slightly negative and I’m leaning towards the idea that this area may mark the highs of a consolidation range for the near-term.
Emerging markets have already been in a 2-month consolidation and could be worth keeping track to gauge sentiment and whether global equities is indeed entering a sideways market (perhaps even as far as Jackson Hole).
Meanwhile commodities is also supporting the case for some potential consolidation ahead — bearish weekly close with negatively divergent higher high, and didn’t participate in the late week rebound seen in equities. Worth keeping track as the week unfolds.
Weekly G8 FX notes:
USD ~ Technical bias is clearly down especially if we look at price action around the consolidation ranges outlined in the yellow boxes — stretching below, then above, then back down through the range again suggesting upper ranges have been firmly tested. As mentioned in prior coments however, I think USD could make a return and will be looking to go long USD tactically on dips as long as inflation worries persist.
EUR~ closed at resistance and technical bias remains bullish having bounced off the key pivot area since the bullish impulse at the beginning of April (marked in Green). A sustained break above resistance should see EUR push April highs. Also the rise in German Bund yields has outpaced US TY and UK GILTS and should support EUR upside if continues.
Conversely, should the momentum in data and price action struggle to the upside, shorts vs GBP (more in GBP comments below) and USD depending on how US yields and risk sentiment is shaping up could be attractive ideas to keep in mind also.
JPY~ downtrend continues and I see no reason why it should stop from a fundamental POV either. First and foremost — we are in a rising rates environment which disfavours low yielding currencies like JPY and CHF for higher yielding ones, and secondly — a good number of bank research points to more M&A and bond buying outflows from Japan which would result in selling JPY for foreign currencies.
CHF~ reached a key pivot/technical level and showing tentative signs of a turn on the daily timeframe. CHF outperformance I believe is due to improved sentiment and rising yields domesticallly while US rates have been in consolidation.
‘Assuming’ much of the domestic optimism is in price now together with the strong technical level, I think short CHF ideas are starting to look attractive again, for example:
- vs USD if we start to see a rising trend in US yields again,
- vs EUR if upside momentum is sustained, and
- vs Commodity-dollars if risk sentiment stays positive.
GBP~ rally stalling into this area I’ve highlighed over recent months. Looking at the calendar this week, I think GBP could have more legs to continue higher as the data should reflect the ongoing rebound in UK activity. EURGBP short attractive if risk sentiment holds up or EUR is unable to sustain upside momentum, GBPAUD (possibly CAD )long if sentiment is shaky.
CAD~ hit a fresh supply zone last week with decent selling reaction. The 4-week rally off the April low is noticeably slowing and one would probably expect a pivot around this region however brief it may be, while also taking into account that positioning is starting to look stretched.
AUD~ still stuck in a range after many failed attempts of a breakout. I don’t find the upside so compelling based on that price action and would generally prefer shorts given my view of consolidating markets and AUD’s strong correlation with equities.
NZD~ price action is a lot more livelier than its neighbour. I’ve pointed out a potential head and shoulder pattern last month and price action is still holding under the shoulderline. While I prefer AUD and CAD for risk downside, NZD would be preferred for upside plays with solid bounces off the pivot level below for two straight weeks. NZDCAD long (if sentiment remains somewhat positive) and AUDNZD short (on flatter sentiment) appear attractive ideas for the week.
Lots of ideas depending on how things unfold and I suspect it will be one of those week’s where flexbility and more nimble trading will be rewarded. Last week was a grind for me so hoping for some better trading this week.
Best of luck!
