MARKET OVERVIEW
G8 FX performance
Fairly flattish week on FX index view — most G8 currencies shared gains against the worst performers NZD and AUD. CHF extending its streak of gains to 5 weeks.
FX positioning
The week ending 18th May saw very modest USD selling on net — 0.074bln vs 3.054bln in prior week of USD net sold.
USD selling was mostly offset by large USDJPY buying which could be an indication of increased Fed tightening bets.
Equities
Closing back at inflection point near last week’s close produces little wk/wk change however bearish momentum has ticked up and technically this does make short ideas look more convincing than was suggested last week.
I also mentioned at the possibility of a near-term range top for equities last week, and while we saw some downside in the early half, we found some firm support and went long.
This week, I still believe we are amid range-top levels and think the case could be even stronger this week due to Options expiry this past weekend as well.
This could pave the way for another gamma build in such a way that it can exacerbate selling as more investors seek downside protection via put options — an idea I explored last month:
In case this needs explaining — as puts volumes relative to calls increases, the more the sellers/writers of puts will need to hedge their exposure by selling the underlying stock. This often involves having to sell more of the underlying than the stock amount in the options contract to be gamma-hedged in dollar-terms, and could therefore exacerbate market moves. We have seen this type of gamma squeeze recently with wallstreetbets except that time it was on the call-side.
Looking at the updated chart since April, volatility has been trending up with the rising Skew/Taildex looking encouraging for the possibility of the above scenario playing out.
(Explanation on vol measures: http://nations.com/nations-volatility-indexes/)
Commodities
Decent confirmation candle after the bearish divergence in prior week and looks like it has more room to go.
From a fundamental view, Fed tightening cycle is likely to put reflation trades at risk, and could cause nervousness in commodities as well as equities.
Bonds
Technical breakdown in T-bond ETF’s doesn’t look convincing with Daily momentum looking to turn positive. Seems to me there is fair demand for US treasuries and could also be an indication weaker sentiment as investors seek more risk parity in portfolios.
G8 FX NOTES
USD
Decline has notably slowed this year and there are a lot of technical patterns to suggest it may have come to an end for the near-term.
For example the lows on the Weekly chart is pointing to a potential inverted Head and Shoulder pattern…and the descending channel on the Daily chart (that typically resolves upwards) looks to be basing above the shoulderline and coiling for an upside break.
The above charts pointing to a bullish reversal also fits in with the main Fed tightening narratives, especially if US core-inflation continues to pick up as Nordea shows USD tends to react well from such a scenario.
EUR
Price action and EUR outlook not so clear to me, but I am leaning towards near-term bearishness due to the topside rejection last week at a key area, along with the last series of Daily candles that is suggestive of a reversal.
Could be interesting to note that Goldman (as are a good numbers of banks) still very bullish on EUR on “firming European growth” and recommends EURCHF long with a target of 1.14. This is interesting as I have been looking at CHF shorts for quite sometime...
JPY
Selling momentum is slowing into this area where price has pivoted off for much of 2017/18 and price action on the Daily is showing some symmetry and like the USD index chart — looks to be basing and coiling up for a break higher.
I have generally avoided long JPY ideas being in a rising rates environment, but given we are seeing some softer sentiment with potentially prolonged risk-off periods, yields could soften up as a result could make long JPY ideas worth considering. I still favour USD’s for now however…
CHF
I’ve a feeling this could be a false break above the 38.2 fib. I have liked CHF shorts for quite some time particularly USDCHF, but EURCHF could be worth considering if risk sentiment stays firm and European data stays solid.
Personally keen on building long USDCHF over the next week or two, though…
GBP
Momentum has slowed last week into this brexit optimism area I’ve mentioned and looking at the Daily chart, we are seeing some ‘toppish’ price action.
UK themes are still generally positive with economic reopening likely to support better economic data as expected last week. The calendar this week is light however and I think it is quite possible GBP may take a breather here and I am looking tactically short this week.
CAD
I suspect CAD could be exhausting into this pivot area — price action still very bullish but we’ve reach a key pivot area and price rarely tends to blow right through first time.
If broad sentiment turns softer for various reasons mentioned above, or see some broad risk-off kick in, CAD could be a good choice on the idea that there is likely to be plenty of fresh long positioning accumulated on the recent rally that can unwind.
AUD
Out of the major commodity-currencies, AUD looks the safest way to express short risk and relative value trades. Price action has looked toppish into the key pivot area for all of this year and now that momentum is turning more firmly bullish, I think AUD retracement is well on its way.
China has been tightening regulations in credit and other various areas, while recent data shows economic activity is coming off the boil. Further, concerns on Aus-China relations remain.
NZD
Head and shoulder pattern I’ve pointed out in prior weeks is playing out well. I’ve not traded this to the downside however and will wait to see what the RBNZ has to say later this week.
That aside, it does appear as though it has more room to go with its sights set on March lows. Persistent but small spikes in coronavirus cases in Asia isn’t helping either with NZ economy fairly dependent on tourism.
Wishing you a good week trading!
