Warm, and fuzzy (literally)…
EQUITIES
SPX closed some 10pts above my perceived shoulderline at 4220. Would like to see how the day’s price action looks given Friday can produce some idiosyncratic moves especially with Meme stocks surging, but the plan remains that I am wrong above 4220 and will either be exiting or trimming down my position, or let it run to stop if we make new ATH’s.
Looking at the updated Emerging and Developed markets chart, last week produced a strong breakout with some tentative signs of stalling. Still too early to say whether we rip higher and have formed a solid base to build upon for the month, or begin to rollover and produce a false break, a scenario of which I’m hoping for...
Last week I’ve posted seasonal charts that points to a challenging month for risk and while there also numerous charts floating around twitter that suggests something similar over the course of the next few months, BofA put out an in-depth and interesting seasonal study last week to offer a wider perspective:
Bonds
Treasury yields took a hit on Friday’s NFP and we saw some bull flattening in the curve with stocks rallying. While I think the report wasn’t bad, it obviously wasn’t good enough to warrant more hawkish pressure on the Fed. This week’s CPI and inflation expectations will be important to see how we progress but I fail to see US yields head lower from current levels with a hiking cycle upon us in the not so distant future.
Commodities
CRB index had a strong week breaking out of the classic consolidation pattern but I do wonder (as many technicians I would imagine) if this is a final exhaustion wave. Momentum would have to pick up to convince me otherwise but as it stands, its looking a little like it…
G8 FX
USD ~ NFP weaker than expectations but overall report was still a satisfactory one with majority of jobs added in hardest hit areas. Overall, employment is continuing to rise and there is more to suggest it will continue. Thus the more pressing question is inflation for the Fed and CPI data and possibly UoM inflation expectations will be of focus for this week and I doubt these will suppress inflation concerns much as I don’t see price pressures dissipating in the near-term. Technically, sell on rallies bias remains with up-legs in the USD being weak in comparison to down-legs, but as I am also of the view that upside breakouts in risk assets can potentially tire out and mark range tops as we head closer to a Fed tightening cycle. I therefore see possibility for USD to see a relief rally with the DXY weekly chart interestingly showing a sequential 13 buy count.
EUR ~ ECB likely to maintain dovish policy and talk down PEPP tapering but probably not important for EUR. Economic data has been extremely resilient so far this year with the CitiFX Economic Surprise Index (CESI) still up at historical highs and should keep EUR supported with European reopening underway.
The reopening narrative is starting to look aged (especially with EURUSD tracking rate movements) and with strong data expectations, I am tempted to look at the data outlook with a contrarian lens. Zooming into CESI, we are seeing lower peaks in European surprises and sloping down into June while the US CESI (purple) is looking like it may have dipped.
Rate differentials still trending below May highs on nominal and real terms…
With the belief US rates are amid the lows going forward, I’m seeing limited upside to EURUSD and I generally favour EUR over USD shorts in terms of which way I see the risks are now skewed. Pairs like EURNZD (possibly EURAUD) and EURMXN getting my attention.
GBP ~ A few data points this week should keep GBP supported — UK reopening in full swing and this continuing to get reflected in incoming data. GBP on dips should be the prevailing medium-term bias and have added GBPCHF long last week to my longer position trading book. That said, GBP price action has been rangey with momentum lacking, and I also see potential for bearish technical breaks in this (brexit peak) area and I will be looking both-ways intra-day for the tactical book.
JPY ~ nothing new to add and dependent on yields and how risk assets trade. I have long been eyeing CADJPY short for when I have some conviction with positioning on both sides having potential to produce an outsized move.
CHF ~ I continue to like shorts being overbought and I would think the strong sentiment would draw flows away from the low yielding CHF. While I’m long GBPCHF, I think USDCHF is also worth keeping an eye on for upside as it has been languishing just below the 0.9 handle for the past month.
CAD ~ Rising crude prices makes it difficult to short CAD but the rally has been losing momentum as it nears the 70 handle in WTI. I’ve been fortunate to catch USDCAD at 1.20 and looking for 1.2050 to hold as support.
AUD ~ RBA still faces subdued inflation and wage pressures to remain one of the most dovish in G10 but AUD is getting support from Iron Ore prices. Momentum has been weakening however and I suspect 1200 handle could cap upside as China attempts to curb prices as well as introducing pollution/production measures, tensions with Australia, and high shipping costs continuing to exert downside risks to demand.
NZD ~ I favour NZD over commodity peers AUD and CAD. Was unable to hold onto strength after RBNZ’s hawkish surprise looking at AUDNZD — looks in part due to a bounce in Iron Ore prices as well as softening in Dairy prices. With AUDNZD being back to pre-RBNZ levels however (and assuming relative commodity prices constant), I would be interested in selling AUDNZD on policy divergence with RBA’s long-faced subdued inflation and wage pressures.
Wishing you a good week trading.
