Happy 4th of July!
We’ve seen a complete reversal in USD, reversing the selling from Friday’s Jobs report. Some defensive/risk off tones so far this week:
- USD and JPY bid, High-beta FX offered
- Bonds bid, Inflation assets offered
- US stock rotation into Growth, Value dumped
- Bonds bid, Yields lower
While charts are pointing to reversals, I’m a little suspicious of that directional cue with markets looking less hawkish that it did before NFP — rates lower, and Gold higher from pre-NFP levels, and having reversed towards some potential pivot levels we’ve seen recently.
The stark contrast in ACWI and ACWX charts shows the strong bounce back in US equities from the FOMC dip while Developed markets are still consolidating lower but finding some support around the 20wma level. EM equities unable to hold on to the strong post FOMC bounce is now trading below the 20wma.
US sector performance showing defensive characteristics
S&P500 volatility metrics suggests some nervous so far this week but far from looking fearful.
CRB commodities index is eyeing a test of the strong trendline support after a bearish engulfing print, but there is a lot of chop around this recent pivot level so I’m skeptical of a deep continuation and could be tempted to use this as one cue to get on a bullish cyclical trade of some sort at new lows.
Bonds to continue to remain bid with major 10year yields turning lower. Japanese bonds the odd one out, not sure why but ‘might’ be in response to the expectations of more stimulus in coming months https://www.bloomberg.com/news/articles/2021-07-06/japan-expected-to-deliver-at-least-180-billion-in-new-stimulus?sref=dJOSAJZH.
Eurodollar is showing a less hawkish market since the Jobs report — December 2023 contract priced out over 10bp of hikes from pre-NFP levels.
Some big swings in positioning data — $10bln of USD was net sold for the week ending Tuesday 29th June,almost 13bln net sold vs EUR, 3.7bln sold vs CAD, while almost 8bln was net bought vs JPY.
We’ve seen a fairly big reversal so far this week with Equities, Yields and Commodities all pointing to some continued selling in risk in the near-term. But the fact that markets are looking less hawkish makes me skeptical of those directional cues and makes me believe that the selling will be short-lived and would therefore prefer buying dips in high-beta’s over chasing the momentum reversal.
General FX views:
- USD ~ Light calendar this week and as long as the market is less hawkish, than it was prior to NFP, I favour the short-side against high-betas.
- EUR ~ I continue to like EUR as a funder of carry trades.
- CHF and JPY ~ I see these paring losses against the USD with the market pulling back on hawkish bets. We are also seeing the effects of supply bottlenecks on output and activity while we have to wait longer to see just how extended the transitory inflation effects will be.
- CAD ~ appears to be suffering from Oil prices falling as the market expects OPEC+ to loosen up production. It seems a lot of the good/hawkish expectations in CAD is in price and even with an economically strong post-pandemic recovery, I would be far less bullish on CAD than I have last Quarter. In fact, I am being increasingly drawn to short CAD relative value ideas against AUD for example…
- AUD ~ Inspired from Westpac Chief Economist Bill Evans who sees RBA hiking in 2023, there could be a pricing gap to take advantage of in AUD with RBA turning hawkish sooner than market was led to believe saying a hike was “unlikely to be until 2024 at the earliest”. Long AUDCAD is the way I’m looking to express this.
- NZD ~ Still like NZD longs — increasingly hawkish rhetoric, looks cheap on rate differentials and soft commodities to outperform with more hawkish policies on the horizon and food demand stays strong.
- EMFX ~ short EURMXN EURZAR are my favoured expressions for buying the dip in the cyclical theme in FX.
Will be a hectic week for me personally (and quite possibly the next couple of months) so I will be spending much less time in front of the screens and on twitter.
Wishing you a great week trading!