Will EUR hold the post-election gains? See our forecast to find out!
Talking Points:
- JPY falls aggressively as outcome of French election seen as risk-on
- DXY could breakdown on multitude of factors
- EUR/USD 55-WMA in focus
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Most attention on Monday is placed squarely and appropriately on European Assets. The DAX has broken to all-time highs and has traded more than 400 points or 3.3% higher. Additionally, German Bund prices on the front end have dropped aggressively sending the yield up 11.9%. The higher yield aligned with EUR/USD pushing higher as EUR/USD weekly open gap was the largest on record per Bloomberg, which brings us to the top chart.
Should the price of Bunds continue to fall, which is predicated on presumed tapering that could be announced by the ECB this Thursday, but most likely, in June we may see the path for a clear move higher in EUR against weaker currencies. In late-April, the weaker currencies have been commodity currencies and the USD. Stronger currencies have been JPY, GBP, & EUR.
The commodity picture could turn the way of Bonds yields, which is to say Bearish. While there remains a lot of managed money netlong certain parts of the commodity landscape, most notably, Crude Oil the price is not responding well.
A further breakdown in key commodities like the base metal Iron Ore or Oil could see a flush out of long positions. The level in Crude Oil that a lot of traders are watching to see if the price holds is ~$48/bbl. A look at the Bloomberg Commodity index shows it trading below the Trendline drawn off the 2016 lows. Commodity pricing is a key input to bond yields rising, and a sustained drop in commodities could lead to suppressed yields.
In the topsy-turvy world, we find ourselves in; this environment of potentially lower yields and lower commodity prices seem to be a unique set-up for higher equity prices. In other words, the perma-bears may have another rough summer. Lower commodities and lower yields mean lower input prices and cheaper borrowing, which could continue to support earnings.
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Closing Bell’s Top Chart: April 24, 2017, EUR/USD Breaks Higher To 55-WMA, Bund Drop Could Assist
This Week’s Main Event:
Given that the French Election outcome of a Macron/ Le Pen run-off on May 7th was seen as risk on (“It is a bull market, ya’ know) traders should know turn focus to Draghi on Thursday. Thursday’s ECB meeting is not expected to bring about a change in the stance of the ECB, but if Draghi acknowledges the up-tick in data, we could see Bullish support for EUR/USD. While Economic Data from Europe has consistently beaten expectations for the past 6-months, June’s ECB meeting will provide new economic forecasts from the ECB, which will provide a clear commentary on the ECB message going forward.
IG Trader Sentiment Highlight: GER30 Bears Fight Risk-On Rally
Germany 30: As of April 24, retail trader data shows 19.4% of traders are net-long with the ratio of traders short to long at 4.16 to 1. The number of traders net-long is 31.0% lower than yesterday and 38.0% lower from last week, while the number of traders net-short is 86.4% higher than yesterday and 108.8% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Germany 30 prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Germany 30-bullish contrarian trading bias. (Emphasis Mine)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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