SPX and Risk Dip Buying Fading, Dollar Turn the Real Deal?
- As North Korea - US tensions ease, the market has reverted to its familiar 'buy the dip' mentality
- While the VIX has retreated from 16 and S&P 500 climbs from its stumble, conviction is flagging well before the key breaks
- EUR/USD, AUD/USD, NZD/CAD, GBP/NZD and Oil all offering appealing setups for very different reasons
Once again, a wave of fear has crested and retreat in the global financial system. The escalation of rhetoric between the US and North Korea brought political uncertainty and global safety back in the forefront, but the threat to full scale crisis has dissipated well before it has set the financial system fully ablaze. DPNK Leader Kim Jun Un has backed off of his threat to launch a missile on US Territory Guam as the mid-August deadline has come and gone, while US President Donald Trump has kept off of Twitter and eased up on the heated language through press conferences. As this threat retreats, the familiar buy-the-dip effort has returned. However, this very effort to take advantage of temporary swells in fear - and nothing more - has readily showed its limitations again. Pace has already tempered for US and global equity indexes along with the other more pointed risk assets just as critical highs have come into view and conviction is needed to forge the next leg higher.
With the steadying of sentiment, we have also seen the havens lose ground. The Yen and Swiss Franc crosses have rebound while gold has failed yet another effort to break its multi-year bear trend. One traditional haven that has yet to fault though is the US Dollar. Though concern had risen this past week, we never came particularly close to the full-tilt panic that would promote the Greenback for its ultimate liquidity standing as it had enjoyed in the past. Further, when the North Korea war of words was in its full stride at the end of last week, the Dollar did not offer a clear response one way or the other - whether haven or fundamentally exposed. It therefore stands to reason that we wouldn't see a move as the pendulum swings in the opposite direction. Nonetheless, the Dollar looks to slowly be regaining traction. For AUD/USD, NZD/USD and GBP/USD that has led to tempting technical progress. With EUR/USD and USD/CHF, the key boundaries are still in place. Will the FOMC minutes be able to leverage rate speculation where it has struggled lately? It would be a struggle, but then again the market has been taking a more meandering course of late.
Among the more active currencies this past session, the Pound had the wind behind it while the New Zealand Dollar seemed to borrow from outside standard themes. The Pound continued extended a drop with pairs like GBP/USD and EUR/GBP as UK CPI struggled to lift BoE speculation and confidence never really rose around a UK government proposal for a customs deal with the EU through Brexit. We'll see if jobs data ahead can tap deeper themes of BoE timing or Brexit conviction, but more likely it will be limited to concentrated volatility with any surprises. From the Kiwi, NZD/USD's tumble continues to impress while GBP/NZD gives a dichotomous volatile range. Here the fundamental force was particularly light, but producer inflation ahead could add structure to the RBNZ forecast. Outside the standard docket and easily read fundamentals, traders should also keep an eye on Bitcoin and the Chinese Yuan. The cryptocurrency's incredible five-day advance to record highs earned a matching 12 percent intraday retreat Tuesday - exploiting the influence of speculative exposure. And for China, the IMF reminded us of what the market has long contemplated: the threat of a financial crisis surrounding debt. The group upgraded its debt-to-GDP forecast for the country and again warned of the risk it posed. We discuss the market developments of the past session and what will have a better chance of carrying forward in today's Trading Video.
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