Talking Points:
- Risk trends continue to settle from this month's extreme volatility, but the Yen is attempting a notable divergence
- The Dollar wouldn't be able to make it to five straight days of gains as a lack of fundamental drive bowed to technicals
- ECB minutes showed no budge on the stubborn dovish bearing for the group, but what really stuck out was concerns of USD manipulation
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Risk Trends Settle
The scars of volatility from earlier this month are still visible, but markets seem to be settling nicely. Concern that the late selloff in US equities Wednesday evening would spill over into the next phase of risk aversion proved unfounded. Risk assets this past session seemed to chose range rather than forge new paths either higher or lower. For the S&P 500 and Dow, a gap higher on the open would turn into an 'inside day' that further caps their respective range for the week. For comparison, the Dow is currently working on a week's range that is less than 500 points where the previous two weeks carved out wide swings of approximately 1,200 and 2,200 points respectively. We are far from technical boundaries that would readily signal a critical break and it there are few obvious fundamental themes that are actively taking up the call to dictate sentiment. It is once again, better to adapt with shorter-term trading rather than commit to a lasting sentiment position whether it be risk on or risk off.
Dollar's Recovery Stalls Out Ahead of Fed Update
The four-day climb the Dollar managed to notch through Wednesday was perhaps heartening some FX traders, but there was little momentum behind the price move and even less tangible fundamental charge to base enthusiasm for continuation to break serious levels. That lack of commitment caught up to the currency Thursday with the first down day in five trading sessions. There wasn't a strong fundamental spark to hang this correction on. The Fed speak on tap seemed to stick to the general script we've seen from the group. Instead, the technical range for the past month from the ICE Dollar Index and EUR/USD seemed to hold more sway on the next move than anything fundamental in nature. This reiterates that we need something tangible to instill conviction and motivate the next move. And, while Fed rate speculation has been a woefully lacking keeper for the Greenback, perhaps the upcoming semi-annual update on monetary policy from the FOMC to Congress will prove weighty enough. This is in advance of Chairman Jerome Powell's first grilling in Washington next week.
The ECB Makes Interesting Accusations
There are a few underlying themes that have helped lift the Euro over the past year, but all of them seem to have deflated over the past weeks and months. We have seen the assumption of relative political stability undermined by the difficulty for forming a German coalition government and with the Italian vote next Sunday. The supposition of superior growth trends has been curbed by the recent PMI figures. And, most importantly, the ECB has actively attempted to undercut rate speculation. In the the minutes following the January rate decision to hold rates, the group was obstinate in its refusal to offer any inkling of hawkishness for speculators to seize upon. That wasn't the most interesting feature of this event for me though. That was the concern expressed by a group of ECB officials that the Dollar was being deflated artificially by US policy which in turn was lifting the Euro. I find that extremely ironic given the European authority drew an express connection between monetary policy and an EUR/USD exchange rate in 2014 that went on to contribute to a 3,500 pip tumble.
Technical and Short-Term Moves
While we await the next high profile theme to develop a lasting trend to jump on, traders should keep tabs on the productive and short-term developments in the market. On the fundamental side, the Canadian retail sales figures this past session led to a big drop for the Loonie across the board which exaggerates a long slide for the currency. The upcoming Canadian CPI figure carries a lot more fundamental weight all else being equal. In commodities, gold checked higher and subsequently avoided its own 5-day slide; but given the motivation for this shift was a tepid dollar, anticipation of a short-term momentum play should be kept in focus. Crude oil meanwhile has a range of technical levels that are explicit and seemingly closely abided by price action. We discuss all of this and more in today's Trading Video.
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