Dollar Talking Points:
- The month of October has ended with risk appetite holding its ground but not marching forward with serious enthusiasm, a problem for SPX
- Uneven enthusiasm found in trade negotiations and a tepid growth backdrop faltered, leaving some risk assets stranded and others at limits
- Despite the lost traction in risk appetite, the Dollar's slide held which leveraged a USDJPY reversal and call interest to other USD Pairs
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Risk Trends Stall Before the S&P 500 and Dow Forge Critical Break
Having passed through 48 hours of heavy event risk that touched upon multiple high-level themes, we were on the verge of some critical bullish trend development. Yet, the transition from spark to full-blown trend would not be bridged through Thursday's active session. With the S&P 500 already pushing a record high, it would have seemed a foregone conclusion that follow through was in the cards. Instead, the next stage of the bull trend that would have been established should the market gain enough traction to clear the upper boundary of a rising wedge pattern stretching back to the January 2018 peak never took. Given the implications of venturing unencumbered into record highs - with a significant skew in speculative premium - it would always be difficult to feed a sustained bull trend at this stage. Yet, another consideration is how robust buoyancy is without a fundamental platform to support a pause.
Chart of S&P 500 (Daily)
Chart Provided by TradingView
As we have often done as of late, the conversation of next steps for most individual markets or asset classes is best determined by the overview of broad risk trends. There is debate on the technical side as to what would be worse: a breakout that loses traction soon after igniting (S&P 500, EEM, VEU) or a stall that holds within its technical bounds (USDJPY or Dow). I believe there is some further measure of urgency in the former scenario; and given the position US indices hold among global speculators, that should be a risk closely watched. Another aspect of sentiment moving forward is seasonality. The month of October has come to a close, and with the period that represents one of the heaviest for volume (S&P 500) and volatility (VIX). That norm is averaged out over decades. What we saw in 2019 clearly defied convention. That begs the question as to whether we will depart from the norm for November and December. Volume and volatility drop through these months while some of the best traction for speculative enthusiasm occurs over this stretch.
Flimsy Growth, Monetary Policy Strain and Trade War Hopes Falter
If you were watching the fundamental landscape this past session, the trip in risk trends shouldn't have come as much of a surprise. There was considerable lift attached to the noncommittal language between the US and China in their ongoing negotiations to end their costly trade war. What modest confidence was built around supposed progress these past few weeks was significant undermined by reports that China seriously doubted the White House would keep to commitments and further that they would demand the removal of tariffs before any 'Phase Two' deal would be considered. This is important to watch as short-term risk appetite is latched onto this speculation, but don't forget that Europe is still considering retaliation for the US broader tariffs to offset Boeing and President Trump has until November 14th to decide on raising taxes against all import autos.
Chart of USDCNH (Daily)
Chart Provided by TradingView
Another questionable support to risk appetite Wednesday that isn't making it through to the final 48 hours of the trading week is the confidence built into monetary policy. The Fed's 25 basis point rate cut didn't even lift markets in the initial response, so the end-of-day rebound came with a dose of skepticism. Where the US central bank has some room to maneuver, its counterparts like the Bank of Japan, European Central Bank and Swiss National Bank are already stretching the bounds of practical reality. Thursday, the BOJ hinted that it could cut rates further, the ECB absorbed disappointing inflation data and the SNB President said negative rates were essential. All of it smacks of desperation as these tools fail. And, as for growth. The best we could must from a global update was a Eurozone GDP (0.2 vs 0.1 percent) and US growth figure (1.9 vs 1.6 percent) that wouldn't slow as fast as feared. That is little consolation when you face PMIs that show segments of key economies are already in recession.
Dollar Slide Continues with USDJPY on Pace, But Consider These Dollar Pairs as Well
While the US indices wouldn't be able to maintain their course, the Dollar wouldn't be able to afford a turn. The Greenback extended its slide this past session to push the DXY closer to the threshold of technical reversal - a fate mirrored in the EURUSD. Between moderate risk aversion and pain for the benchmark currency, the tempo for USDJPY would prove impressive. The pair was on the verge of clearing a range resistance and 200-day moving average stationed around 109; but instead, the market posted its biggest single-day drop in two months and put up a remarkable range reversal. This is arguably one of the better combinations of technical and fundamental appeal, which is why I will keep it higher on my list of Dollar bearish candidates.
Chart of USDJPY with 200-Day Moving Average
Chart Provided by TradingView
Alternatively, a DXY Index break below 97 or EURUSD charge above 1.20000 could prove difficult to forge - though not as difficult as a S&P 500 run into record territory. If the Greenback holds the higher profile technical bounds as risk aversion bolsters its appetite, global economies show greater pressure or Fed forecasts ease back on accelerated rate cuts; I have a few majors that are of appeal. Most would turn to EURUSD given its ubiquity. However, I am more interested in AUDUSD. The range is narrower, but the contrast in fundamentals is more black and white. Perhaps at the top of my 'Dollar bullish' scenario candidates is USDMXN. The technical wedge there is well established while risk, trade, growth and monetary policy could readily throw in support for an upswing. I'm watching its 200-day moving average as another hurdle to serve as another foothold for conviction.
NFPs is a Top Listed Event but ISM Manufacturing May Exert More Pressure
Whether you are looking to the Dollar's next tactical move or keeping tabs on the more capable themes to tip the scales for broader sentiment, the US docket will offer up some weighty event risk. Most will be looking to the US NFPs and its accompanying labor statistics. This is certainly important data and has a rich history of stoking volatility in past years. Yet, the scenarios here are somewhat skewed. Better than expected numbers will not offset economic concerns and only complicate the Fed's path. That said, weak figures that pressure the central bank towards a fourth rate cut in a row could sink the Dollar but not exactly stoke appetite for pre-emptive risk build up in already lagging market response.
Instead, I will afford more of my attention to the US manufacturing activity report from the ISM. While the world's largest economy is far more dependent on its service sector - that figure will come out next week - factory activity is technically in a recession according to similar data released over previous months. This is a serious risk to complacency and the more frequent the reminders to our troubled backdrop, the more likely ill-earned enthusiasm collapses.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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