US Dollar Talking Points:
- The Dollar's fundamentally-light, two-day charge throttled back Wednesday, leaving USDJPY's breakout without traction
- A US-China trade war development could have triggered a flighty market to risk aversion but the Dow kept its extremely tight range
- Growth will be a key topic ahead with the European Commission and BOE updating forecasts, but will it move FX - much less risk - markets?
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Trade War Progress Dims but the Dow and Other Risk Assets Hold Firm
This week has been defined by its dichotomy in risk trends. Monday's open offered a broad surge in most benchmark assets with a speculative bearing, but we have seen absolutely no qualitative progress since that gap. Yet, nor have we seen the collective build up in enthusiasm over the past month undercut by this overt collapse in conviction. The risk that we face with this sort of long-risk exposure is that the fundamental deficit eventually catches up with positioning. It is easy for the herd to ignore traditional warning signs in the economy and financial system so long as momentum gives us somewhere else to look. Yet, the more time there is to contemplate the personal risk the market's participants are taking, the more likely they are to reduce that exposure. Further, with benchmarks like the S&P 500 at records, use of leverage at records, volume deflated and even hedges being used as risk exposure; the capacity for a disorderly correction are significantly higher.
Looking at the range of risk benchmarks that I like to refer, the lack of traction is easily registered. From global equities (ACWI) to emerging markets (EEM) to carry trade (EURJPY), we are met with the same three-day tight-cluster of historical range following Monday's pronounced opening gap. At present, the Dow offers the most impressive of the readings, both statistically and technically. The three-day historical range as a percentage of spot on this blue-chip index is the smallest since December 2017. Adding in the technical basis, this impromptu consolidation has occurred at a record high, but it still falls within a larger rising wedge formation. Not a true breakout with the same glaring conviction as, say, S&P 500. The Dow still suggests that it could reverse.
Chart of the Dow Index with 3-Day Historical Range as Percentage of Spot (Daily)
Chart Provided by TradingView
What makes the market even more interesting is that we were met with another systemic fundamental check that could, under other conditions, send a shockwave of volatility through the system. And yet, Wednesday, it would not. The progress on US-China trade negotiations trumpeted over the weekend and into the very open of trade this week was the genesis of the resent thrust that has sense lost its traction. Given that connection, a reversal in sentiment via the same outlet would theoretically pose a risk of reversal - in course if not momentum. That said, the reports that Presidents Trump and Xi may push back their signing the 'Phase One' deal to December didn't seem to perturb the broader market too much. On the other hand, USDCNH responded with more volatility around the closely watched 7.0000. I don't think traders should expect this round figure to hold up as distinctly as support as it did as resistance.
Chart of USDCNH (Daily)
Chart Provided by TradingView
Europe's Recession Risk and UK Brexit Fear-Saddled Growth Outlook Updated
We should expect trade wars to remain a theme of considerable potential with the proper headline - or just a heightened state of awareness by the markets. For scheduled event risk related to this theme, Chinese reserves could offer some closer connection; but these are not figures that have proven a high level of market movement consistently over the past months. In contrast to the slim pickings on trade insight - at least scheduled points - we have plenty of scheduled event risk ahead when it comes to growth. This past session, German factory orders, Eurozone and Japanese PMI final readings offered some modest improvement. In contrast, the global perspective of the Markit activity report showed a slowdown in the headline figure to its lowest since February 2016.
On tap for the upcoming session, Europe will offer up the most resounding update on economic activity. At the top of the watch list is the updated European Commission's economic forecasts. There is serious concern that this enormous collective economy could stall in the near future - a warning issued by many groups including the IMF, WTO and even local policy officials. We will see if this proves to be the case. Adding to this principal report, we will also have the ECB's monthly economic bulletin and Germany's industrial production figure for September (an appropriate precursor for what is expected to be an official recession signal for the EU's largest member next week). What can this do for the Euro? Systemic risks haven't offered much traction lately, so set expectations to reasonable levels.
Chart of EURAUD with 200-Day Moving Average (Daily)
Chart Provided by TradingView
Another noteworthy update on growth will be issued by the Bank of England. Ahead is the so-called Super Thursday policy meeting which comes equipped with a rate decision and updated forecasts. There is always an outlier chance that the central bank may feel it necessary to move on inflation with a no-deal risk diminished, but that is very unlikely. We are still awaiting a clear course on the UK's divorce from the EU, and that will continue to act like an anchor on the Sterling. Nonetheless, keep tabs on the economic evaluation with recent developments (like the Brexit extension) incorporated.
Chart of EURGBP with 50-Day Moving Average (Daily)
Chart Provided by TradingView
Dollar's Two-Day Rally Ebbs, What Do the Major's Stand Now?
Perhaps the biggest shift in pace this past session from a major market was the stalled Dollar rally. The currency earned an impressive two-day rally Monday and Tuesday, but it was a struggle to find a clear motivator for such a pronounced move that wasn't simply technical in nature. A safe haven appeal wasn't likely given the performance of risk trends. There was no economic update that would put the US at great advantage. The outlook for rates had improved with a forecasted rate hike by the end of 2020 above 50 percent, but that isn't exactly a new development. More understandable would be a reversal on channel support as the market couldn't muster enough conviction for a breakdown. In turn, we followed a path of least resistance.
Chart of the DXY Dollar Index with 100-Day Moving Average (Daily)
Chart Provided by TradingView
For EURUSD and AUDUSD, this throttling has slowed the pace of range-based moves that are lower boundary and could more readily resuscitate momentum with another push or even speculative wind. USDJPY on the other hand was in the early phase of a breakout attempt this past session that lost its drive at the worst time if traditional technicals were observed. Will the pair simply list on the action side of a break until something else comes along and lifts it further or will the loss of momentum turn false break into reversal?
Chart of USDJPY with 200-Day Moving Average (Daily)
Chart Provided by TradingView
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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