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Nasdaq Leads the Uneven Risk Advance, USDJPY Tears Attention from EURUSD

Nasdaq Leads the Uneven Risk Advance, USDJPY Tears Attention from EURUSD

2020-02-20 05:00:00
John Kicklighter, Chief Strategist
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Nasdaq, USDJPY, EURUSD Talking Points:

  • Risk trends took a very modest jog higher this past session as coronavirus and growth headlines seemed to ebb modestly
  • Stand out in the risk crowd was the Nasdaq 100 which pushed a fresh record high and USDJPY breaking from a multi-year congestion pattern
  • Momentum in the standout moves and systemic breadth in sentiment awaits a tangible handle - perhaps Friday's run of February PMIs

Nasdaq’s Explosion to Record Highs Fails to Inspire Global Sentiment

There was a technical lean towards ‘risk on’ this past session, but that is not to say that conviction was in abundance. For many sentiment-leaning assets, there was a bullish gap on the open; but not much in the way of follow through during the active session hours of their respective home markets. Examples of this unfulfilled jump include the S&P 500, EEM emerging market ETF and the HYG junk bond ETF. Given the fundamental backdrop, the hollow conviction comes as less a surprise. The headlines around the coronavirus seemed to be less numerous in the financial media. Yet, where that had been a point of relief rally previously, there seems to be limited discount to eagerly retrace. To remind me of the fundamental stakes, the US 10-year to 3-month Treasury yield curve is floating in inversion territory – though the tickers are not flashing recession warnings they had some six months ago under similar circumstances.

US 500 MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 9% -4% 0%
Weekly 12% 16% 14%
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Chart of US 10-Year to 3-Month Yield Curve Overlaid with S&P 500 and Correlations (Daily)

Yield Curve and S&P 500

Chart Created on Tradingview Platform

One of the most impressive performances in the list of speculative benchmarks that I like to refer was the charge enjoyed by the Nasdaq 100. While there was an initial and broad jump across the US equities market, this particular index earned notable follow through and pushed a new record high for the effort. The tech-heavy measure’s performance was distinct from the broader S&P 500 and blue-chip Dow. That is a remarkable turn of events considering the warning issued by market cap leader Apple around its sales and earnings against the backdrop of the coronavirus. While the particular composition of this index has something to do with the performance, it seems that once again momentum for momentum’s sake seems to play a significant role among the speculative rank. Rather than compare US indices to global counterparts – much less more aggressively-leaning assets – the Nasdaq 100 seems to maintain an impressive outperformance relative to the broader S&P 500.

Chart of Ratio Nasdaq to S&P 500 (Daily)

Ratio of Nasdaq to S&P 500

Chart Created on Tradingview Platform

The Steadfast EURUSD Tumble Gives Way to a USDJPY Explosion

Through the past week, the most prominent focal point in the FX market was the productive tumble for the EURUSD. Easily overtaking a multi-year low established back in October, the benchmark pair continued through 1.0800 the first half of the week. This past session, the bearish wave receded somewhat with a rare advance in a bearish phase that is 14 trading days old. The charge was not significant to define as a trend change, but it does rob expectations of unchallenged momentum. The Euro saw a broad bounce, but follow through likely depends on what lies ahead. As for the Greenback, world’s most liquid currency extended its climb in by the trade-weighted DXY Index and an equally-weighted measure; so the hesitation is particularly notable.

Chart of DXY Dollar Index (Daily)

DXY Dollar Index

Chart Created on Tradingview Platform

While EURUSD’s overall performance deserve a thorough evaluation by FX traders, this past session’s most remarkable performance was undoubtedly USDJPY’s surge. The single-day rate of change was one of the largest in three years which is fitting given the severity of the technical breach recorded as the market overtakes 110.25. A bullish break on a multi-year wedge seems fertile ground for an emergent bull trend, but where is conviction to be sought for follow through? The Dollar has been on the rise for some weeks – just consider DXY – so what will move that lever enough to lift a material rally. As for the risk influence, sentiment doesn’t seem to be running with any measurable enthusiasm on global equities; so why would tepid carry trade take up that torch now? This all boils down to skepticism of follow through on a particularly impressive technical breakout. It isn’t impossible, but I remain dubious of intent.

USD/JPY MIXED
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Change in Longs Shorts OI
Daily -6% 16% 6%
Weekly 31% 8% 16%
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Chart of USDJPY with 200-Day Moving Average and 1-Day Rate of Change(Daily)

Chart of USDJPY

Chart Created with IG Trading Platform

Event Risk for the Aussie Dollar and Euro, Theme for Risk Markets Ahead

Given my lack of conviction in risk trends, USDJPY is not at the top of my watch list. For the Dollar itself, there is a more convincing story to be made. This past session brought housing starts and upstream (producer) inflation, but that does not stand out as a consistent drive. The FOMC minutes held the line while the various policy officials that had speaking engagements seemed to make a point to mention the uncertainty added by the coronavirus. Renowned dove, Kashkari took the most aggressive perspective when he suggested the epidemic could deliver a shock that leads the group to cut rates further. Before we got to that Greenback reaction however, the Aussie Dollar would likely show the ill-effects of the economic fallout from further curbed trade and consumption owing to an external influence. With the addition of today’s targeted event employment data and tomorrows PMI, there is serious volatility fodder at hand.

Chart of AUDUSD with 200-Day Moving Average (Daily)

Chart of AUDUSD

Chart Created with IG Trading Platform

In other scheduled event risk news, the Euro is a currency that has strong representation on the economic docket. The ECB meeting minutes will touch upon more overt considerations of monetary policy – whether the extreme accommodation that the group has been willing to push or the more immediate questions of effectiveness this drive has raised. The German and Eurozone consumer sentiment surveys will offer a reading closer to the closely observed coronavirus fallout. Speaking of which, my attention to them remains fixed on general economic health. The February PMIs for Asia, Europe and US Friday will draw the attention forward. An overview of global performance against the backdrop of the virus can soothe or exacerbate fears that have been held out on traders’ sleeves as of late.

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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