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EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

John Kicklighter, Chief Strategist

S&P 500, USDCNH, AUDUSD, EURUSD Points:

  • Tuesday closed out the second quarter with the largest risk-leaning rally – at least for the S&P 500 – since 4Q 1998; but rebound should not overshadow volatility
  • Growth figures were a key theme this past session and will likely be again Wednesday with EM PMIs in particular, but remember COVID fears and trade pressures
  • EURUSD and AUDUSD sentiment data shows the heavy net short speculative anticipation is progressively easing as congestion holds for both pairs, but I’m more cautious

A Modest Risk Advance to End June but Reminder of Serious Liquidity Concerns

Tuesday market the close of both the month of June and the second quarter. If we were to focus on the session itself, there was a mild risk appetite slant behind the day. The S&P 500 extended Monday’s rebound from what could have been registered as an important technical breakdown the past Friday when the benchmark slipped below the 200-day moving average. There is a lot of seasonal activity that was likely involved in this performance as many financial firms have quarterly rebalancing responsibilities through these periods. In short, I am not reading too much into the price action on the day – particularly considering there are systemic issues still afoot and the liquidity drain through week’s end is still a high profile skew for which we need to account. In contrast, I would point out that the quarter’s performance for the aforementioned US index was the biggest three-month swell we have seen since the fourth quarter of 1998. That is a pace that matches the intensity of the previous quarter’s incredible tumble. Volatility begets volatility, and I don’t think conditions have truly normalized just yet.

Chart of the S&P 500 with 50 and 200-Day Moving Average and COT Positioning (Daily Chart)

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

Chart Created on Tradingview Platform

However, my view may differ from that of the broader market; so I put the consideration to ‘FinTwit’ (the financially interested in Twitter). In my poll of approximately 100 responses, approximately 71 percent of respondents expected volatility in the market to be ‘as volatility’ or even moreso through the second half of 2020. Given the state of the resurgence in coronavirus cases, the indulgent expectations for a V-shaped recovery (which I believe will be dashed) and the particular influence of the US elections; an outlook for volatility is a reasonable one.

Chart of the S&P 500 Overlaid with Ratio of US 10-Year Yield to VIX Index (Monthly Chart)

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

Poll from Twitter.com, @JohnKickligthter Handle

Coronavirus Cases Hold Fast and Trade War Fears Grow

On the fundamental side of things, there are issues for the future and those for the immediate foreground. In the latter category, the spread of the coronavirus remains an imminent concern. Through Monday’s tally, the cases of infection by the COVID-19 strain were slightly lower than the day before; but it was nevertheless just off record highs. This is a serious crisis for global health, but it is also a threat to economic health. There remains a reticence to take a federal response for countries like the US, but businesses and consumers are already taking stock. Furthermore, there is a relative response that raises trade war ghosts. This past session, the EU Trade Commissioner said he expects relations with the United States to hit a ‘rough patch’ in the lead up to the elections.

Graph of Worldwide Cases of Coronavirus (Daily)

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

Chart from Google with Data from Wikipedia

Meanwhile, the pressure between the US and China is already hitting new highs. The latter country’s statistics group reported manufacturing and service sector activity grew more than expected in June – a print many traders question – and the United States will have its own factory update (from the ISM) in the upcoming session. Perhaps more pressing though were remarks from President Trump that reiterated his belief that the blame for the coronavirus should be placed on China while Chinese President Xi Jingping signed the Hong Kong security law that would inevitably draw criticism from the West at large.

Chart of USDCNH with 15-Day Range as Percentage of Spot (Daily)

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

Chart Created on Tradingview Platform

Complacency Builds for AUDUSD and EURUSD Ranges

With the backdrop of escalating US-Chinese trade pressures, the AUDUSD is a ‘major’ that draws a little more attention from me relative to its peers. The pairs has the PMI figures from Australia and the US to consider, but that isn’t the most systemic scheduled event risk to direct fundamental expectations. As we follow systemic issues for market guidance, technical cues for congestion are working their way into a deteriorating pattern that could readily turn into a break of necessity – though such layouts don’t have to be the foundation for trends. Is there a trend building for this pair?

Chart of AUDUSD with Retail Speculative Positioning from IGCS (Daily)

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

Chart Created on Tradingview Platform

With speculative positioning as a guideline, EURUSD is seeing a similar recognition of price-based congestion while retail traders are growing noticeably complacent on the backdrop for volatility. It is also worth nothing that net speculative futures positioning is the most net-long since May 2018 – there is a notable difference in the strategy and duration between the retail FX and large speculative futures traders categories. As a benchmark for the FX market – and markets at large – the restraint expected from the markets is evidence of complacency creeping back into the financial system.

Chart of EURUSD with Retail Speculative Positioning from IGCS (Daily)

EURUSD, AUDUSD Breakout Expectations Ease, SPX Ends Best Quarter in 22 Years

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

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