Dollar, GBPUSD, AUDUSD, Nasdaq Talking Points:
- The Nasdaq didn’t give a clear response following the release of most FAANG member’s earnings Thursday night, which leaves the drive on risk trends unclear for next week
- US stimulus is still up in the air as extraordinary unemployment benefit support expires, but US equities and the Dollar are ready to response Monday whether a solution is offered or not
- With a Friday rally, the Dollar keeps open the possibility of a correction – if properly supported – with EURUSD, AUDUSD and GBPUSD crosses that I’m watching specifically
An Inconclusive View on Risk Trends Except for Volatility
There was an inordinate number of high profile events and themes competing for our attention this past week; but despite a fair number of surprises, none of these sparks took command of global risk trends. Through the final trading day of this past week, I was looking to the market to cast its die on whether fortune would favor the exceptional FAANG earnings (Facebook, Amazon, Apple and Google specifically) that reported Friday after the close or the reality of the troubled economic outlook. Friday’s price action was inconclusive on conviction. The Nasdaq 100 – a pacesetter in global markets these past years – ended the day with a measured gain founded on the opening gap and large lower wick. That is indecision personified and offers little carry over into next week. So, either FOMO reasserts itself, a new lightning rod takes control or the risk of retreat will grow quickly.
Chart of Nasdaq 100 Index with Nasdaq to VEU Ratio in Purple and Daily ‘Wicks’ (Daily)
Chart Created on Tradingview Platform
Though it may seem that momentum-supported risk appetite is the default setting for the markets, there is a troubled backdrop should investors chose to pay closer attention. Speculative value and ultimately market performance is in the eye of the (collective) beholder, and the herd can readily downplay a stuffy consideration like growth outlook in favor of a panicked reach for yield. However, such conditions don’t make for a particular robust backdrop to fend off sanity checks. Essentially a cap on volatility or risk must be held in place because a review of return potential will show there is very little yield to be found. In fact, it is this anemic rate of return that is driving the reckless drive to ‘buy high with hope to sell higher’.
Chart of S&P 500 with G10 10-Year Government Bond Yield Aggregate (Weekly)
Chart Created by John Kicklighter with Data from Bloomberg
Dollar Watches Stimulus and Now Credit Risks
With risk trends lacking for a champion to carry a clear bullish or bearish trend into the new trading week, I will be watching for any external factors to exert any big pushes. While US earnings season is still ongoing, there are few listings that look to reach the heft of an Apple, Caterpillar or Ford for thematic sway. Economic health may not have quarterly growth updates from governments in the hopper, but the subject will not be far from mind. In particular, if the US government manages to pass a stimulus program over the weekend; it could flush the kind of short-term reassurance we have seen so often these past years. This is a consideration for the S&P 500 as well as the US Dollar. EURUSD’s charge following the EU 27 leaders’ approval of its 750 billion euro stimulus package still clearly lacks an ‘answer’ from the US. Could that relief come soon?
Chart of DXY Overlaid with US 10-Year Treasury Yield and 20-Day Rate of Change (Daily)
Chart Created on Tradingview Platform
Should the Dollar Reverse Course for a Recovery
The Greenback is struggling for traction. While the currency still maintains the role of a safe haven of last resort, it is struggling under most other scenarios. The slide in growth prospects, floundering expectation for stimulus and building sense of uncertainty through concerns like the upcoming election have offered more than enough doubt for bears to keep control. However, a more systemic threat may soon take the reins: reserve status. Extreme duress brought on by the pandemic has amplified the concerns about the Dollar’s fitness for top reserve status. Despite that, the market seemed to keep its composure around USD. Yet, Friday’s headline that credit rating agency Fitch lowered its outlook on the US top sovereign credit rating (AAA) to ‘negative’ reminded that uncertainty is not just a consideration or others.
Twitter Poll: ‘What Is Your Preferred Dollar Recovery Option?’
Poll from Twitter.com, @JohnKicklighter Handle
In general, I like to evaluate potential and probability of sentiment and markets. The prevailing wind supports a further Dollar slide; and in that event, EURUSD is still interesting. The addition of reserve stability may raise interests in Gold and Bitcoin, but liquidity is first and foremost should things go awry. And yet, where my expectation for bearing holds with probability, I like to have options scoped out for alternative outcomes. For a Dollar rally, EURUSD is arguably just as fitting should the recovery be prompted by the announcement of fresh stimulus. It also bears mention that net speculative futures positioning is at a record.
| Change in | Longs | Shorts | OI |
| Daily | -1% | -4% | -3% |
| Weekly | 4% | -10% | -5% |
Chart of EURUSD with Net Speculative Futures Positioning (Daily)
Chart Created on Tradingview Platform
Where EURUSD cleared its heavy, multi-year resistance and thereby separate the alignment of technicals and fundamentals, Cable is still wrestling with its own major resistance. GBPUSD tagged its multi-year trendline resistance and shied back. Though post-Brexit trade negotiations are still an uncertainty and the BOE Super Thursday is key event risk, the roll back of pandemic easing procedures can create a bearish foothold.
| Change in | Longs | Shorts | OI |
| Daily | 3% | -7% | -3% |
| Weekly | 4% | -10% | -5% |
Chart of GBPUSD with 50-Day Moving Average (Daily)
Chart Created on Tradingview Platform
Perhaps one of the few pairs to give EURUSD a run for its money (pun intended) for Dollar potential is AUDUSD. The technicals track a remarkably consistence trendline support with the 61.8 percent Fib of the pairs historical range above around 1.72. Fundamentally, this currency has climbed against economic struggle, strain in a key economic relationship with China, a crush in both rates and carry interest as well as a record high in coronavirus cases. Perhaps the RBA will bide more time against fundamentals or perhaps it can finally push the pair over the edge.
| Change in | Longs | Shorts | OI |
| Daily | 2% | 3% | 2% |
| Weekly | 29% | -46% | 0% |
Chart of AUDUSD with 20-Day Moving Average and Net Speculative Futures Positioning (Daily)
Chart Created on Tradingview Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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