EURUSD, GBPUSD, S&P 500 and Nasdaq 100 Talking Points:
- Risk aversion took a hit during afternoon hours in the US session with a particularly sharp loss for the Nasdaq 100 relative to benchmarks like the S&P 500
- While there are high level events ahead like US CPI and UK GDP, top listing on my docket is the ECB rate decision and the EURUSD’s response
- Despite UK PM Johnson’s in-person meeting with EU President Ursula von der Leyen, the two sides have pushed out the post-Brexit timeline rather than find a solution
Risk Aversion Shows Up with Nasdaq Slump and Dollar Jump
For a week preceding Wednesday’s session, risk-leaning assets were grinding to a virtual standstill. That early transition into holiday trading conditions may have broken course Wednesday – though is not exactly clear as to what is carrying the torch of nascent risk aversion. Looking to the dimensions of speculative downshift this past session, it is worth noting that the slump was fairly universal for asset classes. From US indices to emerging market currencies to junk bonds, the speculative slide was showing through. That said, it was interesting to note the difference in standing between the likes of the S&P 500 and the German DAX or UK FTSE 100. This is not a unique situation for US assets but rather a simple distinction between trading sessions. In other words, it seems the slip in enthusiasm came during the afternoon hours of US trade. Another highlight to give dimension was the particular intensity of retreat from the Nasdaq 100 relative to broader outperforming measures like the S&P 500. This suggests that benchmarks with more speculative build up suffered more.
Chart of S&P 500 Overlaid with Nasdaq-to-S&P 500 Ratio and Rate of Change (Daily)
Chart Created on Tradingview Platform
It is fully possible that the risk aversion tide seen through this past session was a natural response to days of quiet and listless grind higher. Such corrections are typical in normal trading conditions and we are not yet so deep into holiday trade that this cannot fit the current conditions. On the other hand, a basic countertrend development is one that is unlikely to evolve into a prevailing trend without a clear fundamental motivation to pick up the reins for driving a persistent trend. To that effect, there are a few matters which could have urged the change in tack. Concern over stimulus may have been just such a compulsion as it the hope around a $918 billion stimulus program brought by the Trump Administration by Treasury Secretary Steve Mnuchin was roundly rejected by Congressional Democrats for dramatically reducing direct stimulus to Americans. Interestingly, the Dollar also managed a modest bid – neither broad nor intense, but measurable. This could reflect a safe haven status for the Greenback, but this too would need more traction to turn trend.
Chart of Google Trends Worldwide News Search for ‘Vaccine’ and ‘Stimulus’ (Daily)
Chart Created by Google
Bank of Canada Holds Course, Now the ECB is On Tap
For top direct event risk this past session, global macro traders were likely trained on the Bank of Canada (BOC) rate decision. That is not due to the sheer magnitude behind the central bank’s global influence but rather owing to the update this particular group could edge for a more universal theme: monetary policy. With the European Central Bank (ECB) rate decision in the upcoming session and the Federal Reserve (Fed) next week, the markets are on high alert to the cumulative influence of these deep pocketed participants. Ultimately though, the BOC would keep its benchmark rate unchanged at 0.25 percent and its asset purchases at a C$4 billion/week pace. This was exactly inline with expectations which kept pairs like CADJPY from decisive action as it stages at the boundaries of a confluent 81.50 resistance. I will now look to see if risk trends will take over for a pair like this – is always about discerning about the priority for fundamental influence.
| Change in | Longs | Shorts | OI |
| Daily | -3% | -8% | -6% |
| Weekly | 21% | -3% | 7% |
Chart of the CADJPY(Daily)
Chart Created on Tradingview Platform
In the meantime, the theme of monetary policy will lead into an even more important milestone with the ECB rate decision. The 12:45 GMT update carries more weight more for the extreme efforts of the central bank these past years as well as the anticipation for meaningful change in this particular meeting. Markets expect no change to the negative rates the group sports, but there is tangible anticipation that the world’s second largest central bank intends to increase its stimulus efforts as lockdowns in response to coronavirus cases combine with struggle to sign off on fiscal support. It seems the market is fairly convinced of greater support, so either this event is staged to ‘disappoint’ or it may be significantly discounted in current market conditions. Keep tabs on major Euro crosses like EURUSD, EURJPY and EURCHF.
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Chart of Major Central Bank Stimulus (Monthly)
Chart Created by John Kicklighter
Speaking of EURUSD, the benchmark cross has consolidated over the past week to draw greater attention to the bullish phase over the past month and ultimately through the past seven month period. I will reiterate that the 1.2150 area carries significant technical weight. It is both the midpoint of the 2014 to 2017 range that defined a critical monetary policy transition period between Fed and ECB as well as the 50 percent retracement of the Euro’s historical range since its official pricing back to 1999.
| Change in | Longs | Shorts | OI |
| Daily | -13% | 19% | -5% |
| Weekly | -2% | -10% | -5% |
Chart of the EURUSD with 100 day Moving Average (Daily)
Chart Created on Tradingview Platform
So Much for a Clear Brexit Outcome
Whether the UK-EU trade relation is on course for a ‘no deal’ outcome or some form of a tangible contract, the markets have been keeping close tabs to see what the next steps are in this high profile divorce. We were supposed to have hit another critical date with Wednesday’s expiration; but just like the Monday cut off, it seems the deadline was more of a date for show rather than a genuine limit. After UK Prime Minister Boris Johnson met EC President Ursela von der Leyen in person, it was reported the high profile meeting closed without a deal. Instead, the sides suggested they would continue to negotiate for a critical Sunday deadline. At this point, cut off dates hold little weight among markets. Despite the importance of this situation, volatility on pairs like GBPUSD may dim.
| Change in | Longs | Shorts | OI |
| Daily | -8% | 2% | -5% |
| Weekly | -2% | 0% | -2% |
Chart of the GBPUSD with Daily Wicks (Daily)
Chart Created on Tradingview Platform
With the moved barriers, it is worth revisiting the question I have posed this past week (and at different intervals over the past years): how much further could GBPUSD and the Pound in general drop if authorities simply cut ties without a replacement trade deal? After this past sessions headlines, it would seem that the expectation is for a higher probability ‘no deal’, but has that led more traders to recognize that we aren’t yet rushing sharply lower on the altered expectations?
Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown
Poll from Twitter.com, @JohnKicklighter
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