EURUSD, GBPUSD, S&P 500 and CADJPY Talking Points:
- Despite a gap lower to start the day, the S&P 500 managed to stabilize before risk aversion set in – meanwhile CADJPY and other carry trades flourished
- Dollar health struggled as stimulus talks fell apart and risk aversion stalled, while a stimulus windfall from Europe increased the growth potential contrast
- While fundamentals favored EURUSD bulls, the pair has yet to break 1.2150; and warnings of a Brexit ‘no deal’ hasn’t yet set GBPUSD to collapse
With an unmistakable risk of faltering risk trends throughout the market this past session, speculators roused enough influence to fend off a long-feared collapse in risk assets. The rebound from a range of speculative favorites generally pushing multi-year – if not record – highs would quell the beast during this liquidity challenged period. That said, growth forecasts are being actively challenged by stopgap promises in stimulus and other short-lived infusions. Investor confidence is coming under obvious strain as a risk appetite seems to show preference for certain assets (rather than a universal bid for discounted speculative measures). This past session, it was worth noting that the tech favorite Nasdaq 100 earned a bigger bounce than the broad S&P 500. That seems to fit the remarkable appetite for fad-favorite Tesla (TSLA) and the incredible IPO performance of Airbnb (ABNB) and DoorDash (DASH) whose market caps are pushing unbelievable heights.
Chart of Nasdaq to S&P 500 Ratio Overlaid with the S&P 500 (Daily)
Chart Created on Tradingview Platform
When measuring risk trends, I like to compare the performance of a range of assets for type and region to indicate whether there is a broad appetite at play or one concentrate on a particular criteria. It seems this past session that risk appetite was firming and thwarting concerns that full risk aversion was setting in. It is worth noting that in US indices – speculative outperformers over the past decade – there was a particular preference for the tech-leaning Nasdaq 100. That echoes the extreme risk reach over the past months – if not years. Outside of US indices which took the temperature of sentiment where European figures were upended by event risk, carry trade seemed to offer a top showing. The CADJPY in particular presented a remarkable show. The BOC and other fundamental matters present less weight than the technical picture of a multi-year resistance under pressure.
| Change in | Longs | Shorts | OI |
| Daily | -10% | -4% | -7% |
| Weekly | 5% | -14% | -8% |
Chart of CADJPY (Daily)
Chart Created on Tradingview Platform
Stimulus Presents a Hit for the Dollar and Boon for the Euro…But Enough to Break 1.2150?
The Dollar has generally wavered these past week as fundamental heft continues to shift for the world’s most liquid currency. This past sessions headlines did little favor for the Greenback. The US CPI was a top listing on the docket, but there is little potential for this otherwise-important measure to alter expectations for the Fed to thereby rouse the Dollar. Instead, the focus was on headlines around stimulus discussions. Hope that a White House-led program would usher a $916 billion deal fell apart quickly when it was clear the funds would not go into unemployment benefits. Yet again, the world’s largest economy is struggling to come up with a back up to an expired stimulus program from late July as coronavirus cases swell.
Chart of the DXY Dollar Index (Monthly)
Chart Created on Tradingview Platform
Next week, the Federal Reserve will deliberate on monetary policy and update on its forecasts for growth, inflation and rates. The market will no doubt be tuned in – though market moving potential will be influenced by the fading hours of liquidity on the year. In the meantime, the University of Michigan consumer sentiment figure is on tap, but its market moving potency is dubious in my mind. The Greenback is struggling for relative growth potential, so a bid likely falls more towards its safe haven properties. That said, we seem to be finding little of that traction as of right now.
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Chart of Major Central Bank Stimulus (Monthly)
Chart Created by John Kicklighter
What is more remarkable this past session: that the EU government finally approved its massive budget increase and the ECB upgraded its stimulus effort or that EURUSD held firmly below 1.2150? There is little doubt that European policy authorities increased their relative capital market support to epic proportions. In past years, that may have led to a Euro depreciation; but against a troubled economic backdrop, more stimulus translates into relative benefit for regions. I will be watching this benchmark pair to see if it intends to genuine overtake the midpoint of its historical range, and a 1.85 trillion EC budget and 500 billion upgrade from the ECB would seem a straightforward boon. If it doesn’t catch, beware.
| Change in | Longs | Shorts | OI |
| Daily | -16% | 3% | -8% |
| Weekly | -19% | 13% | -7% |
Chart of the EURUSD with 100 day Moving Average (Daily)
Chart Created on Tradingview Platform
Brexit Headlines Take a Serious Turn
Relative stimulus efforts is an important driver for capital flows and currency performance. That said, there remain ham-fisted issues that continue to exert indiscriminate pressure in the market. The Brexit discussions is one such point of content. The Sterling took a hit this past session with notable technical progressions for the likes of GBPUSD, EURGBP and GBPJPY. Prime Minister Boris Johnson intimated to the entire market that a post-Brexit trade deal was highly unlikely. That readily overwhelmed headlines like the UK October GDP reading advancing 0.4 percent.
| Change in | Longs | Shorts | OI |
| Daily | -14% | -3% | -10% |
| Weekly | -18% | 18% | -6% |
Chart of the GBPUSD Overlaid with Equally-Weighted Pound Index (Daily)
Chart Created on Tradingview Platform
On the fundamental side, it would seem that the fundamental floor was taken out from under GBPUSD and the Sterling in general. The warning by the British Prime Minister for a hard cut in trade relations is certainly a point of concern, but how far as the market discounted this eventuality already? I’ll note that while the Sterling did drop, it didn’t readily take out meaningful technical supports. Keep tabs on headlines around this fading trade relationship before the supposed Sunday deadline, but the real interest should be in probability versus potential.
Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown
Poll from Twitter.com, @JohnKicklighter
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