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Dollar, USDCAD and Oil Reversals Defy Trend, Suit Anticipation

Dollar, USDCAD and Oil Reversals Defy Trend, Suit Anticipation

John Kicklighter, Chief Strategist

Nasdaq 100, Oil, Dollar and USDCAD Talking Points

  • The Nasdaq 100 extended its climb to a third day Monday to push a new record high while the S&P 500 barely missed out on its own milestone
  • Though the August PMIs were released this past session and raise some concern with a broad slide, the market’s attention seems to be directed elsewhere
  • Like so many other failed bull and bear trends, the Greenback’s breakout continues its retreat to start this week with remarkable technical bearings like that from USDCAD
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After a Brief Wobble, The Nasdaq 100 Is Back at Record Highs

US indices, on the verge of a more meaningful breakdown only a week ago, are once again pushing record highs. And, it is this recharge and nosebleed level that tends to fit my assessment of thinned liquidity conditions that are the result of both seasonal lulls and the approaching structural exhaustion of temporary struts of financial recovery. While the reassuring headlines of the Nasdaq 100 closing a record high offer ruffled bulls a little relief, progress is still the under the control of anticipation. Further afield, we have the expectations of markets filling out and contemplating the possibility of trends – in both directions – after the US Labor Day holiday on September 6th. More immediately, there is a full focus on the Jackson Hole Symposium which starts on Thursday and carries with it expectations for the next phase in global monetary policy.

Chart of the Nasdaq 100 with 100-Day SMA and 3-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

The market’s forward projected attention seems so fervent that the week’s opening fundamental wave seemed to carry little-to-no weight for price action. The flash readings of the developed world’s August PMIs offered a very somber tone through the remainder of the year. All of the major readings fell in this update, with the United States’ downshift proving particularly acute with a 4.5 point drop that significantly outpaced the moderate consensus forecast. That said, a silver lining is available for those evaluating the economic prospects in the West. A slowdown was inevitable given the relative tempo was based on a snap recovery from the fastest onset recession in modern record. However, market participants have not be so sanguine about such doses of reality in the past. It would seem thin liquidity has been a boon for persistent bulls – particularly those in Japan and Australia where the economic readings are tracking into contractionary territory.

Chart of 12-Month Rolling Performance of Risk-Sensitive Assets (Daily)

Chart Created by John Kicklighter with Data from Bloomberg

The Constant Distortion from Liquidity Conditions

As we move forward into the fledgling trading week, it is important to remember what kind of expectations we are dealing with among the speculative rank. August is arguably the most restrained calendar month of the year historically (at least it is on a trading day adjusted basis for the S&P 500 as a benchmark), and there is great interest among the highly exposed to keep that calm as long as possible. It is the rare situation in which panic overrides seasonal confidence, but it has happened with clear catalysts – just look back to August 2015. Monetary policy, a faster cool down in economic moderation, Covid and other themes are lurking; but untethered risk trends alone have been known to flip the market.

Chart of S&P 500’s Performance, Volume and Volatility via VIX Per Calendar Month

Chart Created by John Kicklighter with Data from Bloomberg

In the meantime, if the markets are not willing to break from the norms, those assets that are attempting grand technical efforts are at the greatest risk of witnessing a sharp check back into containment. A great example of the ‘nail that sticks up furthest is the first to be hammered down’ was crude oil. After a seven consecutive trading day slide (the longest since the April 2020 inversion) and a bearish break through range support at 65, the commodity put in for a 5.6 percent rally Monday to throw into doubt the convictions behind this commodity. There wasn’t much in the way of actionable ‘supply’ news and demand via the PMIs had little to latch onto. This seems a clear example of market rebalancing.

Chart of US Crude Oil with 100 and 200-Day SMAs with Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

How Far Will the Dollar’s Reversal Stretch?

Attempting a break to the opposite direction, the Dollar (DXY Index) this past week made an impressive effort to overtake 93.00/93.50. With the rise in Fed rate expectations in the subsequent two years on the back of growing taper speculation, this climb would seem to make sense – even if it was coming with a notable delay to the solidifying probabilities. Overall, the 20-day rolling correlation between the Greenback and the implied rate change through end of 2022 via Fed Funds futures is a strongly positive 0.79. That said, I don’t think last week’s rally was a sudden appreciation of the past week’s build up nor even of the half-hearted risk aversion effort from US indices. And, ultimately, an uncommitted breakout is more likely to reverse back into range. The -0.5 percent retreat is not particularly extreme, but it does fall neatly back into range. It has also turned a broad EURUSD breakout into a descending wedge while GBPUSD has notably kept its bounds on a neckline from a head-and-shoulders pattern above 1.3600.

Chart of DXY Dollar with 50-Day SMA Overlaid with Implied Fed Funds Hikes, 20-Day Correl (Daily)

Chart Created on Tradingview Platform

As we move into the week, there isn’t much in the way of systemically important event risk until we get to the Jackson Hole Symposium. And even if I were to look closer at that multi-day event, I would say the anticipation would truly boil down to a 1.5 hour time frame on Friday between the Fed’s favorite inflation report release (PCE) and the scheduled speech by Fed Chairman Jerome Powell at the virtual event. That likely translates into struggle for top liquid assets as anticipation anchors action. For the likes of USDCAD, AUDUSD and NZDUSD; that reality seemed to hit particularly hard. Of the three, USDCAD’s reversal was the most impressive. After an exceptional reversal on Friday below 1.2950, Monday followed with the biggest single-day loss for the pair, -1.3 percent, since June 1, 2020. For those looking for volatility and not necessarily direction, that can seem appealing, but it looks more likely that the market will settle back into listless congestion like so many of its counterparts.

Chart of USDCAD with 100-Day SMA and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

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