S&P 500, CADJPY, Bitcoin, FOMC, Dollar and EURUSD Talking Points
- The Trade Perspective: CADJPY Bearish Below 96; EURUSD Breakout from 1.1050 – 1.0950
- A curb in volatility this past week has left us with uncomfortably tight ranges which are likely due a break ahead – particularly from EURUSD and S&P 500
- For catalysts, the Russian invasion of Ukraine is a skewed potential catalysts while monetary policy remains a driving catalyst
Most Risk Assets have Downshifted Into Break Out Risk
This past week’s market activity reflects a serious moderation of volatility. As Russia’s invasion of Ukraine passes the month-long mark, we can see the market’s hallmark complacency creep capping legitimate concerns for speculative interests. That isn’t just manifesting in a ‘risk on’ turn for the financial system but it is also showing through in a moderation of volatility. I believe that comfort is premature and the risk seeking is dangerous risk/reward. Whether or not the masses are going to see it that way is another matter entirely. Evaluating this past week’s sentiment, the S&P 500 carved out its smallest range since the closing weeks of 2021 which is essentially holiday conditions. For technical considerations, this index didn’t really make a serious move in clearing 4,520 as the real weight is in the 100-day moving average and 61.8 percent Fib of the 2022 range (thus far) at 4,550. I believe a break of this 100-day to 200-day range is ahead of us, but the bearish resolution seems far more likely to be productive given a backdrop of downgraded growth projections, upgraded rate forecasts and various serious systemic threats along the way.
Chart of S&P 500 ETF with 100 and 200-Day Mov Avgs (Daily)
Chart Created on Tradingview Platform
In evaluating sentiment, most of the speculative benchmarks that I follow are in the same category as the US indices. There is certainly a disparity in confidence between the recovery of the S&P 500 and the more reticent EEM emerging market ETF, but there is nevertheless restraint and a recent bullish bias. Ultimately, investors can (and should) debate whether the post-pandemic bullish charge, the 1Q 2022 retreat or past two week rally is the prevailing trend; but I don’t think we can really conclude that just yet – unless you have a very low risk tolerance. Against that uncertainty, I still see the Yen crosses as extraordinary outliers on speculative appetite. The ability to trade rate forecasts for risk trends for commodity inflation is an unusual mix of catalysts for speculative lift, but the commodity currency-driven crosses have been able to step up the task. I am particularly impressed with CADJPY which closed this past week with a record breaking 13-day rally that beat back a temporary retracement and cleared long-term Fibonacci levels. There are other Yen crosses I like more fundamentally, but this is a cross that should be appreciated for its statistics abnormalities.
Chart of CADJPY with 20-Day Moving Average and Daily Tails (Daily)
Chart Created on Tradingview Platform
The Top Themes for the Week Ahead
When it comes to ‘risk trends’, it pays to follow the principal themes in the market. While sentiment can be its own driver, it is best served with a distinct catalyst and steady fuel source. While there are a number of feeder themes that the astute analyst would watch, traders should be more concerned with two dominate themes: Ukraine and monetary policy. If you are looking for a sustained rebound in risk appetite, the former matter seems the only viable charge for a meaningful rally. Overall, Russia’s invasion of Ukraine has led to an enormous loss of life, untold disruption of lives and extreme influence on economic potential; but it can still be a source of relief. If a ceasefire and diplomacy is announced, it can take serious pressure off the biggest uncertainty in the world. I hope for that outcome, but ‘hope’ is not a trading approach. Over the weekend, the most liquid crypto players (like BTCUSD below) is the best measure to watch, but more popular ‘risk’ measures will be viable come next week.
Chart of BTCUSD with 200-Day SMA (Daily)
Chart Created on Tradingview Platform
Even if we take Ukraine out of the equation, there is not an easy fundamental landscape ahead of us. Inflation has proven itself a persistent threat that demands action from the world’s largest central banks. That leads to a number of issues. Against a slowing growth forecast, the Fed and other major groups are warning that rate hikes are ahead. That is the withdrawal of a major safety net and for many the chief motivation to escalate exposure in order to outpace an impossibly robust market advance. What’s more, even the most aggressive rate hikes in the developed world are falling far behind the forecasts for inflation, leaving significantly negative real rates of return. Ultimately, if the markets collective believe that monetary policy is due to contract, I believe the principal fundamental correlation over the past 13 years will hold with a weight of markets to the downside.
Chart of S&P 500 Overlaid with Aggregate of Major Central Banks’ Stimulus Programs (Monthly)
Chart Created by John Kicklighter with Data from FRED
A Focus on the US Rate Forecast
While my broader focus is on the health and direction of global risk trends and monetary policy views, there is little doubt in my mind that the US rate forecast is the most prominent driver at present. Heading into this new trading week, Fed Fund futures are pricing a more than 60 percent chance of a 50 basis point rate hike on May 4th and an over 70 percent chance of another 50 basis point lift on June 15. That is aggressive. In fact, it is so aggressive that we haven’t seen anything like this short-term rate outlook in over 20 years. Nonetheless, the Greenback has notably fallen off the pace of interest rate views as measured by Fed Fund futures and short-term Treasury yields. That can be a problem for a bullish case on the Dollar, but don’t write off its upside potential just yet.
Chart of DXY Dollar Index Overlaid with Next Meeting Rate Forecast (Weekly)
Chart Created on Tradingview Platform
In FX, everything is relative. Even if the US rate outlook was statics, a distinctly dovish view of the Greenback’s major counterparts could lift the US currency. There are some very interesting majors to consider into the week ahead, but EURUSD is particularly interesting to me. Compared to the Fed’s hawkish lean, the ECB has taken all effort to project an extremely dovish course. It is hard to generate a greater contrast from extremely liquid currencies, and a move to 1.0500 and subsequently 1.0000 would seem logical just on that basis. However, I will not project that far ahead considering the market tends to shift its priorities. First, I want to see EURUSD clear its 1.0950 to 1.1050 range which is the generous bands of a rapidly deteriorating wedge. There is plenty of event risk to provoke the initial move. On the Euro’s side, we have the European unemployment rate, Eurozone consumer inflation expectations and regional sentiment surveys. Aside from the US consumer sentiment survey (Conference Board) earlier in the week, my Dollar focus will be on the PCE deflator (Fed’s favorite inflation indicator) and NFPs at the end of the week ahead.
Chart of EURUSD with 20, 100-Day SMAs, 5-Day Range and 5/20 ATR Ratio (Daily)
Chart Created on Tradingview Platform
