Dollar, Yield Curve, S&P 500 and Crude Oil Talking Points
- The Trade Perspective: USDJPY Bearish Below 121; AUDUSD Bullish Above 0.7450; GBPCAD Bullish Above 1.6500
- The S&P 500 managed to hold the line on its 2022 range midpoint, but the move was hardly a reflection on broader risk appetite
- As the Dollar extends its rally to a sixth straight session, questions arise on how far Fed forecasts can go and speculation of USDJPY intervention build
S&P 500 Volatility Versus Dollar Consistency
Between top fundamental themes of Russian sanctions, monetary policy speculation and growth concerns; there exists a tumultuous churn of speculation. A hallmark of these circumstances is a frequency of short-term reversals and the elusive formation of reliable trends. We would see just such a situation this past session with the benchmark S&P 500 advancing 0.4 percent after a fairly volatile trading day. With the previous day’s hawkish Fed commentary hanging in the air and the US Senate voting on escalated sanctions against Russia, the open of the session was threatening a break below support formed by the midpoint of its 2022 range and 20-day simple moving average at approximately 4,465. However, after a recovery effort through the second half of the session – enough to ‘close the gap on Wednesday’s gap lower – we find the most representative US index prone to switchbacks amid volatility and ephemeral attachment to significant fundamental themes.
Chart of S&P 500 with 20 and 200-Day SMAs, Net Speculative Futures Positioning (Daily)
Chart Created on Tradingview Platform
Overall, the major US indices have an abundance of volatility but they are very ‘poor’ in the department of consistency. The Dollar seems to have the exact opposite problem. The DXY Dollar Index rallied for a sixth consecutive session through Thursday’s close – which is the longest run since July 1st. This climb has pushed the benchmark currency to a near two-year high as it has cleared March resistance of 99.40, but the tempo leaves much to be desired. That previously mentioned advance (which was 7 days) was seriously uninspiring with a series of sessions of barely any progress made. Naturally, when the drive ended, there wasn’t much pressure for a sharp pullback. What we are witnessing now is more productive, but it has similar hallmarks. Fundamentally-speaking, what is the boost for the Greenback to keep it not just buoyant but ready for the next major leg higher? As a safe haven and growth leader, there is little charge to be found. Rate expectations is a key factor, but we are already pricing in a remarkably hawkish path for the Fed. How much further can we push that line?
Chart of DXY Dollar Index with 100-Day SMA and Consecutive Candle Count (Daily)
Chart Created on Tradingview Platform
Monetary Policy Remains My Targeted Top Theme
When it comes to prospecting for serious volatility or momentum, it pays to evaluate the deeper fundamental wells to see where potential rests, waiting for a spark. The US 2-10 yield curve has corrected under very questionable circumstances, but we can see ‘recession’ fears have noticeably eased just in the simplistic shift from the indicator. As for Russia’s invasion of Ukraine, the global economic toll rose this past session as the US Senate voted to both strip the aggressor country of its normal trade status (leading to steeper tariffs) and to ban imports of the country’s energy products. The bigger impact to the country’s foreign income would be from Europe cutting off its purchases of Russian energy, but that call seems to have been pushed back to August. Meanwhile, monetary policy continues to press the markets. The US 10-year Treasury yield continued its advance to three-year highs above 2.6 percent this past session on the aftermath of (dovish) Vice Chair Lael Brainard’s verbal support of an aggressive ‘quantitative tightening’ and the FOMC minutes suggesting the reductions will start at $95 billion per month. How pervasive is this policy of allowing the long-end of the curve to rise? That is just as much a relative value perspective as with pairs like EURUSD as it is a collective driver for risk assets (where there remains a significant premium around the central banks’ years of support).
Chart of Central Bank Monetary Policy Stance with Rate Forecasts
Chart Created by John Kicklighter
Speaking of relative monetary policy, it is worth pointing out that that the contrast between the hawks and the doves is ever more extreme. At the lower end of the spectrum, we have the Bank of Japan and Swiss National Bank who have lamented their currencies and refused to move off of their exceptional dovish policy paths. On the other end of that spectrum, there is an identical 216 basis points of tightening priced in for the Federal Reserve, Reserve Bank of New Zealand and Bank of Canada. That is exceptionally aggressive, but which currency will find traction relative to its hawkish peers? I believe the stimulus unwind that raises the long-end of the yield curve will cater more to speculative shifts for the near term. Meanwhile, keep tabs on the movement of these major players from last week and last month. The Bank of England’s forecast noticeably eased recently while the ECB’s peak forecast of approximately 40 bps of hikes by end of year has jumped to 62 bps. There is considerable market moving potential in these transitions.
Chart of Major Macroeconomic Events
Calendar Created by John Kicklighter
Pairs to Watch: USDJPY and GBPCAD
As we head into the end of the trading week, I will keep a wary eye on the Yen crosses. Recently, an ex-Finance Minister from Japan stated that he believed authorities are worried about the local currency and that they could intervene to shore up the JPY should USDJPY hit 130. I believe that they probably wouldn’t wait that long – and that they may have acted in March to keep the benchmark pair from overtaking 125. BOJ Governor Kuroda stated his concern about the unusually intense depreciation of the Yen as of late, but he would hedge by suggesting that a weaker local currency could still be overall beneficial for the economy. I am dubious that position will hold out as the cheaper exports faces significant offset by the sharply higher costs for imported raw materials where that the country needs to supply its manufacturing. Keep tabs on this pair.
Chart of USDJPY with 100-Month Moving Average and 1-Month ROC (Monthly)
Chart Created on Tradingview Platform
Looking ahead to the final trading day of the week, there isn’t a deep list of high profile events. One of the more interesting listings on my radar is the Canadian employment report for March. Historically, this data series has generated significant volatility; and given the aggressive rate forecast for the BOC, it can absolutely tap into a deeper market artery. Generally speaking, I think the greater potential is for a disappointment given how much yield premium is already factor in for the Loonie. That is not to say however that the data will disappoint. Looking through the CAD crosses, one pair that is particularly interesting to me is GBPCAD. Both the BOE and BOC are projecting similar paths of tightening through year end; and yet, the cross is down over 1,000 pips in just over a month. There is a one-sided market here that could spark a steeper correction.
GBPCAD with 20-Day Moving Average (Daily))
Chart Created on Tradingview Platform
