Intraday Market Thoughts

What’s the Yields Signal?

Jan 26, 2021 18:12 | by Adam Button

Another jumbled mess of a trading session in an exuberant but divergent stock market and whippy FX but bonds, while bonds attempt to stabilize after Monday's selloff. The dollar is off its lows of the day, but still down across the board. EURUSD is off its highs after the ECB said it's studying the causes behind prolonged USD weakness despite rebounding US growth. Ashraf posted the chart below, highlting similarities in DXY weakness alongside the acceleration in yields and indices. Note how DXY bottomed in mid Q1 2018 (after a brief market selloff), while yields extended their gains into year-end. 

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What’s the Yields Signal? - Dxy Yields Jan 26 2021 (Chart 1)

Monday's 7-bp decline in US 10-year yields (from 1.10% to 1.03%) is considered a break below its 2-week range support, but keep an eye on the new foundation at 21-day MA (1.03%) and prior 1.0750% support as new resistance.

Normally, that would signal risk aversion or declining economic prospects but that's not necessarily the case at the moment. The Fed is buying $120B in Treasuries and MBS per month while re-investing maturing securities so that's a natural skew in the market. One force driving down yields was yesterday's remarks from Senate Leader Schumer saying Congress will try passing the stimulus bill in month or more, far longer than was expected by markets. This lingering disappointing may also explain why indices are reluctant to build on Tuesda's earlier gains. 

Any further decline in yields would be likely accelerate selling in USD/JPY and USD/CHF as yield differentials narrow while boosting EUR/USD. The problem is that the opposite happened on Monday in what was a strange day in markets driven by unusual moves in equities.

Much of the broader discussion in markets is about bubbles and there are measures like the Citi panic/euphoria model, which is at an all time high; and the BofA fund manager survey showing record levels of risk taking.

Bonds might be giving us an early signal that it's all run too far. At the same time, bonds themselves will become the story on a fall back below 1%. That would signal more easy money for equities and we've little doubt that Powell will be supportive on Wednesday.

In summary, it's a market without a real theme right now besides anticipation of the post-virus boom. US stimulus talks have tried to fill the void but haven't been able to capture the market's imagination.


ندوة مساء اليوم مع أشرف العايدي

Jan 26, 2021 12:31 | by Ashraf Laidi

تنتظر الأسواق لقاء الفيدرالي الأمريكي الأول لهذا العام لاحقاً خلال شهر يناير. فما هي أهمية هذا اللقاء، وكيف سنرى تأثيره على الأسواق؟ وكيف سيؤثر التحكم بالعوائد على مستويات أزواج الدولار والمعادن؟ وما هي الإشارات الثلاث التي يجب ترقبها عند متابعة بيان المؤتمر الصحفي؟ تابعوا هذه الندوة الالكترونية المجانيّة القادمة مع خبير الأسواق  للتسجيل من السعودية  و للتسجيل من باقي دول العالم

FX Priorities

Jan 24, 2021 15:00 | by Adam Button

Let's recap the week's gentle rumblings on FX from policy makers, before shedding light on CNH below.  US Treasury Secretary nominee Janet Yellen said the US would adhere to market-based determinations of FX rates in her confirmation hearing Tuesday. Never mind that record-breaking QE is outright manipulation of the bond market and indirect FX intervention. On Thursday, ECB's Lagarde was silent on the euro's direction, while warning of double-dip recession in the Eurozone. On Friday, USD reversed the week's course to rebound against all major currencies, save for EUR. So what do  we make of the inv H&S in DXY? Below is Friday's Premium video, highlighting the technical rationale for the latest trades on XAUUSD, EURUSD and EURNZD. 

All currencies ended the week higher against the US dollar, but on Friday, the greenback reversed corused and strengthened against all currencies (including gold and silver), with the exception for EUR. 

The ECB has been clear that it doesn't want a stronger euro, especially with the eurozone expected to recover slowly from the pandemic. This week's ECB decision will be all about the levers it can pull to keep the euro from appreciating further.

EUR/USD has risen to 1.21 from 1.06 at the pandemic low and it's near a two-year high. More worrisome for the ECB is that if it rises another 400 pips, it will be at the highest since 2014.

The US has the ability to easily monetize debt but with eurozone deficit rules, it's much tougher. That leaves policymakers in the bloc with few options in the face of FX strength.

CNH Indication

China has shown it can be bullied by the US on the currency but with a less antagonistic President, they might attempt to weaken the yuan. We have already strarted to see USD/CNH pushing further, while DXY bounced off the neckline of its inv H&S seen in the above video.  Ashraf highlighted last week that USDCNH is increasingly serving as parth foward for selected USD pairs. 

Other countries will also have to continue to navigate US currency policy. Switzerland was named a currency manipulator in the latest Treasury report and that gives the Biden administration some leverage as they enter office.

With the presidential inauguration out of the way, we keep an open mind as the policies of the new administration start to unfold-- Tax decisions, energy policy and foreign/econ policy vis-a-vis China. The past four years has certainly taught everyone to be ready for anything.

Savings Watch from Central Banks

Jan 21, 2021 23:47 | by Adam Button

USD weakness extended anew as the ECB leaned towards guarded optimism in Thursday's meeting. ECB policy makers continue to be more pre-occupied with the deflationary obstacles to recovery. Earlier this week, policy makers at the BOE and BoC highlighted that the fate of accumulating personal savings were vital to the economic outlook once the pandemic has passed. On Wednesday, Ashraf posted the below chart to the WhatsApp Broadcast Group, highlighting a possible recurrence of the Dec 8 peak, which triggered a $50 drop pullback before later bouncing towads the 1950s. Stay alert. 

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Savings Watch from Central Banks - Gold Daily Jan 20 2021 (Chart 1)

The combination of stay-at-home orders and government handouts has left many consumers with swollen balance sheets. In normal times, you would expect that to lead to a boom in consumer spending but central bankers are cautious about the timing and nature of that spend.

Surely there will be some celebrating when it's all over and travel will temporarily boom but it's not clear whether it will all be spent, or how quickly. It's possible the pandemic leaves consumers more cautious but it's equally plausible that they end up spending more than ever before.

Where exactly that level of spending falls was highlighted as the key post-pandemic x-factor by the BoE's Bailey and BoC's Macklem on Wednesday and the market will no-doubt be watching how that develops.

It's still far too early but in a few months, we will start to closely watch pent up spending and sentiment data in the UK and US. Another spot to watch closely will be Israel, which is on track to be the first country to fully vaccinate and re-open. How consumers behave there will be a strong clue on what's coming elsewhere.

Lagging behind in the recovery will be the eurozone, in part due to a slow vaccine rollout. The statement from the central bank was essentially unchanged and Lagarde repeatedly emphasized that QE would continue until at least March 2022. She also offered jawboning by saying the rising euro is a drag on inflation.

The press conference helped to stall the euro's rally but the scope for further cuts everywhere is fading so dovish talk will have a diminishing effect. The next big question will be who tapers first.

Yellen Drops Strong USD Policy

Jan 19, 2021 18:10 | by Adam Button

US dollar is well off its highs after Janet Yellen reiterated the importance of allowing market-determined exchange rates and sticking with the status quo order of FX dynamics.  The fact that she did not reiterate the long-touted "strong USD policy" expressed since the mid 1990s may allow for further decline in the greenback. Elsewhere, CAD dropped to start the week on a report saying Biden will halt the Keystone XL pipeline but more than actions themselves, the market will be looking at Biden priorities domestically and abroad early in his term. The chart below dissects EURUSD futures positioning into gross longs and shorts, highlighting the direction and similarity/dissimilarity between now and 2018. 

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Yellen Drops Strong USD Policy - Eur Net Longs Jan 19 2021 (Chart 1)

Biden had promised to halt the Keystone XL permit in his campaign so it doesn't come as a big surprise and shares of the pipeline operator itself only fell 4%. So it was an overreaction to see the loonie down 40 pips early in the week and it later halved the decline.

More than the loss of export capacity, we'd argue that signals from Biden are more meaningful. Trump deeply strained relations with many allies including Canada. Repairing those is assumed to be a Biden priority but such quick action against a key Canadian project suggests that might not be the case.

One thing to watch will be where Biden decides to visit first. In-person diplomacy is on hold because of the pandemic but there's a deep symbolic value in a Presidents first visit. For generations, Presidents visited Canada first but George W Bush broke that streak with a visit to Mexico. Trump's first stop was Saudi Arabia and that signaled a shift to a pro-Saudi, anti-Iran stance.

All of Mexico, Saudi Arabia and Iran will be waiting for early signals on what Biden's trade priorities will be.

Of course, the largest trading relationship in the world is the US and China and that's the critical question for global growth in his term. Politically, it would be impossible to undo all of Trump's moves but China will surely offer an olive branch. Ultimately, it will be the most-difficult dance of his Presidency and a tough one to predict.