Intraday Market Thoughts Archives

Markets remain jittery--caught between positive vaccine news and attempts at broader market "manipulation" in shares and metals. Two top-tier reports on Thursday were entirely ignored by the market in US Q4 advance GDP and German CPI. Both missed the mark and in different times would have dominated trading but economic data is an after-thought at the moment. Why? Can you guess the lower graph in the chart below? Correct answers will win a FREE 6-mth subscription to our WhatsApp Broadcast Group. 

It's not because market participants are currently consumed by the meme stock madness. The flows around it have certainly caused some broader market moves but the FX market is largely unperturbed.

GDP in the $22 trillion US economy is certainly more consequential than a $25 billion short squeeze but only one moved the market on Thursday. Some are seeing the squeeze as indicative of vulnerability in the broader market and that may be the case but it's not going to change the path of the broader economy.

Q4 GDP grew at a 4.0% annualized pace compared to 4.2% expected. That's not a big miss but consumer spending was particularly soft, something we've seen in the Nov/Dec retail sales reports.

So why didn't it matter? Or why didn't the surprisingly strong German CPI report matter?

The market simply doesn't care about the current economy. What matters is the post-vaccine economy and current economic data simply doesn't tell us much about how consumers and businesses will behave in the return to 'normal'.

Central banks believe the major economies will take years to recoup losses and generate inflation. That may be the case. Some market participants think the release of pent-up savings and demand will cause problematic inflation.

What's priced in is a rosy economy but nothing too hot to push up rates. That's a reasonable expectation but so many things about the pandemic have been hard to predict. We've written recently about the questions about pent-up savings and about watching early-vaccinators like Israel for economic signs. We also think surveys showing rising inflation are telling and worrisome but it's early.

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. 

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.

 

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

 

 

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.