Precarious Positions

Metals are pulling back as yields stabilise along with most yen crosses. If USDJPY regains 110.60s, would gold retrace to as low as 1812/13?  The lack of fundamental clarity at the moment pushes us closer to the technical side of the equation as we wait for lingering questions to be answered. NZD is the strongest currency after higher than expected CPI figures (see what we said we told our WhatsApp Broadcast Group members here ). Yen is the weakest alongside CHF as yields attempt holding above 1.30%. US retail sales (Control Group exp +0.4% from -0.7%) and UMich consumer sentiment (exp 86.5 from 85.5) are due up next. The chart below shows US 10 yr yields falling for their 4th staight month and the only time they fell by more than 4 straight months was in 2002 and 2010. 

A number of risk-sensitive charts are showing persistent softness and holding precariously above support. Whether that's because of delta worries, a Fed mistake or something else the market is seeing in the economy remains unclear.

The technical message is beginning to crystalize though. On Thursday, it was USD/CAD stretching to a three-month high above 1.26, with the 200-DMA at 1.2627. 

Another message came from AUD/USD, which is less than two-dozen pips above the lows of the year despite a jobs report that knocked unemployment down to 4.9% versus 5.5% expected.

We can't rule out that thinned liquidity and demand for Treasuries is behind the move (something Jeff Gundlach highlighted) but the moves have already stretched far enough and for long enough to make that implausible. Moreover, yen crosses are also creaking with EUR/JPY threatening a convergence of support near 129.50.

The main equity indexes have held up so far but perhaps that only adds fuel to a potential risk-off fire. Moreover, the breadth of equity gains has been extraordinarily narrow and confined to big-cap tech, a sector that benefitted early in the pandemic. More broadly, the Russell 2000 is where it was in February, while the Nikkei 225 is barely higher on the year.

The elephant in the room remains the bond market and yields on Thursday fell back towards the recent lows, making the recent rise look more like a dead-cat bounce.

So while there are plenty of reasons for optimism, discretion is the better part of valour, particularly in a July market.

Looking ahead, the willingness to spend of the post-pandemic consumer remains a major question and we will get two data points Thursday in retail sales and consumer confidence. In the breakdown of sales, look for spending on restaurants for a clue on pent up demand.