Short-Term Flows Strengthen USD Dominance

Quick Take

Markets have temporarily stripped out the gloomy macro outlook of decelerating growth and low inflation as G10 yield curves demonstrate, to instead revert back to positive microflows. It may last hours or days, but what’s clear is that there is still a major divergence between the macro risk profile, one that still keeps the pendulum on the caution side, while the short-term is more optimistic as US official continue to sound rather upbeat about an eventual US-China trade deal.

The USD dominance is undeniable, and even if the trend looks over-stretched, the price action seen does not provide any evidence that the bullish USD tide is receding. Flows keep favoring downward pressure in GBP/USD, AUD/USD, upside strength in USD/JPY, USD/CAD while Yen crosses should continue to have a hard time until the microflows re-align with the macro ‘weak risk-off’.

Narrative In Financial Markets

  • The US Dollar hits the best levels in 2019 in what’s been a stellar rally, with the onset just days after the FOMC sent a clear signal over a prolonged pause in rates. The counter-intuitive move as a time when the Fed won’t be as restrictive in policies speaks volumes about the lack of FX alternatives. It’s an ugly context out there, and the USD is still the fav of the G10 FX pack.
  • It’s still up in the air whether or not a fresh US government shutdown will come into effect on Friday, which is the deadline before the continuing resolution funding expires. There is a lot of uncertainty following the breakdown of border security funding talks to build a wall.
  • White House Advisor Conway sounds upbeat by saying that it looks like US-China are getting closer to a trade deal. Axios also reported that a Trump-Xi meeting could take place in Trump’s Florida resort by mid-March, reigniting a positive outlook in a trade resolution. High-level talks get underway on February 14. The key actors involved in the conversations will be China Vice Premier Liu He, US Trade Representative Lighthizer and Treasury Secretary Mnuchin.
  • The Brexit deadline is on March 29th and the lack of progress is very concerning as the clock keeps ticking down. There have been no breakthroughs on the Irish border while an offer to discuss the Labour opposition proposal for the UK to stay in the Customs Union looks like is going to be ruled out outright. A UK government spokesman said a meaningful vote on Brexit won’t be this week. The options are narrowing down to a no-deal Brexit or a delayed Brexit.
  • The UK exhibits a poor slew of economic indicators, comprised of a weak Q4 GDP of +0.2%, a contraction in December’s GDP reading at -0.4% while industrial and manufacturing production both fell by a significant margin of 0.5% and 0.7% respectively. GBP was the weakest in FX.
  • Reports from Bloomberg vindicate, even if we needed further proof, that this year’s China Luna New Year holiday spending saw the slowest increase (8.5%) since 2011. If one then looks at the bull flattening yield curve dynamics across the globe, we are clearly in the midst of a stagnation period, with low growth and little to no inflation to boast of.

Potential Drivers — Economic Calendar

The calendar is light, with only Australian data to contend alongside US NFIB small business index and US jobs openings, all low-tier events that will hardly have an impact on price. In terms of speakers, we get German Buba President Weidmann and BoE Governor Carney as the line-up for today.

Source: Forexfactory

RORO Model: Risk-On Risk-Off Conditions

The positive re-adjustment in the S&P 500 has resulted in short-term flows taking the 25-HMA slope pointing upwards again. Additionally, a flatter 125-HMA (5-DMA) slope is also a positive development for the risk outlook. Similarly, renewed demand has been found in the US 30-year bond yield (supply imbalances in US bonds), which has now allowed the US long-dated yields to experience the first positive short-term flows as per the upward slope of the 25-HMA sine Feb 5th. Unlike in equities, there is still significant room to crawl back up to turn this market macro positive, as the 125-HMA (5-DMA) still points at downward tendencies as the overall rhythm. Meanwhile, the USD continues to trade at the beat of its own drum, accelerating the gains to reach the highest levels in 2019 as both micro and macro flows are in complete synchronicity to keep powering the trend. Further proof that ‘risk on’ conditions are improving, Gold has come back down, re-coupling its negative correlation with the DXY, in a move that can also be interpreted as decreasing demand for safe-havens. Overall, the short-term microflows have transitioned into an environment characterized by USD strength with cues to be obtained via equities to determine the susceptibility of the market to risk. From a macro standpoint, the 5-DMA upward slope in the DXY, the downward one in the US 30-y yield and the flattish positioning in the S&P 500 leaves us with an environment that is still neutral to slightly risk-off inclined.

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