US Equity Bounce Within 'Risk-Off' Context

In the UK, we get growth and manufacturing data as a sideshow to Brexit.

Source: Forexfactory

RORO Model: Risk-On Risk-Off Conditions

From a microflows standpoint, the late rebound in the S&P 500, even if it has turned the slope of the 25-HMA upwards, does not carry enough credence for one to latch on and conclude that constructive ‘risk-on’ conditions are set to extend much further. The main reason is predicated on the basis that the rebound occurs in the context of a newly found bearish macrostructure in the S&P 500 as per the downward slope in the 125-HMA (5-DMA).

Additionally, the rest of the risk assets monitored as part of the model are far from sending us the right signals to support risk trades. We are faced with a backdrop in which the DXY shows little signs of slowing down its bull trend, while the US 30-year bond yield continues to move downhill.

Even more worrisome, Gold has decoupled from its negative correlation with the DXY by printing gains on Friday even as the USD rose. Whenever this happens, the market may be anticipating trouble ahead by diversifying into gold as a shelter to protect against a wave of deleveraging risk.

Overall, the pre-conditions are far from ideal to support a sustainable ‘risk-on’ environment. The combination of movements can be understood, from a micro perspective, as ‘weak risk-off’ in nature, which is wrapped within a broader context of a ‘true risk-off’ market profile.

Yield Curve: Outlook For Growth, Inflation & Policies

The environment continues to be dominated by deteriorating bull flattener dynamics, which should add to the notion that the environment is far from constructive to lean on risky currencies.

With the exception of the Canadian Dollar, which saw its yield curve improve a tad, the rest of G6 FX are all caught up in a downward spiral of anticipatory lower growth and weak inflation.

What this means is that this environment, if anything, worsens the outlook for the market to recover back its mojo and I’d expect the JPY and the USD to fare quite well against beta currencies.

Wonder what’s the yield curve in a bond? It’s really critical to understand what the market is pricing in terms of Central Bank policies going forward. Learn the basics in this article.

Chart Insights: Technicals & Intermarket Analysis

EUR/JPY: Case To Sell On Strength

In light of the negative risk backdrop expected, one would expect the JPY to be well positioned to capitalize on the weakest currencies. On my radar, I can think of two in particular (EUR, AUD). The former looks particularly attractive from a technical standpoint, as the current rebound is faced with a plethora of converging bearish technicals such as the rest of a broken resistance-turned-support circa 124.35–40, a downward sloppy 25-HMA, coupled with a tap into last Friday’s POC. The trade would be negated should the market structure of lower lows gets violated by a breakout of the 124.70–75 level, in which case, a re-assessment of the conditions will be required.

EUR/USD: Sellers In Absolute Control, 1.13 Next Target

Buyers continue suffocated by the selling pressure ignited ever since Feb 4th. While in the last early stages of the bear rally the trend developed in a non — volatile orderly manner, the last 2 trading days we’ve seen buying flows coming in with more impetus. Regardless, attempts to regain control above the previously highlighted critical 1.1350–60 have failed with each corrective leg up being weaker in magnitude (35p followed by 28p). With the 1.1325 low now taken out, the next focal point is likely to be 1.13 round number. Any rebounds will face pressure technical pressure emanating from momentum traders given the slope of the 25-HMA. Similarly, a descending trendline off Feb 4th high alongside Feb 7, 8 POCs overhead suggests further clusters of offers ahead that may limit any rally and still make it corrective in nature with the market eyeing 1.13, where significant buying pressure is a real possibility judging by the major divergence with the yield spread. Also note, the mentioned psychological level is a perfectly symmetrical target as a 100% measured move from 1.1512–1.1405.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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