All Aboard The Yuan Bullish Story, USD Unloved

Narratives in Financial Markets

  • The USD continues to trade on the back foot as reports emerge that US trade negotiators aim to target a more stable Yuan as part of the comprehensive trade deal being negotiated. A firmer Yuan is a risk positive event for the likes of EM (emerging markets) and beta currencies (AUD).
  • Renewed hopes of a benign Brexit resolution kept the GBP well bid across the board. Tuesday’s GBP spike appears to have been triggered by headlines from a government minister (Harrington) stating that if May cannot pass a deal, then the parliament will take control, adding a no-deal Brexit not envisioned. UK PM May is scheduled to meet EC President Juncker on Wednesday, so be prepared for further headlines with intraday spikes in vol.
  • US equities ended building on top of its recent gains with an upbeat earnings report by the retail giant Walmart re-igniting the ebullient mood from the open of business in NY. On the contrary, European equities ended mostly lower as the threat of car tariffs by the US persists.
  • Fed’s Mester went on a feast of headlines, of which the admission that the Fed should announce balance sheet plans well in advance was the most relevant, further adding she doesn’t see the need to taper the balance sheet runoff before halting it (risk positive).
  • Germany’s Feb ZEW survey current situation remains on a continuous slump, falling to 15.00 vs 20.00 expected, marking the lowest reading since Dec 2014. The ZEW institute sounded quite cautious, noting they don’t expect a ‘rapid recovery’ of the weakening trend.
  • BoJ’s uber-dovish Mr. Kuroda said the Central Bank will mull further easing if deemed necessary in cases such as perception of slowing economy or weaker price trends.
  • Out of the recent RBA minutes, the key takeaway was the uncertainty surrounding household consumption as the housing crisis continues. The board continues to sound fairly vague and non-committal on the next rate direction, even if the tone has been skewed towards the dovish side. In the minutes, they noted the RBA ‘saw scenarios for hikes or lower rates’.
  • UK wage inflation keeps growing at the fastest pace in a decade while employment figures remain strong with a jobless rate of 4%, which is the lowest since 1970.

RORO — Risk On Risk Off Conditions

A familiar theme continues to pan out in financial markets. By looking at the charts, and represented in the table above, we can clearly see how the environment remains aggressively USD negative. The next wave of selling has finally produced an inflection point in the macro flows as depicted by the downward slope in the 125-HMA (5-DMA). From a market structure standpoint, the selling in the DXY has opened up further downside after achieving a successful rotation lower.

The USD weakness is also manifested via lower US yields and a much higher Gold, closing at nearly $1,340.00. As part of this excess of USD supply, US equities keep pushing higher, which is obviously helping the likes of the beta currencies such as the Aussie, the Kiwi, the Loonie. As part of this context, even the Euro or the Pound have also made significant gains following the strength in the Chinese Yuan.

Dashboard: Intermarket Flows & Technical Analysis

EUR/USD: Uptrend Develops, Further Upside Eyed

The outlook for the Euro in the next 24h is unambiguously bullish. The dashboard above represents the positive outlook, with both technicals and intermarket flows converging to expect further demand imbalances. What’s also important is to acknowledge that in the scenario that the EUR/USD trend really takes off, we are just coming out of a macro trend as per the prolonged downward slope of the 5-DMA (125-HMA), which means that from a risk-reward perspective, this could be a potentially attractive period to build long positions in order to capitalize on the broad-based USD weakness. The chart, from a technical perspective, is a thing of beauty. We’ve validated a new swing high by finding acceptance above 1.1330, which means we can now draw an ascending trendline. Besides, most of the volume transacted in the last 24 (POC) has been trapped behind the close. Talking about the close, the currency pair has finished at the very high, which speaks volumes of the lack of supply. Allow me to also remark that the 125-HMA slope has finally turned north, while the German vs US yield spread, which has been playing a greater role in the carving of the bottom, did spike yesterday. Overall, this is a market that has all the credence for buy-side strategies to do well.

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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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