'Risk On' Firms Up, First Signs Of DXY Weakness

Quick Take

Anyway you slice it, the short term conditions in financial markets have fully transitioned into a blossoming state, with the environment characterized by ‘true risk-on’ as depicted by the surge in US equities coupled with further supply in US bonds (higher yields). To top it off, the USD has finally caved in to the ebullient mood by finding a wave of selling pressure, which makes the short-term context one of full-blown risk appetite mood.

From a longer-term perspective, using the 5-DMA as a reference, further adjustments in structures must still eventuate before we can synchronize microflows with the macrostructure. A clear reminder of how fragile the macro outlook still looks, even if less so than 24h ago, is the prolonged bull flattening yield curves in developed countries. Near term, a tentative recovery is in the making as risk recovers and with it, the short-term formations of bear-steepeners, which translates into the prospects of an improved growth outlook down the road as long-dated yields rise faster than short-dated.

What this means in FX is that the short-term flows do suggest a more constructive outlook towards beta currencies the likes of the Aussie, Canadian Dollar, Kiwi (overstretched today). The JPY should continue to struggle in finding much demand amid the current dynamics in place. In this intersection, one can imagine that Oil prices will fare fairly well. The Euro looks technically better positioned than its been for the last 2 weeks to eke out further gains after a sizeable bullish outside day, while the Sterling is the only “?” failing to capitalize on USD weakness due to the Brexit uncertainties.

Narrative In Financial Markets

  • Markets latched on to the positive rhetoric in the Sino-US trade talks, with prospects of US President Trump skipping March 1st tariff hikes deadline if a ‘real deal” is in the making.
  • The risk sentiment has been further boosted in Asia as reputable sources suggest China’s President Xi is planning to meet the US delegation currently in China later this week.
  • Increasing likelihood that a border security funding agreement will eventuate that will prevent the US from shutting down its government again, with the deadline for this Friday. The political cost for Trump does not allow for another ‘shutdown’ drama.
  • The RBNZ keeps rates unchanged and the NZD soars as the New Zealand Central Bank does not telegraph an easing of its narrative. The yield curve tells us the RBNZ is making a policy mistake but Governor Orr is not yet blinking to the global deceleration in growth.
  • The USD loses big against the EUR in the first signs of a turnaround in fortunes for the single-currency, as the USD pares back its largest win run since mid 2016.
  • In a speech in Michigan to University students, US Federal Reserve Chairman Powell said that recession risk is ‘not elevated’.
  • BoE Governor Carney calls for clarity over Brexit, noting that the latest contraction in Dec GDP shows “the importance of deciding a transition to whatever end-state parliament decides.”
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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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