Clear As Mud!
Good news and bad news in the past week is not an unusual scenario. Mixed bags are a sign of the volatile times but the sensitivity that showed up in the USD certainly identifies the market driving potential of the world’s reserve currency.
Uncertainty is the only thing that it is certain in this current environment as we wait and watch for direction and clarity. And it will return, it always does but the effects of loss of central bank guidance, aka confusion seep into sentiment very quickly.
Credibility in both the intention and effectiveness of policy decisions has been seriously undermined by the two extreme viewpoints; those in favour of extending liquidity when the results seem singularly underwhelming, not to mention liquidity issues going forward, and on the opposite end of the spectrum the Fed holding on to their hawkish tendencies.
Oil lurks in its range with rumours attempting to ‘prove’ the bottom intentionally or otherwise and it continues to threaten deflationary forces globally. At least China will give us a week’s break as they celebrate their new year.
The week ahead is likely to focus on the strength and follow-through abilities of the USD and the ever present effect of risk appetite. Or lack of it.
Clear As Mud!: Will They, Won’t They?
A shocking fall in the USD resulted from ISM data revealing a slight miss in manufacturing PMI which is languishing below 50 and thus already in contraction territory and took the Index down to a trend line but with a much more serious negative reaction to the Services PMI, slipping to 53,5 and well beneath the expected number:
The concern of course is that as manufacturing numbers fall across the world economies, strengths need to be found in other sectors. Services have been developing in the growth arena in both the US and the UK and elsewhere efforts are growing in that direction, including the Chinese. Little surprise that this piece of data sent shockwaves through the market as to the resilience of the US economy and the appropriateness of their monetary policy.
NFP recovered some composure and the USD rallied into the close. The jobs number was in fact a miss on the expectation but there was an improvement in unemployment stats and more importantly a significant improvement in average hourly earnings, beating an estimate. This is certainly a factor that can help justify the Fed in the direction of rate hikes at least in the short term. The concern continues to be growth for without it, economic recovery is a pipe dream.
The fact remains that in the forex context of comparatives the USD remains the head of the recovery pack or can we say…the least weak. How depressing.
Clear As Mud? : The Main Event
Week by week the starting place has been in the risk trends. Risk on and risk off environments are rarely black and white and transitional conditions are common. What is particularly difficult to handle currently is their changing behaviour, resulting in volatility and indicating uncertainty and confusion.
Week by week we see both extremes and our assessments are now necessary on a daily basis, sometimes a session basis. There are some key areas to watch .
Bonds provide some repetitive warnings of recessionary headwinds, The US 10 year bond is providing a safe haven as the yield drops further to a nine month low highlighting the divergence between market and Fed policy and this despite Fridays more positive leanings: chart courtesy of stockcharts.com:
The Vix is creeping up:chart courtesy of stockcharts.com:
Commodities are falling from their relief rally:chart courtesy of stockcharts.com:
Emerging markets also and not surprisingly suffered on the perception of US jobs data:chart courtesy of stockcharts.com:
Equities continue to fall the S&P now with a broken weekly 200 EMA in a technically and fundamentally weak position this will have to figure strongly in any assessment of sentiment:
Globally we see the same weaknesses:
Most interestingly, as far as the USD rally on Friday was concerned was the chart of the USDJPY, where the greenback failed to make any advances. It was the exception that maybe proves the rule. It will be one to watch in the week ahead but signals a risk aversion trend. How about this for indecision :
This is not a pair on my trading list but it does offer an interesting technical place on the weekly chart as well:
Clear As Mud! : Clarifying Carney
It was a bit of a fence-sit on the part of the BOE Chairmen and whilst the media tried to draw him on rate hikes, he maintained a neutral stance. He noted the lack of wage pressure, admitted Brexit concerns bring risks to business investment and that inflation is ‘sluggish’. He did see further solid expansion and robust business and household confidence. He added that global pressure could lower inflation projections but that the projected inflation should be in line with the two-year target unless there are ‘shocks’ from global sources.
Cautiously optimistic, thus keeping the UK at this point away from the prospect of further accommodation along with the USA. On the dovish side votes did change to 9-0 in favour of holding rates where they are. There was a trimming in growth forecasts but The BOE still sees the next rate move as higher not lower but it was also very clear that that may be some way off.
The UK do maintain their position on the policy curve.
Clear As Mud!: The Week Ahead
Thankfully less catalysts this week which hopefully will calm volatility and give direction a respite to firm one way or the other. The main event here is the two day testimony from Janet Yellen,starting Wednesday and that always is a risk event. There is UK manufacturing and crude inventories as well.
RBA governor Stevens speaks on Thursday and on Friday look out for German GDP, flash Eurozone GDP and US retail…another inflation indicator and therefor a potentially ‘sensitive’ number.
I am looking primarily at USD strength at the beginning of the week, particularly the emerging markets, so longs USDSGD, also shorts in the EURUSD. Of course critical to monitor sentiment as always and on the any signs of continuance of Friday’s risk aversion signs, longs in the the JPY , particularly like AUDJPY short. If aversion firms and commodities continue to fall after opening (with an eagle eye on oil as usual), looking for longs in the GBP against the commodity set. Short opportunities in the EURGBP.
Clear As Mud! : The Crude Saga
There is danger in trying to call the bottom in oil. Technicals are very tempting but this is fundamentally driven and once again we saw the mirror image of the crude chart in the S&P.
On both the supply side and the demand side there are continuing negative implications and until Opec countries agree a cut in production supply looks set to enlarge. US production alone continues to rise despite rig closure.
The recent rumours have impacted the market on the positive side, but if they continue to be without real foundation, and that means at least an agreement for an extraordinary meeting, then they will lose their power to impact the market. On the demand side as deflationary forces continue to prevent global recovery it does not look set to increase any time soon and in the longer term maybe we should not forget the global effects of climate warming.
Clear As Mud! Concluding Comments
Despite the holiday there has been some Chinese news of note over the weekend with reserves sinking again to a three year low as China sells USD to prop up its own currency and its reputation in an attempt to balance the continuing capital flows from the country .This could well rattle the global doves and add to the tone of risk aversion. Since Chinese markets are closed for the week the effects may be dampened but it will be noted by the market.
Gold has continued an upward path in the face of deepening accommodation in monetary policy among the majority of central banks. It has however reached a point of resistance so a good place to assess where it may head from here. Traditionally a safe haven but we have to remember it does not produce yield and it does not always follow the risk aversion group. Technically interesting!
The focus at least in the first few sessions will be on the USD and any potential follow through and the risk environment using the available clues. There are still mixed arguments as well as data from the US, with a falling participation rate undermining job statistics, member Dudley warning that tightening has already taken place by the scale of risky asset selling. On the other hand the US is not doing bad in the light of their strong currency. So the arguments will continue and the market will decide how they perceive it all.
If you want another sign of global slow down, consider this; the use of private jets to the International Petroleum Week, the annual meeting for major oil traders starting in a few days apparently is a third lower than usual. Tough times indeed!
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