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Thursday 15

November, 2018 3:16 PM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

A look at the price action on the daily chart of the USD index highlights increased indecision to push price lower, where a minor battle is underway between the bears and bulls that needs to be rectified.

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29.08.2018 09:26 AM

A look at the price action on the daily chart of the USD index highlights increased indecision to push price lower, where a minor battle is underway between the bears and bulls that needs to be rectified.


The indecision to push the USD around has been reflected in the moves across both the EM and G10 spectrum, where we can see the USD finding buyers against the SEK, AUD, TRY and MXN. While the USD has been offered on the session versus CHF and CAD.

Broad market sentiment is still fairly positive if we look in look at the sell-off in US fixed income, although moves in the S&P 500, implied volatility (VIX index) and high yield credit have been far more sanguine, with little net change seen on the day. Asian equity markets should follow suit with a flat open-eyed, although where too for Chinese equities is anyone’s guess and the bulls will take heart if the CSI 300 pushes through 3400.

There has been a plethora of fundamental news to drive, complementing the tailwinds from the US-Mexico talks still feeding into markets. On the data side, we also saw a better-than-forecast August US consumer confidence report (printing 133.4 vs 127.4), Richmond Fed manufacturing report and US June Case-Shiller home price index (+0.5%). However, we can also throw in comments from US Treasury Secretary Steven Mnuchin that he is ‘not at all concerned’ about the flatter yield curve and is ‘perfectly content’ with this market issue.

I mentioned moves in US fixed income and we can also throw in a soft auction of five-year Treasury bonds, with the bid-to-cover at 2.49x, where this stood at 2.61x last month. The result of all of these factors has been a sell-off of around three basis points (bp) across the US fixed income curve, with small steepening of the 3 month /US 10-year curve; which is the yield curve the Fed focus on.

We have seen US-German 10-year yield spreads widen 4bp to 250bp, and on any other given day, this would have caused the USD to find better buyers against the EUR. One would argue reassuring comments from the Italian finance minister supported the EUR, with Mr Tria detailing ‘Italy’s government is not planning to breach the EU’s 3% deficit limit’ and saying that he ‘doesn’t believe there is a problem with Italy’s debt.’

While the comments from the Italian FM pushed EURUSD into $1.1730, just shy of my target of $1.1750, perhaps the US-German yield did become more of a consideration with price reversing and is currently trading below the figure. We have also seen relative interest rate differentials working in favour of modest EURUSD downside, and we can use the pricing differential seen in the interest rates markets (in December 2018 to December 2020) as a simple fundamental model. 


A quick overlap of the rates model and EURUSD shows that EURUSD is perhaps a touch overextended and could offer more aggressive traders an opportunity to fade this move.  That said, technically, the downside looks somewhat limited. In the coming 24 hours the pair should be supported at the former June downtrend at $1.1663, while I would want to see a daily close through the five-day exponential moving average (currently seen at $1.1630) before holding the conviction to be short this pair.

One to watch, although I am sceptical whether traders will react in any form to the US Q2 GDP revision (the consensus expects 4%), while US core PCE should get some focus in its comes in hotter than the 2% eyed.

Looking through the landmines in Asia today and the key release is Australia’s Q2 Capex expenditure, with Japanese retail sales and fund flow data unlikely to drive. Whether the AUD will react to today’s CAPEX report seems unlikely and while this report will be an influence on next week’s Q2 GDP calculation, implied overnight volatility in the AUDUSD suggests the moves on the day should be greater move than 30 points (in either direction) from the current spot price. This hardly implies fireworks from today's Aussie or even US data releases and there doesn’t seem too much impetus to drive AUDUSD, with price printing a higher high yesterday, but failing to hold Friday's highs of 0.7380. The bears need to see price trade through Monday's lows of 0.7306 before increasing bearish exposures again.

EURAUD remains a key play here, and the daily chart shows price breaking higher, so it seems prudent to tighten stops to 1.5860.

Published by Chris Weston, Head of Research, Pepperstone
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