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Wednesday 14

November, 2018 9:31 AM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

I talked up the prospect of a reversal in the USD, but the feeling was this should come post-non-farms, and as we hurtled into the US Midterms.

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01.11.2018 04:10 PM

I talked up the prospect of a reversal in the USD, but the feeling was this should come post-non-farms, and as we hurtled into the US Midterms.

Well, if we focus on the USD index, we can see sellers getting a better say, and that is due to three key factors today. That being aside from the fact we have month-end out of the way, as well as incredibly over loved sentiment.

Firstly, the PBoC moved the mid-point on the daily (at 12:15aedt) CNY (yuan) ‘fix’ higher by just 24 pips, which was far lower than what the market was looking for and the markets have taken this as a clear message. I remain fixated on USDCNH as a crossover in momentum and a convincing sell-off through 6.9586 (the 15 August high) should cause a broad sell-off in the USD. It should support AUDUSD, as well as EURUSD, GBPUSD and drag USDJPY modestly lower and this is what we see today. It seems to be supporting Chinese equities, as there is an interesting correlation between weakness in the yuan and weakness in Chinese equities and the gains today in Chinese equities have been fairly pronounced.

EURUSD has to be on the radar as there has been a strong defence of the August lows of 1.1301 and when we talk levels, there are not many that are getting more attention than this one. I would throw in the 16 August low in US crude at $64.43 as another huge level, as a close through here opens up a move into $55.00 and that will smack the CAD, NOK and will have huge influence on US ‘real Treasury yields, which have huge implications for, well, everything. However, the EURUSD low of 1.1301 is on our ‘high-watch’ list, and as one would imagine there is a whole universe of stops waiting to be triggered should we see it break this level.

EURUSD found buyers from 1.1315 into 1.1341 (from around 11:00aedt), and this can be entirely attributed to The Times article suggesting Theresa May had struck a deal with the EU on financial services. As one would imagine, GBPUSD had a far more impressive rally on this news, pushing up 80-odd points to a session high of 1.2855, with supply coming in around the 29 October high (1.2853). Assuming we can hold these levels, the price would close above the 5-day EMA (1.2813), which has contained every rally since the bearish channel started on 16 October. So, the bulls are having more of a say here, and the one-way action has abated, with the bulls now eyeing an assault the 4 October low of 1.2920.

The headlines seen in The Times article marries nicely with the narrative from Brexit secretary Dominic Raab (in an open letter) yesterday that the UK and EU are not far from a deal. We also hear that there could be another hearing with the EU on 21 November, of which we could see more constructive dialogue. Instinctively, it feels as though if we do see a deal, then it will come after a lengthy, all-night meeting. With the European contingent appealing to the Brexiteers and Eurosceptics that Theresa May was a true warrior and fought tooth and nail, with a steely determination that this is the best deal they will get to vote on through the Commons.

Politics is about the art of the deal and politicians have to be seen to get the best deal to sell to their constituents.

GBP traders will also have to face today's (23:00aedt) BoE rate decision and inflation report, although when a currency is defined purely by politics, I find it hard to see this event risk as a strong driver of volatility.

AUD and NZD have been the star performers of G10 today, which won't surprise given they both tend to do well when China is firing up. AUD has also been helped by a strong September trade data, with export growth of 3.7% qoq, relative to 1.9% import growth. AUDUSD feels as though it wants to trade higher, but again, a lot will depend on whether the CNH can find buyers and whether this better tone in risk (across broad financial markets) continues to play out. I have been advocating buying the pair, but only on a close through 0.7160, which confirms the positive divergence seen with between price and momentum (stochastic) and should see the January channel resistance at 0.7150 come into play, ahead of the 55-day EMA at 0.7181. So, there is plenty of wood to chop before we start seeing genuine short covering from AUD shorts, of which we still see ‘non-commercial’ accounts holding a net short position of 70,368 AUD futures contracts.

Aside from a position adjustment to promote AUD upside, it still feels as though the upside in the Aussie is limited to 73c. Industrial metals look weak, and there are technical signs that US Treasury yields may make a renewed push higher, which could boost the USD valuation. I would personally be looking the US 30-year Treasury, as this is the real read on whether trader’s appetite to be short ‘duration’ and here we see yields eyeing a break of the recent consolidation range and the 2007 downtrend at 3.41%.

A close through 3.42-3.42% could be another red flag that the volatility in financial markets is not going away, especially, if we inflation-adjust bond yields and look at ‘real’ yield. Specifically, the 10-year Treasury has made a new cycle high and at 1.09% is the highest since March 2011. Many put higher ‘real’ bond yields as a core component behind the sizeable volatility in high valuation growth names, so we should watch this space especially for those who have recently bought back into tech stocks.

Published by Chris Weston, Head of Research, Pepperstone
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