Ivan Delgado | Mar 21, 2019 11:07PM ET
To start with, it's worth pointing out that even if the low volume environment is suppressing directional biases from a higher timeframe perspective, it doesn't mean there is a deficit of opportunities if you know where to look for. For instance, ever since the FOMC meeting, there has been two currencies (GBP, CAD) which have exhibited strong directional moves intraday as our currency meter shows. The same can not be said about the USD, as one of the key factors behind the attractiveness towards the currency, even after a clearly dovish FOMC, is that it continues to act as the pick of choice when it comes to carry trading (borrow low yielding currencies and play long high yielding). It is on the basis on this market dynamics of capitalizing on low vol through carry trades, coupled with overextended nature of the moves post FOMC, that led the euro to give back its gains. On the flip side, the JPY showed a more combative spirit amid the 'weak risk off' environment given the falls in US yields yet the rise in the DXY (equities higher as well). Somewhere in the middle, still showing signs of decent demand we find the Aussie and the Kiwi, backed by the recent economic data (Australian jobs, New Zealand Q4 GDP).
Key Narratives in Financial Markets
Recent Economic Indicators and Events Ahead
Source: Forexfactory
RORO - Risk On Risk Off Conditions
It didn’t take long for the USD weakness environment to reverse it course, even if the admission by the Fed to stay on the sidelines for the most part of 2019 and 2020 was a potential catalyst for the USD to endure a more sustainable period of supply flows. The issue, however, is that there is no clear winners in the currency space, in a world where Central Banks have permuted from a tentative tightening bias back in 2018 (BOE, BOC, FED, ECB) to one of the relatively high chances of deploying back most of its easing artillery to combat tighter financial conditions and promote the decade-long elusive mandate of creating real inflation. Amid this environment, the US economy is still the one that, in its own right, wins the least ugly contest. The low vol regime, which increases the appeal of carry trades (borrow low yielding currencies EUR, JPY and buy the higher yielding USD), makes it even harder to see a sustainable bearish trend in the US dollar. When it comes to the RORO (risk on, risk off) model, the environment has turned ‘weak risk off’ in the short term, as the magenta slope (microflows) based on the 25-HMA depicts. The S&P 500 is back making new highs for the year, but that is not being supported by further ‘risk on’ cues, as the combination of lower US yields and a higher US dollar makes the overall risk backdrop not ideal, even if the rapid and elongated rise in equities takes a bit of heat and pressure off ‘beta currencies’. Note, the RORO model and the link it has to gauge the performance of FX is contingent to individual economic data merits as well.
h3 Summary: Intermarket Flows and Technical Analysis/h3EUR/USD: Quick Round Trip From North To South
The FOMC-induced gains have evaporated amid low conviction to promote further USD selling. One of the key reasons hindering the upside potential can be found in the still relatively high appeal to jump back into the USD bandwagon in an environment of lower volatility, which makes the countries with a yield advantage, as in the case of the United States, an attractive destination amid the lack of FX alternatives. The U-turn type of movement since the FOMC found pockets of demand at 1.1340-45. The volume profile is characterized by a triple distribution down, with the NY close sub POC a negative development, even if the overall technical structure still lacks bearish credentials. Instead, until further price dynamics play out, the structure is best described as a wide 100p range, despite the clear refusal to find acceptance above 1.14 makes for a tentative 1.1340-1.14 range box as reference heading into Friday. Only an hourly close back above the $1.14 handle would start to suggest a potential resumption of the uptrend, which at this stage, given the abrupt retracement, is not the preferred case. Stay proactive analyzing technicals, especially in a market so choppy and directionless from a weekly standpoint as the euro vs USD is.
When all things considered, Gold is still widely perceived as an ideal shelter to diversify one’s portfolio amid the lack of solid investment alternatives in the FX land. Against the USD, and akin to what I’ve shared about the AUD, the precious metal also shows a rather benign technical outlook following the creation of a new up-cycle on the back of the FOMC, which is yet to be invalidated. The latest setback, as part of the USD buying wave seen, has stopped in its tracks at Wed’s POC intersection, where a fairly sizeable tail in the hourly acts as a clear testament of the solid interest to engage in buy-side propositions in that first pass. Looking at intermarket flows, the risk of transitioning into a period of rotational fluctuations in the market, which essentially means fading breakouts as the conviction towards a directional bias wanes. This is predicated on the basis of the conflicting signals from the DXY (strengthening) and US yields (weakening). Overall, gold remains an instrument that should attract decent interest but if you aim to exploit it, there are other currencies with poorer fundamentals or of low yielding nature it can be traded against to maximize potential runs.
The rise in Bitcoin during March has some interesting dynamics worth exploring, which speaks volumes of the commitment by buyers to accumulate the digital currency. The double bottom formation in early March around $3.7k has exhibited technicals merits to have been the onset of a potentially prolonged buy-side campaign. The fact that an almost analogous price pattern involving a double rejection of $3.8k took place shortly after is a vindication that the price has been in a developing bullish cycle phase, where the upside breakout through $3.9k proved the latest clue needed to suggest that we are still missing one more leg to complete a full 3-leg cycle. Clear patterns have emerged in how the cycle has evolved in March, such as each break higher is accompanied by the compression in price dynamics within a $130 range before the next breakout occurs. That’s been very accurate in the formation of the 3 boxes drawn in the chart. Not only that, but each time Bitcoin achieves a new cycle high as the blue line in the chart depicts, in both instances, the rally has been worth $270, but what’s positive about the prospects for an eventual breakout of the current box is the fact that the selling impetus appears to be dying down a tad, as the max extension of the last correction off recent highs could only run for about $130, even if quite impulsive in nature. Overall, the structure in bitcoin still suggests buying on dips is a strategy set to find ample demand.
Important Footnotes
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