Can EURUSD break into 1.2000?
One questions whether this will spill over into other markets in trade today. At this early juncture, AUDJPY is unchanged on the re-open and this is a decent proxy to risk semantics – in fact, if this kicks on above 84.45 then I’d be keen to explore the long side of this trade.
Passions run deep on social as to the likely near-term path for Crypto while traders have to navigate a stream of often misleading headlines, but dips are clearly supported. Ethereum still seems the best play for me, with price trading into a low of 1951, before attracting strong buyers off clear support. I expect the price to chop around, but if 2170 can hold and price can build a base, then ETH should resume its trend higher.
The fixed income market will dominate my world this week and partly because I want to see if the USDX can break the 91.30 area, and most importantly EURUSD to break above 1.2000 for a run to 1.2150/22. The ECB meeting this Thursday shouldn’t offer too much fanfare, ahead of Friday’s EU PMI data. However, the EU data flow is improving and the vaccine roll out in Europe is going in the right direction - most importantly, the advantage US Treasury yields command over German bunds is closing. Since 1 April, we’ve seen the yield premium US 10yr Treasuries enjoy over bunds coming in from 207bp to 184bp, while we’ve seen an aggressive tightening of the US-EU real rates spread and this has helped EURUSD push into 1.1980. The US bond market is key for so many markets.
(US-bund yield spread vs USDEUR)
Can the bid in US bonds continue? This was the factor that confused so many last week given Treasury yields have fallen while the US data flow (NFP, CPI, retail sales, ISM manufacturing, jobless claims) has been hot of late. However, as we’ve seen reported in build in US Treasury futures shorts (in the weekly CFTC report), the market was fully prepared and positioned for it. I'm not sure they are positioned for a red-hot non-farm payrolls numbers due on 7 May though, with some calling for 3 million jobs to be created! For now, the risk is we see a further bid in US 10s, perhaps falling as low as 1.47% to 1.49% (the 50-day MA), which should keep the USD offered before sellers start to emerge again, which in turn would be the point to flip to USD longs.
Further to the move in bond, a further push higher in US equities married with a lower VIX index should keep USD rallies contained and attract further USD sellers. That is by no means assured, and while the various equity markets are chugging away nicely, we are seeing signs of euphoria now that may see funds look to increase their hedging activity. Liquidity is still the dominant driver and while China is a concern, more broadly, the liquidity backdrop in the US suggests remaining long of equity for now, but a 4-5% pullback is certainly closer and being prepared to seize the opportunity when it presents itself is key.
If yields do indeed take a further decline, both on a nominal and real basis then I’d looking for the NAS100 to be the key beneficiary. For now, I trade from the long side but am on alert. In a falling yield environment, we should also see gold working well and the set-up on the daily suggests the bulls are in control with price breaking the 50-day MA and the neckline of the double bottom seen at 1755 – the technical target residing up at 1840. That said, given I see risks that yields will have limited scope to fall past 1.49% - 1.47%, before a stronger run higher into 1.80%-1.90% then 1840 in gold may be optimistic.
USDCHF may be another way to look at EURUSD – price is holding below horizontal support at 0.9220 and eyeing a crack through the 50-day – watch for this to kick lower.
In equity land, the AUS200 looks hot too, with eyes on a move towards 7100. After the 6900-6500 range break, we’ve seen a re-test of the breakout area, with a higher high. The index is overbought, but there's little to suggest the momentum can’t stay in the mix for now.