The Daily Fix – The USD just can't find a friend

Again, there was no real news to drive the cross-asset flows, so positioning and liquidity dynamics will likely get the blame. On net, the risk bulls will feel today’s moves have grazed but the wounds will not cut too deep given many have traded this move well and would be sitting on some good profits in equity indices. For those trading intraday, we can say that the price action – certainly in the S&P500 - was a low-energy chop fest, where cash volumes were 25% lower than the 30-day average.

Small caps underperformed with the Russell -1.2%, while 66% of S&P500 companies closed lower, with energy getting a solid working over by the sellers. Nvidia caught some flow, where the 2.1% lower close has weighed on the S&P500 and NAS100, and the attention on this name will clearly ramp up from here as we look ahead to its all-important quarterly earnings release next Wednesday.

We may have seen choppy trade in US equity, but the same can't be said in the US Treasury market, with good buying across the curve. Notably, we saw the yield on the US 2-year lower by 8bp to 3.98%, and in US interest rate swaps, traders have added 6bp of implied cuts to the December FOMC meeting.

Bond traders pointing to a lower core Canadian CPI print (at 2.4%) as a trigger behind the bond buying, backed by anticipation for the BLS annual revisions to the Establishment nonfarm payrolls survey (due 10 am local tomorrow) - where the view is US payroll growth will be revised lower by 600k to 1m jobs for the year ending March 2024. You’re only as good as the data you can model and backtest, but with the Fed moving its focus towards the US labour market, we’ll see how the less compelling employment backdrop affects their thinking.

US yields have subsequently tightened and come in vs its G10 peers, and the reduced yield premium in the US Treasury market has been a clear factor driving the USD lower vs the JPY, CHF and EUR. USDCHF has seen a pronounced move on the day and sellers are firmly in control, where good buying in CHF more broadly should be noted. With a market still short of CHF I feel EURCHF has good near-term downside potential and would be positioned short on this cross.

USDJPY eyes a move into 145, and we’ll look to see how Asia trades the move on the day – however, as we can see in so many USD pairs of late, the USD just can’t find a friend in the market and is in freefall. EURUSD smashed through 1.1100 for the highest close since July 2023.

DXY – daily chart

Gold has found support from the weaker USD and holds the former trend support for a new closing high. The broad market is long and strong, perhaps a touch too long, but until price can close below the 5-day EMA, I would either be long or neutral, but shorts have been frustrating and costly. There is always the risk we see USD shorts lighten up into Jay Powell’s testimony on Friday but picking the low in the USD and top in gold has been costly, where the weight of capital flow has been one-way, and it still suggests that trend not for fighting just yet.

Crude also screens at big levels with the June and August lows in play around $73. One could argue the fall in crude has impacted the US Treasury market and been a factor that has seen buyers in the 10-year Treasury, but for those trading the crude market how price reacts to these big prior support levels is key. The sellers have work to do but the set-up on the higher timeframes needs monitoring and the price action doesn’t portray an overly positive picture of demand.

Good luck to all,