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USDGBP

Risk off - but are we closer to a trading low?

Chris Weston
Head of Research
Jan 10, 2022
Another lively session and I expect this to remain the case through Q1 22, as the market grapples with rising rates, as well as front-running the notion of reduced liquidity as the Fed embarks on quantitative tightening (QT) and balance sheet run-off - possibly mid-year.

NAS100 daily

(Source: TradingVIew - Past performance is not indicative of future performance.)

Tech has been shunned through much of Q4 21 and certainly 2022, with our NAS100 getting a solid run and this makes sense given US 10-year real rates have moved up close to 40bp this year. Subsequently cash flow matters so much more than the halcyon days of ever-increasing liquidity and a ‘buy everything’ mantra. Still, after a move down to 15,162, the buyers have stepped in and there's been a decent bid from oversold levels, with turnover through the various US cash markets 10-20% above the 30-day average – certainly a feel in the flow that for now that we’re quite full-on US rates pricing, with 81% probability of a hike (from the Fed in March) and 3.5 hikes priced this year.

The NAS bulls will want a firm push back through the 20 Dec swing low before feeling more confident of holding for the 100-day MA. However, this may require a far better bid in rates, as well as better buying across the US Treasury curve – a fate which now lies in the hands of Fed chair Powell who testifies to the Senate Banking Committee in the session ahead. And of course US CPI (due Wed 00:30 AEDT), where NAS100 longs will want to see below 6.8% YoY on headline CPI and into 5% on core.

Conversely, if we see Powell fail to push back on market pricing on rates and we see a 5.6% on core CPI (consensus is 5.4%), then Treasuries sell-off (yields higher) and tech likely trades lower. Hypothetical of course but we look at the distribution of outcomes.

A short-term opportunity in growth to value?

Much ink has been spilt assessing the rotation from growth to value within the equity markets and this has made a lot of sense as investors flock to quality defensive plays. From a truly simplistic standpoint, if QE was there to push people out the risk scale, then QT is partly designed to tighten financial conditions, so investors head back to the cream de la cream. This trade is mature though and from a tactical standpoint, one questions if this does offer a short-term entry to fade the move?

Obviously mean reversion is more scientific than this, but this is one for the radar.

BRK/ARKK ratio – a possibly ST reversal due?

(Source: TradingVIew - Past performance is not indicative of future performance.)

One long and short (relative value) play around this thematic is BRK/ARKK (Berkshire/ARKK Innovation). Perhaps the poster-child ratio of growth to value rotation, there’s been a huge outperformance from Berkshire, but is it now time to fade this flow by taking short BRK and long ARKK exposure? The chart says it may well be the case if even for a day or a short-term swing trade.

FX flows – movers and shakers

In FX our flow has been quite focused on GBP – GBPUSD has printed a Doji on the daily and failed to kick on from the rally from 1.3200 to 1.3600 – intuitively it feels like the probability is raised for consolidation, at least until the US CPI print is known. If GBPUSD does kick up though and we see a green candle with a solid range, then this is one the momentum players will be all over, whether its 4-hour charts or scalping the move in 15 or 30-min charts.

GBPNZD daily

(Source: TradingVIew - Past performance is not indicative of future performance.)

GBPNZD is also one that has caught my eye and is on the radar – a move into the 2-handle and the July and August double top is one I really want to take notice of. It’s been a huge trend exposure of late and a closing break could again offer bullish momentum flows in what is an already incredibly overbought setting – that said, it’s hard to short while the cross finds support every time it hits the 5 day EMA – again consolidation seems the probability.

It’s the CHF that has underperformed most on the day, with USDCHF having solid range expansion and pushing into congestion from the Dec highs. The Swissy has lost its safe-haven touch, perhaps due to news around Russia and perhaps some deleveraging/switching from CHF to JPY – but we’ve got a punchy green candle on the daily and it feels like this has legs into 0.9350 and the October and November double top.

Levels to guide in EURUSD

The USD is modestly stronger, with EURUSD finding headwinds into the 50-day MA – either way, the market can't make up its mind ahead of Powell testimony and US CPI and the range we’ve seen through December and January holds.

There's more bearish USD calls emerging from the banks, notably turning more optimistic on EURUSD. I tend to agree that fundamentally the failure of the USD to rally despite a growing relative premium of US bond yields (over other G10 economies) has many talking about what will need to play out to drive the USD higher? For me it comes down to the US yield curve – the Fed is now guided by the shape of the curve, and if we see a rampant flattening then rate hikes can come out of pricing as very little good comes from hiking into a flatter curve.

If the curve steepens, however – I like to view the 2s v 5 curve - then the USD should get new life. I'm guided by 1.1380 to 1.1270 in EURUSD – a closing break on either side of this sets my trading bias.

Crypto finding sellers – but are we closer to a bottom?

Elsewhere, Crypto is seeing further unwind with our Bitcoin price trading sub-40k and holding the September lows. Technically grossly oversold, the question is how far rallies can last before seller’s kick back in? Again, I see this space at this juncture as a former liquidity beneficiary, similar to the NAS100. A high beta momentum play, recall momentum works both ways – long and short.

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