The Weekly Close Out
The main news story for this week has been the collapse in the yield curve, particularly the 2s10s as 10-year yields slide all the way down to their 200-day SMA. There are a couple of narratives swirling around explaining this move from anxiety over causing a modest growth scare, China growth slowdown, lower inflation expectations, mild rethink on the timeline for tapering QE and lastly a short squeeze. JPM believe 10-year yields are now 3 standard deviations below their fair value according to their model. So could we see a snapback in yields? Given the dollar’s status as a risk-off currency its managed to hold up well allowing FX and rates to decouple. General risk aversion is definitely ensconcing the market, just look at the push higher in the VIX, equity sell-off and strength in the yen and Swiss franc. The minutes were a bit of a damp squib in terms of market reaction. There were some mild Hawkish undertones - Various participants felt conditions for reducing the central bank's asset purchases would be met somewhat earlier than they had anticipated. Substantial majority of the officials saw inflation risks tilted to the upside. However, minutes didn’t offer any more clues as to when the Fed will taper and hike rates, but did show debate over those policies are moving up a gear. Looking at positioning data from last week, we saw another trimming of USD shorts, albeit not as dramatic as 2 weeks ago, dollar shorts continue to be unwound, bulk of this move came from an increase in shorts against the yen. As for economic data, we got some below consensus prints in final PMIs and the JOLTS job opening figures were slightly softer than expected, but still solid numbers highlighting plenty of jobs are available. Initial claims were higher than the 350k expectations, showing how sticky it’s proving to ween people off stimmy cheques.
The dollar is softer as we move into the weekend, but is still holding the 92.2 mini support as indicated by the small white line on the chart. There is quite significant support around the 92 area with the 61.8% Fibonacci level and 21-day EMA just below that. One concerning signal on the chart is the negative divergence on the RSI. The RSI will need to hold the 55 level which will act as support on pullbacks. The 50-day SMA is looking like it wants to have a go at the 200-day SMA to make a golden cross if price can continue to increase. On the upside the first price target I’d be looking at would be the recent highs of 92.845 and to the downside I’d watch around 91.8 -92.
The big event for the single currency, although looking at the euro’s reaction some could argue otherwise, was its strategy review where the inflation target shifted from an asymmetrical regime to one of a symmetrical nature targeting 2%, allowing room for a temporary overshoot when needed. They also emphasized it wasn’t like the Fed’s AIT. Markets had priced this scenario so the euro didn’t flinch. We also saw a change to the formula of how inflation is calculated. The ECB has incorporated housing in its new inflation metric, which could help push inflation higher. The mandate was also expanded to include climate change related policy changes, still think central banks have no business in the climate change arena. On the economic data front, euro area final PMIs came in stronger than expected as well as solid retail sales numbers, throwing a dampener on these good numbers was German ZEW economic sentiment which was far below expectations and a weaker industrial production figure.
EURUSD is holding up well despite the softer risk environment. Price slipped briefly below the 1.18 support and is looking to put in two solid bullish candles into the weekend. Upside resistance would come in around 1.19 and 1.192 (21-day EMA). Above that is the trendline too. The RSI has moved out of oversold territory, making a double bottom pattern. Still think EURUSD remains a good candidate to fade rallies, while it remains below all key moving averages.
Daily cases in the UK are going vertical once again, but the key factor is that hospitalizations and deaths have remained flat. The vaccines reduce severe cases and hospitalizations, trying to turn covid as close to a mild flu as possible. With freedom day fast approaching the UK will be a good test case for whether we can get back to normality with a large proportion of the population vaccinated. The Office for National Statistics also released data that 90% of the adult population in England were estimated to have antibodies, another positive sign in the fight against covid. Just today the UK said it didn’t agree with the EU’s estimate for the payment necessary for Brexit, which could raise some temperatures slightly. Economic data for this week was fairly barren and leaning towards the negative side with softer than expected GDP prints, industrial production and manufacturing production with the only ray of light coming from better than expected final PMIs.
Cable has held in there for dear life, a bit like the English football team against Denmark. Support of 1.378 has held for now and price looks set for a decent close into the weekend. There is also the 200-day SMA below where price is trading currently as well as support at 1.366. 1.385 could add some headwinds to price on the upside as well as the 21-day EMA at 1.388. The RSI did make some divergence with price which may have kept additional weakness in Cable at bay.
As mentioned above JPY has been catching a bid on the back of general risk aversion given it’s classification as a safe haven currency. Also, as discussed here many times previously US 10-year yields are a significant driver of movements in the yen and with the large move lower in yields its aided to the tailwind blowing in the yen’s favour.
USDJPY has put in some punchy moves this week, sliding right below the 111 level, its lower trend line of the ascending channel and 21-day EMA. Price got all the way down to the 50-day SMA, but has held this level quite well. But that technical break isn’t too good. The RSI has dipped briefly below key 46 support, but is trying to reclaim this level. Downside target would be 109.1 support and upside would be around 110.3 (21-day EMA and trendline).
The yellow metal has had a good week, which seems strange with the dollar holding up firmly, but this move is all due to US 10-year real yields tumbling and some risk-off bid potentially towards the latter half of this week. Higher oil prices up till Tuesday were feeding through to higher breakeven inflation rates while nominal yields have been aggressively moving lower – the combination is deeper negative real yields. I still think gold will struggle over the medium term as Fed policy is on the road to normalization, can’t get more dovish from here unless there is a new variant which renders vaccines ineffectual. Therefore, in my opinion there is a floor under how far real yields can really decline and the bias is now for them to head North over time, which would hit gold 2 fold – on the real yield front given it’s a yield less asset and from a stronger dollar. The other driver of gold, fears over runaway inflation, seem unlikely to occur. On this basis that’s why I’m not too excited about gold’s prospects on a medium term view.
Gold has had a fantastic run of late, rising above the $1800 level. Price is looking a bit exhausted as it brushed up against the 21-day EMA and upper trend line of the descending channel. Above that we have both the 50-day and 200-day SMA. The RSI made divergence and likely played a hand in propelling gold higher technically. There was also a crude double bottom pattern present around $1750. On the upside further moves higher would bring $1830 into play and on the downside $1770-50 would be key levels to watch.
The crude market is really interesting at the moment – touched 2-year highs on Tuesday just below $78. Dispute between Saudi Arabia and UAE led to a collapse in talks with the current production deal remaining in place, until the deadlock is resolved. There is no timeline on when the next meeting will take place. Essentially, the 4th largest producer in OPEC+, UAE is against the current output cuts agreement being extended past April 2022 till the end of 2022. They believe their baseline is too low at about 3.2 mln bbls/d and want it to be revised up to 3.8 mln bbls/d. Reconfiguring its baseline would change how its quota is calculated and allow it to produce more. Saudi Arabia and Russia are reticent to do this as reviewing UAE’s baseline would require all members' production calculations to be reviewed. Iraq, Kazakhstan, Nigeria and Iran have in the past expressed grievances with their baselines. This could lead to a supply dump. 3 ways I see this turning out: 1) There is an agreement on the current deal on offer (or close to it) – so modest increase in supply 2) Compromise – giving the Emirati’s a larger increase or not extending current arrangement past April 2022 3) Complete breakdown in relations leading to unilateral action amongst OPEC+ members trying to grab market share, causing a price war. Third outcome is the most bearish for oil, but would be dampened by the large supply-demand deficit around 2.5 mln bbls/d (as evidenced by the steep backwardation in futures curve) - inventories are being unwound and global demand is on the rise via economic re-opening. Headline news flow will dictate price action and inject volatility into crude markets. My feeling is that dips will continue to be bought with most seeing $80 as a short-medium term price target. The recent explosion at the Dubai oil tanker has helped oil to hold its ascending channel.
Oil slumped mid-week as it hit the top of its upward channel and moved all the way down to the bottom of the channel. But price has rebounded now and is perched just above the 21-day EMA below $75 (mini resistance). The RSI had been making some divergence as price pushed higher last week which pointed to some price weakness. Currently, the RSI is just above the key 53 support level and will need to remain above this to keep oil bulls happy. There’s decent support down by the 50-day SMA and $72 level which would be where I’d monitor on further price weakness. On the upside price needs to break through $75 first then it could have a run at $80.
Cryptocurrencies have been under pressure as China continues its clamp down on the digital currency. Binance has continued to be pressured by UK regulators and the risk-off environment hasn’t done Bitcoin any favours either. We’ll also get earnings results from digital currency exchange platform, Coinbase, on Thursday whose results could have some impact on the price of Bitcoin. One to keep on the radar.
Bitcoin has just been bumbling along. Very unlike its usual volatile self. Right now price remains stuck in a range between $35.7k and $31k. With the 21-day EMA capping upside moves for now. There’s further resistance in the form of the 50-day SMA higher up. The RSI is below the key 48 resistance level too and looks to have made a crude double top pattern. Price needs a positive catalyst to take it higher.