Five key charts that are top of mind
US500 – breaking down
We head into monthly options expiry (OPEX) on Friday and that may influence flows and price action in the US500, but for now, the equity bears are starting to get some traction. We saw the bulls try and take price above Monday’s high (4493) but they failed and the index closed not just below the range lows, but through the 50-day MA. Outright shorts remain challenged as implied vol is still so low (the VIX sits at 16.46%) and China could easily bounce (such is the extreme negative sentiment), but traders are betting on downside and the index looks likely to test 4385 in the near term.
US 10-year real rates (TIPS) – the rising true cost of capital
US 10YR ‘real’ rates are essentially US 10yr Treasuries adjusted for 10yr inflation expectations – TradingView users can set this up using the equation: TVC:US10Y-FRED:T10YIE. We can see this as the true cost of capital and in effect, the higher yields rise the more this supports the USD and negatively impacts US equity valuations. The rate of change (ROC) is always important, but if US 10yr real rates head to 2% then this may accelerate the selling in the US500 and NAS100.
AUDUSD – oversold but following China
When trading the AUD, you’re essentially expressing a view on China. USDCNH has been on a one-way tear of late and has weighed on AUDUSD, reflecting poor China economics, concerns of a credit event, but also the comparative returns seen in US Treasuries (over China bonds). We’ve seen underperformance in Chinese equity and industrial metals. The AUDUSD daily suggests the double top target of 0.6300 over the medium-term, and as we see in the price action, rallies have been savaged. It will take a while to get there, and the move will not be linear. For now, I see modest upside risk as shorts possibly cover given the PBoC has just announced a sizeable liquidity injection into the interbank market – but I would look to flip short into 0.6480. GBPAUD, EURAUD and AUDCHF have also been huge trades of late, and I would be taking some off the table to assess how headlines around China's fiscal stimulus play out.
Copper – the message from Dr Copper
A strong input into the AUD trade, we’ve seen price close below the 29 June low. On the session, shorts are failing to follow through, and we are seeing small upside playing out. A daily close above $3.68 would be positive and could indicate a failed breakout, which could compel longs for $3.80. The catalyst for upside is a more coherent and tangible plan to support on a fiscal level. If price cracks, however, I’d be looking at momentum shorts.
GBPUSD – CP-I see downside risk
GBP has been a clear outperformer in G10 FX of late, notably vs AUD and NZD. After yesterday's wage data, UK rates are pricing 32bp of hikes for the 21 Sept BoE meeting, which seems too rich. We’ll react to the UK CPI data (out shortly at 4 pm AEST). I still think there is a very high bar to hike by 50bp increments, and so I see a downside CPI surprise having a more pronounced impact on the GBP, than an upside surprise in the CPI print. I am reluctant to position for downside though as I have no edge in predicting the data (the consensus is for 6.8% core CPI YoY) but feel we’re more likely to see 1.2620 than the top of the range at 1.2780. Tactically, I feel using this range to fade moves on the day is the play.
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