Forex Analysis

The Daily Fix

The leads set for Asia and the start of the new trading week are hardly inspiring, although the weekend news has been uneventful. Early selling in AUDJPY has manifested into early weakenss in equity futures, with S&P500 futs -1.1%.

Aussie SPI futures were down smalls on Friday, with the net change from 16:10 aest just some -0.2%, while NKY futures are 0.8% lower. Both will open lower, in line with S&P500 futures.

Economic data, unsurprisingly, continues to deteriorate, with Friday’s US ISM manufacturing showing some worrying trends when you look behind the headline number and focus on the orders, new export orders and employment sub-components. While a number of states (in the US) start to ease lockdown restrictions this week, representing about a third of US GDP, and this is fitting ahead of Friday’s NFP, which is expected to show some 21.3m jobs lost in April – its seems too big a number not to be a vol event, even if we know circa 30m workers filed for unemployment in the past six weekly jobless claims.

One aspect that won’t have gone unnoticed is the weekly candles on so many major equity indices. Take the S&P500, for example, with price having rejected the 61.8% fibo and forming a very ominous hammer. Follow-through selling on the open would suggest the buy the dip crowd could just hold off for now, and perhaps the markets may attract increased short interest.

A move through the 2727-22 region just accelerating that view, especially if we can see the VIX index adding to the 3.04 vol gain seen on Friday (closing at 37.19%) and pushing above 40% again, which would portray daily moves of 2.5%+. We’ve seen the CBoE put/call ratio push up to 0.82, which is one standard deviation from the 12-month range and showing a greater absolute propensity to buy puts over calls.

I would be looking at this ratio through 0.90 before I really through the market was becoming more structurally bearish.

For Dow traders, the Dow Transports has rejected the 2018 low and broken the March uptrend and has pushed below the 55-day MA. Whether this holds any type of statistical edge as a lead indicator I am unsure but marries nicely with some of the other set-ups I am seeing. I would add a 2.2% drop in the HYG ETF, and a slight bid in duration, with US 10- and 30-yr Treasuries closing lower by 3 and 4 basis points apiece). Gold also found a better tone.

Inflation expectation were largely  unchanged and I’ll focus more intently on them tomorrow as I see these as one of the key indicators going forward.

In FX markets, the move lower in equities saw a risk-off vibe play through currencies, with the CHF the best performer on the day, followed by the JPY and the EUR. Whether this is a glimpse into what we may see this week is something to follow. On the downside, the MXN, ZAR and AUD were best offered – so in effect, the funding currencies worked, and high beta FX was sold with traders largely squaring off risk-on longs.
Whether we can consider AUDCHF or AUDJPY shorts with greater conviction will be a function of equity vol (in my opinion), and if the VIX pushes into 40%, as I say, then AUDCHF or AUDJPY shorts may worth a look. AUDCHF 1-week vol did push a tad higher on Friday, as did AUDJPY, although neither are at alarming levels but could be good beckons for FX markets this week, as a higher vol regime again would see carry unwound and funding FX working again.

Staying on the FX vol theme, as we can learn a lot for spot FX trading by looking at changes in implied options vol. We also see AUDJPY risk reversals haven’t really moved, with 1-week AUDJPY put vol trading at a -2.72 vol premium to calls, so we’re almost back to levels seen since before the massive deterioration in global financial conditions from mid-to-late February. The point being, until I see a pickup in AUDJPY vol and certainly a sizeable skew for puts, the FX market is still feeling that central bank have firm control and liquidity dynamics are king.

That said, the risk of a pullback has increased this week. I focused last week on growing tensions between the US and China as a shock to the markets. This is certainly gaining legs, with trader’s re-focusing on the USDCNH cross. The US are not alone in publicly taking aim at China, but whether its Trump, Kudlow or Pompeo the narrative is more frequent, and traders are selling CNH/CNY.

USDCNH daily chart

It is certainly a theme worth watching, and the market will be eyeing the probability of tariffs from the US administration or restrictions on Chinese investments. Whatever this happens, Trump will have to weigh an incredibly fragile US economy, with financial markets that could easily roll over if the wrong measures are implemented.

The China FXI ETF (Large-Cap ETF) could be interesting viewing this week and we see the relationship here with AUDJPY.

As we do with AUDUSD (inverted) vs USDCNH. With crude looking in a far better spot, I am eyeing shorts in AUDCAD or AUDNOK. I’ll post real-time on the Telegram account if that happens.

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