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Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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FX Breakout Monitor: Fresh US-China trade tensions feed JPY strength
John J. Hardy
Global Head of Macro Strategy
Summary: Market volatility has picked up as the US-China trade tensions have escalated, although trading ranges are still muted relative to even marginally normal times. That could quickly change if China’s commitment to the CNY floor weakens.
While markets are clearly very nervous, the trading ranges in the major currencies still look fairly compressed given what is at stake and the higher level of energy evident in global equity markets today. We assume much of the complacency is linked to two factors: first, speculators are already positioned relatively long in the US dollar, limiting is ability to serve as a safe haven in this environment and second, the complacent assumption that China will maintain its floor on the CNY, keeping USDCNY below the 7.00 level.
The speed of the USDCNY’s rise over the last week, and especially today, beg the question of whether the recent escalation of the trade showdown between the US and China could see the latter surrendering to market forces and allowing the CNY to weaken to offset the impact of some of the trade tariffs. Such a move would be seen as an escalation from the US side, but it could also drive considerable further uncertainty across markets, especially currencies. We would assume the most exposed to a move lower in the CNY would be the AUD, NZD and major Asian exporters into China, like SGD, THB, IDR, etc..
Breakout signal tracker
We stand aside here after taking off the two remaining positions on Friday.
The speed of the USDCNY’s rise over the last week, and especially today, beg the question of whether the recent escalation of the trade showdown between the US and China could see the latter surrendering to market forces and allowing the CNY to weaken to offset the impact of some of the trade tariffs. Such a move would be seen as an escalation from the US side, but it could also drive considerable further uncertainty across markets, especially currencies. We would assume the most exposed to a move lower in the CNY would be the AUD, NZD and major Asian exporters into China, like SGD, THB, IDR, etc..
Breakout signal tracker
We stand aside here after taking off the two remaining positions on Friday.
Today’s FX Breakout monitor
Page 1: No surprise to see the heavy JPY crosses, given nervous risk sentiment. Suddenly, the CHF is serving as a safe haven after largely ignoring risk sentiment developments recently and USDCHF and EURCHF are also looking at downside breaks here.
Page 1: No surprise to see the heavy JPY crosses, given nervous risk sentiment. Suddenly, the CHF is serving as a safe haven after largely ignoring risk sentiment developments recently and USDCHF and EURCHF are also looking at downside breaks here.
Page 2: Here, developments are largely extensions of prior trends, the most notable new developments being the spike higher in spot gold today (see chart below).
Chart: XAUUSD
Gold has sprung into action on the latest US-China trade showdown and traders and commentators bandying about the idea that China could look to sell some of its treasuries. The move looks impressive, but works against the recent tendency for gold to weaken together with a weak CNY – can the two head in opposite directions? Stay tuned… still quite a ways from the cycle top near 1,347.
Gold has sprung into action on the latest US-China trade showdown and traders and commentators bandying about the idea that China could look to sell some of its treasuries. The move looks impressive, but works against the recent tendency for gold to weaken together with a weak CNY – can the two head in opposite directions? Stay tuned… still quite a ways from the cycle top near 1,347.
REFERENCE: FX Breakout Monitor overview explanations
The following is a left-to-right, column by column explanation of the FX Breakout Monitor tables.
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout.
NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
The following is a left-to-right, column by column explanation of the FX Breakout Monitor tables.
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout.
NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
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