The UK parliament’s rejection of Prime Minister Theresa May’s Brexit deal sees sterling continuing to surge, triggering fresh breakouts in major sterling crosses. Elsewhere, NOK is having a look at new highs versus euro and its fellow Scandies while EM momentum maintains a head of steam on China stimulus and Fed dovishness.
First, please note that we have a new format for the FX Breakout Monitor that hopefully provides a more intuitive overview than previously on what is going on – both today and for the prior six trading days for 19-day breakouts and 49-day breakouts.
Today’s FX Breakout monitor
Page 1: Here the most prominent developments remain the GBP surge in recent days (especially EURGBP) and EUR showing signs of weakness... is this on the weight of EURGBP flows or concerns about the Eurozone economy, or both? Regardless, a new 19-day low is suddenly close again in EURUSD – more below – and EURCAD has registered a new local low today and yesterday, with EURAUD close to doing the same.
Page 2: Of the two sterling pairs on Page 2, GBPCHF has been in breakout since closing above 1.2579 three days ago and continues to head higher while GBPJPY has not yet achieved a new 19-day high, though that is not far away now in the 140.70 area. NOK, meanwhile, is pushing on the key pivot area below 9.75 in EURNOK again over the last couple of days and breaking higher against SEK today if closes clear of 1.0503.
In EM, USDRUB is close to breakout levels on a close below 66.68, and USDTHB and USDZAR have been trending persistently in recent days, as can be seen in the series of new lows over the last five or six trading days. Finally, it's somewhat interesting to note that spot silver and gold are registering some of the their smallest trading ranges in the last 1,000 trading days despite the recent sharp rally – has volatility been suppressed as the market awaits bigger developments in CNY volatility? Below we discuss the AUDNZD potential break on a close above 1.0620.
EURGBP has pushed lower in recent days – note that the action merely takes us back to the range of the last several months. Bears will hope the sterling surge can take us to the lows of the range back below 0.8650. Still, bulls and bears must both beware the risks of ad hoc Brexit developments; the situation remains fluid as we await the next steps in a rather tighter timeframe ahead of the original March 29 deadline.
EURUSD is still bogged down in the multi-month range, and its choppy tendencies of the last many months don’t inspire confidence that a local break of the 19-day low close, currently 1.1344, will provide further momentum. The bigger break level is the 49-day low close at 1.1218, though many will be tempted on any close below 1.1300 as the pair has only closed below that level three times since late November.
EM currencies have traded broadly stronger, led by a CNY resurgence that has taken much of Asia with it (note the string of new lows in USDTHB, as Thailand’s chief export destination is China and other countries across Asia that also export to China). As well, the Fed’s dovish downshift has inspired a resurgence in EM currencies and oil prices have bounced after a frantic slide in Q4. The local level break here for USDRUB is close to the current price and could set up a test of the range low near 65.00 at minimum, though traders should also note the 200-day moving average.
The AUDNZD chart is fairly compelling here as the recent strong bounce off the lows saw a pivot level posted around 1.0620 – the current 19-day high. On the fundamental side, we note that short New Zealand rates have been moving aggressively lower in contrast with more stable Australian rates as the market is shifting RBNZ rate cut expectations more rapidly than those for the RBA at the moment. A close above there could set something more in motion to the upside, possibly toward the oft-visited 1.0800-50 area.
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 road to a bond bull market is paved, although challenges remain
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
FX: King dollar and its far-reaching repercussions
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Equities: Higher cost of capital is getting painful
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Commodity sector supported by peak rates, tight supply focus
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.
Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.
To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.
None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.
Your browser cannot display this website correctly.
Our website is optimised to be browsed by a system running iOS 9.X and on desktop IE 10 or newer. If you are using an older system or browser, the website may look strange. To improve your experience on our site, please update your browser or system.