Head of FX Strategy
Summary: Strong risk appetite is driving strong performance for smaller currencies and sterling, at least in part fed by hopes for a smooth Brexit and as the Fed is seen as onside in providing needed liquidity at every turn from here, helping the USD lower.
The FX Breakout Monitor is back, and it is expanded with "autosignals" that show examples of how to trade new breakouts, defined as new 19-day high or low closes not preceded by a breakout in the same direction in the prior week. Click on the link below for a look at the full PDF of the table overview and the Recent New Breakouts tables. See further below for a couple of chart highlights related to today's monitor.
Today’s Breakout monitor
We are largely seeing extensions of recent themes in the latest market action – especially in sterling trades continue to power through to the strong side despite this weekend’s indecisive outcome for Johnson’s Brexit deal and the uncertainty on whether we will see a vote on the deal this week (even this evening) or not until after a delay to January has been agreed with possible elections in the interim.
Elsewhere, the USD continues to extend the lower outside of USDJPY, with “new” breaks (the first in at least a week) below the 19-day low close on Friday’s close in USDSEK, USDCHF and USDRUB adding to the three breaks lower for the USD recorded on Friday (against NZD, AUD and THB).
Note in the auto-signals list that the weak performance (stop-outs) of the recent sterling upside breaks is due to the “automatic” setup for the signals – the big break higher in sterling on Friday the 11th saw a big back-fill day on the subsequent Monday that extended more than 1.05 ATR (the default distance to the stop). Normally a trader would not enter “at close” on a given day, especially a Friday, but look to work an order on the following day and adjust the distance to the stop relative to recent volatility (thus also decreasing the size of the overall position to keep the risk per trade as a constant) so in reality the break has performed quite well to date on a reasonable entry long GBP on Monday the 14th in many pairs, using a wide-ish stop, that traders would now have moved significantly higher. (Standard holding period is 9 days)
Today’s Breakout Highlight: USDSEK
The Swedish krona has firmed up well over the last few sessions, in part driven by last week’s revelation that the Swedish statistics agency responsible for reporting unemployment data has reported that the data may be underestimating the strength of the Swedish jobs market, a factor that could ease any sense of panic from the Riksbank this week. The SEK has indirectly also been riding the coattails of a stronger sterling, as hopes for a smooth Brexit bring relief to the outlook for EU- and Swedish exports. The latest price action here is beginning has provided a fairly profound rejection of the recent new highs above 9.90, but a full trend reversal needs to see the destruction of the rising channel-like formation and push well south of 9.50. In addition, there is a bit of a pivot area around 9.60 that needs to be taken out for a more profound break.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
