Macro Dragon: USDCNH > 7.1400 signals danger on US|CH...
Global Macro Strategist, Saxo Bank Group
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Macro Dragon: USDCNH > 7.1400 signals danger on US|CH...
Top of Mind…
- Lets kick off with some anthem waving from Hansen’s COT: Strong buying of WTI; Subdued gold interest & another one of the weekly favorites from Dembik’s Chart of the Week: Cyprus 5-Year CDS.
- To those from the UK, SG & US, welcome back from the long wkd & good luck on the final trading days into month end.
- As we mentioned in yest’s Macro Dragon Welcome to WK 22 – USDCNH should be on everybody’s dashboard. The US / CH weekly cold to colder relationship is a new underlying theme that may at some point create some serious risk-off for certain asset classes & securities
- The paradox of course is that technically, US equities have their anti-gravity boots on (yes still need to break above 100 & 200DMA of 2970 & 3000). After the SPX posted +3.2% last wk to the c. 2955 lvls, its seem almost certain that they will break 3,000 this wk (this Tues morning Asia the S&P futures are +1.4% at 2993) & we could be in for the NDQ (which +3.3% from breaking its ATH of 9737, set on the 19 of Feb – the Fri before Italy joined, then took over the global Covid-19 charts). Don’t hate the messenger, the technicals are the technicals & for now… it still seems like the path of least resistance is to the upside. Its not just about breaking it, but holding the lvls.
- The fact that the VIX & the vol of vol have pretty much gone sideways since early May, suggests to KVP at least that the likely next structural move on vol is lower. Point being, elevated lvls of volatility have time decay working against them. Does not mean that a move lower in volatility could be miss-priced & we can’t get back over 40 or 50 on the VIX, its just we are struggling to meaningfully get back structurally above 30. In fact, the move to 20 is likely ‘easier’ than a move to +35. Yet you know what could potentially take equity volatility higher & curb, or at the very least give a short-term reversal to the US equity ascent?
- That’s right US / CH… HK has become the latest epicenter, with clearly only parts of the world noticing or perhaps folks calling on the ‘boy who cried wolf’ analogy… i.e. they had the umbrella movement & protests for months, legal wranglings before, then C19… surely HK will get through this latest saga as well. Hard to say for the Dragon, yet there are at least four things we can say with high probability.
- One: The stakes are higher now in a post C19 world, as its gone from economic posturing to the much more dangerous kind, societal/cultural/heritage posturing – the former is generally more rationale & weighted towards benefits & costs to the economy & society, the latter is about face & perception of power. From CH perspective its pretty simple, this was (& is) a sovereign territory of theirs, extracted from them through a lease to the then colonial world powers of the world, the Great Britain & it is time to heal that historical slight.
- From the US (Trump administration) perspective it’s pretty simple, its yet another button to press to either enhance Trump’s “strong man” stance on China & American interests as we countdown to the Nov elections, as well as potentially extract further trader terms (china to buy more US assets) and also potentially placate the backlash back in the US at the Trump administrations’ abysmal handling of the C19 outbreak on US soil. As in all Crisis there is a lot of anger. And as in most crisis, there is no leadership accepting responsibility so scapegoats need to be found – remember bankers in the GFC? At one point people were being told to not wear suits or anything that looked professional going into work. The questions here is will Trump & his administration follow through in making China the scapegoat?
- Two: A lot of the folks that KVP knows from HK – who are as embedded as one can get & have been there for decades, are not so sure this time around that things will sail through. This time it could be different. The two big things are obviously a repegging of the HKD to the CNH, as well as HK losing its special status to the world.
- Three: At 7.1435 USDCNH is at the top of its YTD range, with the 7.1653 high clocked on Mar 19th when we had global risk-off. A break above 7.15 could easily take us to new near-term highs & even challenge the 7.1965 high set on 3 Sep 19. So long as the USDCNH remains elevated & ready to break higher, we may be at the cusp of bite over bark. i.e. there really is a wolf in the fields.
- Four: Whilst just 3m ago, a US/CH trade deal fall-out would have been abysmal for both US, global equities & risk assets in general. This time around, KVP is not so sure. For one thing, you have a Fed/Treasury that have committed to doing whatever it takes – in fact, such a deal break may be construed as a great opportunity to buy the dip, after all, the Fed always rides into town on a greenback horse to save the day. Point here is, the vast majority of the move up continues to be (imho) driven by liquidity by the Fed & not fundamentals.
- Lets look at it like this, if you were to take away all the liquidity that the fed has done today, where do you think SPX would go from these 2955 lvls? That’s right… likely at least sub of 2000 if not 1500. But liquidity & Fed still reign supreme… can they do this forever? No, look at Japan Equities & the fact that BoJ has been buying them for years… Yet it could still take 6-24m for the Fed’s Lack of Impact = BoJ’s Lack of Impact. Abenomics was really about BoJ liquidity & since being announced in 4Q 2012, the NKY ran for 3 straight years for a c. +150% move , before retracing c. -30% over the course of a year (Aug 2015 to Jun 2016), then going on a two & half year stint to 24448 highs on 5 Oct 2018, where it clocked a +65% move. Now obviously the tail end of this also has to do with the longest business cycle on record that we had in the US, but the underlying point here is that its not insane to think that SPX can double from these 3000 lvls to 6000 before the Fed's liquidity bang for buck finally dissipates - like an EMP on a new years countdown in New York city.
- Back on deal break - This would obviously not be symmetrical to CH equities & perhaps even more importantly Asia, EM equities & FX. A phase one deal break, means more tariffs & potentially also means a USDCNH well north of 7.20, which would crucify the likes of the Aud & also likely get a knee jerk move to USD higher, bond prices higher, VIX 28 back above 35-40, gold 1726 above 1780/1800 & of course a -5% to -15% run on things like the HSI.
On The Radar Today
- NZ: Trade balance 1267m a 1250m e 722m p
- JP: All industries Activity, BoJ Core CPI (note National CPI last wk turned negative, which was the first time since Jan 2017)
- EZ: ECB Financial Stability Review, GER Gfk Cons. Climate
- US: House Prices, CB Cons. Confidence, New Home Sales & FOMC’s Kashkari @ 01:00 SGT
- Early door tmr @ 05:00 we’ll actually have BoC’s Poloz speaking, as well as RBNZ Financial Stability Report due
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