FX Breakout Monitor: Daily direction changes the norm
Head of FX Strategy
Summary: NZD weakens sharply on a dovish RBNZ – suddenly looking at a downside break level after poking at resistance. Elsewhere, currencies can’t decide what to do on the conflicting signals of clear safe haven seeking in sovereign bond markets while equities zig and zag.
Yesterday we discussed the case of whiplash that was dealt in JPY crosses on the sharp weakening of the yen after Friday’s rally. Today’s session saw another direction change, with the powerful bid in sovereign bond markets driving fresh yen resilience and dogging trend traders’ hopes for a clear direction.
Elsewhere, the NZD sagged badly overnight on a dovish broadside from the Reserve Bank of New Zealand which brings the bank’s guidance more in line with other central banks around the world. As we discus below, this takes AUDNZD suddenly close to resistance just after a long string of fresh new lows for the cycle.
As well, sentiment in EM was weak today, especially in TRY (Turkish lira) with liquidity drying up as tom/next rolls have spiked as high as 1,000% annualised (yes, one-thousand percent) today, driven by Turkish authorities punishing short TRY positions ahead of this weekend’s election.
Breakout signal tracker
Our latest position, a EURAUD short promptly found a bottom and then backed up sharply as the AUD suffered collateral damage on the huge sell-off in NZD overnight on the RBNZ’s dovish turn. Whether the sell-off move can get back on track will likely rely on a further improvement in risk sentiment, and today’s developments leave us none the wiser. The losses will only pile up for breakout traders if every directional feint reverses…
Today’s FX Breakout monitor
Page 1: The strength in sovereign bonds sees EURJPY poking near the downside breakout level today. Elsewhere, note that AUDNZD is nearly back at a 19-day highs just a couple of session after testing 19-day lows – more below. And EURCHF poked below the key cycle low area around 1.1200.
Page 2: A hold into the close above the break levels in USDZAR looks tempting for a long position as we discuss below. Elsewhere, AUDJPY has reversed nearly all of yesterday’s gains and change direction sharply for the third time in just a few sessions.
AUDNZD is looking at a 19-day high today just a couple of sessions after poking to new lows for the cycle on the RBNZ’s dovish guidance. Trading against a former trend is difficult, but a move back above 1.0500 would suggest that the lows are in for this pair for at least a try back to the 1.0700 area.
This is a chart we brought up a couple of days ago and the upside break signal looks technically compelling on a close above 14.50-55 today – we’ll have a look at the price action into today’s close and early tomorrow for more guidance.
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.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.