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Summary: Many currency pairs are pinballing around with no sustained directional conviction at the moment, a treacherous environment for momentum traders. EURUSD has been Exhibit One for this kind of behaviour for months.
Click here for the full FX Breakout Monitor report.
The incredible surge in US treasuries reached a near term climax yesterday and a subsequent wave of strong risk sentiment today – just after an ugly meltdown in the US’ largest cap internet monopolies yesterday on news of an official anti-trust probe into their behaviour.
The latter story may have driven a sharp weakening in the US dollar yesterday, a move that was already reversing partially today – a sign that short-term nerves, reactivity to headlines and lack of conviction are rampant. The EURUSD chart has been Exhibit One in this kind of behaviour for months and our EURJPY short is about to get stopped out at break even in the signal tracker. We suggest that momentum / breakout traders should tread carefully here.
Given the inability of JPY crosses to develop greater momentum last week even as US treasury yields slid more sharply than even during the December equity market carnage, we wonder if there is anything left in the tank for yen longs here.
Breakout signal tracker
We leave the EURJPY short signal afloat for now – not far from our lowered stop.
Source: Saxo Bank
Today’s FX Breakout monitor
Page 1: price action rather choppy in many pairs. EURUSD closed at a new 19-day high yesterday, but only within the context of absurdly compressed volatility – we’ve argued that at least 1.1300 needed for more attention there and arguably 1.1375-1.1400. The European Central Bank meeting is up on Thursday and is the next test for euro pairs. Elsewhere, the USDJPY move suddenly ran out of steam today as US yields rose again and risk sentiment brightened. EURGBP posted new highs yesterday and intraday today, but the reversal today points to fading momentum. The NZDUSD poking to a new 19-day high close yesterday is not occurring in the context of a compelling chart structure – reserving judgment there for now.
Source: Saxo Bank
Page 2: mostly continuation breakouts here on the top half of the chart – interesting to note the near miss on the downside USDNOK attempt today if the intraday bounce holds. In EM, USDZAR has jumped after two heavy selling days on a weak South Africa GDP report. Again – more churn.
Source: Saxo Bank
Chart: EURGBP
EURGBP is showing signs of momentum decay as today’s fresh highs failed to hold – the second rejection of a new high recently. Bullish momentum failure could see the pair back in the lower range below 0.8800.
Source: Saxo Bank
Chart: NZDUSD
NZDUSD managed to barely scratch to a new 19-day high close yesterday, but the chart context does not offer a compelling toehold for bulls, with no identifiable pivot or break level. Stay tuned for the broader USD direction here.
Source: Saxo Bank
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.
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
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.
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