Enthusiasm

Dollar breakout and Dow collapse begin to dampen enthusiasm


Dow, Nasdaq, Dollar, GBPUSD, USDCAD and AUDUSD Talking Points:

  • The fall that spilled over to risky assets to end last week led to a general rebound to start this new week, but where is the conviction?
  • Normalizing the Fed as a risk of excessive risk exposure may be an important fundamental theme, but volatility and participation market conditions are my top priority
  • A dollar retreat suits the “hard to follow” environment, but where does that leave technical breakouts like GBPUSD, AUDUSD and USDCAD?

A full breakdown of risks that is suffocated by liquidity

Risk aversion was in full swing during the second half of last week, which made me wonder if we hadn’t hit the exact speculative deal that would replace a seasonal drain on liquidity. I was absent on Friday when risk aversion concentrated via stocks like the Dow Jones Industrial Average and the simultaneous supply of the US dollar spread to other corners of the financial system. Was this a slow response to the FOMC’s signaling of earlier rate hikes than the market was prepared for or maybe it was just a disruption caused by the confluence expiring? of derivative products (what is called a “quad witching” event)? It is important to try to distinguish the motivation from the move, as the ability to generate a follow-up in adverse market conditions is entirely dependent on the inspiration source. Given the large rebound in global indices and other sentiment-linked assets on Monday, this would seem a point for a temporary disruption. However, the rebound for the likes of the Dow Jones does not erase the pain of the previous week’s retirement. It is important to keep as close an eye on market volume and correlation between assets as it is on benchmarks.

Dow Jones Industrial Average ETF chart with 50-DMA and volume (daily)

Graphic created on TradingView platform

Speaking of volume, there was a noticeable divergence in revenue for Monday’s rebound from the drop in trading sessions that preceded the move. Under normal conditions, steadily rising volume tends to be more reserved than a heavy sell event. However, when the effort is to overcome thinned market conditions with a return to a mature uptrend, deeper engagement is of considerable importance. As we find markets searching for a collective view of its speculative directions, the interplay of liquidity with directionality will provide invaluable insight into what the market is capable of and perhaps the intention to collaborate.

VIX Volatility Index superimposed on the 20-day moving average of SPY volume (weekly)

Dollar breakout and Dow collapse begin to dampen enthusiasm

Graphic created on TradingView platform

Monetary policy speculation follows market into new trading week

There is no doubt that last week’s FOMC rate decision is weighing heavily on US and global markets. The world’s largest central bank was at the helm of the massive stimulus package that has now become the bedrock of modern monetary policy, so it makes sense that it represents the symbolic precursor of a possible turnaround to normalize against its extreme position. With the blackout period surrounding the official rate decision and the market clearly struggling to digest the modified SEP rate forecasts, central bank members decided to attempt to calm the situation by clarifying the situation. way forward. In the last session, New York Fed Chairman John Williams reiterated that the economy had not recovered enough in his mind to warrant a reduction in stimulus measures. South Louis Fed Chairman James Bullard took a more mixed stance saying they were starting to talk about a cone, but the cone this time around couldn’t be on autopilot. Meanwhile, Dallas Fed Chairman Robert Kaplan said he was in favor of releasing the “accelerator” as soon as possible. Although not a politician, I have resented the remarks of renowned investor Ray Dalio that, whatever the intentions of the central bank, it could not tighten “much” without “big negative effects. ” on the stairs. I think it’s perfect after years of establishing central bank support as the foundation upon which such excessive market heights have been scaled.

Graph of the relative monetary policy positions of the main central banks

Dollar breakout and Dow collapse begin to dampen enthusiasm

Graphic by John Kicklighter

For the dollar, the disparity in US monetary policy relative to its global counterparts likely accounts for more of the currency’s rise last week than the safe-haven supply that only arose until Friday. . The central bank’s rhetoric in the last session probably wasn’t a strong headwind to push the DXY Dollar Index down – although a rebound in risk appetite likely worked in conjunction with a a natural urge to moderate the strongest three-day rally for the benchmark since the height of the pandemic. If yield differentials are a fundamental theme capable of moving the market, I think the series of Fed updates expected throughout the week will carry substantial weight. Today, Fed Chairman Jerome Powell is scheduled to testify before Congress on pandemic lending programs. His prepared remarks have been pre-published, so it will be the questions put to the central banker that will carry weight. Longer term, the results of the Fed’s bank stress tests and Friday’s PCE deflator – the Fed’s preferred inflation reading – will be the most decisive updates on policy expectations.

DXY Dollar index chart with 50 and 100 DMA, 3-day rate of change (daily)

Dollar breakout and Dow collapse begin to dampen enthusiasm

Graphic created on TradingView platform

What to do about these majors with technical breaks?

With the dollar struggling to find a continuation, there are pairs like EURUSD and USDJPY that are always moving in wide technical ranges and therefore would be suitable for market conditions that end in uncomfortable congestion. Alternatively, there are some pairs who have made impressive technical breaks that will struggle for their next moves. Consider GBPUSD which has broken its post-pandemic recovery trend channel support and the 100-day moving average. The net speculative positioning on futures shows in particular the confidence that the bullish wave will continue.

GBPUSD chart with 50 and 100-DMA and positioning of COT Net Spec futures (daily)

Dollar breakout and Dow collapse begin to dampen enthusiasm

Graphic created on TradingView platform

AUDUSD is another dollar pair with a noticeable technical correction, which erased the head-and-shoulder pattern that formed throughout 2021 with the 200-day moving average in the process. Given last month’s false breakout reversal around the smaller congestion pattern with a bottom at 0.7700, traders are likely prepared for a quick correction from a false signal. Unlike Cable, the speculative net futures positioning on AUDUSD shows the most bearish conviction since June of last year.

AUDUSD chart with 200 day moving average and COT Net Spec futures positioning (daily)

Dollar breakout and Dow collapse begin to dampen enthusiasm

Graphic created on TradingView platform

The pair that recorded the most productive anti-dollar advances over the past three months – and an impressive load year before that – was the USDDCAD. When the greenback’s rebound was a moderate signal on the horizon, this pair moved freely within a well-established range (a downtrend channel). Still, the bullish pressure just in the second half of last week pushed us to the other side of the long-standing bullish pattern again. Given the similarity of these currencies in regional economic disposition, the focus on relative monetary policy is likely to be greater – an interesting case given the BOC’s own slowdown two months ago.

USDCAD Chart with 100 Day Moving Average and COT Net Spec Futures Positioning (Daily)

Breakout of dollar and collapse of Dow is starting to dampen enthusiasm

Graphic created on TradingView platform

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