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Intermarket:
• SP Futures 4134 (-0.45%)
• EUSTXX 4028 (-0.82%)
• Crude Oil 71.88 (+0.31%)
• US 10YR 1.37% (-5.20%)
• EurUsd 1.1865 (+0.08%)
• UsdJpy 109.81 (-0.36%)
• DAX 15298 (-0.75%)
Markets continue their post-FOMC slump as concerns over rate normalisation continues to keep a lid on risk sentiment. European stock futures point to a weak open this morning. USD strength continues. Gold is soft. The US yield curve continues to flatten. All moves are potentially a reaction to the squaring of “reflation trades”.
Instead, Crude Oil remains rather strong and has resisted the decline in other commodity markets.
A busy week of Fed talk lies ahead, with the key speech being Fed Chair Powell’s testimony before Congress. Other Fed speakers include Bullard, Kaplan, Williams, Mester, Daly, Bowman, Bostic, Rosengren and Harker – the latter two of which are among the most hawkish in the current FOMC. Further hints of hawkishness may further dampen risk appetite.
Looking ahead today: ECB President Lagarde speaks at the European Parliament at 16:15 CET. We expect mostly a repetition of the ECB decision two weeks ago in the prepared remarks, but look for PEPP discussions and strategy review discussions in the following Q&A.
Matters that Matter:
• China keeps lending benchmark rate unchanged for 14th straight month
• AU May Retail Sales MM 0.1%, 0.5% f’cast, 1.1% prev
• ECB Pres Lagarde – ECB has made good progress on new strategy
• Digital euro will protect consumer privacy, ECB executives pledge - FT
• Bank of Canada to break sequence of lower terminal rates as governments splurge
Majors 1-Day View:
Comment: reflation trades are being unwound now that the FED is starting to think about policy normalization. Gold and other precious metals are dropping, the US dollar and the Yen are moving sharply higher, and the US yield curve is flattening as the short end is discounting higher rates, while the long-end is discounting less inflation.
USDJPY
After the rally towards Mar/Apr closing highs at 110.72, sellers returned to market, prices posting the 3rd lower daily high & low during today’s Asia trade. This move is still seen as corrective however, and buyers may return from the prior week close at 109.66 or closer to prior week lows at 109.40s. Initial resistance is today’s high at 110.25.
EURUSD
Last week’s volatility expansion took prices below May lows and towards Mar/Apr support zones at 1.1777 (Apr 2 open) and 1.1714 (Mar 31 open). However, with a bullish divergence forming at the hourly level, caution is advised and playing pullbacks towards Friday’s Open at 1.1909 is the preferred play.
AUDUSD
Last week’s decline took prices to fresh lows for 2021 via a sequence of 4 consecutive lower daily lows, but momentum readings are currently extended at multiple levels and a bullish divergence is forming at the hourly level. Hence, while the downtrend remains in place, caution is advised and selling into pullbacks between today’s top at .7522 and Thursday’s low at .7540 is the preferred play.
GBPUSD
Last week’s 3 ½ Big Fig decline has taken prices to May lows via a sequence of 5 consecutive lower daily lows. Momentum readings are extended at multiple levels, suggesting caution. Playing pullbacks towards today’s Asia top at 1.3830 or to Friday’s Marabuzo line at 1.3864 is the preferred strategy for today.
USDCAD
Prices posted the 8th higher daily low in a row into today’s Asia trade, as last week’s 3 ½ Big Fig gains surpassed May highs and are currently transacting support levels from a consolidation in April. Alongside extended momentum readings, this suggests some caution. Pullbacks towards Asia lows at 1.2440 are preferred today.
FX Weekly ATR Grid
Comment: weekly volatility levels increased last week for the first time in weeks. USD and JPY pairs are showing the strongest expansions, and are the continuation candidates. But there were also outright vol contractions last week on select CAD, AUD, CHF, NZD pairs which have setup potential vol expansions this week as well. Overall, trading conditions are much more favourable now.
FX Relative Strength Grid
Comment: the strongest trends are currently USD (bullish), AUD (bearish), NZD (bearish). The strongest momentum was seen Friday in CHF (bullish), GBP (bearish), AUD (bearish).