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Trading on Friday was again dominated by the reaction to the FOMC meeting. Increased risk aversion and a general USD bid tone were the main themes, alongside the closing of curve steepening strategies.
The moves reflect profit taking in the “consensus trades”: short USD, short long bonds, long equities. We believe this is a welcome corrective move, but not the start of a serious bear market shift.
This week, the focus will likely be on the Bank of England, EU Flash PMIs and GER IFO, and the FED’s favorite inflation gauge – the PCE.
Themes for the Week
- BOE: no change is expected after the BOE slowed it’s pace of bond buying. The delay in reopening requires more patience and caution.
- PMIs: with vaccines being rolled out with dispatch, economic conditions have been stabilizing but we may be nearing a peak in the PMIs. Also, there is wide disparity between G10 and other countries like India, Brazil and Thailand which are still fighting the virus.
- Crude Oil: Crude continues to defy gravity. As other commodities pull back, Crude remains rather resilient despite the fact most analysts suggest “long commodities” being a crowded trade.
- Central Bank Speakers: market participants will be eager to hear from FOMC members and ECB’s Lagarde. Perhaps there will be more colour on the recent curve flattening?
Data in the Week Ahead:
• AU Retail Sales (Mon)
• ECB’s Lagarde Speech (Mon)
• FED’s Powell Testimony (Tue)
• EU Flash PMIs (Wed)
• CAD Retail Sales (Wed)
• ECB’s Lagarde Speech (Wed)
• GER IFO (Thur)
• BOE Decision (Thur)
• US GDP & Jobless Claims (Thur)
• US Core PCE Index (Fri)
Correlation Report:
Comment: correlations are showing strong influence of USD movements and the risk off dynamic.
Technical Comment
The short-USD unwind continues, with strong directional moves in all major pairs. The Dow broke through May lows. Gold has passed the 62% retracement of the Mar-Jun rally. These moves look poised to continue in the coming week, although perhaps at a slower pace.
SP500
Prices posted a bearish engulfing last week, declining from close to 4258 all the way to 4140s, consolidating near the lows. A bearish divergence in momentum at the weekly level was also created. As such, signals for the coming week remain bearish, with sellers expected to cap any pullback.
GOLD
After 3 little changed weeks, volatility expanded and prices declined through the lows from Jun 4th and neither the 50% or the 62% retracements of the recent rally were respected. As such, further declines are expected this coming week, and selling into pullbacks is the favoured play as momentum readings are extended at the daily level.
EURUSD
Prices posted the 3rd lower weekly high in a row last week, with losses of 1 ½ Big Figs. As such, signals remain bearish for the coming week and selling into pullbacks remains the favoured stance as momemntum is extended at the daily level.
USDJPY
Despite prices posting an 11-week high, coming close to the March top at 110.97, sellers returned, stalling the ascent. However, the move seen on Thursday and Friday is likely corrective and as such, signals still remain biased to the topside going into this week.
GBPUSD
Prices posted the 2nd lower weekly high in a row last week, with losses of over 4 Big Figs. As such, signals remain bearish for this week and selling into pullbacks remains the favoured play as momentum is extended at the daily level.
AUDUSD
After exiting the Apr/May consolidation, prices continued to decline through March lows to post fresh lows for 2021 at .7478, with losses of 2 ½ Big Figs. As such, signals remain bearish for the coming week but with some caution as momentum readings are extended at the daily level.
USDCAD
Prices posted the 2nd higher weekly low in a row last week, with gains of 3 ½ Big Figs. As such, signals remain bullish for this week and buying into pullbacks is the favoured play as momentum is extended at the daily level.