From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US 10-year yield has made a decisive move back above 1.40% in recent sessions.
We’ve been pounding the table about this critical level for months now--and for a good reason. It’s a vital component of the global growth narrative and rotation into cyclicals.
And most investors probably aren’t prepared for it!
Yesterday, JC and Steve discussed areas that demand attention in a rising rate environment and how we should position ourselves. You can check it out here.
For starters, most currencies versus the US dollar should be beneficiaries of rising rates. This is particularly true for commodity-centric currencies like the Australian dollar, the Canadian dollar, the Russian ruble, and the South African rand.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
In recent weeks, the market has taken a risk-off tone as dollar-denominated risk assets have come under increasing pressure.
Major US stock indexes have pulled back, and procyclical commodities such as crude oil and copper continue to chop around beneath overhead supply.
Interestingly, we haven’t seen much of a bid in defensive assets through the recent bout of downside volatility. US treasuries have been relatively quiet, and the dollar remains below its August highs. Meanwhile, bond-proxy sectors like Utilities and Staples continue to make new relative lows.
None of this suggests the kind of defensive positioning that would be typical in an environment where risk assets are getting hit.
But what about one of the most significant safe-haven assets of all... the Yen?
Let’s take a look at how the Japanese Yen is setting up against other major currencies right now and what it could mean for the market at large.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US Dollar has been trapped in a sideways trading range for the trailing 12 months now. The primary trend is lower, and we continue to see near-term weakness from the DXY Index as well as most USD crosses.
Commodity-centric currencies have been some of the best performers versus the Dollar since early last year, although most of them have been correcting since Q1 or Q2, giving back a good deal of their earlier gains.
So, will we see a resurgence back to those risk-on pairs, or will they keep sliding lower against the Dollar?
Today, we’re going to focus specifically on the currencies of some of the largest oil-producing countries in the world.
This should give us information not just about currency markets, but also commodities and risk assets in general.
Let’s talk about it.
An easy way to aggregate and measure their performance as a group is by analyzing our Petrocurrency Index. It includes currencies like the Canadian Dollar $CAD, the Russian Ruble $RUB, and the Brazilian Real $BRL, among others.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
In last week’s Currency Report, we highlighted the NZD/USD cross as a means to express our bearish US dollar thesis.
The setup was too good to resist taking a swing at following the recently failed breakdown. And so far, we’ve been rewarded for it. That’s information.
But it’s not the only cross that continues to trend well against the US Dollar. We see it all over, and it’s only reinforcing our bearish thesis.
As such, we want to look for more opportunities to take advantage of this developing theme.
In this week’s post, we’re going to do just that.
Let’s drill into our forex universe now and identify some of our favorite risk/reward setups we want to bet on to capture profits from a weakening US dollar.
Of the four trade setups we identified--EUR/USD, GBP/USD, AUD/USD, and NZD/USD--the Aussie was the only one that worked.
The fact that many of those trades failed or, more specifically, were never even triggered at all, is information!
Fast forward to today and we're looking at a failed breakout in the US Dollar Index that's been confirmed by strong downside follow-through since last week. Now, it’s time to flip the book long on some of these trades to express our thesis of further USD weakness, at least over the near term.
One trade setup that stands out due to its asymmetric risk-reward profile at current levels is the NZD/USD.
Unless you’ve been stuck under a rock or at the beach all summer, this is old news. And we’ve admittedly been a bit obnoxious when it comes to rehashing this theme. But usually when we find ourselves harping on something, it's because it's a big deal.
Our own behavior can be fantastic information, and it's become a part of our process to pay special attention whenever we begin to repeat ourselves a lot.
This week is no different, as the US Dollar Index $DXY provides another example of the market’s sloppy state of affairs.
Just when we thought we might finally have some decisive price action in the Dollar, Friday’s attempted breakout followed by Monday’s weakness is casting some serious doubts.
Was last week’s breakout above the March pivot highs valid?
Or was it just another failed move to add to the market’s growing list of whipsaws and fake-outs?
Where the USD heads next will have wide-ranging implications across asset classes by either providing a tailwind for risk assets or a headwind in the case it resolves higher from its year-to-date range.
But, as the market continues to chop sideways, we want to direct our attention to one of the most important risk gauges in the currency market.
That’s the Aussie-Yen.
In this week’s post, let’s check in on the AUD/JPY to see what information we can glean regarding risk appetite and what it could mean for other markets.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US Dollar Index $DXY has been a good reminder that price doesn’t always move in a straight line.
Paul Tudor Jones has been quoted saying “markets only trend about 15% of the time.” The textbooks will tell you it’s somewhere between 20% and 30%. But it all comes down to how you’re measuring it.
We think it’s fair to say most markets trend about 25% of the time on a structural basis.
And the present year two market conditions have been a great illustration of what they look like the other 75% of the time… range-bound... sideways... a hot mess.
Speaking of which, last week, we pointed out that Dollar strength had stalled and that things were beginning to look messy on shorter time frames.
A little more than a month ago, we began to see broad-based strength in USD emerge on both a short and intermediate-term basis.
Since then, it’s been the central theme in currency markets.
But we're starting to see signs that this near-term US dollar dominance could be fading as bulls have had ample opportunity to push the USD higher in recent months but have made little progress.
The lack of follow-through can be seen in our long USD trade ideas from late June, as most are not working. We recently saw many crosses reach our risk level, but price rebounded instead of triggering an entry. The EUR/USD is a great example of this.
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
What started out as a tactical bounce in the US Dollar could be turning into a full-fledged reversal of the primary trend.
Defensive assets such as US Treasury bonds and the Japanese yen are catching a bid. On the other hand, risk assets continue to struggle at overhead supply. Many are experiencing significant selling pressure at these logical levels.
With each passing day, the choppy environment that’s been in place since early February is becoming increasingly messy.
This is a perfect environment for the US dollar to thrive as more and more investors are hiding out in safe-haven assets and waiting for the smoke to clear.
