The Fed surprise last week has indeed weighed heavily on risk assets, particularly in the commodities and equities world (i.e. reflation trades):

We see further evidence of this in our Currency Bloc Monitor, with every major Currency Bloc down versus the dollar last week:

The intensity of these moves tells us of the global economies sensitivity to the global liquidity picture, which looks set to contract if the Fed continues down its current path:

This is coincident with a time where we think that global growth has peaked in YoY% terms:

All of this points to us going into an environment less supportive of risk assets, which brings us back to one of our favorite trades earlier this year- short EURUSD. We think of EURUSD as a stabilized risk-on currency, where the central bank needs to print massive amounts of money to keep the economy from falling into deflation. The divergence between ECB & Fed policy and EU growth versus US growth will likely support a weaker Euro. This is conditional upon the Fed following through on its newly set path towards taper:

As a refresher on our lenses:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. You need to know the fundamental developments in markets that are driving these moves promptly. Head to https://www.fxdd.com/mt/en to get access to our research and analysis!