Our pivot to equities (away from commodities) and bullishness in the face of yesterday’s strong correction in US stocks would be paying off today. Today would have been a solid day if you had incrementally added exposure per our Trading Tools report. Looking at major FX action, the dollar continues to be bid versus other major currencies:

As we can see above, the only currency that has been resilient versus the dollar over the last 24 hours has been gold- largely due to its disposition to falling global growth. Market pricing of falling global growth was also evident in our Currency Bloc Monitor, which can be thought of as a rough gauge for capital flows between major Currency Blocs or regions:

As global liquidity conditions have begun to tighten on the back of tightening dollar liquidity- money has flowed out of riskier regions back to the dollar. As a result, Currency Bloc with emerging market/risky characteristics has seen significant outflows, as we can see amplified by the Yuan Bloc, which predominantly contains Asian FX. Combining all this together, we show how all these markets are implicitly pricing a slowing growth regime. To do so, we show our market-implied probabilities for growth and inflation along with their various permutations. On a 1-month basis, global investment markets imply a falling growth and inflation environment, i.e., deflation. However, on a more medium-term basis, market trends point to rising growth and falling inflation:

We tend to prefer signals that are more medium-term in nature (i.e., quarterly signals) as we can often have periods of time when monthly signals can provide a proverbial “head-fake As we have mentioned in the past, we still think that US equities are probably going to be the best performing asset class in the current environment. Therefore, we once again show our Trading Tools Report for the S&P 500 below:

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. Head to https://www.fxdd.com/mt/en to get access to our research and analysis! You need to know the fundamental developments in markets that are driving these moves promptly.