Our bullish equity view paid off handsomely yesterday- with the S&P 500 giving its strongest single-day performance since the start of the pandemic. Looking at our market regime monitor, we think this is a trend that could hold. While in the immediate term, global markets have been pricing a risk-off (deflation), in the intermediate-term, the trend remains strong for rising global growth:

As we can see above, global investment markets continue to think that growth is rising and inflation is falling. However, on a short-term basis, the sentiment has been much more risk-off. This is in line with what we are seeing in major FX markets vs. the dollar:

As we can see above, most major currencies suffered losses versus the dollar- making the dollar the best performing major currency on a YTD basis. We have been of this bias since January 2021. 

As global growth has resumed/normalized, the trend of US exceptionalism, alongside potential pullback in dollar liquidity, has pulled capital out of currency regions. We show this via our Currency Bloc Monitor:

While some regions could recoup some losses intraday, the trend remains negative for currency regions versus the dollar. We don’t expect this dynamic to meaningfully change. Overall, we continue to favor global equities- with a strong bias towards US equities. We show our Trading Tools Report for the same below:

Price momentum remains strong for US equities, and while the announcement of a Fed taper would dampen this momentum somewhat, we expect it to persist through the taper period. Such a monetary policy stance would sharply contrast with that of the ECB, which meets today and tomorrow to decide its own monetary policy. Recently, the ECB announced changes to its monetary policy strategy- particularly that it has now adopted a symmetrical inflation target, i.e., that it will try to achieve 2% inflation over a period of time. However, it has been stressed that they will not aim to overshoot inflation by more than 2%.  The implications for this meeting are that the ECB will likely have to reaffirm its commitments to keeping interest rates at extremely low levels, perhaps all the way to 2023. This would be implemented through asset purchases and forward guidance, which simply compounds the likely monetary policy divergence between the Fed and the ECB. Therefore, we continue to favor a weaker EURUSD:

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.