After a solid week previously, US stocks look to end the week down modestly this week. These moves were not unanticipated- as the FOMC’s indications of staying the course on tapering weighed on markets as w expected. Nonetheless, we think this week adds a good buying opportunity for pr- growth assets, which continues to be the dominant trend in global investment markets:

As we can see above, global markets have indeed had a deflationary tilt to them over the last month, and this has been reflected in the FX markets as well:

We see further evidence of this in our Currency Bloc Monitor, which aggregates 42 currencies based on their economic bias and correlation into the major regions or “blocs,” thereby allowing us to implicitly understand the flow of global capital:

Emerging markets have largely seen outflows, and we think the culprit behind these moves is the synchronized tightening of global liquidity and economic growth. We show how global growth has been resulting in a steadily weaker set of economic data relative to expectations:

Amidst all this, we think US equities be the safest place to hide on a risk-adjusted-return basis. This has been borne out by history, i.e., during the last taper, US stocks were the best performing asset due to the stable profitability of US corporations. We expect a similar dynamic this time around. Therefore, we think of today as a buying opportunity, as confirmed by our Trading Tools Report:

Recall:

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