On the Daily will be taking a break for scheduled maintenance. We will resume coverage next week.

On the Daily will take a break today and tomorrow for scheduled maintenance.

As we expected yesterday, US CPI came in at the highest level in the last decade. This has caused a stagflationary tilt to market prices recently, with capital retreating from most geographies and gold rallying:

We see this in our currency bloc monitor as well. Particularly, exporting and producing countries in the Yuan Bloc saw some strength alongside gold:

As mentioned in Monetary Monitor, we think we are around the peak of the inflation cycle in the US, and we expect inflation to stabilize at slightly lower levels (but elevated) for the rest of the year.  This isn’t the case for the rest of the world (particularly Europe), where we expect higher inflation through the year:

Given this backdrop of potentially higher inflation globally- markets continue to price a rising growth and inflation environment. However, we think that this global environment is increasingly stabilizing at higher levels rather than accelerating. In such a backdrop, we expect global equities to be a winner relative to global commodities.

Turning to what’s ahead of us this week, we think the BOJ meeting, in particular, should be important. USDJPY has been on a tear upwards this year, as the BOJ continues to provide huge monetary stimulus to keep the Japanese economy from falling into a deflationary spiral. The monetary impulse remains extremely large in Japan relative to GDP, and given the poor COVID containment that has hampered the economy, we don’t expect the BOJ to move meaningfully. Therefore, we continue to expect more of the same from USDJPY. We show USDJPY through the lenses of our Trading Tools Report 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. 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!

Today is an important day, as we believe tomorrow will bring peak inflation in the US on a cyclical basis. This means that we think that the current market action (stronger dollar, stronger equities, i.e., stronger deflation) is more likely to become the dominant theme in markets. We see this has happened to a degree over the last month:

Further, we see in our currency bloc monitor that the US has been sucking capital out of every geography over the same period:

We think this is happening on the back of the ongoing policy-liquidity tightening happening in the US. Further, this strong dollar theme comes at a time where we expect US cyclical inflation to peak (CPI tomorrow):

Given this macroeconomic backdrop of slowing and stabilizing economic growth rates, we think it is time to fail down our enthusiasm for commodity exposures. This does not mean that commodities can’t go up any further or are a good short. We just think that the time for the “no-brainer” commodity trade is now behind us. Further, we still think we are in a positive global growth environment- and we expect global equities to do better than commodities from here on. In particular, we think the setup is still positive for US equities, which have seen strong momentum over the recent months:

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!

Welcome back to On the Daily, where we contextualize economic data and market moves using our research process. Let’s start by looking at major FX moves versus the dollar:

The dollar has given back some gain over the last 24 hours, giving the Yen and Pound respite. We don’t think this intraday move is indicative of anything significant. We still think we’re in an environment where the dollar will continue to see inflows versus other reserve currencies. Further, the dollar seems to be decisively pulling capital out of EMFX now:

Particularly, Asia FX has been getting battered over the last 6 months, with the commodity currency bloc seeing losses over the same period. This doesn’t mean that commodities themselves cannot perform in the immediate future, but rather that capital outflows from the US on the back of risk-on sentiment are reversing. Further, we have seen further evidence of supply remaining tight, coming from OPEC+ and today’s oil inventories report, supporting stronger commodities.  With this in mind, we take a look at the price action in commodities through the lenses of our Trading Tools Report:

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!

Welcome back to On the Daily, where we contextualize economic data and market moves using our research process. Let’s start by looking at major FX moves versus the dollar:

Across the board, the dollar has been and continues to strengthen versus the rest of the world. This view is confirmed by our Currency Bloc analysis:

The outflows from the Yuan Bloc have been huge. A good way to think about this is this conceptual chart from Nordea research:

Over the last month, USD liquidity has indeed begun to go lower, putting pressure on major currencies versus the dollar. This might be a sign of things to come if the Federal Reserve gets to a taper sooner than expected. Looking at the FOMC minutes released today:

“Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. “

In our view, the current price action could be a harbinger of things to come if US liquidity relative to the rest of the world continues to decline. History confirms this view:

As we can see above, the reduction of USD liquidity over the last tapering led to a steady decline of all major currencies & commodities versus the dollar. We think a similar dynamic is in place today. Given this  backdrop, EURUSD has once again started its downwards trend:

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!

Welcome back to On the Daily, where we contextualize economic data, and market moves using our research process. Let’s start by looking at major FX moves versus the dollar:

The dollar was broadly weaker last week, with gold showing the most strength. Looking at this through the lenses of our Currency Bloc analysis:

We see a similar trend, but the Yuan Bloc (think Asia FX) continued to see outflows. The most important marginal change to the current environment on newsflow was the emergence of a “no-deal” at the OPEC+ meeting. The most immediate effect of the breakdown is that, unless an agreement can be salvaged, the Organization of Petroleum Exporting Countries and its allies won’t increase production for August. That will deprive the global economy of vital extra supplies as demand recovers rapidly from the coronavirus pandemic. As of now, this hasn’t translated into a huge outperformance for oil on the daily/weekly level, but we expect this tightening supply dynamic to boost higher oil:

This is given a backdrop of accelerating growth across the globe in the near term, according to our economic forecasting models:

Therefore, the reflation trade, i.e., higher commodities, continues to look fundamentally supported. We show this trade from the perspective of our Trading Tools Report:

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!

Looking at our traditional versus dollar screens over the last week, we see that gold and commodities bucked the general trend of dollar strength:

On a YTD basis, the dollar largely remains up against all major currencies, though it generally remains feeble against commodities- down 25% on a YTD basis. Looking ahead, conditions seem ripe for an escalation in this strong-dollar trend. Please note, we’ve been ahead of the curve on the stronger dollar trade since the start of the year, and our mechanistic views are largely unchanged, i.e. that out of the major currencies, the US has the most attractive return potential. Yesterday, we received further evidence of this dynamic in the June ISM numbers:

While the ISM mfg-composite has indeed slowed over the last few months (since a peak in March), it remains at extremely elevated levels, supportive of US stocks. Given the relatively high level of growth experienced in the US in the current period, along with the continuation of monetary accommodation (for the time being), the outlook for equities still remains strong. The recent price looks rich to be adding exposure, but we will add that trend strength in markets is currently very strong:

Once again, it looks like commodities have taken off on a stellar run:

Yet another day of interesting price actions, with commodities up alongside the dollar. The dollar is now once again up on a YTD basis and a 1 monthly basis. These gains are coming across the board against our currency blocs:

Looking at our trading ranges, commodities continue to have a strong trend support:

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!

After taking a breather, commodities are once again ripping higher in our asset class monitor:

Interestingly, this is happening coincident with a coincident big-dollar bid. We can see this looking through the lenses of our Currency Bloc Monitor:

This movement across asset classes is consistent with the Federal Reserve’s idea to begin to tighten monetary policy this year. What is important to note is that monetary policy hasn’t been tightened yet; only expectations for tightening have begun. Moreover, commodity demand comes from their demand as tangible economic goods; therefore, actual transactions matter just as much as expectations. For the time being, liquidity will remain supportive of commodities, but the outlook is weakening. We think long exposure to commodities will still be profitable for the time being, and we should continue to maintain exposure until either price momentum or economic data justify changing positions. Our Trading Tools Report doesn’t suggest that for commodities today:

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!