Looking at broad markets, the dollar continued to strengthen against Euro, Yen, and Commodities:

Looking at our Currency Bloc Monitor, the dollar remained strong across the board. The Yuan Bloc, in particular, has seen significant weakness recently:

The Emerging Bloc continues to see sequential strength. Further, GBPUSD is showing strength going into tomorrow’s BOE meeting on the back of lower than expected (albeit strong) PMI’s. Market consensus expects (and our expectation) that rates remain unchanged and the asset purchase program continues (though we do expect some dissent within the committee.  For the time being, it looks like the dollar leg of GBPUSD is ruling supreme, with the surprise from the Fed dragging down most currencies versus the dollar. We will monitor market action during the BOE event to digest changes in market expectations.

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, we think markets will wait on Powell’s testimony. In the meantime, commodities retraced some losses, and gold continued to grind lower:

Looking at our currency blocs, we see that the majority of FX weakness versus the dollar is coming from the Yuan Bloc, symptomatic of capital outflows on weaker Federal Reserve liquidity supply:

We’ll keep it brief today, but we’re carefully watching price action in gold going into Powell testimony today. First, we need to see how Powell’s tilt (hawkish or dovish) translates into gold price action. This will give us a good sense of what markets are expecting in terms of the current economic regime:

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!

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!

On Wednesday this week, the Fed surpised us with their hawkishness. The market pricing that followed is less surprising:

Commodities have now started to finally see weakness, after a period of prolonged strength. Further, the broad dollar is now up once again- making our preferred dollar longs in terms of EURUSD and USDJPY look stronger this past month. Concurrent with the weakness in commodities, we see the Commodity Bloc in our currency bloc analysis looking weaker:

Now, while the Fed surprised us this week, they did so in terms of timing, not direction- we have been talking about the prospective monetary policy divergence between the Fed and ECB + BOJ for months now.Further, our economic forecasts point to a coming regime change, leading us to think that asset allocations that have performed strongly might not continue to do so:

As we can see, commodities prefer rising inflationary periods, but also require global growth to be strong for performance to be sustained. Our view is that global growth has indeed peaked with the US peaking, i.e. commodities will slowly become less and less supported. If the next environment (globally) is falling growth and rising inflation- gold could be attractive. However, we think the beta of gold to USD inflation will be greater than its beta to the rest of the world inflation. Therefore, we think it is now time to start taking profits across various reflation trade and start preparing for movements into other asset classes. At this junction, global stocks seem to be the most resilient to slowdowns in growth rates, so those might be appropriate places to add exposure as well.

In line with this, USDJPY long positions have benefitted handsomely this year (and will likely continue to do so). However, we have had a significant move up, and taking some profits could be sensible. Addtionally, we think it makes sense to exit GBPUSD longs:

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!

Reflation seems to be taking a breather these last two days, still the best performing asset versus the dollar on the week, though. Gold continues to take a beating after seeing some strengthening:

We outlined our expectations for today’s FOMC meeting here: https://blog.fxdd.com/2021/06/15/on-the-daily-commodities-fed/

We think that Powell will likely be able to thread the needle about inflation. However, we do think it is important to note Powell’s track record on press conferences isn’t a strong one:

*Source: Bespoke Investment Group 

Above, we can see that the stock market has historically had a quite tepid response to Powell’s press conferences. Now, our view is not one for the intraday but one likely to be played out over the next few months. If Powell is indeed dovish (as we expect), then he will likely cement conditions for another leg higher in commodities. However, cross-currents are emerging on the global front for commodities. China is attempting to slow the rapid ascent of commodity prices by releasing some of its strategic reserves, particularly copper, aluminum, and zinc. While this is marginally negative for these specific assets, we see most demand currently coming from the economic re-opening of the US, UK, and Europe. Therefore, we think commodities could remain well supported if the Fed is indeed accommodative.

Looking at the market action through our Trading Tools, commodities indeed continue to look attractive:

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!

Commodities finally took a breather this morning,  with gold and the dollar up today. The dollar has gained a little momentum recently:

The strong trend we saw emerging in gold seems to have subsidized, for the time being, meaning that the global reflation narrative will likely run a while longer. Our currency bloc monitor does not show any major discernable trend in capital flows at this time, other than the fact that the dollar has weakened on capital outflows over the last 12 months.

Our Big 5 forecast heatmap has us in globally rising growth and inflation for another month or so, after which we will transition into a slowing growth rising inflation period:

Therefore, we think it is a good opportunity to continue to add inflation-biased assets, especially headed into the Federal Reserve meeting tomorrow. We think that Chairman Powell will likely stand firm in the face of what the FOMC deems to be transitory inflation, continuing to support asset markets. This is not to say that inflation is transitory or cannot go any higher in the US, but it is too early for the Fed to pivot. There will eventually come a time when the Fed will begin “talking about talking about tapering,” we just think it is a little too early for that. Chairman Powell is likely to be pressured in the Q&A to define the parameters for what a modest overshoot of inflation looks like to the Fed. We think this will determine the hawkishness or dovishness of this meeting. Overall, we expect Powell to maintain his current stance. After all, this was all expected thus far. Thus, reflation positions continue to look favorable. Below, we show how commodities have triggered all our signals in 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!

The sequential gains in commodities are now at a fevered pace. Once again, commodities continue to shoot up in almost a straight line:

This week will likely be a big one for the reflation theme in markets, as the Federal Reserve will have its monetary policy meeting. We don’t expect major changes to policy, though some tweaking of IOER policy is in the cards. The most important thing will be Powell’s commentary in the press conference on the nature of inflation today, which will inform us of the Fed’s reaction function. This will help us understand the future path of the Fed’s balance sheet:

This week is likely to be an important one for USDJPY, between the cross-currents of the Fed and BOJ monetary policy decisions. However, USDJPY is not sending us a clear signal to add (our preference), as one-month price momentum remains negative :

It seems like everyday commodity momentum just seems to get a little stronger. Once again, commodities were the biggest gainer:

Interestingly, however, the dollar was up yesterday against all major currencies. Reflation is still the dominant theme in markets, and below, we show our estimates of future year-over-year returns in commodities:

Over the next few months, we expect commodities to make all-time highs and eventually lose steam (1-year horizon). In line with this, we see global inflation peaking in the US this month:

However, there remains an important technicality concerning US inflation. Currently, eviction moratoriums and rent forgiveness remain active in the US- but are set to expire by the end of the summer. These policies keep US rents depressed. Once these policies lapse, there will be a significant impulse to US inflation, which could cause inflation to come in significantly above our forecast. At the same time, the income effect of direct stimulus payments might start to fade in the US, leading to elevated but slower growth. This means that the US could continue to stay in an elevated inflationary environment and the rest of the world. This would mean that we would effectively be in a stagflationary environment:

However, this environment would a be an unusual one, as the level of growth deceleration would not be sufficient that risk assets can commoidites get dragged into negative territory. The most negative thing we see on the horizon it the potential for tightening US financial conditions, but we think we are a ways off from that:

Next week will be an important one with Fed meeting, so stay tuned.

Today, we wont be providing our Trading Tools report as we are experiencing some technical difficulties with our systems. Our trading ranges will be up and running next week  and provided for the most important movers via this blog.

Today played out just as we expected (and outlined yesterday). The ECB confirmed that it would continue to move at the same pace as before, and US CPI once again came in extremely hot. But, again, commodities seemed to have the most beta to the CPI print:

EURUSD was largely unmoved by the policy, likely because it was largely priced in by markets well ahead of time. Nonetheless, this continuation of liquidity supply amidst improving economic outcomes will support the euro this summer. Regarding inflation, we think that we are in and around peak inflation data; however, there are some technical caveats that we will cover over the course of the week. Overall, today’s economic events tell us that growth is supported by monetary policy, and it is translating into inflation.

For the time being, nothing can seem to stop global reflation (which is a great thing if you have been as upbeat as we have). The next big event this month will be next week when the Fed decides its monetary policy. Going into the event, the strongest performing currency blocks (on a volatility adjusted basis) over the last quarter are gold and the Emerging Bloc:

Looking towards the Fed meeting, we will focus on gold to gauge what markets are implying. Today, however, we will keep our post short. Until tomorrow!

Is today’s price action leading tomorrow’s economic activity? It certainly looks like it to us:

Gold and commodities are both up on the day (higher inflation print tomorrow?), and EURUSD is up as well (no change in ECB policy?). Regarding the US CPI print tomorrow, our expectation is a strong one (our model has it at approximately 4.5%). Our models are geared not so much towards single prints but more towards trends in the data. We expect inflation to remain elevated for a while this year and the subside, but we think we are in-and-around peak acceleration.

Regarding the ECB tomorrow, we largely expect the ECB to continue its asset purchases at its current pace. Looking at the MPC minutes of the last ECB meeting, it looks like the ECB saw economic risk tilted towards the downside. However, given the improvement in the economic outlook in the EU during the interim period, we think the ECB will likely judge their current stance as appropriate. All else equals, this means there will be no marginal expansion of Euro Area liquidity:

This bodes well for the Euro if it is to materialize. However, these developments are not in a vacuum- it is the interplay between Growth, Inflation, and Liquidity that determines asset prices. We talked about this in-depth for EURUSD in our client-only publication, Monetary Monitor.

Ahead of these two events tomorrow, we show EURUSD and Gold through the lens 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!