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On the Daily: Jackson Hole Week

By | August 23, 2021 12:09 pm | 0 Comments

Happy Monday, and welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. Today’s economic data in the US was marginally stronger- the Chicago Fed Activity Index and Existing Home Sales both came in stronger than expected. However, Markit composite PMIs came in weaker. UK PMIs were split, with services disappointing and manufacturing surprising markets to the upside. Overall, the trend of “growing but slowing” continues globally. Over the last 10 days, US economic momentum has stalled more than global economic momentum, but both remain downtrending.
  2. This week, we’re sitting on the edge of our seats ahead of the Jackson Hole Symposium, where Jerome Powell is widely expected to drop hints about the path of a potential tapering of the Federal Reserve’s asset purchase program. Markets have already begun to tighten (i.e., dollar up), indicating the tightening of global liquidity conditions. If Powell signals that the Fed is on the path to taper in December, we expect markets to tighten further in a dollar rally and risk-off.
  3. Looking at markets thus far this morning, the risk is largely rebounding after a tough week. Global equities are positive, commodities are broadly rallying, and the dollar is giving up some gains. Since our full pivot to US stocks as our dominant preference, the S&P 500 is 3.6%. Going into this week, it would be prudent for us to think about protecting some of these gains ahead of a potentially negative catalyst, i.e., Powell tied teeing up a September taper announcement. Chairman Powell has a poor track record in eliciting strong equity market responses around the major meeting, so we should be cautious this week.

Overall, we continue to think QUALITY US stocks will be the best place to hide during a contraction of liquidity alongside the dollar (vs. EUR and JPY). Let’s look at some of this data. First, we show our YTD tracking of major currencies, what we like to call traditional currencies (we also include commodity returns in the table):

Next, we proxy capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Finally, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Stay vigilant this week, and keep your eye out for our Jackson Hole preview! Until tomorrow.

On the Daily

By | August 20, 2021 12:03 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. Today was yet another light day on economic data. With the end of the week only hours away, global economic momentum saw a broad-based slowdown across the US, UK, EU, JP, and CN. The only major data point worth noting was that UK retail sales came in weaker than expected.
  2. On the central bank front, Fed officials offered some incrementally dovish commentary on the taper. Dallas Federal Reserve President Rob Kaplan said he may rethink his call for the Fed to quickly start to taper its
    $120 billion per month in bond purchases if it looks like the spread of the coronavirus delta variant is slowing
    economic growth. Kaplan was one of the more hawkish members on the committee, calling for an October taper; this new information is incrementally dovish-
  3. Markets continue to have a mixed bent- US stocks are up (vs. global stocks), despite a poor week, commodities are mixed but tilted to the downside, and the dollar is stronger. We think this dynamic is typical of a slowing liquidity environment, where liquidity is marginally weaker, but not outright negative.

Let’s look at some of this data. First, we show our YTD tracking of major currencies, what we like to call traditional currencies (we also include commodity returns in the table):

Next, we proxy capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Finally, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Until next week!

On the Daily: FOMC Minutes

By | August 18, 2021 5:16 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. We received CPI data in the UK and EU today, contrary to popular narratives, but in line with our model estimates- UK CPI was cooler than expected (transitory), and EU CPI was hotter than expected (peaking soon). US Housing Starts data came in weaker than expected, consistent with our models that imply slowing economic growth in the US.
  2. The FOMC released the minutes of its last meeting, providing incremental information about a potential tapering strategy. The major takeaway from the minutes was that the committee saw a taper of asset purchases to be reasonable this year, which we have been talking about since January. There remain risks that the Fed will announce its plans for taper in September, and Jackson Hole will likely offer the best indications as to the likelihood of this move. Overall, we are in a tightening dollar liquidity environment, and markets will continue to grind in this direction.
  3. Markets took the combination of these moves in a risk-off fashion; the dollar was up against EUR and MXN, with DXY up on the day. US equity markets underperformed JPY and EU markets (i.e., where policy support is very entrenched). We think today’s downside moves in US stocks present another chance to add exposure according to our fundamental and technical models.

Let’s look at some of this data. First, we show our YTD tracking of major currencies, what we like to call traditional currencies (we also include commodity returns in the table):

Next, we proxy capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

As we can see above, the Yuan Bloc (includes China, Japan, and ASEAN countries) saw inflows today, consistent with their equity market performance. However, much like the last month, today has been a strong-dollar day. The primary catalyst for today’s moves was the Federal Reserves’ minutes. The key points we found in the minutes were:

“Participants expressed a range of views on the appropriate pace of tapering asset purchases once economic conditions satisfied the criterion laid out in the Committee’s guidance. Many participants saw potential benefits in a pace of tapering that would end net asset purchases before the conditions currently specified in the Committee’s forward guidance on the federal funds rate were likely to be met. At the same time, participants indicated that the standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases and remarked that the timing of those actions would depend on the course of the economy. Several participants noted that an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace and that such a combination could mitigate the risk of an excessive tightening in financial conditions in response to a tapering announcement. “

To us, the above tells us two things. The first is that the full-employment and price stability goals don’t need to be met for the Fed to move its balance sheet policy; they simply need to make “substantial further progress,” which is a purposely ambiguous term. The second is that the Fed could consider tapering sooner rather than later to have a much more gradual taper process. Overall, a taper is very much in the cards for 2021, with significant potential for September as the announcement date. As we have said before, and we shall say again today, we think that high-quality US stocks are likely to be the best hiding place during a time of US liquidity withdrawal. We, therefore, continue to think of it as an optimal exposure given fundamental and market dynamics. As such, we think the current dip offers a good entry point, according to 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.

On the Daily

By | August 17, 2021 11:51 am | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. Global economic data has been incrementally positive- UK employment, EU GDP, & US Industrial Production all came in stronger than expected. However, on the flip side, US Retail Sales missed expectations. Overall, we think global economic data continues to point to the narrative of peaking global growth.
  2. Later today, we will have Powell and Kashkari of the Federal Reserve speak at different events- we will look to see if they will divulge information that will inform us of the Federal Reserve’s path ahead of the Jackson Hole Symposium. Additionally, we will receive the FOMC Minutes tomorrow, which should help markets better understand the Fed’s s thinking at this time. We think a September taper announcement is not out of the question, but a less aggressive approach would warrant a taper announcement closer to December. Evaluating incremental information is key right now.
  3. Despite positive data surprises from the EU and UK, both GBPUSD and EURUSD have continued lower over the last 24 hours. This is in line with the broad trend in capital flows, as our Currency Bloc Monitor proxied. The dynamic of US stocks + dollar strength continues. Overall, markets continue to discount a rising growth environment globally, but most financial market gains are now tilted towards US assets. We have expected this all year and expect this to continue until the end of 2021.

Let’s look at some of this data. First, we show our YTD tracking of major currencies, what we like to call traditional currencies (we also include commodity returns in the table):

As we can see above, EURUSD and GBPUSD were generally weaker over the last 24 hours, both in line with their recent 3-month trend. Looking at this from a capital flows perspective, it is simply the pull of dollar assets, which are sucking back capital across the board:

We think this withdrawal of capital is likely to continue and so far has largely been coincident with a slowdown of global economic momentum. Nonetheless, while momentum might be waning, global economic growth and inflation rates remain elevated, which has resulted in strong risk-on pricing of global investment markets:

As we can see above, our Market Environment Monitor has markets firmly pricing a risk-on environment, i.e., expansion & inflation. We give you a sneak peek into our Market Signal Portfolio, which combines our analysis into a quantitative model portfolio to preview how we apply these frameworks. Typically, we only share this on our client-only publication, “Monetary Monitor,” but today, we share a sliver of our research here publicly:

If you like what you see and want access to this high-quality research, head to https://www.fxdd.com/mt/en to get access to our research and analysis. Until tomorrow!

 

On the Daily

By | August 16, 2021 12:34 pm | 0 Comments

After a brief hiatus last week, we’re back again with FXDD’s On the Daily research. Looking at currencies over the last week, we have seen a counter-trend move, with the dollar generally weakening and gold rallying (counter to the 1-month trend). We show the price action below:

Zooming out, we think it is important to note that our out of consensus call (since the start of 2021) of a stronger dollar has held firm- particularly against gold, euro, and yen. We see this move largely driven by the relative quality of growth, i.e., the US has outperformed Japan and Europe in real growth terms. This has resulted in a pull of capital towards the US from slower-growing regions of the world. We proxy these capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

On a six-month basis, every Currency Bloc is weak versus the dollar. With the backdrop of these capital flows, global markets have largely priced a global economic reflation (expansion + inflation): A trend likely to continue into the end of the year.

However, there is considerable variation within growth assets currently. As we can see above in the asset-class contribution heatmap, not all stock markets are performing positively. Our analysis of global economic trends led us to believe that US stocks were the most attractive bet (after preferring commodities earlier in the year), which has paid off well over the last month. We continue to think this dynamic is likely to continue, particularly in the light of a potential tapering of Fed policy. Already, we see global QE stimulus starting to wane:

This is coincident with a slowing of global economic momentum:

Given this combination of factors, we think that US stocks (particularly high-quality, profitable ones) are going to be the best place to hide during a potential tightening of US monetary policy. Therefore, we once again show our Trading Tools Report for US stocks:

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.

 

 

 

On the Daily: BOE Post View

By | August 5, 2021 1:55 pm | 0 Comments

Yesterday, the BOE provided a hawkish surprise to markets, but not one we at FXDD research were unprepared for. While the immediate policy did not change, the BOE officially adopted negative interest rates as a policy tool. In line with this, set the threshold for a quantitative tightening at an o.5% Bank Rate. This means that if and when the BOE manages to raise rates from the current 0.1% to 0.5%, they will begin to reduce the size of their asset purchases. This move was more hawkish than expected. The BOE had previously set the threshold at 1.5%, and this hawkish surprise has resulted in a stronger GBPUSD:

However, when we put this in context, the policy move really isn’t as hawkish as financial news media may have you believe. The BOE MPC itself has its Bank Rate going to 0.5% by 2024! Therefore, while accommodation isn’t being added by the balance sheet policy, it isn’t being taken away for a while either. Nonetheless, we think this is marginally less supportive of the UK liquidity story. Looking at our global Currency Bloc aggregates, we see that the pound has indeed been one of the stronger currencies blocs versus the dollar, reflecting the relative monetary policy developments (Fed looser than BOE):

Aggregating all this into our global market environment analysis, the mood has been largely risk-off, as the liquidity impulse that came from global central banks slowly waned through this year:

Despite this backdrop of falling liquidity, we remain bullish on the global growth story, which we see best expressed in US stocks. Based on our multi-layered analysis, we continue to think that US stocks will be the best exposure for the current and future environment. We show our Trading Tools Report for the same, which is flashing bullish once again:

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.

On the Daily

By | August 4, 2021 12:21 pm | 0 Comments

Going into the BOE meeting later tonight, our preferred macro exposure- US stocks, bounced after triggering a bullish signal on our trading range. While we don’t think the outcome of this meeting will have a significant impact on US stocks intraday, or even very meaningfully over a longer horizon, we think of this BOE meeting as providing guidelines about the path of the global liquidity impulse.

In the more immediate term, however, investment markets have been far more deflationary in their pricing. Interestingly, this has been coincident with dollar outflows, suggesting that global risk is still indeed healthy:

It’s worth noting that gold has now picked up trend support as well, across the 1, 3, and 6-month horizon. This makes gold one of the major leading currency blocs:

Coming back to the BOE meeting, our expectation is that nothing will materially change regarding the current composition of QE, i.e., the BOE will remain on course for the 895 billion pound target for asset purchases. While some MPC members (Saunders and Ramsden) have voiced concerns about the recent strength of inflation, we think the MPC, in aggregate, will look past current inflation as transitory. This is consistent with what is expected by our models:

The major information coming out of this event (aside from the adoption of negative rates as a policy tool) will be MPC’s outlook on the economy, determining their path towards the eventual tightening of monetary policy. There remains potential for a hawkish surprise, albeit modest. Leading up to the meeting, GBPUSD isn’t giving a clear signal, but US stocks once again look attractive:

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.

On the Daily: US Stocks On Sale

By | August 3, 2021 11:23 am | 0 Comments

No updates to the daily commentary today- but here is the updated systematic data:

We start with our Market Regime Monitor, which infers the growth and inflation regime implied by major global investment markets:

Next, we show movements in major currency pairs, gold, and commodities versus the dollar:

Finally, we show 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:

Taking all these signals together, US stocks are once again on sale, and given our fundamental views, offer a good buying opportunity:

As a refresher:

  • 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.

On the Daily: BOE Week

By | August 2, 2021 10:54 am | 0 Comments

This morning and last night, we received PMI data from the US, UK, and China- all of which disappointed consensus expectations. These moves are consistent with what we have been saying for a while now, i.e., that global growth is likely to trend lower but remain expansionary. These downside surprises have been weighing on global investment markets, leading to a deflationary tilt to asset pricing:

On a rolling quarterly basis, global markets are now signalling a deflationary environment- but they remain a ways off from capturing the yearly signal. Nonetheless, we must keep a close eye on these developments, as they could mean significant changes for our preferred allocations to US stocks. In FX, the dollar bid seems to have cooled in the immediate term:

Being said, however, EM, Asian and Commodity Currencies still remain under pressure:

Looking at the week ahead, we will receive a lot of economic data from the US and UK. Further, the Bank of England will meet this week to set its stance on monetary policy. The meeting is likely to be one where policy remains unchanged, but the policy outlook is likely to be adjusted based on the monetary policy committee’s assessment of the labor market. In particular, there is potential for some guidance on the path for policy withdrawal- but the review for sequencing of policy withdrawal could also be unveiled later this year instead. Overall, the meeting sets the stage for potentially higher yields into and following the meeting, which would be modestly positive for GBPUSD. We don’t have a strong conviction view on this pair at this time, but nonetheless, provide our trading tools for the best execution of trades:

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.

On the Daily

By | July 30, 2021 12:08 pm | 0 Comments

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.

 

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