Big Drops and Potential Impacts: Here is my weekly piece on the released data. But before I start I want to share something. As my awareness begins to grow around the state of play for global macro; and my confidence and knowledge in what the correlated drivers mean, I can begin to form logical conclusions and arguments – But this caused me to realize something very important. It’s not what the market should and could do that you trade, it’s what the market is doing.
The currency market has so many moving pieces that it is impossible to keep track of them all. I have realized that it is important to trade the actual market, not what you feel the market should do – If the price moves 500pips higher or lower, it doesn’t matter if that doesn’t make any sense.
You don’t get paid for picking what is sensible, you get paid for riding what the market is actually doing. Sometimes the logic lines up with the technical factors and the price action – then you’ve got a perfect set-up that you should be ready to capitalize as much as you possibly can.
Other times, price will rally right through key technical levels on the back of seemingly bad news. That’s just the game. The good quote “the markets can stay illogical longer than you can stay in business” sums it up nicely.
Last week, on the back of what many perceived to be a dovish FOMC the week before, saw the dollar make the biggest weekly gain in 6 months – finding support at the 101 level. But what was the driver?
The CPI and PPI both printed very close to expectation – so the driver wasn’t a spike in the inflation numbers which would have increased the bets for future Fed hikes – it could be a mix of various factors. Buy the rumor/sell the fact? The debt ceiling weighing on bond markets and a general risk off vibe.
The US economy has been resilient – with spending and GDP expectations remaining stronger than most would have anticipated, but these factors are beginning to slow which could potentially impact stocks.
Generally the correlation between stocks and the DXY is negatively correlated when recessionary fears are either high or realized- so worries about growth may equal stocks down and DXY up combined with a few technical factors such as the DXY at support and the S&P pushing up against resistance – could see a bounce in the dollar.
The DXY has been in decline since the major high was made in October dropping down from a 114 handle down to 101. There was a bounce from this same level at the end of January and lasted throughout February.
The BoE raised the rates in the UK – and a shift to a very much ‘data driven’ decision next time out – this will really put the data coming out of the UK in the spotlight even more. Already the bets of another hike slightly increased after the BoE raised its official inflation forecast for the end of 2023.
Gov Bailey did send mixed signals – such as “we have to stay the course”, “inflation remains too high” “we have good reasons to think CPI will fall sharply from April” and “the growth outlook is less weak, but not strong”. He has pretty much hedged his bets for all scenarios there. All eyes on the CPI number for April then?
NZD also had some inflation expectations released – although this is ‘soft’ data, it is a survey (due to the way it is calculated) that has a good correlation to the rate of inflation in New Zealand. Below is the New Zealand Inflation Expectations (blue) vs Actual inflation MoM.
The expectations are released quarterly and although it’s not perfect, the trends are fairly correlated. The drop in the expectations changed the markets view of the RBNZ’s next move.
Big Drops and Potential Impacts
USD: Due to issues with flights and missing most of Monday – I have missed the US Empire Manufacturing survey which dropped the most since the peak of COVID worries in April 2020. This is a big drop!
This could potentially have a couple of impacts – one could see the dollar strengthen. If there is a recession and a slowdown in capital – the Dollar could act as a safe haven.
With money flowing into the USD, this should strengthen – however on the flip side – The Fed will no doubt be looking at business surveys as they have a dual mandate of price stability and employment.
The future orders were a major factor in the decline of the survey results. With lower futures orders, less staff are needed lowering employment.
Employment is still pretty strong in the US but the Fed likely doesn’t want it to drop off a cliff. This could potentially see the Fed pause less and pivot sooner. Time will tell.
US retail sales are released on Tuesday – a drop off in this could see the Russell and the S&P move lower in the short term – then again, it’s a question of how the market sees the Fed responding.
Below is retail sales anchored at 0 vs S&P (orange) and the Russell 2000 (aqua). The Russell tends to slightly lead on turning points recently – there has been a little bit of divergence between the two stock indexes.
Big Drops and Potential Impacts
Finally – the last big item is the weekly employment figures. This may give a bit of clarity on what the Fed may do. Unemployment claims coming in less than expected may favour a strong dollar – as one half of the mandate (employment) is still strong and the lower growth/orders and general outlook for the markets is likely to hit equities harder.
If unemployment comes in weak, this will increase the likelihood that the Fed would pivot sooner – giving a boost to equities and potentially weakening in the dollar.
CAD CPI is out this week – there was a recent housing stimulus package which may see the increase in rental payments be tempered slightly and could potentially contribute to higher inflation.
The BoC has said that it wants to see inflation back down to 2%, and the economy is holding up well so far. If the CAD disinflation begins to slow, then this could support the governor’s comments that the next push to get inflation back down towards target could require more tightening.
It’s not outside of the realms of possibility – the Australian central bank did just that very recently.
AUD jobs are out on Wednesday night/Thursday morning (UK time) – the jobs market has remained super super strong picking right back up after 2 months of negative figures in January and February.
With employers seemingly struggling to fill the vacancies this has a tendency to lead to higher wages which inturn leads to more inflation – if the RBA restarted hikes last time out, could hot jobs and wages potentially mean more?
DXY: I’ve zoomed out to show the DXYs reaction in 2017 and 2020 at the 103 level. Recently the markets haven’t really respected this level – the recent static level is around 104.50 level – but there are EMAs beginning to cluster just above the market.
EXY: When the DXY has a very strong week, the EXY has a bad one. Last week was no exception. Price rejected the 200EMA and fell back to the broken resistance zone of 109 region.
S&P: Still tight against the resistance level at 4150 area – with the daily 55/200 and weekly 55EMAs all squeezing from the bottom. The break will be determined by the changing chances of a pivot sooner rather than later.
Oil: Found support 2 weeks ago at the $67 area, but had a pretty small trading range last week. It’s currently sitting under all weekly 200 which lies just under the broken bottom end of that choppy range going back to the beginning of the year.
Copper: the proxy for global demand took a big hit last week, stopping at the 200EMA. Could it find support down at this level? This would largely depend on the growth forecasts. If there is no growth, copper demand will be low.
Iron Ore: as with copper, iron ore is heavily linked with growth – predominantly large infrastructure and housing – this has not happened and as the China reopening story seems dead in the water – iron ore prices are suffering. The next support level is down in the $93 zone.
Make sure to stay up to date on possible fundamental volatility:
Have a great week everyone!