Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Breakout Monitor: JPY potential already exhausted?
John J. Hardy
Chief Macro Strategist
Summary: Today's session produced little in the way of fresh signals with the JPY a particularly lacklustre breakout candidate in view of recent volatility.
For a PDF copy of this edition, click here.
The recent JPY volatility has hyperextended trading ranges in all JPY and AUD crosses, making fresh breaks a difficult proposition in many forex pairs for now. Next week should prove more interesting for the USD as trading themes for the year develop and on well-defined in some key pairs.
Earlier this week we noted the upside JPY breakout, which suddenly developed into a virtual flash crash in JPY crosses and then subsequent hard bounce that makes life difficult for traders looking for a trending move (impressive gains were available for those pouncing on the JPY move, but unless limit orders were placed, a few minutes away from the screen saw large potential profits left unrealised).
With the strong US jobs figures today and bond yields backing up again, the tactical risk for JPY is now perhaps to the downside and the ranges are now so distended in JPY crosses that clean new breakout signals in JPY crosses will be a long time in coming.
The same goes for the AUD in the opposite direction, as AUD pairs were clearly at the center of the JPY move – with even the likes of AUDUSD and AUDCAD suffering under the apparent weight of JPY flows via AUDJPY. Elsewhere, Brexit headline risks mean treacherous conditions for sterling traders until we have concrete developments.
Today’s FX Breakout monitor
Page 1: No fresh signals today and it will be difficult to argue in favour of compelling JPY signals for a time on the aggravated volatility this week. AUD pairs are in the same state after the crazy extension lower and subsequent neutralising bounce. More interesting for next week is EURUSD, where the range is quite well defined – arguably the 1.1308 19-day level is less compelling than the levels we discuss below to the downside, while the upside level 19-day break at 1.1467 looks more interesting if exceeded.
The recent JPY volatility has hyperextended trading ranges in all JPY and AUD crosses, making fresh breaks a difficult proposition in many forex pairs for now. Next week should prove more interesting for the USD as trading themes for the year develop and on well-defined in some key pairs.
Earlier this week we noted the upside JPY breakout, which suddenly developed into a virtual flash crash in JPY crosses and then subsequent hard bounce that makes life difficult for traders looking for a trending move (impressive gains were available for those pouncing on the JPY move, but unless limit orders were placed, a few minutes away from the screen saw large potential profits left unrealised).
With the strong US jobs figures today and bond yields backing up again, the tactical risk for JPY is now perhaps to the downside and the ranges are now so distended in JPY crosses that clean new breakout signals in JPY crosses will be a long time in coming.
The same goes for the AUD in the opposite direction, as AUD pairs were clearly at the center of the JPY move – with even the likes of AUDUSD and AUDCAD suffering under the apparent weight of JPY flows via AUDJPY. Elsewhere, Brexit headline risks mean treacherous conditions for sterling traders until we have concrete developments.
Today’s FX Breakout monitor
Page 1: No fresh signals today and it will be difficult to argue in favour of compelling JPY signals for a time on the aggravated volatility this week. AUD pairs are in the same state after the crazy extension lower and subsequent neutralising bounce. More interesting for next week is EURUSD, where the range is quite well defined – arguably the 1.1308 19-day level is less compelling than the levels we discuss below to the downside, while the upside level 19-day break at 1.1467 looks more interesting if exceeded.
Page 2: we are extremely wary of possible USD/Asia signals like USDTHB and USDSGD due to the managed CNY rate at the moment and likelihood that it may stay more or less frozen for now as long as the US and China are inside the trade negotiation window. As for the remarkable run higher in gold and silver, this may be punctuated for now (not unrelated to the JPY move) as US Treasuries got a strong boost from the US jobs data today.
Chart: EURUSD
The key pair for the US dollar for more widespread trending behavior in the greenback may be the EURUSD, which has been stuck in limbo for months. The tight near-term range makes the 19-day low close too close for comfort, and a better quality signal might be a break of the 1.1270 intraday low – or even the 1.1218 low close from November.
To the upside, the 1.1467 high close is better defined and we’ll be interested in taking the breakout hook on either a close above that level or below 1.1270.
The key pair for the US dollar for more widespread trending behavior in the greenback may be the EURUSD, which has been stuck in limbo for months. The tight near-term range makes the 19-day low close too close for comfort, and a better quality signal might be a break of the 1.1270 intraday low – or even the 1.1218 low close from November.
To the upside, the 1.1467 high close is better defined and we’ll be interested in taking the breakout hook on either a close above that level or below 1.1270.
FX Breakout Monitor overview explanations
The following is a left-to-right, column-by column-explanation of the FX Breakout Monitor table:
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending.
ATR: Average True Range or the average daily trading range. This calculation uses a 50-day exponential moving average. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally large (deep orange), somewhat elevated (lighter orange, normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
UP and DOWN Break Levels: These columns show how close, in ATR terms the current price is from breaking the highest and lowest prior 19- and 49-day daily closing levels, with the “breakout level” indicating the actual level of that highest or lowest close. If a breakout is getting close in ATR terms, it is highlighted in yellow or bright yellow (very close). If the current price is trading above or below the breakout levels, in other words, has just broken out, an “X” is shown to indicate this rather than an actual ATR reading.
NEW Breakouts: These are indications of whether, at the time of the snapshot of the market, the currency pair is trading above or below the breakout level. NOTE: it is key that the intention here is to highlight NEW or initiail breakouts, as a pair that has been trending consistently and has set multiple (more than two) new highs/lows will not be highlighted. This is done to avoid too much noise on the chart and focus on new information.
Number of breakouts for prior 8 days: This is merely a counter to indicate the number of days in which the pair has posted a new daily 19-day or 49-day high or low close. It will flag currency pairs that have been trending strongly recently but aren’t actively breaking out at the time of the snapshot of the model and/or aren’t highlighted in the NEW Breakouts part of the table
Recent New 19-day Signals: this gives the reader a chance to see if any recent 19-day breakout signals were registered over the prior three days for perspective on recent developments. The prior day’s signals particularly interesting if waiting for daily closes before deciding whether to trade a breakout on the following day. If there have been more than three prior signals over the past eight days, no signal is shown in order to reduce the “noise” on the overview (though all signals are tallied in the “number of breakouts…” column to the left).
The following is a left-to-right, column-by column-explanation of the FX Breakout Monitor table:
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending.
ATR: Average True Range or the average daily trading range. This calculation uses a 50-day exponential moving average. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally large (deep orange), somewhat elevated (lighter orange, normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
UP and DOWN Break Levels: These columns show how close, in ATR terms the current price is from breaking the highest and lowest prior 19- and 49-day daily closing levels, with the “breakout level” indicating the actual level of that highest or lowest close. If a breakout is getting close in ATR terms, it is highlighted in yellow or bright yellow (very close). If the current price is trading above or below the breakout levels, in other words, has just broken out, an “X” is shown to indicate this rather than an actual ATR reading.
NEW Breakouts: These are indications of whether, at the time of the snapshot of the market, the currency pair is trading above or below the breakout level. NOTE: it is key that the intention here is to highlight NEW or initiail breakouts, as a pair that has been trending consistently and has set multiple (more than two) new highs/lows will not be highlighted. This is done to avoid too much noise on the chart and focus on new information.
Number of breakouts for prior 8 days: This is merely a counter to indicate the number of days in which the pair has posted a new daily 19-day or 49-day high or low close. It will flag currency pairs that have been trending strongly recently but aren’t actively breaking out at the time of the snapshot of the model and/or aren’t highlighted in the NEW Breakouts part of the table
Recent New 19-day Signals: this gives the reader a chance to see if any recent 19-day breakout signals were registered over the prior three days for perspective on recent developments. The prior day’s signals particularly interesting if waiting for daily closes before deciding whether to trade a breakout on the following day. If there have been more than three prior signals over the past eight days, no signal is shown in order to reduce the “noise” on the overview (though all signals are tallied in the “number of breakouts…” column to the left).
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