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: NOK break extends, spotlight on USDJPY
John J. Hardy
Chief Macro Strategist
Summary: EURNOK, USDJPY and EURCAD in focus.
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EURNOK and USDNOK extended sharply higher after their recent range breaks while USDJPY has tried to crop up on our breakout radar ahead of tomorrow’s Federal Open Market Committee meeting and amidst weak risk sentiment that has boosted the yen.
The US dollar situation remains dicey until we get a signal on the other side of the FOMC meeting tomorrow evening, but USDJPY was trying to make a move ahead of that event nonetheless while EURJPY has likewise dipped to interesting levels at times today. These breaks are likely to register a more compelling breakout signal only if the market decides that whatever the Fed is bringing to the table tomorrow will keep US yields lower but nonetheless is not positive for risk appetite (risk sentiment and bond yields are the two key drivers for JPY as long as Bank of Japan expectations are nil).
Elsewhere, we saw a strong extension in the NOK sell-off today after yesterday’s big break higher in EURNOK and recent break higher in USDNOK, both covered recently. The NOK move was apparently triggered this week by the cessation of Norges Bank purchases of NOK, which ended Friday and won’t pick up until the new calendar year rolls into view. The end of 2017 saw a similar aggravated spike lower in NOK that ended just before the holidays, so unless we are on the verge of another ugly extension lower in risk sentiment and the oil price, further NOK weakness could peter out quickly.
Today’s FX Breakout monitor
Page 1: The USDJPY break attempt here is interesting if that pairs closes weakly today, but do of course note that the FOMC meeting is such a critical risk for this pair that we are unwilling to find a signal compelling until the other side of that particularly event risk (with the further risk that it will have moved significantly before the next signal – alas that is the nature of event risks).
EURNOK and USDNOK extended sharply higher after their recent range breaks while USDJPY has tried to crop up on our breakout radar ahead of tomorrow’s Federal Open Market Committee meeting and amidst weak risk sentiment that has boosted the yen.
The US dollar situation remains dicey until we get a signal on the other side of the FOMC meeting tomorrow evening, but USDJPY was trying to make a move ahead of that event nonetheless while EURJPY has likewise dipped to interesting levels at times today. These breaks are likely to register a more compelling breakout signal only if the market decides that whatever the Fed is bringing to the table tomorrow will keep US yields lower but nonetheless is not positive for risk appetite (risk sentiment and bond yields are the two key drivers for JPY as long as Bank of Japan expectations are nil).
Elsewhere, we saw a strong extension in the NOK sell-off today after yesterday’s big break higher in EURNOK and recent break higher in USDNOK, both covered recently. The NOK move was apparently triggered this week by the cessation of Norges Bank purchases of NOK, which ended Friday and won’t pick up until the new calendar year rolls into view. The end of 2017 saw a similar aggravated spike lower in NOK that ended just before the holidays, so unless we are on the verge of another ugly extension lower in risk sentiment and the oil price, further NOK weakness could peter out quickly.
Today’s FX Breakout monitor
Page 1: The USDJPY break attempt here is interesting if that pairs closes weakly today, but do of course note that the FOMC meeting is such a critical risk for this pair that we are unwilling to find a signal compelling until the other side of that particularly event risk (with the further risk that it will have moved significantly before the next signal – alas that is the nature of event risks).
Page 2: AUDJPY is a repeat today, but not much has happened there – that pair’s fate is likely to track the direction in risk appetite and is complicated by the CNY’s lack of volatility, which is providing considerable gravity for much of Asian FX, especially those countries that export into China. EURNOK and USDNOK continue to extend NOK weakness, as does NOKSEK (not highlighted because it is not a new development, this being the fourth time the pair is looking at a new 19-day and 49-day low close in the last eight days). We look at the EURCAD situation below as well.
Chart: USDJPY
The breakout level for today’s close is 112.67, but as we note above, the FOMC event risk is too important here to start trading a small break on today’s close. As well, note the other technically interesting levels like the actual recent range low around 112.25 and the important Ichimoku cloud level that has also been challenged frequently of late. Surely the pair makes a technical statement either way ahead before the Friday close.
The breakout level for today’s close is 112.67, but as we note above, the FOMC event risk is too important here to start trading a small break on today’s close. As well, note the other technically interesting levels like the actual recent range low around 112.25 and the important Ichimoku cloud level that has also been challenged frequently of late. Surely the pair makes a technical statement either way ahead before the Friday close.
Chart: EURNOK
EURNOK has run away to the upside, no doubt in part due to weak liquidity and lack of Norges Bank bid. Unless we are about to see a considerable aggravation of global liquidity risks or weak risk sentiment, the bulk of the move lower in NOK may already be behind us and we may see the pair reversing quickly in the New Year.
EURNOK has run away to the upside, no doubt in part due to weak liquidity and lack of Norges Bank bid. Unless we are about to see a considerable aggravation of global liquidity risks or weak risk sentiment, the bulk of the move lower in NOK may already be behind us and we may see the pair reversing quickly in the New Year.
Chart: EURCAD
This is a technically compelling break if the CAD weakness holds on the other side of the FOMC meeting tomorrow evening. Note the range levels and the 200-day moving average. Note also that EURCAD and EURUSD have an r-squared (indicator of correlation) of almost 0.25 over the last 100 trading days, so a further rally and success of this breakout may require a weak USD after the FOMC.
This is a technically compelling break if the CAD weakness holds on the other side of the FOMC meeting tomorrow evening. Note the range levels and the 200-day moving average. Note also that EURCAD and EURUSD have an r-squared (indicator of correlation) of almost 0.25 over the last 100 trading days, so a further rally and success of this breakout may require a weak USD after the FOMC.
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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