Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
FX Breakout Monitor: GBP, NOK and EM currencies in breakout
John J. Hardy
Chief Macro Strategist
Summary: Sterling, NOK, and emerging market currencies in focus in this revised edition of our FX Breakout Monitor.
For a PDF copy of this edition, click here.
The UK parliament’s rejection of Prime Minister Theresa May’s Brexit deal sees sterling continuing to surge, triggering fresh breakouts in major sterling crosses. Elsewhere, NOK is having a look at new highs versus euro and its fellow Scandies while EM momentum maintains a head of steam on China stimulus and Fed dovishness.
First, please note that we have a new format for the FX Breakout Monitor that hopefully provides a more intuitive overview than previously on what is going on – both today and for the prior six trading days for 19-day breakouts and 49-day breakouts.
Today’s FX Breakout monitor
Page 1: Here the most prominent developments remain the GBP surge in recent days (especially EURGBP) and EUR showing signs of weakness... is this on the weight of EURGBP flows or concerns about the Eurozone economy, or both? Regardless, a new 19-day low is suddenly close again in EURUSD – more below – and EURCAD has registered a new local low today and yesterday, with EURAUD close to doing the same.
The UK parliament’s rejection of Prime Minister Theresa May’s Brexit deal sees sterling continuing to surge, triggering fresh breakouts in major sterling crosses. Elsewhere, NOK is having a look at new highs versus euro and its fellow Scandies while EM momentum maintains a head of steam on China stimulus and Fed dovishness.
First, please note that we have a new format for the FX Breakout Monitor that hopefully provides a more intuitive overview than previously on what is going on – both today and for the prior six trading days for 19-day breakouts and 49-day breakouts.
Today’s FX Breakout monitor
Page 1: Here the most prominent developments remain the GBP surge in recent days (especially EURGBP) and EUR showing signs of weakness... is this on the weight of EURGBP flows or concerns about the Eurozone economy, or both? Regardless, a new 19-day low is suddenly close again in EURUSD – more below – and EURCAD has registered a new local low today and yesterday, with EURAUD close to doing the same.
Page 2: Of the two sterling pairs on Page 2, GBPCHF has been in breakout since closing above 1.2579 three days ago and continues to head higher while GBPJPY has not yet achieved a new 19-day high, though that is not far away now in the 140.70 area. NOK, meanwhile, is pushing on the key pivot area below 9.75 in EURNOK again over the last couple of days and breaking higher against SEK today if closes clear of 1.0503.
In EM, USDRUB is close to breakout levels on a close below 66.68, and USDTHB and USDZAR have been trending persistently in recent days, as can be seen in the series of new lows over the last five or six trading days. Finally, it's somewhat interesting to note that spot silver and gold are registering some of the their smallest trading ranges in the last 1,000 trading days despite the recent sharp rally – has volatility been suppressed as the market awaits bigger developments in CNY volatility? Below we discuss the AUDNZD potential break on a close above 1.0620.
In EM, USDRUB is close to breakout levels on a close below 66.68, and USDTHB and USDZAR have been trending persistently in recent days, as can be seen in the series of new lows over the last five or six trading days. Finally, it's somewhat interesting to note that spot silver and gold are registering some of the their smallest trading ranges in the last 1,000 trading days despite the recent sharp rally – has volatility been suppressed as the market awaits bigger developments in CNY volatility? Below we discuss the AUDNZD potential break on a close above 1.0620.
Chart: EURGBP
EURGBP has pushed lower in recent days – note that the action merely takes us back to the range of the last several months. Bears will hope the sterling surge can take us to the lows of the range back below 0.8650. Still, bulls and bears must both beware the risks of ad hoc Brexit developments; the situation remains fluid as we await the next steps in a rather tighter timeframe ahead of the original March 29 deadline.
EURGBP has pushed lower in recent days – note that the action merely takes us back to the range of the last several months. Bears will hope the sterling surge can take us to the lows of the range back below 0.8650. Still, bulls and bears must both beware the risks of ad hoc Brexit developments; the situation remains fluid as we await the next steps in a rather tighter timeframe ahead of the original March 29 deadline.
Chart: EURUSD
EURUSD is still bogged down in the multi-month range, and its choppy tendencies of the last many months don’t inspire confidence that a local break of the 19-day low close, currently 1.1344, will provide further momentum. The bigger break level is the 49-day low close at 1.1218, though many will be tempted on any close below 1.1300 as the pair has only closed below that level three times since late November.
EURUSD is still bogged down in the multi-month range, and its choppy tendencies of the last many months don’t inspire confidence that a local break of the 19-day low close, currently 1.1344, will provide further momentum. The bigger break level is the 49-day low close at 1.1218, though many will be tempted on any close below 1.1300 as the pair has only closed below that level three times since late November.
Chart: USDRUB
EM currencies have traded broadly stronger, led by a CNY resurgence that has taken much of Asia with it (note the string of new lows in USDTHB, as Thailand’s chief export destination is China and other countries across Asia that also export to China). As well, the Fed’s dovish downshift has inspired a resurgence in EM currencies and oil prices have bounced after a frantic slide in Q4. The local level break here for USDRUB is close to the current price and could set up a test of the range low near 65.00 at minimum, though traders should also note the 200-day moving average.
EM currencies have traded broadly stronger, led by a CNY resurgence that has taken much of Asia with it (note the string of new lows in USDTHB, as Thailand’s chief export destination is China and other countries across Asia that also export to China). As well, the Fed’s dovish downshift has inspired a resurgence in EM currencies and oil prices have bounced after a frantic slide in Q4. The local level break here for USDRUB is close to the current price and could set up a test of the range low near 65.00 at minimum, though traders should also note the 200-day moving average.
Chart: AUDNZD
The AUDNZD chart is fairly compelling here as the recent strong bounce off the lows saw a pivot level posted around 1.0620 – the current 19-day high. On the fundamental side, we note that short New Zealand rates have been moving aggressively lower in contrast with more stable Australian rates as the market is shifting RBNZ rate cut expectations more rapidly than those for the RBA at the moment. A close above there could set something more in motion to the upside, possibly toward the oft-visited 1.0800-50 area.
The AUDNZD chart is fairly compelling here as the recent strong bounce off the lows saw a pivot level posted around 1.0620 – the current 19-day high. On the fundamental side, we note that short New Zealand rates have been moving aggressively lower in contrast with more stable Australian rates as the market is shifting RBNZ rate cut expectations more rapidly than those for the RBA at the moment. A close above there could set something more in motion to the upside, possibly toward the oft-visited 1.0800-50 area.
REFERENCE: FX Breakout Monitor overview explanations
The following is a left-to-right, column-by-column explanation of the FX Breakout Monitor tables.
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 if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout.
NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
The following is a left-to-right, column-by-column explanation of the FX Breakout Monitor tables.
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 if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout.
NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
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