When will the dollar finally make a statement?

The melt-up scenario of a fresh blast higher for global asset markets on the combination of Chinese stimulus and accommodative global central banks is a theme that is increasingly on the ropes. First, while China released a batch of strong economic data last week supporting the melt-up narrative, data elsewhere have so far failed to indicate that this purported boost to demand is feeding through to China’s trading partners. Elsewhere, Europe’s flash April PMIs gave saw very little to celebrate and both Japan’s latest data runs for March and the flash April Manufacturing PMI have likewise failed to show notable improvement – the last of these showing a hardly meek bump from 49.2 in March to 49.5, merely indicating a slightly slower pace of contraction.

Over the weekend, Bloomberg threw further cold water on the Chinese growth resurgence narrative, pointing out the Politburo’s latest meeting’s focus on property speculation risks and deleveraging imperatives. Others have pointed out China’s inability to launch a stimulus on anything approaching the scale of 2008 or 2016 as long as the country maintains capital controls and a currency “peg”, as its current account is no longer in surplus. 

The currencies most positively aligned to benefit from the melt-up theme have stumbled over the last few trading days, including the Antipodeans (AUD and NZD), as well as emerging markets to some degree, while a EUR rally – at least in part driven by hopes that China’s new stimulus will feed through into export demand – hardly managed to register before folding on barely detectable bounce in the flash Eurozone PMIs last Thursday. 

Another wild card factor challenging the melt-up narrative has been the fresh rise in oil prices, aggravated at the beginning of this week by the US threat to eventually lift the Iran sanctions waivers. Recall that a ramp-up in crude oil prices in September of last year immediately preceded the market melt-down in Q4...

If the melt-up scenario fails to engage, we could be ready for a powerful slide in confidence and equity markets again soon. The failure of economic data to improve for another month or so could eventually overwhelm the prior chief support for global markets: central banks’ big shift into a more accommodative stance. 

For currency traders, I would expect a fresh deterioration in hit the commodity dollars, especially once the crude oil rally rolls over. Sterling looks vulnerable no matter what the scenario here and is struggling for air just below the pivotal 1.3000 level in GBPUSD, and the European Union outlook's inability to improve, along with Brexit and general existential concerns, could drive a spell of EUR weakness as well. Still, we need the 1.1200 level in EURUSD to finally surrender.

Chart: GBPUSD

GBPUSD looks on the verge of a Brexit pause breakdown as the greenback firms and sterling may struggle with the prospects for an eventual referendum that results in a No Deal exit. Speculative positioning in the US futures markets has seen the very large speculative short (-80k contracts in September of last year) now entirely eliminated. The first level lower is arguably 1.2800, but the ultimate target for bears would be 1.2500.