Talking Points:
- The US markets were closed Monday for the President's Day holiday, curbing the natural evolution of risk trends
- Weeks of extreme volatility with a slide and bounce in risk assets makes 'sentiment' the primary concern for the week ahead
- For the Dollar and Euro ahead, top scheduled event risk remains monetary policy oriented
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Tuesday is the Real Start to the Week
The slow start to the new trading week will satisfy few traders. With the US offline for the President's Day market holiday, few were willing to make any real commitment to the reviving the previous week's bounce or the dramatic collapse in capital markets that will more uniquely define February. Checking on risk trends outside of the United States market's influence, we would see shares in Europe fall while those in Asia fell. More aggressive risk assets such as carry, merging market and junk bonds were just as thoroughly mixed. It would be wise not to make any lasting investment calls on the basis of what we have seen Monday - but in reality, it would be just as dubious an evaluation to base any big-picture, heavy-exposure and long-duration trades without a more comprehensive progress on systemic risk trends.
The Dollar Recovery Seeks Out a Benefactor
It is always worthwhile to see who benefits during periods of inactivity, and the Greenback seemed to be just such a opportunist. This is not an indication of any particular connection/motivation by risk trends, monetary policy or other theme; but simply that there has been a strong pressure on the short interest behind the greenback that naturally ebbs with liquidity. That adds some weight to the recent technical support developed by the DXY Dollar Index and gives a little more sway to the EUR/USD's heavy, multi-year resistance around 1.2550/2600. Yet, a concerted rebound in the Greenback's favor requires some fundamental drive. Moderate event risk from the US starts Wednesday (PMIs and existing home sales), Fed speak picks up Thursday and the Fed's semi-annual monetary policy report to congress will be released Friday. In the meantime, we are left to unscheduled influences like protectionism, credit quality speculation and cross currency winds.
Euro Looks to Monetary Policy, Pound to Brexit
EUR/USD cuts one of the most attractive short and medium-term technical pictures; but as with anything else, motivation is the key. The Euro itself has proven one of the most speculatively laden currencies amongst the majors with a 14-month climb that is significantly dependent on speculative interests. The discounted currency has been driven higher in part by an aggressive speculative outlook for the ECB to turn the corner on monetary policy and provide the same kind of windfall for undervalued assets that the Fed's policy turn produced more than three years ago. That is why my interests for pairs like EUR/USD, EUR/JPY and EUR/GBP lay less with data (like the investor sentiment surveys) or EU leaders meeting and focuses more squarely on the ECB meeting minutes Thursday. The Pound is a similar beast. There will be plenty to preoccupy us this week from UK jobless claims to BoE officials speaking, but bearing down on the catalyst, the focus should be on Brexit updates. Unfortunately, that comes without time table or binary scenarios.
Aligning New Zealand Data to Technicals?
I always attempt to align technicals to fundamentals for short-term, volatility-induced moves. That is what draws me to NZD/USD. There is a clear, overriding theme to preoccupy this pair over weeks and months: risk trends. However, in the meantime, we are coming off an immediate resistance on a clean technical pattern and there is event risk a measurable level of speculative impact on the docket: the producer inflation (PPI) report for the fourth quarter. Will there be enough in the data to charge a good swing back into range for NZD/USD or can it make a 'path of least resistance' move? What will EUR/NZD do with a different technical profile? We look at the short-term and definitive up to the abstract and big-picture in today's Trading Video.
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