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What You Need to Know for Wed, Aug 8th - Major Themes by Geolocation

Australia/NZ:

The RBA left rates unchanged at 1.5%, stretching yet another month its record-long ‘no-move’ stand. Prior decision 1.50%. The language was fairly balanced, with some minor tweaks to the inflation outlook, which saw a downgrade short-term although is expected to pick up above previous expectations from 2019 and beyond. That should reinforce the RBA’s low rates ‘status quo’ for 2018 and the early part of 2019. With regards to the labour market, the RBA was less equivocal, noting that the unemployment rate is headed towards 5% and as such, we should see some wage pressures pick up in the foreseeable future.

The Australian bond yield curve has been anchored near lows, as short-dated 2-yr yield spreads stay buoyant above the 2% mark, while the long-dated 30-yr paper remains fairly depressed at 3.16% in what has been a steady downtrend. The flattening of the curve implies possible rate hikes coming up next year, but the market is far from factoring in any aggressive tightening campaign by the RBA.

Next focus for Australian traders will be the RBA Monetary Policy Statement on Friday, where new snippets of insights should be provided, as the Central Bank will go into more in-dept about economic and financial conditions, hopefully shedding a light on the implication of the Chinese economic slowdown to the Aussie economy, as well as understanding new updates on prices, employment, housing, etc.

Reserve Bank of Australia Governor Philip Lowe gave a speech at the Anika Foundation Lunch. His presentation could be defined as fairly lame, given that no surprise in rhetoric were presente. The RBA still sees no strong case for near-term rate move, adding next rate move likely to be up if economy evolves as expected

The RBNZ's New Zealand 2 year inflation expectations for Q3 came higher at 2.04% y/y vs 2.01% exp, with the rise driven by non-tradeable inflation. Meanwhile, 1 year expectations came at 1.86% vs 1.80% prior.
Next up on Thursday we have the RBNZ monetary policy decision, where the outcome is not as predictable as the RBA, as the RBNZ must reconcile a more challenging landscape of higher inflationary pressures near term, coupled with lower medium-term inflation estimates. Besides, the risks for the NZ economy appear to be mounting on lower consumer/business confidence. The CB is expected to announce a no change in rates at 1.75%, which would then shift all the attention towards the RBNZ's projected OCR path.

China:

China end-July FX reserves came slightly higher at $3.118 trillion vs $3.107 trillion prior. What this implies is that the PBoC had no need to step in and intervene in the Chinese Yuan during its relentless fall. It also telegraphs that the moves must have been perceived as fairly orderly and on generally low volumes.

China's State Administration of Foreign Exchange sent a message of reassurance to the market by saying that FX reserves will remain stable overall while pointing at higher uncertainty in international financial markets.

China’s trade balance figures came lower-than-expected in both yuan and usd terms. However, the crux of the matter here is the pick up in exports and imports, including to and from the US y/y.

Big moves in the Chinese Yuan overnight, with USD/CNY snapped down towards the 6.8 vicinity as the PBoC appears to have drawn, temporarily, a line in the sand in Yuan short speculators after it increased the reserve ratio to 20% in FX forwards, essentially making it more expensive to sell the currency. We saw some spillover effect into the Shanghai Composite, up almost 3%, which in turn ratched up risk trades across the board. As a proxy for risk trades, the Aussie was one of the main outperformers while the USD lagged.

China State Researcher issues updated figures, noting that GDP is set to grow 6.7% in H2 2018. Also sounding optimistic about upward revisions to fixed-asset investment, retail sales and inflation.

Japan:

The Bank of Japan published the latest summary of opinions for the July 30/31 meeting, a meeting where it was decided to widen the wiggle room of the JGBs yield range by an extra 10bp. A highlight included a more direct narrative towards the need to scrutinize and review policy framework to mitigate demerits of easy policy. Interestingly, the report also noted that the Central Bank must adopt a greater focus towards forward guidance on interest rates to show BOJ’s unwavering commitment to hitting price goal. As per rates, the BOJ found it appropriate to allow long-term rates to move double the current range of around -0.1 to 0.1 pct, while allowing long-term rates to move at a range of around -0.25 pct to 0.25 pct.

Europe:

We have a vacant calendar with regards to European data. In the last 24h though, we learnt that the France June trade balance came worse-than-expected at -€6.25 bn vs -€5.52 bn prior, extending the downtrend after the figures peaked out around -3.5 bn last December. Any way you slice it, one can imagine the EUR will use the data as a factor to present to the US when coming to the table to negotiate a trade deal with the US.

Germany June trade balance was further inflated to €21.8 billion vs €20.9 billion prior, with exports holding up quite well. The data is in stark contrast to the numbers seen by France. One one hand it won’t help the case to broker a trade deal with the US when details get negotiated but on the other hand, German officials can breathe a sigh of relief as worries on a possible slowdown in activity amid trade war talks is not yet feeding through into the actual numbers, despite other areas such as industrial activity show more worrisome signs.

As a reminder, European-based indicators are largely non-volatile events for the EUR short-term but have serious implications for the economic outlook of the region going forward, and as such it’s constantly analyzed by bond traders. In this front, it’s worth pointing out the slump in German bond yields during August, causing the curve to flatten towards levels not seen since late 2016, last at 1.64.

UK:

An uneventful day in terms of economic data from the UK on Tuesday. BOE's McCafferty spoke to LBC Radio, saying that “It's a reasonable rule of thumb to expect a couple more rate hikes over the next couple years.”

According to a Bloomberg headline, quoting an official familiar with the matter, the UK appears to be mulling a plan to push the Brexit deal deadline from mid-Oct into the end of November on the basis that Trump will act as an inevitable distraction heading into the G-20 summit. However, other sources are suggesting that the actual intentions from the EU are to bring the deadline closer to the third week of Sept. Go figure. Short term, the UK is still awaiting a response to the strategic white paper sent to the EU authorities.

UK July Halifax house price index stood at +1.4% vs +0.2% m/m exp. In terms of historical data, it shows the trend is still down overall but short term it adds to the slew of positive data out of the UK in recent times. That said, make no mistake, Brexit is the absolute main driver and the BoE has already stated that they intend to raise rates at a paltry pace of one per year, so you can probably place this data in the back pocket for now.

US/Canada:

A leaked document suggests Putin lobbied Trump on arms control, according to Politico. It suggests he was interested to extend the Obama-era nuclear-reduction treaty. If the story gets more airtime, watch potential volatility in pairs such as the USD/JPY.

US June JOLTS came at 6662K vs 6625K exp. Looking at all the details, it’s an overall solid report. At this stage, is abundantly clear that the labour market remains very strong. However, for the Fed to flex its muscle on more aggressive tightening, wages must be the component to show further strength.

In Canada, we saw a disappointing July Ivey PMI at 61.8 vs 63.1 prior. The reaction in the Loonie was rather tame, especially as CAD flows originated from areas of greater focus. Not to mention that the Markit PMI has now taken over as the main predictor for the state of the manufacturing sector in Canada.

Saudi Arabia has frozen all trade and investment with Canada, which is further evidence of the sharp deterioration in relationships between the two Oil-rich nations. Further headlines included that Saudi Arabia has summoned the ambassador to Canada for consultation, according to Saudi Press Agency. The news follows an ongoing dispute in which Canada demands the release of rights activists out of Saudi Arabia. The present sum of investment by Saudi Arabia in Canada looks too low to have a significant impact on the Loonie though.

-----------------

As Head of Market Research at Global Prime with over a decade of experience in capital markets, I focus on providing expert market analysis from a technical and fundamental standpoint to Global Prime’s global clients and media outlets, with currencies the area of most expertise and dedication.

My views on the FX market are insightful and actionable, connecting the dots to interpret market dynamics and uncover opportunities. I dive into monetary and fiscal policies, economic data, geopolitics & macro fundamentals. My role also includes oversight of Global Prime’s brand reach globally.

LinkedIn profile: https://www.linkedin.com/in/ivan-delgado-79b770a/
 

What You Need to Know for Friday, Aug 10th - Major Themes by Geolocation


Australia/NZ:

The New Zealand Dollar got annihilated after the Reserve Bank of New Zealand left its official cash rate unchanged as expected at 1.75%, despite issuing a worrying outlook for inflation and growth. The Bank downgraded its outlook for rates as well as the economic activity. RBNZ Governor Orr said “"We expect to keep the OCR through 2019 and into 2020 longer than we projected in our May Statement. The direction of our next OCR move could be up or down." Meanwhile, RBNZ assistant governor John McDermott in an interview even touched on the possibility that a rate cut outcome has increased going forward.

In today’s RBA Monetary Policy Statement, the Central Bank will be providing more detail over the decision to leave the cash rate unchanged on Tuesday. Lowe will dive deeper into economic and financial conditions, with some volatility expected in the Aussie Dollar. The market will be most keen to understand new snippets of information regarding the growth, labour and inflation outlook, while not being too concerned on the exchange rate. At present time, the market is pricing over 70% chances of a rate hike by Sept next year.

China:

China’s July CPI came a tad higher than expected at 2.1% vs 2%, with food CPI ar 0.5% y/y, while non-food hit 2.4% y/y. As a reminder, China aims for a 3% CPI goal this year, hence the data is within comfortable limits. As per the PPI, it came at 4.6% y/y vs 4.5% expected. The risk on tone post data release boosted the Aussie, although it failed to gain much follow through heading into the US session.

The handling of U.S. trade dispute by Chinese authorities is causing a rift in the Chinese leadership, according to Reuters. The report states that “an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government.” The article argues that the ongoing tick for tack trade ware is revealing some rare cracks in the ruling Communist Party.

China’s stock index Shanghai Composite continues to recover, up by 0.75%, after the slight uptick in Chinese inflation. Meanwhile, some stabilization in the USD/CNY is lending support and should keep risky assets buoyant, especially if one analyzes the Yuan against a basket of G10 currencies, extending gains quite significantly and further anchoring a temporary ease over the excessive one-sided Yuan short bets.

Japan:

Japan Q2 preliminary GDP data came at 0.5% q/q vs 0.3% exp, which is a solid beat on estimates. Additionally, the GDP annualized (seasonally adjusted) for Q2, preliminary y/y, also saw a positive reading of 1.9% vs 1.4% expected and -0.6% last. The data is music to the ears of BoJ officials, hoping that a benign growth outlook may result in greater underlying price pressures in the economy. However, when one has such a cyclically horrendous demographic problem as Japan does, achieving such 2% annual CPI objective still appears elusive.

According to the latest Bloomberg survey on 42 economists: BOJ watchers now see less chance of future policy changes in 2019 with 57% of respondents expecting the BOJ taking action after 2019 vs a previous survey in July that showed in only 41% expecting action beyond 2019. The survey also reinforces the view that the inflation target appears to be increasingly unattainable with almost 75% of respondents expecting a 2% target reached after 2022.

Japan Core Machinery Orders for June saw a massive disappointment, coming at -8.8% m/m vs -1% expected. Appeasing the nerves was the fact that preliminary data published for July came upbeat. The series of orders numbers tend to lead capex by up to 9 months, so it’s a good predictor of the economic health.

Thursday marked the start of U.S.-Japan trade talks. Both parties are having a collaborative approach, with a proposal on the table to setting up a sovereign wealth fund to invest in U.S. infrastructure projects as well as U.S.-Japan joint projects in third countries. Further details will be obtained during this week.

Europe:

The ECB published the release of its economic bulletin for its July meeting, pointing at the heightened risks to the global economy, despite identifying the current indicators as still suggesting broad-based growth. Other headlines included the threat of protectionism remains prominent, risk of heightened market volatility. There was an absence of narrative towards monetary policy, which was reflected in the Euro’s muted reaction.

In Turkey, the Lira has been on free-fall, reaching fresh record lows. The weakening of the currency is fueled by a tougher stance by the Trump administration towards Turkey's duty-free access to the U.S. market, which may see as much as $1.66 billion of Turkish exports affected. The market is therefore factoring in a decrease in international demand flows for the Turkish Lira. Earlier this week, the Turkish central bank announced that the upper limit of foreign currency reserve was cut while adjusting the reserve requirement ratio lower.


UK:

BOE McCafferty, who steps down this month as a member of the Central Bank, said that the UK wage growth is expected to near 4% next year, according to a Guardian interview. She added that sees a need for 2 rate hikes in the next 18 months to 2 years, BOE hasn't left rate increases too late.

According to Business Insider sources, the EU is rumoured to offer a major Brexit concession to UK PM May, which may involve keeping Britain as part of the single market. Judging by the reaction in the Sterling in the hours that followed, the market appears to be taking the news with a pinch of salt, as it would be largely conflictive with the very own views of the main EU Brexit negotiator Barnier, not to mention that it would most likely not sit well by parliamentary representatives in the UK.

A data-rich day in Britain, with the release of the monthly as well as the preliminary Q2 GDP figures. While the former is expected to come slightly lower than last month, the q/q look set to have increased by 0.4%, which would represent a 0.2bp improvement from the figures seen in Q1. Manufacturing production, trade balance and business investment will also be published at the same time.


US/Canada:

Fed’s Evans took his hawkish stance a notch higher, which in turn allowed the US Dollar to see an increase in buy-side flows on Thursday. Evans said the economic fundamentals are strong, the labor market is still improving, adding that the economy is generating inflation close to Feds 2% goal. Importantly, he said the Fed may become restrictive in 2020 but could be 2019, while recognizing that trade tariffs add uncertainty.

Mexico's economic minister Guajardo sounded optimistic on NAFTA talks as they aim to nail an auto deal. He said "definitely encouraged to keep on working, covering all the items that we have to cover."

The Atlanta Fed Q3 GDPNow model is currently at 4.32% vs 4.37% prior. The new updated note read: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2018 is 4.3 percent on August 9, down from 4.4 percent on August 3. After this morning's wholesale trade report from the U.S. Census Bureau and this morning's Producer Price Index release from the U.S. Bureau of Labor Statistics, the nowcast of the contribution of inventory investment to third-quarter real GDP growth declined from 1.95 percentage points to 1.91 percentage points.”

Ahead of Friday’s US CPI data, the US June PPI came on the soft side, last at 0.0% vs +0.2% m/m exp, with the subcomponents not boding well either. Today’s headline and core inflation data out of the US are anticipated to come at 0.2% m/m, which would represent a slight uptick from last month’s headline figure.

In Canada, the June new housing price index stood at +0.1% m/m vs +0.1% exp. The main focus has completely shifted towards the country’s latest employment numbers, set to inject the usual volatility in the Loonie. The market expects over 18k new jobs to have been created in July, while the unemployment rate is seen dropping to 5.9% vs 6%. If the data is firm enough, it should solidify the case for further rate hikes by the BoC.

Canada finance minister talked to reporters, noting that the Saudi Arabia situation remains fluid. Canada is watching situation carefully, adding that Canadian-based assets have not seen significant market reaction to Saudi moves. The minister also said he cannot yet fully quantified impact of Saudi measures.
 
What You Need to Know for Monday, Aug 13th - Major Themes by Geolocation

Australia/NZ:

The most recent NZ manufacturing PMI for July continues to suggests an economy that is running out of juice, after a 51.2 read vs 52.8 prior. Last week’s RBNZ reflected such slowing trend in iits statement. According to BNZ economists “growth forecasts for the second half of 2018 are on notice” after the reading. To make matters worse for the Kiwi, Fonterra cut its 2017/2018 farm gate milk price to NZD 6.70/kg last Friday. According to the headlines via Bloomberg, FY earnings may be less than 25 - 30 NZ cents per share, which would results in the corporation being in no position to pay a final dividend.

As per the RBA SoMP from last Friday, the usual mantra applied. The main highlights included an upgrade to their growth forecast for 2018 to 3.25% from 3%, while also raising the GDP for June 2019 to 3.5 from 3.25. As per the CPI, short-term we saw both the headline and core adjusted lower to 1.75% from 2.25% and 2.00%. Meanwhile, heading into H2 2019, the inflation forecast is seen at 2% from 2.25%. No change in the unemployment forecasts, with expectations for 5% next year.

China:

The market has temporarily shifted its focus away from the Chinese Renminbi as the Turkish crisis escalates. With that said, worth noting the latest action by the PBOC, after it announced it will deepen market-based interest rate reform aimed at improving the deleveraging work and strengthening flexibility of yuan levels

Japan:

As a reminder, Japan Q2 preliminary GDP data came at 0.5% q/q vs 0.3% exp, which is a solid beat on estimates, although from a broader context, the data somehow just acts as merely offsetting the slower-than-expected economic growth seen in the country earlier this year. The hope is that the growth outlook may result in greater underlying price pressures in the economy.

Japan Economy Minister Motegi told Kyodo news that there were productive talks with the US on trade. He met with Robert Emmet Lighthizer, a US government official who is the current United States Trade Representative. While details are still lacking, they seemed to agree on expanding trade ties. The Minister said that they will convene with their US counterparts around September again, in order to further define talks.

Europe:

The unequivocal focus remains in the escalating Turkish crisis, which appears to be getting out of control judging by the disruptive fall in the Lira since Friday, down more than 15% and over 45% lowe YTD. The decline in the valuation of the Lira has accelerated sharply since the open of markets on Monday.

Fears of contagion risks after reports hinted a worried ECB, especially on the debt exposure to Turkey of some European banks in Spain, Italy and France, namely BBVA, UniCredit and BNP Paribas. As the FT notes: “The ECB is concerned about the risk that Turkish borrowers might not be hedged against the lira’s weakness and begin to default on foreign currency loans, which make up about 40 per cent of the Turkish banking sector’s assets.”

The Turkish Lira comes at a time when US President Trump has been flexing his muscle on Turkey, doubling down on the tough trade conditions towards the steel and aluminium in the form of higher tariffs to the US.

Erdogan’s speech and subsequent policy actions have only caused further unrest in the markets, as he failed to provide concrete amid an unambiguous defiant stance, saying Turkey will find new allies.

Turkish President Erdogan has been speaking publicly over the weekend. He is trying to put some sort of stop to the slide in the currency but with fear (eg. of capital controls, a damaging impact on the economy, further depreciation … in a nutshell the fear on TRY is that if you don't sell it now you'll get a worse rate by holding off) the dominating emotion it'll take drastic action, not just words, to have an impact.

Erdogan goes on a combative rhetoric, saying that "It is not only our duty to keep this nation alive, but also the duty of the industrialist's merchant. Otherwise, I will have to implement plan B plan C, a perception operation is being conducted over the explanations.” "No person, government or rating agency has the right to threaten Turkey and the Turkish people."

Rabobank is out with a note to clients warning of the heightened risk of shrinking confidence among Turkish households and corporates may result in a run on the country's banks in the coming days, adding that without more coordinated policy efforts it would be "difficult to expect a respite for the battered lira and local assets."

While politicians will always reject the actions, the mere fact that seizing deposits is becoming a buzzword among growing fears of the local population is sufficient evidence to suggests that regulators may indeed implement certain mechanisms to seize deposits. Turkey officials said that authorities will take necessary measures with Turkish banks and banking watchdog, gives no details and that by no means seizing or converting dollar-denominated accounts to liras will be considered.

The combination of over expansionary growth-centric economic measures, with inflation running away from the Central Bank’s 5% mandate for almost a decade, coupled with a poor current account deficit and deteriorating global liquidity amid dollar-funded balance sheets is a recipe for disaster in Turkey.

Turkey bank regulator has announced a limit to swap transactions in an effort to appease the fall in the Lira. Meanwhile, Fahrettin Altun, Communications Director, Turkish Presidency said that Turkey is ready to put up a fight and noting that the economy is strong enough to win the war via a nation-State Union.

The crisis in Turkey has had immediate spillover effects in the value of the Euro and emerging market assets, with the former breaking a major support at 1.15 and seeing significant follow through action on Friday. At the same time, the Russian ruble has been caught in the crossfire of US Trump’s protectionist trade policies, which has led to a major collapse in the value of the Russian currency, further worsening the EM sell-off.

Russia's Medvedev said Moscow will treat US sanctions as act of economic war. The USD/RUB has recently seen a spike to highs not seen since August 2016. The Central Bank of Russia is ready to reduce forex buying to reduce volatility in the market, according to sources.

UK:

The latest slew of economic data saw the UK Q2 preliminary GDP come in line with expectations at +0.4%. When drilling down into the data, household spending in Q2 was the poorest in over 6 years. The data is not going to increase the risks of a more hawkish BoE by any means.

The UK June manufacturing production saw a slight upbeat at +0.4% vs +0.3% m/m exp, while the UK June trade balance came at -£11.38 bn vs -£12.36 bn prior. These two events won’t have much impact on the Pound, which remains under pressure amind heavy buying interest towards the US Dollar.

US/Canada:

Friday’s US CPI for July m/m came at 0.2%, and so did the core CPI, with both readings in line with expectations. There was only one surprise in the components, which is the yearly core CPI a tad higher at 2.4% vs 2.3%. The data was treated as a temp risk out of the way to keep buying USD amid the Turkish crisis. The numbers also suggest the Fed is on track to raise rates one more time this year.

The Canadian July employment came at +54.1K vs +17.0K expected, however, this time the subcomponents showed a weaker labour market as the majority of new hires were part time, while full time jobs saw a decrease of 28.0K vs +9.1K prior. Hourly earnings on pema employees were also significantly lower at +3.0% vs +3.5% prior. On the bright side, participation rate went up to 65.4% vs 65.4% expected, while the unemployment rate was 5.8% vs 5.9% expected. Overall, the data is mixed and while may be considered good enough for the Bank of Canada to stick to its guns and keep tightening its policy, is not ideal.

------------------------------------------

As Head of Market Research at Global Prime with over a decade of experience in capital markets, I focus on providing expert market analysis from a technical and fundamental standpoint to Global Prime’s global clients and media outlets, with currencies the area of most expertise and dedication.

My views on the FX market are insightful and actionable, connecting the dots to interpret market dynamics and uncover opportunities. I dive into monetary and fiscal policies, economic data, geopolitics & macro fundamentals. My role also includes oversight of Global Prime’s brand reach globally.

LinkedIn profile: https://www.linkedin.com/in/ivan-delgado-79b770a/
 
What You Need to Know for Tuesday, Aug 14th - Major Themes by Geolocation

Overall, Monday came to an end and a mixed sweet-bitter feeling prevailed, with the drama in Turkish Lira set to rule the markets for days if not weeks, although a sight of relief was also felt, as judging by the calamitous falls in EM currencies on Monday, it could have been much worse. Ultimately, intraday bottom pickers managed to see risky bets pay off as the markets pared some of the Asian-led losses. The US Dollar index ends quite flat for the day, while the Aussie Dollar, as a direct proxy of risk-off, fell by 0.5%. The Turkish Lira saw losses of over 8% but managed to contain the decline just ahead of the 7.00 round number. Global stocks suffered, especially bank shares for European banks with debt exposure in Turkey. A notable mover was Gold, breaking the 1,200usd.
 
What You Need to Know for Thur, Aug 16th

It was yet again another benign day for the interest of US Dollar buyers, with at least ? of Wed seeing the all too common theme of capital flows entering the currency. The Turkish Lira was the top performer as the market takes a respite from the disorderly moves seen since last Friday. The fact that the nation’s banking regulator limited lenders’ swap transactions to prevent speculators from short-selling the battered currency, along with a report that Turkey might borrow up to $15b from Qatar, probably aimed at propping up their FX reserves, most likely destined to tentatively intervene in the Turkish Lira as and when needed.

That said, reports that a Turkish court rejected a lawyer appeal to release US pastor Brunson, which remains the main crux of the current diplomatic standoff between the US and Turkey. Remember, the retaliatory trade war between the two countries has worsened amid the continuous detention of the pastor.

After all said and done, and while the Turkish Lira is higher for the day, the elongated bullish push on Wed by the Japanese Yen, which ends broadly higher across the board, the continuous drop in EM currencies, communicates the view that Turkey might have been just an early trigger but a distraction nonetheless of a much bigger issue. The strength in the USD is causing EM currencies the likes of the Indonesian Rupiah, the South African Rand, Russian Rubble, … all to suffer, not excluding the Chinese Yuan, which is once again nearing the 7.00 area against the US Dollar.



EM currencies are in trouble as reflected by the chart above



The situation in the Chinese market remains tense (lower RMB, equities)

Donald Trump won’t be too happy with the lower Chinese Yuan. Although let’s not forget that the ebullient mood around the US Dollar as the pick of choice, if anything, is partly a self-inflicted repercussion of its protectionist measures. At the end of the day, the backdrop just described is rather malign for EM equities, teetering on the brink of further losses, which will only worsen the situation of EMs amid a much cheaper currency vs the USD.

So, on the back of a rather fractious environment, in the last 24h, while FX flows were overall US Dollar positive, after the European session came to a close we saw a recovery in battered currencies such as the Euro, back above the 1.1350 after testing 1.13, which led to the rest of the G10 FX conglomerate to also pare some of its early losses, although by no means it represents a disruptor of the dominant USD bull trend.

An asset of which its value is being mercilessly dashed is gold, last exchanging hands at $1,175.00, which is over $200 lower than the levels it traded back in the highs of April. When combined with the appreciation of the broad-based rise in the Yen on Wed, it really unpacks a clear message of the US Dollar being King, as the correlation between a rising Yen and the shine of Gold break up.

The Aussie and Kiwi also managed, as a by-product of some profit-taking in the US Dollar, rather than on its own merits, to edge cautiously higher, although the moves were far from impressive and depicts a still vulnerable and EM dependant markets. Meanwhile, European equities were not immune to the lingering Turkish drama, with the DAX, CAC-50, Euro Stoxx 50 all down to the tune of 1.5% – 2%, tracking the losses seen in Asia and what was to follow in the SP500, Nasdaq, DJ30.



Performance of FX vs Gold + commodities + equities

In terms of new fundamental developments, Wednesday leaves behind an unchanged Australian Q2 wages outlook, which as the RBA has reiterated, it’s an area of slow growth. Pay attention to today’s Aus employment report as it will offer new clues on the labour conditions. Keeping the focus on the far east, China house prices experienced the fastest growth in almost 1y at 0.2% y/y, which allows a sigh of relief as the Chinese economy is heavily reliant on the health of its property market given the over-leveraged nature it’s been built on. Meanwhile, it’s worth keeping an eye on the Hong Kong Dollar, where HKMA had to intervene to defend the peg the nation’s currency in anchored at (btw 7.75-7.85) vs the US Dollar, as capital outflows continue.

As the day continues its course, we learned that inflation remains by in large a source of no short-term concern for the BoE as the British ONS released a flattish 0% change in UK July CPI m/m; the most noticeable snipper of information was the persistent decline in London house prices. The next big focus for the UK economy will be the UK retail sales, where the figures are set to improve for July.

Meanwhile, our daily dose of Brexit commentary came courtesy of the UK foreign secretary, who expressed a growing preoccupation that further negotiations with the EU will not evolve into any meaningful agreements, hence why the prospects of a no-deal on Brexit is an outcome well telegraphed via much cheaper Pound valuations. The British media (Sky) has even gone as far as to report today that MP Alistair Burt is asking constituents about repeating the Brexit referendum, something that is an absolute ‘no-go’ for UK PM May.

Moving on, the US session left us with a sense that US consumer continue to spend at healthy levels as depicted by an increase of 0.5% vs 0.1% exp in the US July adv retail sales data; by drilling down into the details, with the main takeaways being the steadiness in the control group component and clothing. Another piece of data to be optimistic about was the US empire manuf for Aug, where respondents expressed better conditions to conduct business, with the NY Fed highlighting the growth in new orders and shipments.

As per the US Q2 unit labour costs, it dropped by 0.9% vs 0% exp, which brings to light how technology and the rise in productivity are playing a key role on lower labour costs. The US July industrial production came at 0.1% vs 0.3%, with capacity utilization and manuf production steady. Lastly, US NAHB housing market index came flat at 67. As per Canada, the only data of note to report was the July existing home sales, which deteriorated to 1.9% m/m vs 4.1% prior.
 
What You Need to Know for Friday, Aug 17th

Read the full report

Ever since the news of a Chinese delegation heading back to Washington on Aug 21-22 for renewed trade talks broke out during Thursday’s Asian session, fresh bouts of ‘risk appetite’ made its way back to the FX market. By NY 5pm, the Oceanic currencies (AUD, NZD) came on top as the outperformers, followed by a solid recovery in the Euro, while Sterling’s strength remains unimpressive. The Swiss Franc, the Japanese Yen and to a lesser extent the US Dollar all printed losses for the day, with the Loonie being an outlier, as it losses nearly as much as the Japanese Yen despite a fairly robust ‘risk on’ environment.



More friendly ‘risk appetite’ environment as shown above

Some of the most vulnerable emerging markets saw a minor recovery, as it’s the case of the Turkish Lira, that continues to pare some of its recent huge losses. We are seeing a temporary reprieve within the context of a situation that still remains dire, judging by the weakness in the MSCI EM index, the Shanghai Composite or the continued weakness in some EM currencies such as the South African Rand, Indonesian Rupiah, to name a few.



EM remains a source of concern, TRY, RUB recovering

However, for the time being, the gains in the Chinese Yuan, Russian Ruble, Lira, along with buoyant global equities (SP500 near record highs), should be interpreted as a respite, as the market discounts the news of China. The long squeeze in the USD/CNH 1-year forwards helped the recovery in the onshore Yuan, as it makes it even more expensive for speculators to short the Chinese currency as it will now cost more to sell via the offshore market (CNH).



Chinese markets: CNY strengthens, equities under pressure

At the heart of Thursday’s move is the glimmers of hope that China and the US will be able to reconcile some of its current disagreements, however, usual caveats apply, and one should not hold his/her breath as the whole assumption of a recovery in sentiment is just one Trump tweet away from being negated and most likely back to square one and risk aversion to return.

On Thursday, we had an early spoiler of how bumpy the road remains, with White House Economic Advisor blatantly saying that China’s economy “looks terrible”, adding that the story of 2018 is that the US economy is shooting the light out “crushing it”. Not the best approach to build a more constructive narrative towards trade agreements. Besides, the US keeps its hard-line stance on Turkey, suggesting that more sanctions are prepared on Turkey if Pastor Brunson is not released. Meanwhile, Trump entertained himself with tweets over the solid path of the US economy.

In terms of economic data, on Thursday we learned that the Australian labor market is cruising along just fine, after a robust recovery in full-time jobs and a falling unemployment rate, nearing the 5% mark, which is where the RBA projects its headed by next year. The figures managed to offset a disappointing headline number amid lower part-time hires and a participating rate. In other breaking and surprising news, export growth in Japan is waning, and at a rapid pace it appears, which led to July’s trade balance to come much worse-than-expected at -231bn vs -41.2bn exp. It looks as though the trade war, amid such poor numbers, will only get more tricky, as Japan is heavily reliant on international trade. Not good augurs for the BoJ hawkish case, although that’s a story for probably the next decade, so the market won’t bother at this point.

Meanwhile, with a thin economic calendar in Europe, the main data highlight was the UK retail sales, coming at 0.7% vs 0.2% exp, mainly driven by the World Cup effect as well as improved weather conditions. The Sterling had a paltry 20p reaction in response and strengthen the notion that the current recovery remains a by-product of the USD long liquidation by and large. The main culprit of the soggy Sterling performance is the fact that risks of a no-deal on Brexit have gone up significantly in recent weeks, while inflation and wages in the UK appear well contained.

Shifting gears, in the US/Canada, the US Aug Philly Fed came weak at 11.9 vs 22 exp, which does not bode well for the ISM index going forward, as it’s likely to be fed into it; it’s the lowest level since late 2016 and it suggests that higher rates in the US might be starting to bite. In terms of US housing starts, the number came slightly lower although within familiar ranges. Lastly, the US initial jobless claims w/w stood steady. As per the Canadian economy, the ADP July employment report came upbeat although this is not a report that moves the needle on the CAD, with the Canadian June manuf sales coming at 1.1% vs 1% exp.
 
As last week came to an end, we saw a further temporary reprieve in risk-off, with the ongoing USD long liquidation finding a new leg as the US and China lay the ground and prepare for mid-level trade talks on Aug 21-22 that may somehow contribute to disentangle the current trade war between the two countries. A planned US President Trump-Chinese Leader Xi meeting is not scheduled until a multilateral summit in November though.

The current market dynamics remain very much dependent on the binary outcomes of whether the relaxation in risk aversion we’ve seen can be sustainable or will it be re-ignited, in which case it should lead to dominant safe-haven bids, set to benefit the likes of the US Dollar, the Japanese Yen, and the Swiss Franc; these three would be the first refugee camp that investors will resort to, should the risk-off tone make a comeback. As the chart below illustrates, the risk environment is far from the benign conditions experienced back in 2017, where a stage 2 risk trend was in play.



Risk-weighted index: Death cross (50 & 100 SMA)

The Aussie and the Kiwi remain the most exposed to a return of risk-off flows as the favorite proxy plays to concerns over a prolonged Chinese-US trade war and/or spillover contagion effects of the Turkish crisis into the wider spectrum of the emerging markets. Technically, both pairs have embarked upon a short-term corrective move within the context of solid bearish trends, which was solidified by the breakout of the DXY above a major resistance. From a fundamental standpoint, the Kiwi appears to be especially fragile to further sell pressure as the RBNZ stance has turned more cautious on rate rises. On the flips side, fundamentally speaking the Australian Dollar appears increasingly supported by the latest data that further substantiates the strong labor market in Australia as the unemployment rate heads towards 5%.

In the week ahead, keep monitoring the Chinese Yuan, as its performance over coming weeks can easily be one of the driving forces to drive risk flows. For now, since the mid-level trade talks this week were announced, there has been a reprieve in the current bullish trend, despite the hefty levels it trades at (near 6.90) are a reminder that a worsening of the current bleep in risk environment may have various forces acting as catalysts, the Renminbi being one of the familiar culprits to follow. That said, the People’s Bank of China has made it more difficult to short the Yuan in recent weeks, after imposing a reserve requirement of 20 percent on some trading of foreign-exchange forward contracts, which adds to the news of the spike in the forward curve in USD/CNH. 1-year forwards, which essentially makes it even more costly to bet on short Yuans for the capital that is unable to gain access into the onshore Yuan market. Besides, the Shanghai Composite is yet to a realignment with the improved risk mood, teetering on the brink of its lowest levels since Dec 2014.



Performance of the CH market underwhelming amid a weak Yuan

Further evidence that the market continues to walk on a tightrope is Friday’s performance by the Turkish Lira, which after days of strengthening to pare some of its capitulation-led losses from 7 days ago, it is back trading around the 6.00 mark, which is an exchange rate that is set to constitute a major pain for the economy given its major exposure on foreign-denominated debt. For now, the defiant standoff by Turkish President Erdogan to receive any type of financial assistance from the IMF or the refusal by the Turkish Central Bank of resorting to orthodox tactics such as raising rates to stem the unstoppable rise in inflation is paving the way for Turkey to remain a major beacon of uncertainty for the markets, with potential contagion effects into the Euro.



Emerging markets a source of concern that won’t go away short term

And to the Euro we’ve come. While the brakes were pressed for the deepening trade impasse between China and the US to receive the benefit of the doubts, the single currency has nonetheless suffered the consequences of Turkey making headlines in recent weeks, which for the currency has had a double-whammy effect. Firstly, the mismanagement of the Turkish crisis so far, with the immediate implications that this may have towards a few European banks, has had market forces ruminating that the ECB may turn more cautious on growth and hence in the inflation outlook at a time when they attempt a tricky transition from an era of expansionary QE-led monetary policies into a tentative period (a late 2019 story) of tightening. Secondly, the overwhelming ruling of risk aversion in August has seen the appeal towards the USD increase, causing the DXY to materialize a significant technical breakout, further fueling the bearish EUR/USD trend. The recovery in prices we are seeing is set to encounter major roadblocks on an approach of 1.15/1.16.

The Sterling, meanwhile, continues to communicate major risks of a downward extension unless Brexit negotiations exhibit meaningful progress towards a scenario other than a ‘no-deal’, which is by and large one of the key driving forces keeping the selling pressure so persistent. Even on a pick up of risk flows which saw the long-awaited USD liquidation late last week, the British currency has barely been able to muster any gains, which more often than not, is a great leading hint of a market with signs of trend continuation written all over. The data from the UK last week (upbeat UK retail sales + neutral CPI/jobs) won’t move the needle for the current ‘wait and see’ mode by the BoE in the slightest, with the bank in a ‘once a year rate hike’ comfort zone.

A currency that is set up to be a major contender to challenge the rises in safe havens is the Canadian Dollar, emboldened by positive domestic data, which reinforces the notion of hawkish outlook by the BoC. The latest evidence came after a blockbuster inflation reading on Friday, printing 3% y/y in July! The currency, however, is still being threatened by the possible prospects of a no deal in the NAFTA trade talks with the US, which is a risk event that until more clarity in a satisfactory resolution is seen – no much progress so far – should limit the potential upside in the CAD that would otherwise enjoy if the risk was to be removed.
 
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Monday leaves behind different market dynamics than the ones we’ve been used to in recent times with moves entirely dominated by broad-based US Dollar, driven by a double whammy of Atlanta Federal Reserve Bank President Raphael Bostic not sounding as optimistic about an aggressive tightening campaign (sees one more rate hike this year vs the growing assumption for two in 2018), while Bostic also expressed concerns about the flattening of the US yield curve, which might raise the chances of a potential recession.

Adding fuel to the fire was US President Trump, who at a fundraiser event at the Hamptons on Friday, was reportedly disagreeing with the Fed’s current course of action to tighten up policy via the increase of interest rates. Trump continues to put his nose into Fed’s matters, and one cannot help but anticipate that it may only backfire as the Fed is undeniably an independent entity and will be undeterred and even firm up its course as they see most suitable for the interest of the US economy. Trump also shared, according to unnamed sources, a familiar line about China and European manipulating itsrespective currencies.

After all said and done, the Swiss Franc and the Japanese Yen were the main beneficiaries, closely followed by the Euro, the British Pound and the Aussie. The Canadian Dollar and the Kiwi failed to gain much traction even on a broadly lower USD. It’s worth noting that the fact that ‘risk-off’-centric currencies were the top performers on Monday still depicts a rather gloomy backdrop, and tells us that the recovery in the Euro, Sterling or Aussie can be explained as a story of ‘demerits’ by the USD.



FX performance: CHF and JPY climb the most, DXY suffers

An interesting snippet of information was reported on Monday, which falls in line with the growing concerns by Fed’s Bostic over a flattening US yield curve. According to a business survey by NABA on over 250 business economists, an overwhelming 91% of respondents answered that tariffs are unfavorable for US growth while exhibiting major concerns that the effects of the tax cuts are expected to fade by 2019.


US yield curve on a multi-year flattening trend

Unpacking Monday’s risk profile, we continue to see equities in the US marching to the beat of its own drum, tracking the recovery in European and EM shares, including China. Meanwhile, pushed by a lower USD, gold is also making headways. However, capping the potential fortitude of the ongoing ‘risk-on’ leg is the obvious outperformance of the Swiss Franc and the Yen, which raises a red flag and is being reflected in the risk-weighted index (black line), which should be interpreted as a barometer of risk conditions.



Risk-weighted index: Fails to make higher highson Aug 20



The Yuan strengthens vs USD, not against the basket of G10 FX

One of the key events to watch out for this week will be the low-level trade talks between the US and China as tariffs bite. The Wall Street Journal had reported that the talks will be on Aug 22 and 23. However, Trump has already thrown cold water by noting that he doesn’t anticipate much coming from China trade talks this week. The same day, the focus will also stay in the FOMC minutes while later on the week, Fed Chair Powell will speak on ‘Monetary Policy in a Changing Economy’ at the Kansas City’s annual symposium at Jackson Hole on Friday, August 24, with consensus agreeing that no substantive policy announcements are expected.

Note that the proximity of key technical levels to engage on USD buy-side business in line with the underlying bullish trend, combined with an unequivocal USD positive CoT report, a risk-off environment that is far from over (CHF, JPY still outperforming) and Trump playing down any short-term glimmers of hopes to disentangle the current trade disputes between the US and China, are enough indications to keep the US Dollar ruling the G10 FX, with the permission of the Swiss Franc and the Japanese Yen.
 
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The story of the week, so far, continues to be the persistent selling of US Dollar, as the risk sentiment goes from mid into high gear, as reflected by the performance of the S&P 500, marching to the beat of its own drum and revisiting all-time-highs before a sudden setback in risk pared all day’s losses and some more, which will be elaborated and well unpacked in subsequent paragraphs – spoiler: Cohennews sending shockwaves across the market -.



Cohen news sends risk-weighted index to retest trendline

At the epicentre of this week’s USD miseries lies not one but a plethora of factors: It started off with a mere technical correction of an overstretched DXY back on Aug 15th, it got traction on the story that China and the UShave agreed to convene to resume low-level trade talks (Aug 22-23), and even if Trump has hinted that the prospects of a positive resolution are thin at this stage, itwas not an impediment to seeing a notable exodus off USD long positions as the risk recovery ratcheted up at a rate as fast as the depreciation of the Greenback we’ve seen. That was until the proverbial hit the fan and Cohen news sent a major reminder to markets of how fluid the political landscape remains in the United States.



Chinese markets calmer as risk improves, not out of the woods yet

So, until Cohen news, what can explain the current pick up in risk appetite, which has led to the worst 4-day losing streak in the Greenback this year? The mass departure of USD longs took a renewed beat earlier this week as Fed’s Bostic questioned the overly optimistic tightening cycle the market is pricing in, adding further fuel to the fire after raising concerns over the multi-year long depressively flat US yield curve, which if persisting, runs the risk of exerting indirect pressure on the need for much higher rates.



US yield curve on a multi-year flattening trend

Trump has undeniably added to the worsening sentiment towards the USD after criticizing (again) Fed’s Chairman Powell normalization-path in rates, a message that won’t be taken too keen by the policy-maker, and while it shouldn’t and won’t alter the independent status of the Fed, it nonetheless damages the outlook for the USD, as the market grows less certain over the overly hawkish estimates in US monetary policy.

To get to grips with the sharp losses in the USD, we must keep in mind the strong communion the currency has had with risk aversion dynamics, thus why the extension of a friendlier risk environment this week was music to the ears of a market awash with short-term momentum (algo) traders ready to join the offer on the US Dollar.

The fact that US Trump is reportedly backing down on auto tariffs – if only to center all his attention on flexing the muscle on China – set into motion the last wave in risk on Tuesday (USD negative) and it only got worse for the USD, essentially detaching from its correlation on risk-off flows as news broke out that ex Trump’s lawyer Cohen testified that Trump directed him to commit a crime by violating campaign finance laws, with the immediate reaction being another kick lower on the battered US Dollar. It’s hard to think the situation will get better before it gets worse, so understandably, the market is not too keen re-allocating into USDs, and I dare to say, it’s far from ideal for an over-extension of the current risk appetite.

The end-of-day picture in the FX market orbits around the familiar theme of a broadly lower US Dollar, stellar performances by the Euro and the Pound, testing 1.16 and 1.29 respectively; the Sterling received fresh buying impetus as renewed optimism surrounds the Brexit negotiations after a joint press conference between the key actors in the Brexit negotiations – Barnier and Raab -. Meanwhile, the Yen showed two side, on the backfoot early on, only to see late buys to revisit the 110.00 level on Cohen’s headlines. The Swiss Franc was an easier one-way street move to narrate, around 0.9840 after trading near parity last week. The Australian Dollar is fast approaching an area that should be plagued by macro sellers near 0.74. The Canadian Dollar made headway against the US Dollar, getting into close contact with 1.3. Gold, often referred as a safe-haven asset, has recently been acting more as a by-product vehicle of USD performance rather than a barometer of risk dynamics, so Tuesday’s decline in the USD added $8 to Gold, nearing $1.2k.



It’s all about USD weakness this week

In terms of other substantive news of interest in the last 24h, the RBA minutes turned out to be a ‘non-event’ as widely anticipated, reiterating that there is no case for near-term rate moves. Even Westpac has now updated its rates forecast, pushing further out the call for rate hikes into 2020. In New Zealand, the volatile GDT dairy price auction series saw one of the worst results this year, with a 3.6% slump in prices – negative NZD input -, with whole milk powder down over 2.1%. The compounded fall this year is n the double digits. Staying in New Zealand, we just learned that NZ retail sales came much higher at 1.1% vs 0.3% exp.



NZ retail sales: 1.1% upbeat but lower lows in the trend

Going forward, the focus is going to remain onto the Cohen story and the spillover effects it may have, politically speaking, for President US Trump, as it places him on the hot seat and in danger of legal jeopardy, as other people implicated in the matter might be ready to spill the beans and reveal decades of secrets in exchange for a reduced sentences. As we’ve seen in the SP500, this developing story is extremely unsettling for the markets and is hard to see how the risk trade can find new legs. Another major focal point on Wed is set to be the FOMC minutes, although it runs the prospects of being a low key affair given the dated nature of the meeting, with relevant economic data to potentially influence policy published ever since. Fed’s Powell might want to save some ammunition in policy rhetoric for the Kansas City Fed’s annual Jackson Hole Symposium.
 
Market Thoughts Aug 23: Don’t Let the Short-Term Risk Rally Misguide You

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FX market moves on Wed turned out far from impressive, in a day where the FOMC minutes garnered most of the headlines, while the US political drama in the US played no role, ignored by traders. By NY 5pm, the Canadian Dollar ends as the top performer on positive NAFTA headlines and higher Oil prices, followed closely by the Euro as the German vs US yield spreads extend the impressive recovery, while the Swiss Franc plays catch up, which signals a rather short-term benign risk profile as will be unpacked in following paragraphs.



USD weakness has bee the dominant theme as of late



The run-up in EUR, GBP vs US 10-yr bond yield spreads is impressive

In the Australasia content, the New Zealand Dollar cheered a blockbuster NZ retail sales report in Q2, allowing to end net positive against a basket of G10 FX currencies. On the contrary, the Japanese Yen was the worst performer, with a further liquidation of longs seen as short-term traders found a new leg higher in risk, led by gains in the tech-centric Nasdaq. The one currency that paints a rather gloomy picture is the Aussie, down across the board (except vs JPY) as the convoluted Australian political landscape (PM Turnbull faces leadership spills) feeds into lighter AUD bidders.

The majority of the volatility seen in USD-denominated pairs came courtesy of the FOMC minutes, which leaves us with largely unchanged FX valuations although some important snippets of information were revealed. The main takeaway is that the Fed continues to telegraph further gradual increases in rates – another hike next month is 92% priced vs 90% yesterday -, supported by consumer and business spending, although the cautionary caveats included an expected slowdown in economic growth heading towards year-end (fiscal stimulus may start to fade), while they note that global trade disputes also pose a risk to growth going forward.

Most importantly, the Fed explicitly hinted that they are edging towards rate neutrality, saying in the ‘not too distant future’ they should refrain from referring to the current policy as accommodative. The cocktail of a warning in US growth and the prospects of a slower pace in rate hikes once neutrality is achieved appears to have led to some caution. While the FX market did little to reflect major clues, the big boys, that is the bond traders, were underwhelmed by the outcome, as depicted by the flattening of the US yield curve – 10y bond yield keeps pressing lower against the 2y -. As a reminder, the flattening of the curve coupled with sustained ‘risk on’ conditions tends to weigh on the USD.



When it comes to the current market dynamics, the short-term picture remains supportive of risky assets, ignoring a re-emergence of US political risks in the last 24h as news broke out of Trump’s former lawyer testifying against the US President on campaign violations. The absence of risk headlines emanating from today’s China vs US low-key trade talks was another stepping stone temporarily removed; keep an eye on any news as representatives are scheduled to meet again on Aug 23rd. Let’s not forget, that the tensions remain high, with the US set to impose an additional $16b in tariffs on China today, while President Trump has stated that he has low hopes of any good outcomes from the talks taking place in Washington this week. The perceived calm in major asset classes is also assisted by relative stability in emerging markets, including the two countries have so far represented a major source of concern, that is, China and Turkey.



Chinese markets are relatively calm amid China vs US trade talks



Tranquility in emerging markets, MSCI EM index finds a new leg up

With regards to the constructive risk profile, pay attention here, as it’s important not to be too complacent as the short term recovery in the risk-weighted index occurs within a wider negative context. From a top down analysis, we remain in what is often referred by Stock Market Wizard Mark Minervini as Stage 3 of a market cycle, known as distribution of risk, which often signals a topping phase in risk, and if history is any indication, it heralds an eventual market capitulation in risk as the chart below illustrates.

By drawing ascending trendlines in the risk rallies seen since the GFC in 2018, we can notice that everytime the market has breached the line, Stages 3-4 cycles have ensued. When drilling down into the daily changes in the risk-weighted index, note that the market has merely staged a corrective pullback, much more compressive in nature from the broader impulsive swing low witnessed.



The risk rally is no longer exhibiting bullish tendencies

What this communicates is that the technical recovery seen in many USD pairs – strongly linked to the pick up in risk profile – , where the likes of the EUR/USD or the DXY as a proxy are retesting the breakout points from Aug 8th, does not carry enough substance to justify technical recoveries beyond the onset of the latest risk-off leg. In other words, the persistent weakness in the USD, based on this valuation hypothesis of present rates vs underlying drivers (risk on/risk off), should soon be topping and resume the uptrend.



The pick up in risk is capped by the 50% fib retracement
 
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