The crypto markets are working through their MF Global moment, with investors running the rule over the exchanges and many questioning if we will see another run on an exchange early this week.
It feels ominously like we will see some further big changes in the crypto exchanges, but whether this proves to hold systemic challenges through broad financial ecosystem seems remote. Over the weekend we’ve seen a heavy tape in crypto, with Bitcoin reaching 16,423 and in some capacity it’s a surprise it’s not even lower – it’s easy to think traders will be shorting into rallies early this week.
A sell-off for the Dollar
Crypto aside, it was a momentous week from a cross-asset basis. The combination of China announcing changes to its Covid zero policy, a below consensus US core CPI read and even news that Russia had pulled troops out of Kherson, were enough to cause some incredible moves. The USD caught the attention of clients, falling a monster 4% on the week, with the weekly declines on par with a downside last seen in March 2009. It is a USD play though, and other G10 currencies are really moving as one, but at different speeds. Pick your beta!
Are there more legs in the USD sell-off? It feels like the path of least resistance is lower, and some are targeting the 200-day MA in the USD index at 104.48. Many have noted the limited amount of tier 1 data to drive, and we must wait until 2 December to get the US payrolls report. While we do see a raft of Fed speakers this week, they are largely reactionary. The data leads.
Importantly, US 5yr real rates have broken the bottom end of the 1.5% range, while the terminal fed funds pricing has pulled back to 4.9%. Both are a USD negative but overlap the USD and the two variables suggest the USD move is a tad overdone. We also see the USDX having pulled 2.3% away from its 5-day EMA, a 4 standard deviations move over the long-term. While the USD sell-off is justified, the prospect of mean reversion is elevated.
USDCHF is getting less attention from Pepperstone clients than EURUSD, GBPUSD and AUDUSD, but this is where we’ve seen the big percentage change over the last week and the price is in absolute freefall. The epitome of catching a falling knife. We can see the USD has pulled away much more aggressively.
Equities markets see big moves
Equities are on fire, certainly, the DAX40 and Nasdaq, but China-sensitive plays, namely industrials are killing it, as you’d imagine given the tweaks from China on Friday. Consider that on Thursday we saw $1.7t added to the market cap of the S&P500, the third highest amount ever, and while much of this was shorts covering and position re-adjustment from systematic players, it feels like the mountain of cash on the sidelines is looking at the market and fearful of a further melt-up into a seasonally strong period. The pain trade is higher, although we do have options expiry on Friday and that may have implications on equity volatility.
The Nasdaq is where Pepperstone clients are focused, with good attention on the Hang Seng too. The breakout in the Nasdaq looks promising and some will be holding for 12k, with the 200-day MA a possible secondary target at 12,672.
After such a big move in copper, equities and USD, the chance of a pause to catch a breath is elevated. It makes for compelling trading conditions as new trends emerge and momentum takes hold. Markets are never dull, and once again having an open mind to change would have served you well.
Central bank speeches:
- 14 Fed speakers: The highlight for me will be VC Brainard’s speech on Tuesday as she discusses the economic outlook. It’s a good chance to assess how Brainard sees policy given the lower core CPI print.
- 5 BoE speeches: Notably, Bank of England chief Bailey testifies to parliament (17 November)
- 14 ECB speakers: Notably, ECB President Lagarde speaks on Thursday
Data to focus on above others
Tuesday
China high-frequency data industrial production (consensus is 5.2%), retail sales (0.7%) and fixed asset investment (5.9%): The market remains fixated on last week’s Covid pivot, with Chinese authorities making some key changes last week and showing a greater interest to support growth. Not sure these will be market moving, but it feels like traders are seeking out good news, so better numbers may resonate with AUD and Hang Seng buyers.
UK employment change and weekly earnings: The market expects the unemployment rate to remain at 3.5% and earnings to fall to 5.9% (from 6%). It shouldn’t move the dial on the FTSE100 or GBP too intently.
Wednesday
Australia – Q3 Wage Price Index: The market sees Aussie wages rising 0.9% in Q3, or 3% YoY. This is a big jump from the Q2 print (+2.6%), but it’s hard to see this moving the AUD too intently or moving pricing for the 6 Dec RBA meeting past 25bp. The AUD is moving more in alignment with equity markets and copper, which is up +16% in the past 6 days and testing $4.00lb and the 200-day MA. Perhaps this is a level for scalpers to have on the radar.
UK – CPI inflation: The market consensus is for UK consumer prices to rise 10.7% YoY in October. The UK rates market prices 58bp of hikes in the Dec BoE meeting, so the inflation print can affect this pricing. GBPUSD is again trading as a risk barometer, and interest rates are having less of an effect. There is clearly a solid breakout on the daily timeframe and while overbought, the GBP bulls will be long and strong for 1.2000. Pepperstone clients are mixed on the near-term path for GBPUSD, with 56% of open positions held short.
Thursday
Australia employment report: The market sees 15k jobs to be created, with the unemployment rate expected at 3.6%. An unemployment rate above 3.7% may impact the AUD most vs the crosses. Notably, on a higher unemployment rate we could see AUDNZD trade sub-1.0900. However, AUDUSD remains a play on the USD and global risk sentiment.
US – Oct retail sales: The consensus estimate is calling for 1% MoM and for 0.3% in the ‘control group’ element. The basket of goods that feeds directly into the GDP calculation. Retail sales is typically not a market mover, and while the market is more focused on the labour market and inflation, this time around a weak number could keep the downward pressure on the USD.
UK government fiscal statement: Talk of a big fiscal tightening worth some £50-60bn annually over the coming five years has been widely discussed. This equates to just under 2% of GDP. Predominantly the expected measures from public spending, but there could be sizable tax hikes too. The market likes a more prudent government and it’s unclear where this becomes a volume event for the GBP. Perhaps a greater weight towards tax hikes could be a modest GBP positive as it would impact future growth less.
EU CPI: The market expects EU headline inflation of 10.7% YoY and 5% YoY on core (unchanged), again, EURUSD is another risk play and tracks closely to the Nasdaq. Yet, while we see 63bp of hikes priced for the Dec ECB meeting, we’d need to see a big beat/miss to cause too much of a rethink on the pricing for this meeting. Perhaps one for the EUR crosses. The cleanest reaction may be seen in the German DAX, where we see real upside momentum in the EU equity markets, for example. We see the DAX up 21% since the 3 Oct low. After this sort of a run, it’s hardly a surprise to see 78% of open positions (held by Pepperstone clients) held short now.
Canada CPI: The market expects headline CAD CPI of 7% (from 6.9%). Markets currently price 32bp of hikes in the 7 Dec BoC meeting. The CAD has lagged other G10 currencies in the recent risk-on rally, with CADCHF shorts working well and testing solid multi-year support.
Friday
Japan – National CPI: The market sees headline inflation rising to 3.7% (from 3%) and core (ex food and energy) to 2.4% (1.8%). While this would be the highest level of inflation since 2014 the Bank of Japan should remain steadfastly dovish and should not lead to a change of heart on policy.
US – Oct leading Index: The market expects a reading of -0.4%, where a weaker print could push US bond yields lower and push USDJPY towards 137.
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