Weekly analysis

Crude oil  +7% rally in the week to March 9 that was partly driven by a temporary risk spike following the attempted attack on Saudi oil installations, only triggered a small 2.8k lots net increase in the combined crude oil long in WTI (+7.6k) and Brent (-4.8k). During the past four weeks a 12% rally in crude oil has triggered no additional increase in the combined net long which currently stands at a 2-1/2-year high at 731k lots. While rising US bond yields and the stronger dollar has lowered investment appetite, these developments also support our view that crude oil has reached a level beyond which can be hard to justify given current fundamentals. 

A two-week record draw in US fuel stocks, following the Texas freeze disruption, helped attract net buying in both gasoline and distillates. A natural gas price slump on warmer weather driving less demand triggered a 14% reduction in the net long to 284k lots.
Speculators cut bullish commodity bets for a second week with rising yields and a stronger dollar triggering some risk adversity. The combined net long across 24 major futures contracts was reduced by 4% to 2.6 million lots, representing a nominal value of $129.2 billion.

A strong week for the energy sector with crude oil trading higher by 8% while natural gas surged by 17% on the outlook for cold weather and an unusually big weekly reduction in stocks. Brent crude oil meanwhile is marching toward resistance at $60/b, the 61.8% retracement of the 2018 peak to the 2020 low, driven by a tightening market on expectations that OPEC+ is committed to supporting further price gains by restraining global supplies even as demand outlook improves as the vaccine-led recovery in global mobility increases.

Silver’s go it alone rally, inspired by conspiracy theories and ill-informed traders in the group on Reddit, almost ended before it began. After failing to break above $30/oz, now a double top, the trade idea crumbled fast. But unfortunately not before having sucked 3,500 tons of new investments into exchange-traded funds, most of which are now under water.

Without strong support from gold, which instead drifted lower in response to a stronger dollar and rising bond yields, the rally was doomed to fail. Not least given the lack of fundamental reasons for the gold-silver ratio (Ticker: XAUXAG) moving to a seven-year low at this point in the cycle. 

While premiums for silver coins and small bars due to strong retail demand has been rising, thereby forcing unfortunate buyers into paying a huge and potentially loss-making premium above the prevailing spot, the LBMA in London reported that one billion ounces or 28,350 tons of silver traded in the London spot market on Monday.

Despite the recent setback, we maintain a bullish view on precious metals but given the current focus on a post-pandemic growth sprint, demand for safe havens has faded. 

Fed Chair Powell failed to signal a sufficient level of concern on rising US treasury yields yesterday to soothe this market, which threw another tantrum, sending treasuries lower and yields soaring, and sending equities into a new tailspin while the US dollar went nearly straight up. The Fed will eventually act, but only once financial conditions are sufficiently dire to give him the cover to do so, as he can argue that sharply weaker financial conditions would feed through to Main Street USA and present disinflationary and labor market risks. The Fed may be happy for some measure of speculative froth to come out of this market rather than to be seen riding too quickly to the rescue. 

The Bank of Japan’s Kuroda made comments rejecting the notion in a parliamentary hearing that the BoJ is ready to expand the range of trading for Japanese government bonds. The 10-year yield was smashed back lower to around 0.07% after rising as high as 0.15% recently. 

USDJPY upside action accelerated again overnight as BoJ Governor Kuroda rejected the notion that the Japanese yield curve should be allowed to lift, which smashed long JGB yields back lower. To me, the pace of recent gains in USDJPY is getting to be too much too fast and will inevitably hit a brick wall at some point down the road – either once the Fed steps in with something to counteract the move in yields, or, perhaps more likely in the near term, when the move higher simply exhausts itself of its own accord. A reversal in all JPY crosses would prove most climactic if asset markets tank badly and finally trigger a bid into bonds. But for now, traders shouldn’t dare step in front of an onrushing train and should consider JPY call option strategies for any contrarian trading notions to the present trend  with a measure of patience and building a position over multiple sessions. Next big round level is 110 here.

The medium term setup is still clear that the pair had a nice orderly consolidation that tested just below the 38.2% retracement of the large rally wave from late last year (1.2050 ), which is the tactical support for remounting a charge on the highs for the cycle, and if we avoid an uglier deleveraging event here, the EURUSD higher trade is a less volatile way to trade for a resumption of the USD bear market, adding possibly EM and commodity dollar trades to the mix next week if those recovery smartly versus the USD into the close of the day and week today and into early next week. The key upside objective to take out is the 1.2200 area for the bulls.

Data wise, European figures were generally discouraging. German published the IFO Business Climate, which contracted to 90.1 in January, while the GFK Consumer Confidence Survey resulted at -15.6 in February, much worse than anticipated. Inflation in the country picked up modestly in January, as it printed at 1.0% YoY, according to preliminary estimates. Also, the economy grew 0.1% QoQ in the last quarter of the year, better than anticipated but way below the previous 8.5%. 

On the other hand, US data was mostly upbeat. Durable Goods Orders were the only down note, as they rose by a modest 0.2% in January. Q4 Gross Domestic Product resulted at 4.0%, beating expectations, while weekly unemployment claims continued shrinking, down to 875K in the week ended January 22.

Still, macroeconomic figures indicate shy economic progress. It seems that investors still believe that growth will return in the second half of the year.

The Federal Reserve announced its latest decision on monetary policy, and as widely estimated, they left rates and bond-buying programs unchanged. The central bank reiterated that the “path of the economy would depend significantly on the course of the virus, including progress on vaccinations,” while adding that the pace of the recovery in economic activity and employment has moderated in recent months. A generally dovish statement maintained markets in risk-off mode.

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One of the contributing factors to the heady gyrations is the Fed not sufficiently addressing the issue of the US Treasury needing to draw down its account at the Fed from the current $1.6+ trillion to $120 billion, which creates all manner of havoc at the shortest end of the curve as banks and others in the financial system run out of places to park this money in “risk free” assets like t-bills,
Something was a bit of loud statement at the time from the Powell Fed that the market did not pick up on was his observation this week at testimony before Congress that all of the rise in treasury yields of late was merely a reflection of rising optimism for the economic outlook. What about the scary levels of treasury issuance?

The additional damage may not need be significant if the Fed first: moves both makes the technical moves need to avoid further system risk linked to the US treasury’s monumental shift of liquidity, but also second: provide some obvious hint that it will only allow yields to go so high before stepping in with yield curve control There is the irony and the chicken and egg question – the Fed may first need some more damage before it has the coverage to do something as drastic as yield curve control. So if the first move is merely the technical one on money markets to deal with liquidity issues and no hint at yield-curve-control, we could get dragged through the mud of a bigger traditional risk off move here for a while. Let’s make no mistake: yield curve control is a must, or the Fed will have no chance of seeing its inflation and employment targets met. In the beginning, we may only see this in baby steps, like a promise to cap two- or three year yields (the latter like Australia’s RBA). That would likely be enough for a while, even if the Fed would like have to shift to five years and longer if rising yields persist and this continues to plague risk appetite. 

This reversal in EURUSD is an ugly one for the bulls, coming as it did just after the pair had spiked through a major resistance level just below 1.2200. A weak close  would point to a test of the 1.2000 and possibly the even more important existential level for the uptrend at 1.1900.  Already with this latest burst higher in yields spreading to Europe earlier this week, we saw ECB President Lagarde out declaring that that the central bank is vigilant on the need to watch yields.

AUDJPY has long traded as an excellent risk proxy among G-10 pairs, traditionally from a carry perspective as Australia used to run one of the higher policy rates within G-10 and Japan has wallowed around close to zero for more than two decades. In more recent times, it is more about Australia as a proxy for the reflation trade and the strength in specific commodities, especially iron ore and the demand for Australia’s exports into the star performer since the pandemic breakout, China. So if we are set to see a second guessing of the risk-on and to some degree the reflation trade a risk correlated pair like AUDJPY could be in for a correction. The MACD has crossed over to the downside, suggesting that AUDJPY is at a pivotal point here after mounting a low-energy retracement of the recent sell-off, and generally not correlating well with the recent surge in other risk assets. The pair can push all the way back to 76.50 without beginning to really strain the up-trend.

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Britain's rapid vaccination campaign and nationwide lockdown have yielded a sharp drop in COVID-19 infections, hospitalizations, and deaths, raising hopes for a quicker return to normality.
The promise of a slow exit from the lockdown is that it will allow vaccinating more people and also diminish the chances of having yet another shuttering of the economy.
GBP/USD is also weighed down by fresh dollar strength, stemming from higher US yields. Expectations of stronger growth  perhaps even overheating due to stimulus  is pushing investors away from US Treasuries. So far, the central bank has seen it is as a healthy sign of recovery.
Powell is set to testify before Congress on Tuesday and his prepared remarks may be released already on Monday. If he reiterates the bank's willingness to do more and opens the door to expanded bond-buying, yields could fall and the dollar could rise. While he is unlikely to commit to new and imminent stimulus, Powell's commitment to do more may provide the next leg higher for GBP/USD. 

Pound/dollar continues benefiting from upside momentum on the four-hour chart and also trades well above the 50, 100 and 200 Simple Moving Averages. The recent dip pushed the Relative Strength Index away from the 70 level thus further out from overbought conditions.

The fresh multi-year high of 1.4052 is the first resistance level to watch. It is followed by 1.4145, 1.4255 and 1.4370, all date back to 2018.

Support awaits at the daily low of 1.3980, then by 1.3950 and 1.39, which served as stepping stones on the way up.

The US dollar continues to consolidate to the strong side as the Biden presidency approaches, one that was meant to weaken the US dollar further, given the slim Democratic control of Congress, but with the market constantly trying to operate on far future expectations, it may simply have gotten ahead of itself. This consolidation will become a bit more threatening for the USD bearish case if it continues.

The US dollar has managed to pull higher still since the weak close on Wall Street on Friday, with sentiment still a bit edgy ahead of this Wednesday’s Biden inauguration and despite a near total lack of unrest across the US at the weekend after warnings were loudly trumpeted from official quarters. Supposedly, we should also be concerned for protests on Inauguration Day itself, but the hopeful view for public order is that the Capitol Hill riots were a one-off, down to the presence of a gaggle of the most extreme Trump supporters and a mob mentality excited by a number of fiery speeches from Trump and others that goaded them on.

Assuming an orderly transition, there are still a number of burning questions looming as Biden takes office, from whether and how quickly his administration can do anything about the vaccination effort and winning the race against hyper-contagious Covid strains, to the temperature in Congress (most importantly among a key handful of senators) on stimulus checks and other stimulus measuresI will also be keeping a close in eye in the first weeks of the new administration on signals from the Biden administration on China and on Russia, where sanctions are a looming threat after accusation that Russia is behind a recent cyber-attack of US government agencies and as the Democrats still claim Russian interference in the 2016 election. The outgoing Trump administration has also moved rather aggressively against China on a number of fronts and the market may be taken aback if the Biden administration doesn’t soften its stance against positions that the Republicans have now staked out on Chinese companies and listings on US exchanges, among other issues.

While we await all of this incoming information, the USD consolidation has reached reasonable, consolidation levels without yet breaking anything. And while full trend reversal levels remain some ways off, further USD strength in the near term begins to stress the USD bearish case. One thing that is most concerning for the risk of a more profound USD rally here is one of positioning.. This kind of divergence has marked a major market turn in the past.

A combination of factors prompted some follow-through selling around USD/CAD.

The risk-on mood continued weighing on the safe-haven USD and exerted downward pressure.

Rallying crude oil prices underpinned the loonie and further contributed to the offered tone.

The USD/CAD pair remained depressed through the week and was last seen trading around the 1.2650 region, just above multi-week lows.

The pair edged lower on the first day of a new trading week and extended Friday's intraday fall of around 85-90 pips from the 1.2765 area. The downtick was sponsored by a combination of factors, though lacked any strong follow-through and the USD/CAD pair, so far, has managed to hold above multi-week lows support around the 1.2660 region.

The progress in the coronavirus vaccinations and hopes for a massive US fiscal stimulus plan has been fueling the optimism about a strong global economic recovery. This, in turn, remained supportive of the underlying bullish sentiment as depicted by the continuation of a rally in the equity markets  and dented the US dollar's safe-haven status.

A strong pickup in crude oil prices underpinned the commodity-linked loonie and exerted some pressure on the USD/CAD pair. Oil prices remained well supported by hopes that easing of lockdown restrictions will lift the global fuel demand and got an additional boost from rising fears of heightened tensions in the Middle East.

The US equity market is trading near all-time highs in the futures market overnight, as US President Trump’s signing of the stimulus bill removes the last notable political hurdle of the moment, although we are bearing down on important political risks just after the New Year in the shape of the Georgia Senate run-off races  The high market from last week for the S&P 500 is the 3,724 level.

Chinese regulators have demanded Ant to return to its ‘roots’ in payments closing down its businesses in insurance, consumer loans, and wealth management. Very little specifics have been provided and the deadline is specified as ‘as soon as possible’. China is clearly saying no to sprawling technology groups exercising their power across many businesses unified by personal data. Chinese technology companies are becoming a bigger and bigger part of the MSCI Emerging Markets Index and thus the Chinese crackdown could create an unexpected headwind for EM equities in 2021.

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