Back to the Choppy Trends for Buying Dips in Risk Assets

01/19/2018 6:00 am EST

Focus: CURRENCIES

Robert Savage

Partner & CEO, CCTrack Solutions

No onse seems scared in forex. The rate markets are happy to melt up along with equities while the commodity markets thrash about with the bid in Asia unwound a bit into Europe, writes Bob Savage, CEO of Track Research Thursday.

Focus in Asia Afternoon is on the idea that 2018 is U.S. dollar (USD/EUR) down, Equities up still.

The news flow is all about China GDP, Bank of Korea and Australia Jobs – big data and decisions with the sense that the USD weakness is about a central bank reserve diversification game limiting the USD weakness at U.S. dollar/South Korean won 1050 (USD/KRW) and 6.40 Chinese yuan (CNY/USD) meaning the EUR and others see buying vs. USD post-intervention.

The notable story for 2018 so far maybe in the rise in actual volatility and how that hasn’t yet translated into any real fear.

No one is scared in forex, buying EUR or U.S. dollar/Japanese yen (USD/JPY) on dips has worked.

EM is a straight shot for yield and assets while the underperformer of choice has been bonds but even there the bears appear limited. In the U.S. 3% 10Y yields seems to be the target but getting there from 2.60% looks more like a slog than a sprint.


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Limits to the speed of rate change push the rest of the world into watching financial conditions and what central bankers will do about it. Easy money may be on the way out but easy markets not yet. So back to the trends, even if they are choppy, for buying dips in risk-assets.

China SAFE allowing more CNY rate flexibility is an admission that actual forex volatility is bottoming but that doesn’t bubble up into equities yet.

Politics remain a red herring for most investors. The headlines Wednesday night are about North Korea – on one hand you have Trump blaming Russia for helping the North evade sanctions, and on the other, you have the North and South Koreans at the Olympics marching under one flag and sharing a women’s hockey team – god forbid they take a metal – what will that do to the C$ and USD?

There are limits to credibility and peace overtures are limited ahead of the G20 in Canada with the U.S. likely pushing for plan B (surgical military options) if plan A of sanctions is useless thanks to China and Russia.

Limits to patience when it comes to nuclear ICBMs remains real. There are also limits to holding policy easy – witness the story from the Nikkei Asian Review that the Japanese Ministry of Finance will cap the amount of front-loaded JGB issuance at Y55tn down around Y1tn from the FY2017 cap and denoting the first cut in front loading since 2009.

This adds to speculation of a YCC shift in April with rise from 0% to 0.25% 10Y target talk increasing. The reversal in the Japan Topix at 1900 Thursday is also important for markets as it resembles the same mood swing as the S&P500 (SPX) and Dow Jones Industrial Average (DJIA) a couple days ago and suggests the profit-taking urge at round numbers still matters.

The rest of Thursday may be about the EU auctions and what that means for EUR demand – it seems good so far for another 1.23 test and more consolidation in the USD downtrend.

The rate markets are happy to melt up along with equities while the commodity markets thrash about with the bid in Asia unwound a bit into Europe. All of this puts the EM central bank meetings still to come and the U.S. housing starts, 10Y TIPS and Fed speeches in the spotlight but unlikely to change the view that there are limits to bulls and bears both – with volatility and consolidation of trading ranges key.

The risk mood and the USD/JPY seems to capture this point most clearly.

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