Currency and rate markets are the plumbing of the global financial system, states Bill Baruch of

In essence, stock and commodity markets do not function without those working properly. As we have always said here with rates; rising rates are not the biggest headwind for risk assets, it’s the velocity in which they move. Excessively sharp drops or rises create stress and dysfunction, equating to risk-off tailwinds. The same goes for currencies. In August, the Euro hit parity against the US Dollar for the first time since December 2002. It traded to a low of 0.9609 last night, down as much as 4.5% on the month and 16% on the year. The Yen has been falling precipitously since the start of last year when inflation in the US began to show. The worst came with an 11% drop from March through April. There has still been no reprieve, and the Yen has fallen as much as another 9.5% through last week.

The Bank of Japan has kept rates at -0.10%, diverging from the global central bank tightening trend, especially from that of the Federal Reserve. This forced the BoJ to intervene last Thursday for the first time since the Asian Financial Crisis in 1998. However, interventions rarely work, and the Yen has surrendered most of its knee-jerk rebound. This brings us to last night’s flash crash in the British Pound.

On Friday, the UK government announced sweeping tax cuts and increased fiscal spending to boost the economy in the face of exorbitant energy costs. The market punished this behavior, sending the already vulnerable Cable -3.57% on Friday before cratering another 4.2% Sunday night, in less than five minutes. This was a record low for the GBPUSD, painfully breaching the February 1985 level for a moment, before rebounding. Talking about velocity, the yield of the UK’s two-year Gilt has risen by 150bps this month, from 3.00% to 4.50%, with the bulk of the move coming in the last two sessions, and five sessions in total. Furthermore, this comes after a 130bps rise in August. Given the currency move, rate markets are begging for the Bank of England to step in and alleviate this pain (or cause more elsewhere), pricing in as much as 200bps worth of hikes through November. The BoE is expected to make a statement today.

Pain is the key word amid this chaos. Markets tend to bring the most pain, to the greatest number of people. Whether it be poor energy policy around the world creating a crisis of survival, extreme market whipsaws knocking out risk parameters of participants, or the pain Fed Chair Powell discusses in bringing down inflation. It all comes down to pain, and the US Dollar is a safe haven to avoid pain elsewhere.

We have said for the last couple of months, pain in stocks and commodities will not dissipate until the US Dollar has a blow-off top. What we are getting at is a stew of peak Federal Reserve hawkishness, the Euro deeply below parity against the US Dollar, the need for the Bank of Japan to intervene Thursday, and the flash crash in the Cable last night (which it has now gone positive), together all have the makings of a capitulatory blow off top in the US Dollar.

E-mini S&P (December) / NQ (December)

  • S&P, last week’s close: Settled at 3709.00, down 63.00 on Friday and 181.00 on the week.
  • NQ, last week’s close: Settled at 11,376.75, down 188.75 on Friday and 556.75 on the week.
  • We have had a cautiously Bearish Bias since Fed Chair’s Jackson Hole speech on August 26 but are taking this to outright Neutral due to excessive negativity and record put buying equating to the limited downside in the near term. The potential capitulatory blow-off top in the US Dollar heightens our caution to the upside.
  • Closing lows from June were tested and held on a closing basis in the S&P and held outright in the NQ.
  • The first key resistances align with the settlement, while major three-star resistance.
Crude Oil (November)
  • Last week’s close: Settled at 78.74, down 4.75 on Friday and 6.02 on the week.
  • The flush through $80 and rare major four-star support at 81.63-81.94 finally took place on Friday.
  • We believe this sharp break has technically begun to create opportunities for the long side over the intermediate to long term.
  • Currency pain brings pain to commodities, per our discussion above.
  • US officials rule out secondary sanctions for the Russian Oil price cap.
  • Session lows hit between two levels of major three-star support, detailed below and adjusted for Friday’s settlement.
  • Look for stability above our Pivot and point of balance.
  • Gold, last week’s close: Settled at 1655.6, down 25.5 on Friday and 27.9 on the week.
  • Silver, last week’s close: Settled at 18.91, down 0.707 on Friday and 0.471 on the week.
  • If the US Dollar is experiencing a capitulatory blow-off top, this is a very bullish factor for the metals complex.
  • We have been cautiously Bearish on Gold and Silver in recent weeks; however, we have now flipped to cautiously Bullish due to the aforementioned fundamental developments and the test and hold of major three-star support in Gold at 1631.9 and Silver at 18.40-18.47.
  • We plan to hold this cautiously Bullish Bias while price-action holds above those supports.
  • Still, we must see confirmation to the upside with a close back above major three-star resistance.

Learn more about Bill Baruch at Blue Line Futures.