Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Cross Asset Strategy

Commodities are on the rise again with the clearest sign coming from Oil which posted a strong bullish weekly reversal and is expected to go back to the highs. US breakevens have also rebounded and further gains along with commodities are likely to unfold.The expectations of US data points remain high which is keeping a lid on US nominal yields in the short term.Combining the above, lower negative real yields in the US should be seen in the short term just as we saw in late July when Oil rallied from similar levels. This mix is undoubtedly helping precious metals. The month end’s closing price on Gold is the next important development to watch, especially if we close above $1,834. Silver is also on the up towards $25. In the end the USD remains on the back foot.

Commodities are on the rise again with the clearest sign coming from Oil which posted a strong bullish weekly reversal and is expected to go back to the highs. US breakevens have also rebounded and further gains along with commodities are likely to unfold.The expectations of US data points remain high which is keeping a lid on US nominal yields in the short term.Combining the above, lower negative real yields in the US should be seen in the short term just as we saw in late July when Oil rallied from similar levels. This mix is undoubtedly helping precious metals. The month end’s closing price on Gold is the next important development to watch, especially if we close above $1,834. Silver is also on the up towards $25. In the end the USD remains on the back foot. 

Lower Real Yields with Higher Oil Supports Gold

Technical Analysis

It is sometimes the case that Gold and the USD are inverted. That is not always true, but it is often.It is with this in mind following the note <a href="https://www.smartkarma.com/insights/gold-positive-price-action" target="_blank" data-smartkarma-citation="insights:56598" rel="noopener">Gold: Positive Price Action</a> that the chart below of the USD Index is particularly interesting…

It is sometimes the case that Gold and the USD are inverted. That is not always true, but it is often.It is with this in mind following the note Gold: Positive Price Action that the chart below of the USD Index is particularly interesting…

FX & Rates

Sometimes it is not what the market does but rather what the market does not do that can be more telling.The USD is down almost across the board following concerning sentiment data from the US which also took yields lower. BUT…Why is USDCNH unchanged?It brings us back to the conversation of ‘currency wars’The Renminbi basket has been trading near its multi year highs for several weeks. It is perhaps why the Chinese changed their RRR policy a few weeks ago. Recent data reflects a more relaxed recovery in China as it is worse than expected – see retail sales and industrial production as latest examples. The Covid situation in China is far from over as news, including partial closure of ports, clearly shows. In basic terms China is uncomfortable with its current situation and needs support. Given the rise of the Renminbi in broad terms over the past year, it appears now might be the time for that support to come in the form of a weaker currency.It is with this in mind that we must pay further attention to EURCNH which is turning from the covid panic lows of 2020. What business does it have trading around 7.60? The price action developments suggest we move higher. The technicals on the chart suggest the same. The logical path following the height of the Renminbi basket also points to the same, especially if this is the start of a decent enough short term move down on the USD.This possible tactical ‘rotation’ or ‘USD diversification’ on part of China (if indeed that is what we are seeing) could add further support to EURUSD, which once again has held on to good levels at 1.17.

Sometimes it is not what the market does but rather what the market does not do that can be more telling.The USD is down almost across the board following concerning sentiment data from the US which also took yields lower. BUT…Why is USDCNH unchanged?It brings us back to the conversation of ‘currency wars’The Renminbi basket has been trading near its multi year highs for several weeks. It is perhaps why the Chinese changed their RRR policy a few weeks ago. Recent data reflects a more relaxed recovery in China as it is worse than expected – see retail sales and industrial production as latest examples. The Covid situation in China is far from over as news, including partial closure of ports, clearly shows. In basic terms China is uncomfortable with its current situation and needs support. Given the rise of the Renminbi in broad terms over the past year, it appears now might be the time for that support to come in the form of a weaker currency.It is with this in mind that we must pay further attention to EURCNH which is turning from the covid panic lows of 2020. What business does it have trading around 7.60? The price action developments suggest we move higher. The technicals on the chart suggest the same. The logical path following the height of the Renminbi basket also points to the same, especially if this is the start of a decent enough short term move down on the USD.This possible tactical ‘rotation’ or ‘USD diversification’ on part of China (if indeed that is what we are seeing) could add further support to EURUSD, which once again has held on to good levels at 1.17.

Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

Global FX volatility – as measured by the 5-day Standard Deviation (SD) in the daily percentage change in the spot (closing) price of a turnover-weighted basket of 32 major currency pairs against the US Dollar – remains depressed by historical standards.While global FX volatility rose slightly on 11th August to about 0.32 SD following the release of US CPI-inflation data, it is still well below its level one month ago (0.43 SD) and 10-year average (0.47 SD). Notably global FX volatility is at a similar level (0.30 SD) as it was in the run-up to the 16th June Fed meeting and release of a more hawkish FOMC “<a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210616.pdf" target="_blank" rel="noopener">dot-chart</a>”.Volatility versus the US Dollar in most of these 32 developed and EM currencies has either fallen in the past month from already modest levels or been broadly stable. Volatility in the high-yielding Brazilian Real and low-yielding Canadian Dollar, Czech Crown, Norwegian Krone and Hungarian Forint has fallen the most in absolute terms. However, there have been a few notable exceptions, including the Turkish Lira, Thai Baht and Chilean, Colombian and Philippines Pesos.USD/THB volatility has risen further in past month and is now near top end of its admittedly narrow 12-month range. The Baht has been choppy against a strong US Dollar, resulting in the Baht NEER appreciating 1.4% since the multi-year low recorded on 6th August.GBP/EUR volatility is currently at its lowest level since early June. Sterling’s appreciation against the Euro has been slow and steady, in line with our expectations. Volatility in global FX (and the S&amp;P 500) also remains very modest compared to volatility in other asset classes, notably US Treasuries and Brent crude oil (see Figure 5). Most of the price action has been in the US rates market in recent months, perhaps unsurprisingly given protracted debate about the timeline for Fed tapering and rate hikes.There are a number of factors behind this low transmission from US rates to Dollar crosses and equities but, as was the case in late-2019, FX markets are ultimately pricing in very little risk of policy, macro data or geopolitical surprises, in our view.

Global FX volatility – as measured by the 5-day Standard Deviation (SD) in the daily percentage change in the spot (closing) price of a turnover-weighted basket of 32 major currency pairs against the US Dollar – remains depressed by historical standards.While global FX volatility rose slightly on 11th August to about 0.32 SD following the release of US CPI-inflation data, it is still well below its level one month ago (0.43 SD) and 10-year average (0.47 SD). Notably global FX volatility is at a similar level (0.30 SD) as it was in the run-up to the 16th June Fed meeting and release of a more hawkish FOMC “dot-chart”.Volatility versus the US Dollar in most of these 32 developed and EM currencies has either fallen in the past month from already modest levels or been broadly stable. Volatility in the high-yielding Brazilian Real and low-yielding Canadian Dollar, Czech Crown, Norwegian Krone and Hungarian Forint has fallen the most in absolute terms. However, there have been a few notable exceptions, including the Turkish Lira, Thai Baht and Chilean, Colombian and Philippines Pesos.USD/THB volatility has risen further in past month and is now near top end of its admittedly narrow 12-month range. The Baht has been choppy against a strong US Dollar, resulting in the Baht NEER appreciating 1.4% since the multi-year low recorded on 6th August.GBP/EUR volatility is currently at its lowest level since early June. Sterling’s appreciation against the Euro has been slow and steady, in line with our expectations. Volatility in global FX (and the S&amp;P 500) also remains very modest compared to volatility in other asset classes, notably US Treasuries and Brent crude oil (see Figure 5). Most of the price action has been in the US rates market in recent months, perhaps unsurprisingly given protracted debate about the timeline for Fed tapering and rate hikes.There are a number of factors behind this low transmission from US rates to Dollar crosses and equities but, as was the case in late-2019, FX markets are ultimately pricing in very little risk of policy, macro data or geopolitical surprises, in our view. 

Low Global FX Vol: Maturity or Complacency?

The recent moves higher in US long end yields, when coupled with a stable equity market environment (US), are likely to continue to support USDJPY and probably JPY crosses. USDJPY is strong above 110.70. Nearly all JPY crosses have something that points towards higher levels. AUDJPY and NZDJPY both posted bullish outside days. GBPJPY shows a decent bullish setup but we need to see a break through the 153.50 area. The 5+ figure correction down on EURJPY since June also looks to be over just when we trade at notable levels on EURUSD .While we are still waiting for breaks to be confirmed on many of these crosses, the emerging setups &amp; price action all highlight the risk of higher levels ahead.

The recent moves higher in US long end yields, when coupled with a stable equity market environment (US), are likely to continue to support USDJPY and probably JPY crosses. USDJPY is strong above 110.70. Nearly all JPY crosses have something that points towards higher levels. AUDJPY and NZDJPY both posted bullish outside days. GBPJPY shows a decent bullish setup but we need to see a break through the 153.50 area. The 5+ figure correction down on EURJPY since June also looks to be over just when we trade at notable levels on EURUSD .While we are still waiting for breaks to be confirmed on many of these crosses, the emerging setups &amp; price action all highlight the risk of higher levels ahead.

United States

The euro is the official currency of the European Economic & Monetary Union.  The US dollar is the official currency of the United States of America.

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Global FX vol is low by historical standards and relative to vol in US Treasuries, and for good resason. But FX markets are pricing in very little...

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FX: JPY Crosses Ready to Move?

Rising yields and stable equities are providing support for USDJPY. JPY crosses are increasingly looking bullish though breaks are yet to be confirmed

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