risky assets

No price test occurred in EUR/USD this morning due to low volatility and empty macroeconomic calendar. But ahead lies the latest consumer price index in the US, which will likely force many market players to review their positions on risky assets. Demand for euro may drop, which could lead to a decline in the pair.   There will be an increase only when inflation drops more than expected. Markets will also pay attention to the speeches of FOMC members Neel Kashkari and Raphael Bostic. For long positions: Buy when euro hits 1.1036 (green line on the chart) and take profit at the price of 1.1075. Growth will occur amid weak US inflation.   However, when buying, traders should make sure that the MACD line lies above zero or rises from it. Euro can also be bought after two consecutive price tests of 1.1017, but the MACD line should be in the oversold area as only by that will the market reverse to 1.1036 and 1.1075. For short positions: Sell when euro reaches 1.1017 (red line on the chart) and take profit at the price of 1.0981. Pressure will increase in the case of another jump in US inflation. However, when selling, traders should make sure that the MACD line lies below zero or drops down from it. Euro can also be sold after two consecutive price tests of 1.1036, but the MACD line should be in the overbought area as only by that will the market reverse to 1.1017 and 1.0981.       What's on the chart: Thin green line - entry price at which you can buy EUR/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell EUR/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market       Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.  

The test of 1.2942, coinciding with the decline of the MACD line from zero, prompted a sell signal that led to a price decrease of around 20 pips. The latest CPI data in the US lies ahead, and this will likely cause market players to review their positions on risky assets. Demand for pound may drop, which could lead to a decline in GBP/USD. There will be an increase only when inflation drops more than expected. Markets will also pay attention to the speeches of FOMC members Neel Kashkari and Raphael Bostic.   For long positions: Buy when pound hits 1.2946 (green line on the chart) and take profit at the price of 1.3014 (thicker green line on the chart). Further growth will be seen in the case of weak US inflation data. However, when buying, make sure that the MACD line lies above zero or rises from it. Pound can also be bought after two consecutive price tests of 1.2895, but the MACD line should be in the oversold area as only by that will the market reverse to 1.2946 and 1.3014.     For short positions: Sell when pound reaches 1.2895 (red line on the chart) and take profit at the price of 1.2844. Pressure will increase in the event of further growth in US inflation. However, when selling, make sure that the MACD line lies below zero or drops down from it. Pound can also be sold after two consecutive price tests of 1.2946, but the MACD line should be in the overbought area as only by that will the market reverse to 1.2895 and 1.2844.         What's on the chart: Thin green line - entry price at which you can buy GBP/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell GBP/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market     Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.  

The US consumer price index turned out to be much weaker than forecasts, leading to a drop in yields and a sharp increase in demand for risky assets. Inflation dropped from 4% YoY to 3% (forecast at 3.1%), the core index from 5.3% to 4.8% (forecast at 5.0%). The main reason for the decrease was the group of volatile goods and services – prices for airline tickets, hotel rooms, and used cars. Fed rate futures slightly changed - the likelihood of a rate hike in July even slightly increased to 92%, while the start of the easing cycle was shifted from May to March 2024.     This is possibly due to the fact that we don't know if this pace of decline will be sustainable. Richmond Fed President Barkin spoke after the report and urged not to pay attention to the fall in inflation, as long as the labor market remains too tense, inflation could return to high levels, and then it would take much more effort.   Meester from the Cleveland Fed essentially said the same thing - as long as wage growth is 4.5-5.0%, with productivity growth of less than 1.5%, it is too early to talk about price stability. Markets quickly reacted and the dollar noticeably weakened, September Brent futures crossed the barrier of 80 dollars a barrel, while demand for commodity currencies increased. The New Zealand dollar rose sharply, despite the fact that the Reserve Bank of New Zealand kept the rate at 5.5% and hinted that it expects further inflation decline from peak levels.   USD/CAD The Bank of Canada, as expected, raised the benchmark rate by 0.25% to 5.00% at Wednesday's meeting.   The forecast for the start of the easing cycle is postponed to the indefinite future, and according to analysts at Scotiabank, another increase should be expected in September or October. The main reason for such estimates is the high likelihood that inflation in Canada is slowing down much slower than in the US, and economic growth is more stable.   The Bank of Canada's updated forecasts claim that GDP will grow by 1.8% this year, 1.5% next year, and 2.5% in 2025, all amid expectations of a recession in the US.   Also, considering that the Canadian labor market has appeared more stable since the time of COVID restrictions, its recovery was faster than in the US. In general, the week is likely to end in the positive for the loonie, there are fewer factors that could turn the Canadian dollar's course towards weakening.   The net short position on CAD has been liquidated, weekly change +0.51 billion, a long position of 270 million has been formed. The positioning is neutral for now, but the trend is towards further demand for the Canadian dollar. The calculated price is noticeably lower than the long-term average.       USD/CAD continues to trade lower, although it has not yet managed to reach the target of 1.3040/60 outlined a week earlier. We expect the pair to fall further, the next target after passing the lower band of the channel will be the technical level of 1.30. USD/JPY The Bank of Japan published its latest regional economic report on July 10. One of the key topics is the comments by the leaders of the BoJ's regional offices regarding the pace of growth in average wages, which is key to understanding the BoJ's position on methods of responding to high inflation. Most of the reports indicate that there is a nationwide increase in average wages by around 5%, in some cases, it rises to 7%, as high inflation reduces real household incomes.   In May, the average wage across Japan grew by 2.5% YoY compared to 0.8% in April. At the same time, comments clearly trace the idea that changing the yield curve control policy means subjecting stability to unjustified risk. Nobody wants to take responsibility, and the question of whether practical steps will be taken at the July meeting remains open.   In regards to the yen exchange rate, this uncertainty does not compel us to expect the pair to strengthen. The net short position on the yen grew by 0.7 billion over the reporting week to -10.5 billion, positioning is confidently bearish. The calculated price is higher than the long-term average and is directed upwards. The yen sharply corrected, the main reason for the decline is the US dollar's weakness and the growth of the Japanese stock market, which continues to receive foreign capital in large volumes.  

 Central banks are realising that over a year of aggressive monetary policies might not have been enough to fight inflation. Financial conditions remain loose, governments continue t implement expansionary fiscal policies, and the economy is not decelerating at the expected pace. There is more tightening to do, which will continue to drive yield curves to a deeper inversion in the third quarter of the year. However, additional interest rate hikes might not work as intended. That's why policymakers must consider the active disinvestment of central banks' balance sheets to lift yields in the long part of the yield curve. As the hiking cycle approaches its end, the corporate and sovereign bond markets will provide enticing opportunities in the front part of the yield curve.   Central banks face a troubling dilemma: should they burst the bubble created by more than a decade of Quantitative Easing (QE), or are they able to fight inflation without doing that? Hiking interest rates by 500bps in the United States and 400bps in Europe has not done the job as central bankers hoped. The job market remains solid, and inflation is stubbornly sticky and well above central banks’ 2% target. All developed central banks have done so far is to drive yield curves to inversion. While an inverted yield curve puts cash-strapped companies at risk, bigger corporates continue to take advantage of lower yields in the long part of the yield curve. Amazon can raise debt at 4.5% and invest at more than 5% in short-term bills. It doesn’t take much to understand that such a rate environment would create the wrong incentives. The dream that fighting inflation won’t mean putting financial stability at risk is adding to the existing bubble. Overall, financial conditions remain loose. The Chicago Fed adjusted national financial conditions index is negative, indicating that financial conditions are looser on average than would be typically suggested by current economic conditions. Similarly, the real Fed Fund rate has turned positive at the end of March for the first time since November 2019, reaching a restrictive posture only one year and 500bps rate hikes later. The ECB, on the other hand, is markedly behind the curve with the real ECB deposit rate in the bottom range it was trading in before Covid, when the ECB was trying to stimulate growth. Yet, governments continue to perpetrate lavish fiscal policies to win the electorate, adding pressure to the dangerous inflationary environment.     The way forward: active quantitative tightening becomes preferrable over rate hikes Despite being officially ended, quantitative easing and big central banks’ balance sheets remain the core issue to sticky inflation.  The joint balance sheet of the Federal Reserve and the ECB is above $15 trillion. Currently, both central banks are not actively selling their balance sheets as they have chosen not to reinvest part of their maturing securities. Calling such a strategy “Quantitative Tightening” is just a way for them to talk hawkish and act dovish. They know that to fight the inflation boogeyman, long term yields need to rise, and the way to do that is to actively disinvest their balance sheets, which are composed of long-term bonds. The outcome might be the opposite if central banks choose to hike rates beyond expectations. The higher the benchmark rate, the more likely long-term sovereign yields will begin to drop, as markets forecast a deep recession. Such a move would work against the central banks’ tightening agenda. Thus, it’s safe to expect that the tightening cycle will come to an end in the second half of the year as more interest rate hikes than those expected by markets would just further invert yield curves rather than have a significant impact on inflation. As the tightening cycle approaches its end, we expect Federal Reserve and ECB officials to begin to talk about balance sheet disinvestments. At that point, yield curves will begin to steepen, driven by the rise of long-term yields. The front part of the yield curve might start to descend, as markets anticipate the beginning of a rate-cutting cycle. However, if interest rate cut expectations are pushed further in the future, there is a chance that they will remain underpinned for a period. Yet, this path is less certain, as it depends on the ability of policy makers to keep rate cut expectations at bay and the capability of the economy to endure periods of higher volatility. It is at this point that we expect the market to rotate from risky assets to risk-free assets, bursting the bubble created by decades of QE. We expect the first central bank to end the rate hiking cycle to be the Federal Reserve, while the ECB will need to hike a few additional times to bring the real ECB deposit rate further up. The Bank of England might need to hike into the new year, diverging further from its pee

Franc posts 11th straight daily decline versus the dollar US consumer confidence falls to 4-month low 10-year Treasury yield rises 1.2 bps to 4.546% The relief rally was not meant to be for risky assets, but that didn’t seem to matter for USD/CHF.  The US dollar is rallying after consumer confidence fell to 4-month low, new home sales had their largest drop in almost a year, while S&P Corelogic Case-Shiller reported home prices rose to a record high. The economy sure looks like it might break, and it could easily get a lot worse if the Fed needs to take rates much higher.  The dollar is higher on both safe-haven flows and fears the Fed might not be done.   JPMorgan CEO Dimon warned that the Fed might not be done raising rates, highlighting that he is not sure the world is prepared for 7% along with stagflation.  The Dow is having its worst day since March, and it won’t take a lot for momentum selling to heat up.  A government shutdown seems likely as lawmakers are nowhere close to agreeing on deep spending cuts and how much aid should go to Ukraine. A stopgap solution is losing momentum and it seems that House Speaker McCarthy might lose his position as hard-right Republicans are not budging.  The worse the economic outlook becomes; the lower Fed rate hike odds should get but inflation is proving to be tricky here.  Wall Street won’t be able to say the peak is in place and that the disinflation process will remain if we are seeing record house prices, surging oil prices, and a surging dollar. US Data The economy is headed towards a rough patch if you believe the Conference Board’s latest consumer confidence report.  Given how high gas prices are becoming and the record prices it takes to buy a house, the consumer isn’t feeling too good.  Corporate stress is here and as credit conditions tighten further, the labor market is ready to weaken.  The Expectations survey plunged from 83.3 to 73.7, which is below the 80 level that typically signals a recession is coming.        USD/CHF Daily Chart     USD/CHF (a daily chart of which is shown) as of Tuesday (9/26/2023) has been locked into a very strong bullish trend.  Price action is close to hitting 0.9161 level, which is the 38.2% Fibonacci retracement of the 1.0150 to 0.8550 downward move.  If bullish momentum remains intact key resistance lies at the 0.9350 level.  Major support lies at the 0.89o0 level.