We are only eight weeks into 2019 and the financial markets look to have reached an inflection point from both a technical and fundamental perspective.
After Wall Street experienced its worst December performance in over 80 years, the SP 500 responded with a furious rebound to climb over 8% higher for its best January result since 1987.
Many market commentators attributed the surge in “risk on” sentiment to the perceived dovish reversal in rate policy from the ECB, the FED and other major central banks. With respect to the FED, credit markets have now incredibly priced out 50 basis points of tightening with a 50/50 chance US rates will remain unchanged throughout 2019.
It’s a widely accepted notion that when financial markets are in a liquidity induced “risk on” mode, global stocks and bond yields will trade higher, while the USD and Gold will generally trade lower.
However, during the recent strong rally in G-7 equity markets, that theory has only been partially correct. Looking at the daily charts since the start of the year, we see that the USD Index is near unchanged at 96.40, the US 10-year yield has dropped 6.5% (18 basis points) and Spot Gold has gained almost $30.00.
Reviewing the equity flow data from the last two weeks, it’s pretty clear that many investors don’t have faith in the recent surge in stocks and are preparing for the return of a “risk off’ trading environment. According to market flow data, G-7 investors have bought over $40 billion in IG and Government bonds, while selling $25 billion in US equities and $15 billion in Euro zone equities.
The net impact of these outflows on the major stock indexes may experience some phase delay and take a few weeks to manifest into a substantial correction.
We believe that the narrow, 160 point trading range between 108.50 and 110.10 in the USD/JPY since January 17th reflects the uncertainty of Forex traders who are unwilling to bid the pair through 110.40 for a “risk on” move; and are equally reluctant to offer the pair down through 108.50 to profit from a “risk off” market.
The technical picture looks to support a move lower more than a move higher. Since posting a 14-month high of 114.55 on October 4th, the pair has failed to maintain any upside momentum including a series of ‘lower lows”. Our trade suggestion to sell USD/JPY at 109.70 was filled. We suggest medium-term traders can add to short positions at 110.20 with an initial target of 107.30 and a 110.90 stop.
The highlight of the Euro zone schedule this week will be tomorrow’s ECOFIN finance ministers meeting in Brussels. Aside from the usual calls for EU structural reform, Forex traders will be listening for any hints of a timetable for the next round of targeted loans to stimulate lending.
The daily charts suggest firm resistance in the 1.1380 area and key support near 1.1275. We are currently holding short from 1.1475 with an initial target of 1.1180 and a 1.1460 stop.
With no first-tier data scheduled in Australia this week, Aussie dollar flow will likely follow news of the talks between the US and China in Beijing. We don’t underestimate the potential impact that news of progress will have on the AUD/USD with initial resistance seen near the 30-day moving average of .7150.
We are currently short from .7175 and suggest looking to add at .7160, with an initial target of .6920 and a .7230 stop.
With the technical set-up in the Sterling on the neutral side and no Brexit votes scheduled this week, we see scope for the pair to retrace some of last week’s losses. We are currently flat the GBP/USD and suggest short-term traders can look to sell the pair at 1.3070 with an initial target of 1.2860 and a 1.3125 stop.
Driven To Be The Best Forex Broker In The World, Synergy FX Offers: Dedicated Forex Trading Education Membership · High Performance Trading Infrastructure · Special Bonuses.
Synergy FX Is The Smarter Choice For Traders. Download A Forex Demo Account And Get Instant Access To Your Forex Trading Education Portal.