April proved to be as expected, choppy and nasty for currency trend traders. The first two weeks was same old froth of back and forth. Then the Greenback began to run from the 18th and finally broke out of its range on the 24th to peak late that week. We are now seeing some selling as the US Dollar Index retests that previous consolidation zone of 95 to 97.
Where it goes from here, I suggest higher. The US Greenback is anti-intuitive in the sense that it weakens when the US is raising rates and strengthens when the US is lowering rates. This due to a variety of factors such as being the global reserve currency, and a bit of a safe haven currency at times. So, if the US is lowering rates, then global growth is weaker so the US dollar (and bonds) are bought up.
Whilst the US dollar did trend for a week, and looks like it might continue that trend, the only other currency to trend really, has been the Swiss. The SNB is actively (and has been for a long time) manipulating their currency and continually weaken it. The CHF has trended nicely lower against the stronger currencies, being USD, JPY, EUR (surprisingly) and AUD. Against the weaker pairs (GBP, NZD, CAD) it has continued to chop.
As the Greenback was the strongest this month, the USDCHF gave a great trend. Buying strength and selling weakness – proves you that if you are a trend trader you should always be looking for the currency that is weak (or strong) and trade against a currency that is opposite. Trading a pair that is both weak or both strong gives you choppy mess.
Stocks have continued to rally, with new record highs in both the S&P500 and NASDAQ. Not quite a “melt” up but close. This term is increasing in its appearance in financial news and that is an alarm bell in itself. Melting up is when the price races away from the moving average as FOMO (fear of missing out) traders pile in. US indices by and large have not done this yet, it has been gradual so far, but they are some distance already from the mean. Any rush move higher now will bring the sellers in quickly, much like Feb 2018 after it “melted” up in Januarys rush (2nd to 29th), to tank hard and by Feb 5th be 347 points lower. A 12% drop in six trading days.
May starts with a bang and within the first 8 days it will set the tone for the rest of the month, perhaps longer. First up on May 2nd at 04:00 Sydney time we have the US FOMC meeting. Followed by UK’s super Thursday later that day at 21:00. The following week will see the RBA on the 7th and RBNZ on the 8th.
What the market will be looking for from the US is any potential change in the dot plot suggesting rate cuts are on the cards. Currently the dot plot is showing a forward guidance of no rate move by the US Fed in 2019 and one rate hike in 2020. This might change as the market is already pricing in a 29-basis point cut this year, i.e. one cut with no hike in 2020. The current US Treasury yield curve (as I write on April 30th) is still inverted. With the short end at 2.4%, 2- and 5-year bonds at 2.3% (so lower, and making the curve bend down rather than up), the 10 year at 2.5% with the 30 year at 2.95%.
I have been writing for months now about the yield curve effect and what it portends, a recession. I still see that as high probability of happening later this year.
Down in the antipodes, the RBA and RBNZ are both expected to cut rates next week after very poor inflation numbers this month from both economies. It would have surprised the heck out of Lowe and Orr, as it certainly surprised the market with both currencies tumbling on the news release. This brings inflation for them at 1.3% and 1.5% respectively. Well below their mandated 2-3% band for inflation. They may want to wait for further data as both economies are showing mixed signals, so if they do not do it next week it would be a surprise to the market and expect a strong bounce. Look to fade that bounce as it will be false bravado by them and a cut will happen this year for us both. It is just a matter of when.