When the market talks...

American readers of a certain vintage may recall a series of advertisements trumpeting the advisory acumen of broker E.F. Hutton, noting that "when E.F. Hutton talks, people listen."



While the most acute listeners in the 1980's turned out to be the Feds (Hutton was done for check kiting and money laundering for the mob, causing it to be merged out of existence), yesterday's price action called to mind those hackneyed adverts of decades gone by.  In this case, however, the agent worth listening to is not some brokerage savant but the market itself.

Macro Man noted in yesterday's post that the DXY had reached what seemed to be a critical level of support.  Early doors, it looked like the level had broken and the door opened for a further downdraft.  It was at that point, however, that the market spoke...and your author, for one, was listening.  Price action around key technical levels can often be revealing, not only in whether a given threshold is breached but the market's path in doing so (or not, as the case may be).

Yesterday's failed attempt to punch through DXY support, followed by a strong intraday rally to close higher on the day, offered a fairly compelling argument that the dollar's downdraft may be over, if only temporarily.   For sure, the candle is one consistent with a bottoming/reversal, particularly when it comes after a period of such pronounced weakness.

Obviously, there have been some dollar-supportive catalysts along the way.   Tuesday's decision by the RBA to cut rates was not particularly surprising, but neither was it an obvious outcome, either.   To be sure, Q1 CPI was shockingly low, but there are legitimate questions as to how much impact the RBA can really expect to have on domestically generated inflation as the cash rate moves ever closer to "pushing on a string" territory.   The obvious channel by which the rate cut could could impact inflation is of course the exchange rate, and the Aussie has duly wet the bed.

While the AUD has also weakened on a cross basis, its recent travails does draw some negative attention to other commodity currencies, particularly given suspicions in some quarters of the market that much of the recent commodity rally is merely a function of some big Pangzi scheme.  The magnitude of the rally in some other commodity-linked currencies has been little short of stunning; yesterday morning, USD/CAD was more than 22 figures below its highs of the year.  Needless to say, it didn't close there, and broke some naive trendlines off the highs to boot.

Again, the candle really couldn't be more bullish...but what about the fundamentals?  Macro Man re-ran the simple USD/CAD model he wrote about a few months ago, but this time regressing 6 month changes in the variables, rather than simply levels.   Unsurprisingly there's a pretty decent fit over the past few years, and the message currently is that USD/CAD has overshot to the downside.

While the magnitude of the "mispricing" is certainly not unprecedented, combine it with the powerful statement from yesterday's price action and there looks like a decent set up.   Positive technicals, positive fundamentals, and good risk/reward checks most of the boxes for a solid tactical trade, and Macro Man has acted accordingly.

Finally, given the importance of China in, well, everything, Macro Man would be remiss in not mentioning developments there.    While USD/RMB fixed 378 pips higher last night, that was actually not much of a story...the basket was totally unchanged.  No, the real story was the previous day, when USD/RMB fixed largely unchanged...and, thanks to a large dollar decline against everything else, the CFETS basket dropped some 60 bps.

Now, you only need vision a little better than Stevie Wonder's to see what Chinese FX policy has been this year.  Following the volatility of the first eight weeks of the year, the authorities have managed to weaken the RMB on the Q.T., with little disruption to the rest of the world.

However....IF the dollar is going to bounce and IF SAFE remains intent on a gradual weakening of the RMB versus the basket, the necessary upshot is that USD/RMB is going to have to turn around and start boogieing higher.  Readers can reach their own conclusions as to what it might mean for other assets.   As for Macro Man, let's just say that the message he's getting from the market makes him  more inclined to trim his (still long) GDX than (short) SPX position at this juncture.