Market Analysis

In an email exchange recently a friend of my working in the markets bemoaned the dull state of the forex market these days. I recall well how much grumbling there was in the middle 2000s about how little action there was in exchange rates at that time. I asked my friend if this was anything like that. His response was that the markets are the worst he’s ever known. No doubt there’s a fair bit of hyperbole in that statement, but this is a fellow who was a bank dealer in London back in the 1980s, so he’s seen a thing or two.

Overstated or not, the market has definitely gotten less volatile recently. As the weekly chart below shows, the USD Index has been in a quite narrow range for the last few months. That’s seen the Bollinger Bands get to their narrowest since 2006.

Weekly USD Index chart - click to enlarge

The range-bound dollar is linked to range-bound interest rates. As the 10-year Treasury Note yield chart below shows, the volatility there has dried up considerably of late as well. Exchange rates are closely tied to interest rates, and especially interest rate differentials. When those rates aren’t moving, it tends to keep the forex market quiet.

Weekly 10 year treasury chart - click to enlarge

Interestingly, though, the USD Index chart belies what’s been happening in the dollar exchange rates to a certain degree. If we look to the likes of EUR/USD and GBP/USD we can see weakening trends at work. These are being countered by an opposing trend in USD/CAD and USD/JPY (though in the latter case ranging is more the theme). That makes this a market where you want to be looking at specific pairs, not the major USD pattern as depicted by the index.

That said, however, the narrowness of the Bollinger Bands and interest rates suggests something big is building. One need only look at what has happened in the markets after the Bands got as narrow as they have become recently to see the potential for market mayhem this set-up represents. I’m definitely not calling for another Financial Crisis type experience for the markets. I think, however, that it won’t be too much longer before my friend is no longer complaining about dull markets.

Consumer confidence rose from a nine-week low as Americans grew more upbeat about the economy, their finances and the buying climate.

The Bloomberg Consumer Comfort (COMFCOMF) Index rose to minus 29.1 in the period ended April 13 from minus 31.9 the prior week, the weakest reading since the start of February. The monthly economic expectations gauge improved in April after falling to a four-month low.

Read the original article at Forex News

Cassandras warn that the foreign appetite for US debt is satiated and wonder who is going to buy US Treasuries when the Federal Reserve stops. Not only are US officials not concerned about this, but the Department of Treasury continues its campaign to discourage foreign central banks from buying so many Treasuries.

Read the original article at Seeking Alpha

Some noteworthy downside volatility in US stocks in the last couple of weeks has got the global markets quite nervous. Have we seen the top in the market? That risk is certainly there.

The first thing on the chart which jumps out negatively to me is the shooting star candlestick pattern on the weekly chart from last week. That was the result of the market making a new high, then failing and actually finishing low on the period. That’s visible in the weekly S&P 500 chart below.

Weekly S&P Chart - click to enlarge

The other thing I’m looking at which isn’t yet decisively bullish or bearish yet, but which represents potential either way, is the narrowness of the Bollinger Bands. As the lower plot on the graph above shows, that width is at its narrowest for quite some time – lower even than it got in late 2012 before the S&P 500 went on a 100 point rally over the next few months.

Narrow Bands worth both ways, of course. As such, if the market were to fall below about 1775 and get the Bands widening as a result, the implications would be negative. We are already seeing in the daily chart time frame that a relatively narrow Band situation there, combined with the break below the bottom of a key range, is seeing the S&P flip into a negative trend mode.

Daily S&P Chart - click to enlarge

It looks very likely from the daily chart set up that we’ll see the S&P 500 test the lower weekly time frame Bollinger Band. That would be a meaningful move at this point, so on a first go we may not quite see 1775 broken at this stage. That, however, could just set things up for a move through that level, and the widening of the Bollinger Bands which would happen as a result, signalling a likely longer-term bear trend move. Even then, though, the 1650-1700 area where the market ranged before would be a sticking point.

The emerging market carry trade is back on, helping to chase higher the very assets that were sold off last year amid concerns U.S. interest rates were set to rise.

“The U.S. yields haven’t actually risen,” said Nizam Idris, head of fixed income and foreign-exchange strategy at Macquarie. “That environment encourages funds to look for yields,” which can typically be found in the very current account deficit countries that were sold off last year, he added.

Read the original article at Forex News

Diverging rates are expected to benefit the dollar – a hawkish Fed will trump a dovish Draghi every time. This is the scenario that dollar ‘bulls’ have bought into, however, it’s currently not working for them this week – the release of the dovish FOMC minutes coupled with some economic slack comments from Yellen has the dollar ‘hawks’ on the run. Leading to many ‘long’ dollar positions being squeezed, as the market drastically prices out an early rate hikes by the Fed.

Read the original article at Forex News

FXStreet (Bali) - According to Federal Reserve Board Governor Daniel Tarullo, who is giving a prepared speech at the Hyman P. Minsky Conference on “Stabilizing Financial Systems for Growth and Full Employment” in Washington, when time comes for interest rate rises, Fed can do so gradually.

Read the original article at fxstreet.com