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Fx Horizon Blog Ep 1

This is it! The new format of Fx Horizon´s weekly, free market analysis.

What can you expect from this?
Fundamental and technical analysis of selected markets / assets on a weekly basis, likely to be posted on the weekend.

Benchmark for equities – S&P500

We saw a lot of back and forth in the benchmark SPX this week on the same back and forth on headlines about the tensions between Russia and Ukraine. If you remember Friday a week ago, we had a late session selloff on US officials saying that Russia is about to invade Ukraine this following week – well, it did not happen (surprise). Nevertheless, after opening the week at 4420 on Monday, the selling continued on more tension reports, getting the Index to a swing low of 4430, but closing with a relatively modest loss of 10Pts (0,22%). Tuesday then saw the bigger bounce on “good news” with price going above mondays highs, breaking a small trendline at 4410 to reach a high of 4470, up some 1,35% on the day. Everybody thought the Russia-Ukraine problem is solved, but it never let go. Price turned to the weekly high on Wednesday to touch the 200hma (green line) at 4488 just to get sold there again in a heck of a lot of headline jumps and dips from there on. Overall, it was just selling the rallies after that high though, with Thursday beeing the biggest losing day, down roughly 1,5%. The week ended at 4350, down some 70Pts. (1,58%) on the week, hitting new lows in fridays US session and edging closer to the bigger swing lows from January around 4290 down to the Jan. 24th low of 4220.

SPX 1h chart, 100hma blue, 200hma green

SPX 15min chart

SPX 1d chart, 21dma purple, 100dma blue, 200dma green

Fundamentally, the whole Russia – Ukraine stuff could be solved, or not. Fact is, we just don´t know – nobody does. For now, there is some shooting in east Ukraine, but that is “biz as usual” as seperatists try to heat up the tension in an effort to get Russia involved. Keeping an eye on the situation is a must do anyway though. So all in all, there IS tension. There IS a demand on Russias side for Ukraine not to join the NATO. There IS shooting in the Donbas region. There IS the west demanding Russia to withdraw troops from the boarder. But there IS NO intension on both sides to start a full scale war. I still think this is going to be solved via politics, not on the streets, but I know what to do in a full scale war too – so what is it?

The Peace trade:

  • Buy equities, especially Russian ones
  • Buy the russian Ruble
  • Sell Gold
  • Sell Oil
  • Sell the Yen
  • Sell Bonds

I don´t want to get into too much details why, but in short:

Equities are in discount currently on the tensions, as soon as they are solved, the discount will be gone again – this is especially true for russian stocks.

The Ruble is in trouble too since the tensions rose. Higher russian equities demand, the higher oil and natgas prices should act as a big demand for the ruble as soon as everything is in peace again.

Gold is the natural safe haven and its showing it off. Touching 1.900$ this week Friday was the highest in half a year – get some peace and the premium is going to be deducted again.

Oil is up on fears of Russia´s supply beeing off the market in case of a war, touching new highs at 95$ this week in crude. How far it can fall on a true peace statement is hard to guess, but estimates are for easily 10$ off the highs.

The Yen got bid across the board in Fx on each bad headline. Of course, it´s the safe haven of currencies. Get a political solution and buying all xxxJpy crosses is an easy bet.

Bonds got bid too, same as the Yen on bad headlines, beeing the “ultimate” safe haven and fixed income. Selling them again on good news is the same trade as the Yen one, with other fundamentals making it (in my opinion) one of the better trades anyway.

Vice Versa is true for a full-scale war breakout.

I remain highly scepticle about the dip buying trade in equities in the mid- and longterm, shortterm it all depends on the Ukraine affair.
For now my trade would be to buy longer dated (1m+) put spreads on each rally towards the 100/200hma and/or 21/100/200dma as long as the FED holds its hawkish stance.

The big question mark USD

Trying to wrap your head around the USD is a thing many get headache from these days. In short, it´s a big big chop all over the place. A lot of forces are pushing and pulling currently on the greenback, but the main forces remain the following:

  • FED hike-path pricing
  • Risk sentiment
  • Rate spreads

The FED pricing is the bigger picture thing thats driving the USD in the background, below the shortterm action. We saw market going as far as pricing 7x 25bps hikes this year after an ultra-hawkish Bullard speak some weeks ago. This has faded a big and we are on pace expecting 5x 25bps hikes this year, with a lift-off on the March meeting.
Is there such a big difference between 5 and 7 hikes this year? Yes and no.
Yes, that 7 could be too much too fast for the economy to handle it, even though I doubt that.
No, that in the bigger picture the terminal rate remains 2% for now anyway, no matter if its 5 or 7 hikes in 2022.
The shortterm implication is a little bit different here as we see sustained USD selling if other shortterm factors subside. This is because the market was probably too aggressive in pricing in the 7 hikes and is now repricing to “only” 5 hikes.

Risk sentiment is a big big thing in the shortterm value change of the dollar. With tensions in the Ukraine affair rising, the USD is gaining strength beside the YEN as safe haven, but also losing on lower tensions. That said, we saw a heck of chop this week on the same chop in headlines, pretty much the same as in the SPX.

Rate spreads are going to be a longterm factor in the greenback too, comparing the FED path with that of other central banks. Thats the main reason why I remain bullish on the USD as the FED is currently one of the more hawkish central banks out there. This is especially true compared to their japanese and european counterpart. The latter had a little touch of bullishness just 3 weeks ago, but is already fading it along the way.

Looking at the price action, traders don´t have a lot to be uber excited about in the USD. We saw a lil´bit of a rise on Monday, selling on Tuesday and Wednesday, a very steady Thursday to end the week nearly unchanged on a better-tone Friday. All trades closed the DXY is up 8pips on the week with a range of roughly 77pips, way below its 10w average of 109pips. High and low extension is nearly symmetrical with a high of 42 above the weekly open and a low of 35pips below that level.
Whats interesting on a technical view is the holding of the 200hma support line (green line) from Wednesday on until Friday.

DXY 1h chart, 100hma blue, 200hma green

DXY 15min chart

DXY 1d chart, 21dma purple, 100dma blue, 200dma green

Overall I remain bullish on the USD on longterm technical as well as fundamental factors supporting it, but Im only taking the longshot on EurUsd and UsdJpy for the rate difference. In the shortterm Im aware and looking for pullbacks across the board, especially against higher yielding counter currencies such as the Gbp, Aud, Nzd and Cad – which is also the commodity and “risk” bunch in the G8.

My trade here is a mid- to longterm buy on UsdJpy / short on spot EurUsd everytime we see a dip in the Usd towards the 100dma (blue line) or on a test of a shortterm breakout level, such as the 95.7 area seen in the 1h chart.
Upside in other pairs should be limited, but I refuse to short the usd outright longer than an intraday play.

Looking forward to extend the Horizon Blog with more assets, higher frequency and hopefully other authors too again!

Have a nice weekend and see you all in a new trading week again!


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