Welcome to the FXDD Research: On the Daily newsletter. This publication provides readers with a sliver of our research process to help contextualize daily economic and market developments across the globe. We designed FXDD’s research process to be intuitive and actionable; therefore, you can expect regular call-outs on risk-reward scenarios we think are lucrative. We typically follow global macro markets, particularly the US, UK, EU, Japan, China, alongside the aggregate World economy. We also follow global assets, i.e., stocks, currencies, commodities, and fixed income (though to a lesser extent). We quantitatively do all this; therefore, you can expect most of our analysis to be standardized, consistent, and repeatable.
2022: Week 5
Week 5 of 2022 was characterized by volatility. Global equity markets fought to rebound amidst slowing global growth, and commodity markets continued their ascent. The dollar continued to whipsaw amidst these global capital flows. This week, the most significant change was the ECB’s seeming capitulation that inflation might not be transitory, potentially suggesting a rate hike in the EU. The BOE hiked interest rates 50 basis points while markets remained concerned about the US's beginning and pace of quantitative tightening. This hawkishness comes alongside weakening global economic data, which we expect to get worse. Overall, rumblings of persistently high inflation are beginning to worry international central banks. Difficult times for economies, but exciting times for traders!
Before we dive into our trading signals, here are the latest developments in global macro:
Global Economic Momentum: US nonfarm-payrolls data surprised consensus expectations significant, coming in extremely strong. This resulted in a large sell-off in US treasuries, and the dollar was weaker. However, this gives further credence to a tightening of Fed policy, and equity markets are taking this with mixed feelings.
Global Policy: No major developments today, however, this is a welcome respite, as markets process the hawkish pivot of global central bankers.
Global Market Trends: Stock markets were generally down, though the US market continued to put up a fight. Commodities continue to surge as crude oil strengthened, leading the pack. There will come a point where commodity strength (especially oil) will begin to eat into real economic growth globally. This will likely come just as central banks around the world hit max hawkishness, i.e. tough times ahead for risk assets if commodity strength prevaisl. Nonetheless, we continue to ride the trend!
Now, for those looking for more detail, let us look at the underlying models. We start by tracking economic data relative to consensus expectations, as the impact of financial data on markets depends on whether its surprises the upside or downside. We standardize this data and call this indicator Economic Momentum, i.e., higher values are positive and lower values are negative. The color-coding in the table represents higher/more downward momentum for a given country:
Under the surface of these high-frequency aggregates, we showcase the latest data for the US in the form of US unemployment rate data. We also show its surprise/disappointment score versus consensus:
Next, we show our Market Trend Monitor, which tracks changes in global investment markets to classify market pricing as expansionary, inflationary, deflationary, or stagflationary. While inflation dominated last week, we see nascent signs of stagflation taking over as the dominant market trend. With commodity prices still on the rise globally, continuing this trend would mean that both the dollar and gold could rise simultaneously, as safe havens will become paramount in a slowing growth environment:
Next, we show our Bloc Monitor, which aggregates exchange rate moves across 20+ currency pairs into significant regions or Blocs. We use this method to estimate the flow of capital in the global economy. The color-coding in the table reflects the strength of a Currency Bloc versus others for a given time frame. We aggregate these currencies versus the dollar and show our Dollar Composite below:
We finish with our quantitative trend-following allocation:
And here are the top 10 FX signals for today:
We look forward to sharing our extensive library of content with you over the months to come. If you enjoyed these materials, feel free to share this with friends or colleagues, and don’t forget to subscribe for more!
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