Dollar Rebound Earns USDCAD Break, Nasdaq 100 Conditions Hit Extreme

• Underlying risk trends are stoic – with the Nasdaq 100 closing out the second smallest daily range since December 2019 this past session

• AMC and GME continue to draw rampant retail trading interest, but the appetite isnt universal

• A rise in US yields contrasted the slide in global 10-year yields, a divergence that led to a Dollar jump with varying technical influences

Risk appetite globally continues to deflate and the receding water is leaving technical traders on run aground. For many of the benchmarks with a ‘risk’ earmark across the global and asset classes, the picture is one of restraint. Global indices, emerging market assets, carry trade, junk bonds and more are carving out modest trading ranges. This consolidation is more remarkable when the contrast – as it is for the major US indices – is drawn to such proximate record highs. On the extreme of that inactivity spectrum is the Nasdaq 100 which spanned a daily range of approximately 60 points. As a percentage of spot, that is only 0.4 percent which is the second most restrained trading day since December 2019. Consider that over the past five years, this was one of the persistent targets for risk appetite and a particularly active mover relative to its peers. Risk appetite is moderating but there is also a shift in preference among benchmarks.

Chart of the Nasdaq 100 with 20 and 200-Day Moving Average and 1-Day Historical Range (Daily)

One of the most prominent targets for the volatility-hungry is the meme stocks that were the focus of so much retail capital and headlines back in January. Movie theater chain AMC advanced another 19 percent this past session while GameStop climbed 16 percent. That is an extended – and accelerated – move that has seen volume for these tickers dwarf many of the blue chips and certainly register record turnover for the companies themselves. It is also a distinct reflection of the appetite for volatility for a segment of the market (retail) that is desperately seeking out something that moves. It is possible that the swell here could be a sign of another phase where retail interests guide the broader market. However, I think it is far more probable that these are remarkable efforts for concentrated and leveraged money that will instead succumb to the broader market conditions.

Chart of AMC Overlaid with GameStop (Daily)

FUNDAMENTALS AHEAD AND INTERESTS RATES ARE STILL AN ACTIVE THEME

Looking out over the economic calendar through the next 24 hours, there is some event risk that can tap into more traditional interests. On the US docket for example, the first quarter corporate earnings figure will be a recap of the earnings season that has wrapped up while the durable goods order report from last month will factor into growth expectations. Yet, on both accounts, their ability for market impact will likely depend on the market‘s ability to interpret that news as a motivation for the Fed and its time tables for normalization (taper and then hike). While the remarks from SF Fed President Daly and Vice Chair Clarida Tuesday seemed to go unmarked, Governor Quarles’ reinforcement of the same message that a discussion of taper could be soon at hand gained a little more interest. That could be a case of the market giving the event credence because the Greenback was already in motion and seeking justification. If that is the case, don‘t expect the currency’s rebound to clear resistance without additional motivation.

Google Search for ‘Taper’ and ‘Inflation’ in the US (Monthly)

While the motivations of the masses is often up to speculation, there is less doubt as to related markets to the currency that were offering a more productive backdrop for a DXY Dollar Index rebound. Where the risk of a rise in yields is a problem perhaps for risk trends that have built a dependency on the promise of central banks to always stand in as a backstop for risk (fostering so-called ‘moral hazard’). For the Greenback, higher rates can prove beneficial. First, the currency has a frequent role as a safe haven in more extreme conditions, but it more generally benefits from the perception of a higher relative rate of future returns – particularly as risk trends remain steady. Notably, the US 10-Year treasury yield rose 1.5 percent Wednesday while most of its major counterparts from Germany, the UK, Australia, Canada and elsewhere were lower. While a solid motivator, the Treasury markets have not been producing many reliable trends; so I would not hold out for a systemic bull trend starting back up for the US currency.

Chart of US 10-Year Yield with Aggregate 10-Year of Global Bonds in Red and DXY in Blue (Daily)

Im sure my natural inclination to assume a tentative technical development could turn into a full-blown multi-week or month trend is not unique to my particular neuroses – speculative positioning measures suggest that is a particularly broad phenomenon among retail traders. But, reminding myself that serious reversals and major breaks with follow through are infrequent events, I attempt to approach market developments with a greater sense of skepticism. I think that is warranted for the DXY which had a rebound this past session but which still fits comfortably within the descending trend channel from the beginning of April. It is possible follow through carries over to Thursday trade and sees a break of the trendline and 20-day moving average; but in a market where meaningful trends and productive fundamental themes are so infrequent, it would be a remarkable achievement.

Chart of DXY Dollar Index with 20, 100-DMA, Overlaid with Rate Forecast from FF Futures (Daily)

If the Dollar is going to truly struggle with spinning a days rally – generally with a range – into a true trend, then the circumstances tend to reasonably match patterns like those on EURUSD (above 1.2175), GBPUSD (above 1.4100) and USDJPY (range up to 109.75). Alternatively, the loaded break higher from USDCAD through resistance on a descending wedge with a very narrow spans (1.2180 to 1.2120) can stir an emotional assessment that perhaps this stretched move can earn a more significant rebound. As impressive as the picture is with a support that goes back years, it is important to abide conditions first and foremost. Ill watch more closely here than most other pairs, but tempo will take precedence over technicals or fundamentals for the time being.

Chart of USDCAD with 20 and 100-Day Moving Averages, COT Net Spec Positioning (Daily )

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