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Global Macro Insights

Global Macro Insights

Global Macro Insights

When the EUR was moving higher against the USD, in previous weeks, due to speculation that the ECB might “taper” sooner than expected, due to higher yields in the Euro-zone and improved inflation and growth forecasts, I had been explaining that this line of thinking doesn’t seem likely and it was probably flawed.  I was expecting a macro catalyst that would put things in the right perspective again and that didn’t take long to arrive.  My thinking at the time was that the ECB would have to react sooner rather than later, as a strong currency is not appropriate for their monetary goals.

The first “shot” came from the man himself, Mr. Mario Draghi, when in a speech at IMF he clearly said and I quote: “…we will implement in full our purchase program as announced and, in any case, until we see a sustained adjustment in the path of inflation.”

Then it was the turn of the member of the ECB, Coeure, to deliver the final blow, who said in a speech last Monday that the ECB purchases will slightly be increased in May and June due to low market liquidity in July and August.

The impact on the Euro-zone 10y bond yields was obvious, because of the ECB’s policies there is a “ceiling” to the yields and how further higher they can move. Please have a look at the following chart:

Images courtesy of

Global Macro Insights

This was exactly the macro catalyst I was expecting before start selling the Euro again, as the Euro is highly correlated with the yields. Next, you can see a market profile chart of the EURUSD and the areas, where we are looking to do “business”:

Global Macro Insights
I could see the formation of a balance just around the 1.1400 area but I wasn’t ready to sell yet, as I was waiting for the release of the US CPI figures first. That was fine by me as I had identified that a move below 1.1070, as you can see highlighted with the brown horizontal lines, would open the road for a higher probability move towards much lower levels.

I am currently short the Euro with a stop in the 1.1170 area and a target towards the Value Areas, as indicated by the horizontal green lines, which provide me with a very good risk/reward characteristic.

At this point, it might also be beneficial, to examine other inter-market relationships, so you can see how the “forces” in the markets are currently developing and what to expect next.

The sharp correction in oil prices from the lows provided momentum to a move higher in inflation in the Euro-zone during Q1. Please have a look here:


You can clearly see the positive correlation between 5y5y breakeven inflation in US, UK and France and WTI Oil prices. In very simple English, lower oil prices contributed to stronger deflation trends but higher oil prices help inflation move higher. You can understand even better what has happened at a macro level, by having a look at this chart:

Global Macro Insights
Here you can see Crude oil Futures prices against the Dollar index. You can see how inversely correlated they are, the correction higher in Oil prices, caused the Dollar to move lower but since the upwards momentum was exhausted in Oil and started drifting lower again, the USD is gaining more strength. Therefore, we can expect that what happens with Oil prices, will eventually affect to a certain extent, the direction of the USD.

Technically speaking, Crude has lost momentum and has moved into a sideways movement, with a negative bias. Unless there is a strong catalysts, I can see the Crude staying in a range for a couple of months and it is important to note if it breaks the upward trend line or not, and attempt to test the $56 region. If the weakness in Oil prices persists and teh US data are not “soft” again, it might be a good idea to take a look at the USDCAD:

I will be looking for a consolidation above 1.2300 and I will be using that balance as a reference point to initiate a trade and manage my risk. At the same time we see the Commodities’ Index CRB, moving lower again after an upward correction:

Images courtesy of




Therefore, with commodities showing weakness again and because of strong macro factors, as I was explaining in previous posts, such as weak Chinese growth, lower projection of GDP in Australia and a very problematic mining industry, we were very bearish towards the Aussie and the New Zealand Dollar for weeks now. Most probably this week and ahead of the release of the US GDP on Friday, I will be collecting our profits as the shorts in the AUDUSD and NZDUSD have provided some very nice reward/risk ratios.



However, I have started establishing a short position in the AUDNZD and please allow me to explain the reasoning. If you would like, take a look at the following chart which shows the 2yr interest rate differential between AUD and NZD.



You can see that because of very strong dovish comment by the Reserve Bank of New Zealand and anticipation of interest rates cuts, the interest rate differentials had moved strongly in favor of the AUD. Bond markets are expecting two 25bp rate cuts in New Zealand by the end of the year but, there is uncertainty about the actions of the Reserve Bank of Australia. It is my impression that the markets are pricing in too much easing for New Zealand and the spread should narrow down. Furthermore, if you take a look at commodity prices in New Zealand you will notice that they look a bit better than those at either Canada or Australia.




You can see how the prices moved sharply higher, because of the interest rate differential, but sentiment started changing again. The tail at the highs indicates a rejection by the buyers to push prices higher and furthermore, we broke below the Value Area and the High Volume Node. As I said I keep a short position and my target is towards the value areas represent by the green horizontal lines lower. There are also other opportunities supported by good fundamental catalysts. I can identify one of those in Japan at the moment. So far, the interest rate differentials have been positively correlated with the USDJPY.





Here you can see a market profile chart of the USDJPY. We had a period of a long consolidation and because of the better than expected Core CPI in the US, we finally pushed higher. I am not very confident yet to recommend an outright long exposure in this particular case, as I want to understand better the collapse of volatility in previous weeks and the impact in the options markets and the market makers that were selling strike prices at the highs, now they are buying it back! I will wait and see. But, we do have a couple of opportunities in the equity markets that provide a better reward/risk and the fundamentals are clearer.




Global Macro Insights

Japan’s Foreign Investments abroad keeps growing, which is going to cause not only the Yen to weaken but also due to inter-market relationships, this can cause the Nikkei to move higher. A move which is of course helped by the low yields in Japan as well.




If the macro conditions stay as they are, I would be looking to establish a long position in the Nikkei, as we attempt to move to higher levels. At the moment the markets are not “worried” about the future and we might be moving into a period of low volatility, where investors will go after the higher yields that equities offer at the moment. You can see in the VIX, the “fear” index that we move into very low levels:




You can also see that the MSCI World Index ex US is also moving again to higher territory:



Because of reasons I mentioned above and a strong ongoing QE program in place, I favor getting a long exposure in European equities.



Above you can see a 1-hour chart of the Eurostoxx 50. You can see that prices are currently inside a wedge and testing that downward trend line that acts as resistance. We need to have a clear move and acceptance above resistance that will offer us an opportunity to test the highs again. My main risk this week could potentially come from the US GDP figures, in case we have soft numbers again so please be aware of that. I also see a divergence between the Dow Jones Index and the Dow Jones Transportation Index, which is a bearish indicator; therefore I wouldn’t like any exposure to US equities at the moment.




Thank you!

Fotis Papatheofanous

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