Dollar volatility moves to Friday’s growth data after yields drop due to risk

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S&P 500, Nasdaq 100, Bitcoin, Dogecoin and US dollar talking points:

  • Risk trends are still recovering from Wednesday’s slump, but there is a growing preference for momentum contenders like Dogecoin and Nasdaq
  • There is a distinct “ buy down ” trend in broader markets, which suggests short-term intentions unless a key fundamental driver contributes to the momentum – like the May PMIs.
  • While a sentimental response to growth data depends heavily on the mood of the markets on Friday, the dollar scenarios appear more distinct.

More of the “ Buy The Dip ” mentality

In the last 48 hours of trading, we have seen a sharp turnaround in speculative markets; but volatility has remained consistently high. Such a context is not particularly conducive to the establishment of adrift trends, even if it conversely increases the risk of a sudden reversal and even of short-term technical disruptions. It is this systemic market backdrop that can determine how well technical developments follow archetypes in their textbooks or whether event risk can turn surprise into a meaningful response to price action. While Thursday’s session saw gains in US indices, emerging market assets, carry trade and other “high beta” markets; there remains a notable preference for assets that favor short-term acceleration rather than long-term value. It can shine through in a variety of similar habits, but the most accessible is the ‘buy the dip’ mentality. As I monitor the likes of the S&P 500 as it looks at 4,175/4,200, my favorite metric for a litmus test of the markets in general is the performance of the Nasdaq 100 against the Dow. This is the growth consumed versus value performance in recent years, and it has charged higher in recent days.

Nasdaq 100 / Dow ratio chart with 20-day and 200-day movement averages and 3-day ROC (daily)

Graphic created on Tradingview platform

Another measure of risk appetite using close comparisons for a particularly popular asset class among the crowd of traders, we can see the strength of the rally in high-level cryptocurrencies favoring more intensely speculative coins. To be fair, the plunge we’re seeing midweek saw bigger losses further down the market cap curve, with Bitcoin falling 30%, Ethereum falling 45%, and Dogecoin 55%. In the rally from that low, we have seen intensity hold up – volatility breeds volatility. Dogecoin canceled almost 60% more, Ethereum 50% and Bitcoin 35%. Doge is a coin which has hardly been adopted in practice by the financial system, but which has seen the most extraordinary rally until 2021. If you are looking for a particularly sensitive gauge for risk trends, it is is the area to watch. Of course, endogenous risks such as reports that the US Treasury will require crypto transfers over $ 10.00 can be negated by its benchmarking for the market.

Bitcoin, Ethereum and Dogecoin performance chart from Wednesday low (10 minutes)

Dollar volatility moves to Friday's growth data after yields drop due to risk

Graphic created on Tradingview platform

The most powerful planned event risk to end the week

Recent volatility suggests that not all of our potential for market activity is rooted in planned events. In particular, the lingering concern about inflation and the normalization of monetary policy (especially in the United States) will remain at the center of my concerns, as its re-emergence could easily gain the upper hand. Barring the turbulent theme’s upset, there is a separate theme on tap to end this week around economic activity. In particular, we are awaiting the first May PMI readings for some of Markit’s largest developed economies. These indicators are solid approximations of the official GDP figures that so often come out at a delayed quarterly pace. As a result, they can fuel intense speculation around the pace of the economic recovery and the currency debates that dominate rate forecasts.

Composite PMIs in US, UK, Eurozone, Japan, Australia and China (monthly)

Dollar volatility moves to Friday's growth data after yields drop due to risk

Chart produced by John Kicklighter with data from Markit

In a growth update, there are clear implications for risk trends. However, if the market maintains a bright-eyed bias supporting downside buy-in, it is possible that the data could be interpreted favorably anyway. For example, if global measurements show general improvement, it could be recorded as a bullish mindset for capital gains in line with economic tempo. On the other hand, a sharp pullback in measures, similar to recent US sentiment surveys, could lead enthusiasts to believe that the Fed may use the data as a rationale for pushing monetary policy moderation even further. The outlook for the dollar, on the other hand, is less likely to be this murky. If the appetite for risk persists regardless of the outcome, it could dampen the emerging surge in safe haven. If the US data were to disappoint relative to its global counterparts, it would weaken the currency on a linear basis. On the flip side, a strong data impression is likely to push the most performance sensitive currency into another reversal. The last three days for DXY are back and forth. There is a lot of range to go through until the end of the week, but soon we will have to resolve the descending channel from early April and the massive trendline support at 89.50.

DXY Chart with 1 Day Change, US 10 Year Yield and Implied Rate Fed Funds Futures (Daily)

Dollar volatility moves to Friday's growth data after yields drop due to risk

Graphic created on Tradingview platform

The dollar crosses to watch Friday

With the dollar’s ability to respond more decisively to upcoming data, I will look for crossovers that offer clean technical models or have counter-currency event risk to leverage even more power. The USDJPY belongs to the first category. This pair is struggling to have a clear focus. Risk trends are sometimes a hindrance as the two currencies act as safe havens against a larger set of currencies, but they compensate in the pairing. Nonetheless, we are shifted to immediate support rising to the reversal low that opened 2021 – now around 108.75. The path of least resistance is higher, but it would be a good candidate if the dollar entered another lower leg – but before removing the greenback’s larger support.

USDJPY chart with 20-day moving averages (daily)

Dollar volatility moves to Friday's growth data after yields drop due to risk

Graphic created on Tradingview platform

The technical barriers on GBPUSD are much deeper. Upwards, 1.4300 is not far away and that number represents the high recoil range with testing over several years and it also happens to coincide with the midpoint of the range from 2014 to 2020. Further down there is has interim support at 1.4000 while the channel floor approaches 1.3850. Since we are over 100 points from either barrier, there are movements that would have to happen to just get to the border, let alone break it. That said, while the UK and US PMI provides a clear contrast and subsequent UK retail sales add to the mix, there is potential here outside of a range change.

GBPUSD chart with 100-day moving average (daily)

Dollar volatility moves to Friday's growth data after yields drop due to risk

Graphic created on Tradingview platform

Finally, I will be keeping a very close eye on USDCAD. The technicalities here were a false reverse start from the accelerating decline of the past four weeks that collapsed alongside the dollar’s failure to recover yesterday. There is terminal congestion here where the accelerating downtrend hits long term support at around 1.2000. This pair is stretched into a longer term trend with short term breakout potential and data available. While Canada does not have a PMI to stir the pot, we do have Canadian retail sales.

USDCAD chart with 100 day moving average (daily)

Dollar volatility moves to Friday's growth data after yields drop due to risk

Graphic created on Tradingview platform

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