“Asian equities hit a record high on Monday as investors set aside fears about rising coronavirus cases and bought stocks, cheered by data showing a robust recovery in China and Japan.” (Reuters)
The SP500 is also at a record high – In terms of data: The Japanese economy grew by 5 percent in the third quarter of the year compared to the previous quarter and taken it out of the worst recession in the post-war period. Over in China Industrial production, in the Chinese economy, grew by 6.9 percent from a year earlier, the same level As September but retail sales were weak.
Record Volumes in Stock Markets on Vaccine Hopes
Stock funds attracted a record amount after positive results for a coronavirus vaccine, adding $44.5 billion in the week through Nov. 11, according to Bank of America Corp. and EPFR Global data. Despite this heavy volume, we saw the SP500 fall back from its high last week (see chart below) Today we are firm and if we can’t take out the intraday high, we would expect a correction.
Investors are looking for the global recovery to continue but the problem is Asia relies on the US and Europe in terms of exports and the bad news is COVID cases and deaths are rising across the US and the EU and a vaccine will have no impact until mid-2021 at the earliest.
Stocks Soar FX Volatility Low and DXY Holding a Key Level of Support
While stock markets are at multi-year highs the volatility in many FX pairs remains low despite stock market strength. In terms of the DXY (Which is a measure of the USD against a basket of currencies) is holding above the bottom of the channel on the chart below. We are looking for the USD to Bounce back and have a short-covering rally to correct its oversold condition and other major currencies. Also, we are looking at the USD against two minor currencies the TRY and MXN.
USD/TRY Correction a Buying Opportunity?
“Turkish President Recep Tayyip Erdogan pledged a new economic growth strategy on Wednesday based on stability, lower inflation and international investment,” (Aljazeera)
In terms of USD/TRY, we have seen a big correction as the market now expects a 5% interest rate hike at the up and coming central bank meeting on Thursday. One of the reasons for the big run up on the USD was the fact that interest rates are at 10.5% which is below inflation which is running at 12%. Will they hike rates?
They might but it’s now priced in and Erdogan has repeated a statement he has made frequently in the past that interest rates “are the cause of inflation” and he said Turkey want to reduce inflation. If that is his view the market could well be disappointed. The USD is oversold anyway and the risk to reward on USD/TRY longs is good.
USD/MXN Watch the Key 18.00 Level
If the USD does have a broad-based rally an attractive set up is to buy USD/MXN as proxy risk on currency. We are looking to buy the USD on strength on a breakout with a stop behind key weekly support at 18.00.
SP500 DAILY CHART: This is a big up trend and we are now moving to try and take out the spike high which featured record volume – of course this level could be taken out but if we fail into the level and break support we would expect a correction to support levels shown.
DXY DAILY CHART: Despite strong stock markets and risk on the USD is holding above the bottom of the channel and the 0.9200 level. Volatility is low in most USD pairs v other majors and we are looking for the DXY to move to 0.9400 and then 0.9600 longer term as the large number of speculators who are short exit the market.
USD/TRY DAILY CHART: We have seen a big fall and a big interest rate hike is discounted – We view the USD as a buy through Fridays High, stop behind the 20 week moving average and support at 7.500 for another move back up to chart highs.
USD/MXN DAILY CHART: The USD bounced from the 18.00 level which is strong weekly support and if we can breakout above the nearby double trend line resistance, we would expect a rally back up to October highs.
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