Finding sense in mayhem

Markets were at their neurotic best early this week, as news and events in two emerging markets, Turkey and China drove movement across several asset classes. Things have quickly settled again and if last night’s rally in the Dow Jones of just under 400 points is anything to go by, it’s business as usual at least in the U.S.

The situation in Turkey has calmed with USDTRY closing overnight at about 5.82 in response to authorities taking measures to stabilise the currency. Short term measures only thus far, which do need to be supported by a comprehensive package tackling the bigger structural issues including a large current account deficit, reducing inflation through interest rate hikes and a return of the Turkish Central Bank’s independence to regain credibility.

Likewise, in China a positive market response following the news that the China Vice Commerce Minister would visit the U.S. for trade talks in an effort to ease trade tensions. The Yuan was able to regain some lost ground with USDCNY backing off from a possible retest of the 6.9633 high of December 2016 to close yesterday at about 6.88. While China A shares held and bounced from support at 10800 to finish the session 1.30% higher.  

In recent months, the falling Yuan and a resurgent U.S. dollar have been a key driver of markets across various asset classes. An example of intermarket relationships, which can be seen on the chart below as a tumbling CNY vs the U.S. dollar has driven Golds 15% fall this year. Intermarket analysis is often used by professional traders as part of a trading strategy or as part of their overall market analysis.

Yesterday’s minor recovery in the Yuan and sell off in the U.S. dollar, prompted a tentative bounce in the beaten-up metals complex. Gold bounced 1% from lows, while copper which tumbled over 4% on Wednesday, clawed back 2.0%, to close at U.S. $261.45.

Why I highlight this, is while I expect the U.S. dollar to remain in demand in the medium term, in the short term the U.S. dollar’s rally appears overbought. The recent high in the U.S. dollar Index (DXY) has not been supported by a new high in the relative strength indicator (RSI), which provides evidence of bearish divergence. Elliott Wave analysis puts the U.S. dollars rally in a Wave 5, the last part of an impulsive wave which will should then be followed by a corrective pullback, before the uptrend resumes.

The view for a pullback in the U.S. dollar finds support in the price action viewed yesterday in the metals complex and particularly in the Gold chart viewed below. Gold appears oversold and overnight the type of candle formed that warns of a loss of down momentum and or possible near-term bounce.

While, I am not considering fading the U.S. dollar rally or buying the Gold dip given the strength of recent trends, I would suggest tightening up the stop losses on existing positions as better entry prices might soon be available.

Source Tradingview. The figures stated are as of the 8th of August 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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