Playing the S&P500 Through FX – the AUD has Found its Mojo

We can also consider the notion that the RBA has been active in cutting its daily bond purchases from $5b p/d to $1.5b p/d and that may also be another factor boosting the AUD of late.

If I look at the technical set-up of the S&P500 it looks like the benchmark heads towards the 50-day MA (2919) in the near-term, and the pain trade in the market is clearly higher. Liquidity is at the heart of the move

• Top pane – white – Feb excess reserves, blue -RBA excess cash, orange – ECB excess liquidity
• Lower pane – blue – global money supply, yellow – S&P500

I like the outperformance from small over large caps, cyclical over defensive sectors, and even companies with levered buybacks are outperforming the S&P500 – until we start to see earnings roll in, I would not want to be short the S&P500 here. Although, we have event risk in spades today, with weekly jobless claims (consensus 5.5m claims) and Fed chair Powell speaking on the economy.

Traders are also getting excited about today’s OPEC meeting (commences at 3pm London time), with Kuwait suggesting we could see up to 15m barrels of crude output being cut. Russia has committed to a cut of 1.6m barrels. The sticking point being how the cuts will be distributed through OPEC nations, and how involved the US will be, or whether they even go down the tariffs route. Oil could easily be 10% higher or lower by the end of the day, but one suspects it will influence the S&P500 and the AUD by proxy.

Here, we see S&P500 10-day realised volatility (white) has collapsed, but at 59% details the S&P500 is moving 3.71% a day (over the past 10 days). Implied volatility has dropped hard from 77% to 37% (although the VIX index sits higher at 43%), which suggests the market still sees daily moves of some 2.3%. Either way, vols are painting a picture of calmer conditions, although, they’re not at levels which tell us we are firmly out of the woods by any means.

AUD the strong

The reason I have singled out the AUD, is that it is strong – simple as that. If you believe you can obtain an edge by keeping things simple in FX trading by buying strong and selling weak, albeit assessing how mature that move is, then the AUD has found its mojo. That said, if you look at the weekly commitment of traders (CoT) report as a loose guide on positioning, with non-commercial accounts holding a short position of 31,664 contracts, so, clearly the recent rally has been part driven by a position readjustment.

The technical set-ups

All of these positions are a play on the US500 moving higher, as the correlation suggests, and while I feel there could be downside risk next week when earnings start rolling in, the pain trade in the short-term, as I say, is higher.

AUDJPY – marries the weakest and the strongest and the look on the daily is certainly compelling. Price is just breaking horizontal resistance, with the 5-day EMA portraying the move, and that may define a more aggressive move higher. If price is to trend, traders will lean into this average especially when the impulsive move is in its infancy, but if this kicks higher I’d follow.

AUDUSD – finding sellers into the 61.8% retracement of the March sell-off, after a break of 0.6212 high. Watch price action around the fibo, but a break here and I’d be holding for 0.6350.

EURAUD – Price has broken below the 61.8% retracement of Feb-March rally at 1.7510 and maybe headed into trend support. Conditions are oversold, and we watch for a turn in stochastic momentum, but unless we see a sharp turnaround in market dynamics, rallies are to be sold

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Chris Weston, Head of Global Research at Pepperstone.

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