1. USDCNY

USD bulls have taken a break over the summer, with the Dollar giving back some of the massive gains that it has recorded. The weakest currencies of the current cycle have been Developed Market (DM) currencies, such as the EUR, GBP, and JPY. 

All three have rallied against the USD over the summer after a very wobbly June and July, especially for the EUR and JPY which were making new multi-year lows against the Dollar.

Together with the broad rally in US and European equities, the weaker Dollar has contributed to a slightly more optimistic mood in the market, especially as the rally has caught many traders off guard, leaving many of them chasing markets higher.

However, USD weakness has, very curiously, not spread to the Chinese Yuan (USDCNY).

Instead of rallying against the USD, the CNY has been weakening against it, and is hovering around the top end of its recent range, threatening to break out in a bearish manner.

Why is this important?

Quite simply, when global markets first began their sell off in April of this year, CNY was front and center of it, as it tends to be under such circumstances.

This stems from the fact that China, due to the sheer size and structure of its economy, is a key purchaser of raw materials, and a key exporter of products manufactured from them. Its economy is therefore sensitive to changes in global trade; and changes in its economy also severely affect global trade.     

Consequently, when USDCNY wobbles, it speaks to big problems in global trade and the global economy, contributing to problems in global Dollar funding markets.

In short, if CNY keeps weakening against the USD, expect broader sell offs in risk assets to follow.

Charts of the CNY, as well as other macro markets, can be found in our Macro Edge reports.

2. EEM

Similar to how CNY weakness acts as a leading indicator of the future direction of the global economy and markets, Emerging Market (EM) stocks can, on occasion, do the same.

This comes down to the same concept behind CNY’s importance as an indicator – that change happens at the margins before moving to the core.

In other words, global economic weakness, and hence selloffs, tend to show up first in EMs, before moving on to hit DMs. If you are interested in learning more about this phenomena, and how it fits into a broader global macro trading strategy, check out our course on how to trade global macro.

In the current global macro cycle, EEM topped out in late February 2021, while SPY topped out in January 2022 – almost a full year’s difference!

That being said, EEM has not participated in the broader rally in equities (and ETFs), and continues to languish in a range near its recent lows.

Should it break below this range, expect more sell offs in other markets, especially DM equities, and vice versa.

Charts of EEM and other ETFs can be found in our ETF Edge reports.

3. USTs

Finally, the last market to keep an eye on is the ever important US Treasury (UST) market.

The crucial piece of information in relation to USTs is that even as the Fed has been hiking rates and making all sorts of hawkish noises, long US yields (10y and 30y) have been tumbling. 

Yields in both the US 10y and 30y recently broke below key support levels, around 2.71% for the 10y, and 3% for the 30y. At the same time, the US yield curve has fallen deeper into inversion, and across multiple points.

The bond market is very clearly shouting, for anyone who cares to listen, that current levels of economic growth cannot support higher yields.

From a trading standpoint, watch for UST yields to continue falling past the recent lows they made after breaking key support. Charts of the 10y, 30y, and US yield curve are included in the Macro Edge.

If you are more comfortable tracking USTs using ETFs, keep an eye on TLT, and if it can make a decisive break out its range over the last few months (charts in ETF Edge).

Keep a close eye on what these 3 markets are doing, especially if they all move together.

If CNY weakens against the USD, EEM breaks out to the downside, and UST yields keep falling, expect heavy sell offs to hit global markets.

If CNY strengthens against the Dollar, EEM breaks out to the upside, and UST yields head higher again, expect the summer rally to continue for a while.