Special report: Fed Policy, Stocks and Bubbles
Next 24 hours: GBP Whips Around But FX Mostly Quiet
Today’s report: Pounded from All Sides
It hasn't been a great 24 hours for the Pound, with the UK currency underperforming on the back of dovish Carney comments, reports of shaky talks between the PM and DUP and a fresh wave of US Dollar demand as Fed speak continues to back up last week's more hawkish Fed decision.
Wake-up call
Chart talk: Major markets technical overview video
- ECB outlook
- Queen’s Speech
- Sentiment deterioration
- EURCHF Big battle could be coming for SNB
- macro themes
- glut fears
- RBNZ decision
- Fed speak
- Global uncertainty
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- The Appeal of High-Yield Bonds, R. Smith, Financial Times (June 20, 2017)
- How to Wind Down $4 Trillion, J. Hussman, Hussman Funds (June 18, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market is showing signs of short-term exhaustion after extending its 2017 run. But with the medium-term structure still quite bullish, any setbacks that we do see in the sessions ahead should ideally be well supported in favour of the next higher low and bullish continuation towards key resistance around 1.1365, which represents the August 2016 peak. While above 1.1110 on a daily close basis, the outlook favours a more immediate continuation of gains. However, a daily close below 1.1110 would open the door for a deeper correction targeting a measured move extension at 1.0925.
EURUSD – fundamental overview
Although the Euro managed to post a fresh 2017 high last week it wasn’t able to extend gains much further before settling back. The big story here has been the shifting outlook over at the Fed, now seemingly less data dependent, with the central bank committed to moving forward with policy normalization despite a data slowdown and subdued inflation. All of this has been backed up by Fed speak this week, while on the other side, a combination of dovish ECB speak and chatter the ECB may not be moving as quickly on tapering, hasn’t done anything to help the Euro’s cause. Still, with nothing confirmed as of yet, the trend of selling the US Dollar and buying the Euro remains well intact in 2017 and demand is expected to emerge into dips. As far as today goes, absence of first tier data in the zone leaves the focus on US existing home sales.
GBPUSD – technical overview
The latest round of setbacks are viewed as corrective with the market expected to be very well supported on dips ahead of 1.2400 in favour of a higher low and bullish continuation towards a measured move extension objective at 1.3500 in the weeks ahead. A breakout above critical resistance at 1.2775 back in April triggered a structural shift in the major pair warning of a longer-term base. Only a break back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
It hasn't been a great 24 hours for the Pound, with the UK currency underperforming on the back of dovish Carney comments, reports of shaky talks between the PM and DUP and a fresh wave of US Dollar demand as Fed speak continues to back up last week's more hawkish Fed decision. The market will continue to focus on the political developments and Brexit negotiation headlines, but will also need to contend with the Queen’s Speech, a BOE Haldane appearance, the Financial Policy Committee meeting and UK public finance data. Later in the day, US existing home sales are due.
USDJPY – technical overview
Despite the latest recovery rally, the overall pressure remains on the downside. In the interim, look for any additional upside to remain capped below 113.00, though only a break back above the recent high at 114.37 will negate the outlook and take the pressure off the downside.
USDJPY – fundamental overview
Last week’s Bank of Japan policy meeting went off without a hitch, with no change to policy and no meaningful changes to the policy statement. And so, the market has been left with the combination of a more hawkish Fed decision and an ongoing bid in US equities, two drivers that have been very supportive of the major pair. Of course, scope exists for renewed Yen demand if risk markets become more sensitive to the reality of the dangers associated with stocks if the Fed actually does follow through. Looking ahead, US existing home sales are the only notable standout.
EURCHF – technical overview
A recent break above 1.0900 has taken the short-term pressure off the downside and could be warning of a more significant structural shift. Next key resistance comes in at 1.1000, with the psychological barrier coinciding with a high from August 2016. The establishment above 1.1000 would force a meaningful shift in the structure and open the door for longer-term upside. At the same time, while the market holds below 1.1000 the overall trend is still bearish and a break back below 1.0800 would renew downside pressure.
EURCHF – fundamental overview
The combination of artificially supported, record high US equities and rising geopolitical tension should be a worry for the SNB as any capitulation on the equity front is likely to invite massive safe haven Franc demand the central bank will be unable to offset, irrespective of the central bank’s commitment to negative rate policy as reflected in this latest policy decision. For now, the SNB is hoping global sentiment will remain artificially elevated and the ECB will take on a more hawkish policy approach in the months ahead. But the key focus for this market going forward will unquestionably be on the performance in US equities given the influence on broader sentiment. Any signs of intensification to the downside will likely invite a pickup in Franc demand and unwanted downside pressure on EURCHF. Certainly the message from the Fed in which it refused to back away from forward guidance will only make the SNB’s job that much tougher.
AUDUSD – technical overview
Despite the latest rally,the market continues to be very well capped into medium-term resistance around 0.7800. Ultimately, any moves to the topside are therefore classified as corrective with the market expected to stall out and roll over again. Look for a break back below 0.7500 to strengthen this outlook and accelerate declines.
AUDUSD – fundamental overview
Overall, the Australian Dollar has done a good job relative to its peers over the past week, helped along by local developments that include balanced RBA policy (once again reflected in this week’s Minutes), better than expected Australia GDP, solid China data and this latest impressive Aussie employment report. However, there are plenty of offers from medium-term players into this rally, with these accounts still feeling quite skeptical about the outlook for China, elevated equities and choppy commodities prices. Moreover, the Fed has just delivered a pivotal decision that could push yields significantly back in favour of the Buck, while also weighing on Aussie if risk comes off as a consequence. Looking ahead, the calendar is light, with only US existing home sales standing out.
USDCAD – technical overview
The latest round of setbacks has taken the pressure off the topside for now, with the market trading back into the middle of a longer-term range. The recent break below 1.3200 opens the door for the possibility of a more pronounced decline in the days ahead towards 1.3000. Ultimately however, the longer-term uptrend remains intact and setbacks should be well supported around the 1.3000 psychological barrier. Look for a break back above 1.3325 to strengthen the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar has put in an impressive recovery in 2017, helped along by surprisingly hawkish comments from Bank of Canada’s Wilkins and Poloz. The central bankers have been flagging a reconsideration of current policy stimulus and the prospect for a rate hike in the 2017 pipeline. Odds for a 2017 rate hike have jumped well above 50%, reflecting this shift in BoC sentiment, clearly benefiting the Loonie as a result. However, the Loonie has been finding renewed offers in light of last week’s Fed hawkishness and ongoing setbacks in the price of OIL, to 7 month lows on worry over a never ending global supply glut. Looking ahead, the Canada calendar is quiet, with only US existing home sales standing out in North America.
NZDUSD – technical overview
Despite the intense surge over the past several days, the overall pressure remains on the downside with the market expected to be very well capped around 0.7300. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high, with the outlook strengthened on the May breakdown to fresh 2017 lows. Only a clear break back above 0.7300 would compromise the outlook, while back below 0.7170 strengthens the bearish case.
NZDUSD – fundamental overview
An impressive Kiwi run over the past several days looks to be fizzling out as the combination of last week’s more hawkish Fed decision, softer Kiwi GDP, an RBNZ research paper postulating a continued decline in the neutral rate and a negative GDT auction result could start to invite medium-term players to look to sell into what might be an overdone rally. Certainly with the RBNZ policy decision due early Thursday, there is room for additional profit taking after a very healthy recovery rally from 2017 lows. As far as the Wednesday docket goes, only US existing home sales stand out.
US SPX 500 – technical overview
The record run continues with the intense bullish momentum intact and the door open for that next push towards a measured move extension at 2480. At a minimum, a break back below 2400 would be required to take the immediate pressure off the topside, while only a break below 2320 would signal a meaningful shift in the structure.
US SPX 500 – fundamental overview
There has been a lot of talk about a potential top in the US equity market, with the rally pushing to record highs at an unnerving pace in the face of some disturbing fundamentals including exhausted (and reversing) Fed policy and rising geopolitical risk. And certainly this ongoing turmoil surrounding the US administration has made things even more tense. But overall, the US equity market has done a good job proving it can easily buy back into any dip and keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on forward guidance. This bet will be put to the test in an even bigger way going forward, after the Fed surprisingly held to its forward guidance last week, still calling for another rate hike in 2017 despite a slowdown in data, something that could start to weigh more heavily on investor sentiment as Fed speak remains consistent with the decision.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016, putting in a series of higher lows and higher highs. This latest break to a fresh 2017 high confirms that next higher low in the 1215 area and opens an upside extension towards the 2016 peak at 1375 further up. At this point, only a break back below 1215 would compromise the constructive outlook with setbacks ideally seen well supported in the 1230s.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the US Dollar under pressure in 2017 is adding to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid, gold may continue to find bids on risk off macro implications.
Feature – technical overview
USDZAR has been under pressure in recent weeks, though setbacks have managed to stall ahead of the 2017 low thus far. Look for a break back above 13.21 to negate the bearish outlook and open the door for a bullish resumption.
Feature – fundamental overview
The South African Rand has done a good job holding up when considering ongoing domestic woes including a prosecutor report critical of the SARB, regulatory dispute between miners and the government, and a Moody’s downgrade. But it seems these troubling fundamentals coupled with last week’s more hawkish Fed decision are starting to get the better of the Rand, with the greater risk from here for renewed weakness. Remember, US equities are also exceptionally elevated and at risk for capitulation, yet another risk that could expose the emerging market currency to additional pressure. The local market is however focused back on news out of the South African Constitutional Court that it will announce a decision on holding a secret no confidence vote against Zuma. The last time this came up, the Rand rallied on hopes the vote would result in new leadership steering the economy in a better direction.