Differentials Drive USD Weakness, Equities Collapse

GBPUSD – technical overview

Setbacks have been very well supported and the market could be looking to carve out a fresh higher low at 1.5350 in favour of the next major upside extension back towards and above the recent 2015 high at 1.5930. Look for a close above 1.5690 on Friday to confirm and accelerate gains. At this point, only back below 1.5350 would negate the constructive outlook and compromise the constructive outlook.

• R2 1.5750 – Mid-Figure – Medium
• R1 1.5717 – 18Aug high – Strong
• S1 1.5562 – 18Aug low  – Medium
• S2 1.5425 – 7Jul low  – Strong

GBPUSD – fundamental overview

The Pound continues to hold up well on the back of the growing expectation the Fed will hold off from raising rates in September. Earlier this week, the UK currency found some bids of its own on a hotter inflation release, but Thursday’s softer retail sales was not well received and pushes back the BOE rate hike timeline as well. Yet with broad based US Dollar weakness driving most of the flows at the moment, there is risk for additional upside in this major pair towards the recent 2015 peak at 1.5930. Looking ahead, UK public finances and public sector net borrowing are due, followed by US manufacturing PMIs. For the most part, Friday’s price action will likely be driven off the fallout from Thursday’s collapse in US equity markets.

USDJPY – technical overview

The rally has been well capped around 125.00 and ahead of the critical multi-year peak from June at 125.85. Though the broader uptrend remains firmly intact, longer-term studies are well overbought and warn of some form of a more meaningful correction before any bullish trend resumption beyond 125.85. As such, look for the latest topside failure to trigger deeper setbacks towards 120.00 in the days ahead. A daily close below 123.00 on Friday will strengthen the bearish outlook. Ultimately, only a daily close back above 125.85 would force a shift in the outlook.

• R2 124.63 – 13Aug high – Strong
• R1 124.15 – 20Aug high – Medium
• S1 122.98 – 21Aug low – Medium
• S2 122.46 – 10Jun low – Medium

USDJPY – fundamental overview

Price action in this market has been all about scaled back Fed liftoff bets and a collapse in US equities. Yield differentials have shifted out of the US Dollar’s favour and the Yen is benefitting from the flows. The aggressive liquidation in stocks is also inviting renewed Yen demand, with market participants exiting higher yielding investments funded through the Japanese currency. Dealers cite stops below 123.00, with offers now emerging into rallies. Solid PMIs out of Japan and a poor PMI print in China are only contributing to further downside pressure in early Friday trade. Looking ahead, Friday’s price action will be driven off global macro sentiment and reaction to the latest equity slide. We also get some second tier data out of the US in the form of manufacturing PMIs.

EURCHF – technical overview

The market looks to be in the process of carving a meaningful base since taking out key multi-day range resistance at 1.0575 several days back. This has opened the latest break above the February peak at 1.0815 which now exposes fresh upside towards psychological barriers at 1.1000 further up. At this point, daily studies are however a little stretched, so we are seeing a bit of a short-term retreat to allow for these studies to unwind. But any setbacks should be well supported ahead of 1.0575.

• R2 1.0962 – 12Aug high – Strong
• R1 1.0850 – 18Aug high – Medium
• S1 1.0690 – 27Jul high – Strong
• S2 1.0575 – Previous Resistance – Medium

EURCHF – fundamental overview

The SNB has unquestionably benefitted from some razor thin summer trade, with the Franc selling off to more comfortable levels for the Swiss central bank. However, the Franc selling has stalled out over the past few sessions and there are signs of renewed safe haven demand as equities collapse, China uncertainty intensifies and worry over the outlook for Greece works its way back into the equation. It is actually impressive the Franc was able to close lower against the Euro on Thursday in the face of the broader risk liquidation. But if this risk liquidation intensifies, it could spell trouble for the SNB. Overall, with the SNB balance sheet ballooning to around 85% of GDP, it is unlikely there is a lot left in the tank for future interventions.

AUDUSD – technical overview

While the downtrend remains firmly intact, with the market breaking to yet another multi-year low in the previous week, there is risk for a period of consolidation in the days ahead to allow for some stretched studies to unwind before any meaningful bearish resumption. Still, rallies are expected to be well capped and look for any corrective gains to stall out ahead of 0.7700.

• R2 0.7440 – 11Aug high – Strong
• R1 0.7409 – 13Aug high – Strong
• S1 0.7285 – 20Aug low – Strong
• S2 0.7215 – 12Aug/2015 low – Medium

AUDUSD – fundamental overview

The Australian Dollar isn’t too sure which way to break this week, with the currency tempted to move in both directions. Broad based USD selling on the back of scaled back Fed liftoff bets has been helping to keep the currency supported, while a downturn in global sentiment on deteriorating fundamentals in China has put a solid cap on gains. A softer PMI print out of China early Friday has only added to the downside pressure in risk assets. Looking ahead, the market will continue to digest these latest developments, while monitoring the price action in broader FX and risk assets for directional insight. The economic calendar for Friday is quite light, with some second tier US manufacturing PMIs the only standout.

USDCAD – technical overview

The market is locked within a well defined uptrend, recently pushing to fresh 11-year highs. However, with daily studies now unwinding from overbought territory, there is risk for some form of a more meaningful corrective pullback towards support at 1.2861 in the sessions ahead to allow for these stretched studies to unwind. Ultimately however, any corrective declines should be well supported ahead of 1.2600, with a higher low sought out in favour of a bullish continuation.

• R2 1.3214 – 5Aug/2015 high – Strong
• R1 1.3178 – 19Aug high – Medium
• S1 1.3025 – 19Aug low – Medium
• S2 1.2952 – 12Aug low– Strong

USDCAD – fundamental overview

Yield differentials have moved out of the US Dollar’s favour in the aftermath of a more dovish FOMC Minutes this week, though the Canadian Dollar has not been able to put in a meaningful recovery rally, with collapsing OIL prices holding it back.  The slide in OIL to fresh 6 year lows is a major drag on the Canadian economy and increases the chance for another Bank of Canada rate cut. Looking ahead, what happens to OIL on Friday will play major role in direction, while US Dollar sentiment in the face of an acceleration in equity market declines will also influence. Of course, market participants will also need to make sure they don’t forget about the biggest economic releases on Friday which feature Canada CPI and retail sales.

NZDUSD – technical overview

Daily studies are in the process of unwinding from oversold off fresh multi-year lows and there is risk for additional consolidation in the sessions ahead to allow for these studies to further unwind before the market considers a legitimate bearish continuation below 0.6500. Still, any rallies should be well capped ahead of 0.7000 in favour of the existing downtrend.

• R2 0.6739 – 29Jul high– Medium
• R1 0.6673 – 31Jul high– Medium
• S1 0.6514 – 14Aug low – Strong
• S2 0.6468 – 12Aug/2015 low – Strong

NZDUSD – fundamental overview

Some welcome relief for the New Zealand Dollar this week, with the currency finally finding a few things to prop it up. This week’s solid GDT auction result and not as soft PPI data have contributed to Kiwi’s recovery, while the currency is also now benefitting on the yield differential front after the FOMC Minutes came in more dovish than expected. This has opened some broad based profit taking on USD longs which could invite additional Kiwi upside in the sessions ahead. Still, overall, with risk sentiment starting to falter, global equities on the slide and China uncertainty hanging in the balance, any rallies are expected to be met with good offers from medium-term players. Softer New Zealand inflation and consumer confidence readings are also a reminder that the RBNZ will most likely be preparing for more rate cuts at upcoming meetings.

US SPX 500 – technical overview

Thursday’s breakdown below the 2040 March low is a significant development and strengthens the case for the formation of major top in this market off the record high from May. Look for a close below 2040 on Friday to confirm the outlook and open the door for an acceleration of declines towards a measured move extension into the 1950 area. Any rallies are now expected to be well capped ahead of 2100.

• R2 2108.00 – 18Aug high – Strong
• R1 2082.00 – 20Aug high – Medium
• S1 2000.00 – Psychological – Strong
• S2 1950.00 – Measured Move – Strong

US SPX 500 – fundamental overview

The stock market has been increasingly vulnerable these past several weeks, with many participants finally pricing in the end of Fed accommodation and the beginning of a new era of monetary policy tightening. The most bearish development for the market came on Wednesday, when investors failed to find any confidence in a more dovish FOMC Minutes which resulted in a scaled back expectation for Fed liftoff. Accommodative Fed policy has driven stocks to record highs and investors have been quick to add to positions at any sign of dovishness from the Fed over the past several years. As such, inability to rally on Wednesday’s dovish Minutes has resulted in a wave of profit taking.

GOLD (SPOT) – technical overview

Finally signs of a potential base since breaking down to fresh multi-year lows below 1100. The latest break and close back above the previous 2015 base at 1142 strengthens the recovery outlook and could open the door for additional upside towards 1233 over the coming days. Look for any setbacks to now be well supported on dips ahead of 1100. Only a daily close below 1100 negates and puts the pressure back on the downside.

• R2 1188.00 – 29Jun high – Strong
• R1 1175.00 – 6Jul high – Medium
• S1 1132.00 – 20Aug low – Medium
• S2 1110.00 – 18Aug low – Strong

GOLD (SPOT) – fundamental overview

GOLD continues to mount an impressive recovery out from recent multi-year lows below $1100. The metal managed to extend gains this week on a combination of a more dovish than expected FOMC Minutes, which fueled broad based selling in the US Dollar, and a pickup in safe haven demand with risk assets rolling over. The threat of risk associated with China (and now Greece) and the deterioration in emerging markets has finally invited renewed demand for the beaten down yellow metal.

Feature – technical overview

USDTRY remains locked in a well defined uptrend, with the market breaking to fresh record highs beyond 3.0000. However, at this point, with technical readings through the roof, additional upside should be limited. Daily, weekly and monthly RSI readings are tracking in severe overbought territory, in need of some form of decent corrective pullback before a bullish trend resumption. Look for Thursday’s bearish close off record highs to potentially act as the catalyst for the correction.

• R2 3.1000 – Psychological – Medium
• R1 3.0030 – 20Aug/Record – Strong
• S1 2.8660 – 18Aug low – Medium
• S2 2.7610 – 11Aug low – Strong

Feature – fundamental overview

While the more dovish than expected FOMC Minutes may have stalled the depreciation in the Lira for the moment, the currency is going to need a lot more help right now to recover from record lows. Even though the Fed Minutes were more dovish, the Fed is still moving towards a rate hike this year and that hike could still very well come in September. The Lira is contending with a toxic combination of variables which on top of the Fed policy divergence theme include a broken down Turkish government, and already tight CBRT policy that is strangling the local economy.