A New Era for Central Bank Policy

Today’s report: A New Era for Central Bank Policy

The US Dollar has been getting knocked around over the past week or so, with the Buck extending recent declines ahead of next week's highly anticipated FOMC rate decision. A wave of less dovish central bank decisions has been influencing price action, and attention now shifts to today’s SNB and BOE moves.

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Wake-up call

Chart talk: Major markets technical overview video

Chart talk: Technical & fundamental highlights

EURUSD – technical overview

An intense round of declines in the major pair finally bottomed out, with the market trading just shy of the critical March, multi year low at 1.0460, before reversing sharply in the previous week. However, despite the wild upswing, the broader downtrend remains firmly intact, and the market should now look to carve out the next lower top ahead of a bearish continuation back towards the March low. Still, this latest push through 1.10000 does leave open the possibility for a fresh upside extension towards the 1.1200 area before the market finally stalls and heads lower again. Back below 1.0796 will officially put the pressure back on the downside.

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  • R2 1.1140 – 23Oct high – Strong
  • R1 1.1043 – 9Dec high – Medium
  • S1 1.0981 – 3Dec high – Medium
  • S2 1.0879 – 9Dec low – Strong

EURUSD – fundamental overview

A fresh wave of risk off trade has been attributed as the primary driver behind the latest surge in the Euro through its post-ECB 1.0981 high. ECB Nowotny was also out on the wires contributing to the rally, after saying market expectations for substantial stimulus from the ECB were unrealistic. The Euro rally has gained momentum, with market participants looking to potentially square up on short positions into next week’s highly anticipated Fed rate decision, where many believe the Euro could see more upside, if the Fed delivers the dovish rate hike the market has come to expect. Looking ahead, ECB’s Liikanen and Coeure are slated to speak, while in the US, we get import prices and initial jobless claims.

GBPUSD – technical overview

The market continues to show signs of topping off the 2015 peak at 1.5930, putting in a series of lower tops. The latest topside failure has stalled ahead of 1.5400 with a fresh lower top now confirmed at 1.5336, following the break to fresh multi-day lows below 1.5027. This has set up the next major downside extension towards medium-term support in the form of the 2015 low at 1.4566. At this point, look for intraday rallies to be well capped ahead of 1.5336, while only back above would compromise the immediate bearish structure.

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  • R2 1.5265 – 13Dec high – Strong
  • R1 1.5200 – Figure – Medium
  • S1 1.5061 – 8Dec high  – Medium
  • S2 1.4957 – 8Dec low  – Strong

GBPUSD – fundamental overview

The Pound has been a prime beneficiary of a combination of positive drivers over the past 24 hours, which include a surging Euro, profit taking ahead of today’s Bank of England policy decision, and squaring up into next week’s highly anticipated FOMC rate decision. Looking at today’s BOE, the expectation is for the central bank to remain on hold, with an 8-1 vote, and the statement will therefore likely be the primary driver of price action. Heading into the decision, recent BOE commentary and softer data suggest the BOE will err on the dovish side, though there has been a pattern in the market over the past week and a half of consistently less dovish than expected central bank rate decisions, which could also be adding to a bit of the Cable bid ahead of the risk. Also out on Thursday are UK trade data, US initial jobless claims and US import prices.

USDJPY – technical overview

A period of multi-day consolidation between 123.75 and 122.20 has finally been broken, with the market dropping below range support at 122.20 to open an acceleration to the downside. Deeper setbacks are now projected towards 120.00 in the sessions ahead, with any rallies expected to be well capped on a daily close basis, below previous support turned resistance at 122.20. Ultimately, only back above 123.76 puts the focus back on the topside.

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  • R2 123.05 – 9Dec high – Medium
  • R1 122.23 – 16Nov low – Strong
  • S1 121.08 – 9Dec low – Medium
  • S2 120.00 – Psychological – Medium

USDJPY – fundamental overview

The downside pressure in risk assets on Wednesday proved too much for this major pair to ignore, with the Yen benefitting as a primary beneficiary from the flow and rallying through key multi-day range resistance (USDJPY lower). The markets have grown increasingly uneasy with a round of less dovish central bank rate decisions over the past several days, as this sends a message that an era of crutch supporting, ultra accommodative monetary policy could be coming to an end. It also seems many participants are looking ahead to the Fed and squaring up on US Dollar longs on the expectation the Fed will deliver a dovish hike. Looking ahead, US initial jobless claims and import prices are the key standouts on the calendar.

EURCHF – technical overview

The market has entered a period of multi-week consolidation following an impressive recovery earlier in the year. At this point, the recovery structure remains intact, with only a break back below 1.0714 to compromise. As such, look for setbacks to continue to be well supported ahead of 1.0714 in favour of the next major upside extension through 1.1050 and towards 1.1200 further up.

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  • R2 1.1050 – 11Sep high – Strong
  • R1 1.0950 – 13Oct high – Medium
  • S1 1.0755 – 12Nov low – Medium
  • S2 1.0714 – 19Aug low – Strong

EURCHF – fundamental overview

The SNB has been able to breathe out a bit in the aftermath of last week’s ECB let down, after the central bank underdelivered with its latest round of easing measures. This opened a massive surge in the Euro, alleviating some of the pressure on the SNB to defend against unwanted Franc appreciation from Euro weakness. Still, the consequence of this latest move has been the initiation of a bout of risk off flow in the market, which in turn has also acted as a weight on the risk correlated EURCHF rate. This is something that could be a concern to the SNB going forward, particularly if the Euro rally fades and risk off price action intensifies. Attention now turns to today’s SNB policy decision, where the central bank is unlikely to make any major changes to policy, in light of the latest ECB decision. Still, given the SNB’s mandate, changes should not be ruled out and it will be worth keeping an eye on the Franc.

AUDUSD – technical overview

The market continues to show signs of topping out in favour of a resumption of the broader underlying downtrend, with a fresh medium-term lower top sought out at the recent 0.7385 high. Any rallies are therefore classified as corrective and should continue to be well capped ahead of 0.7385, with deeper setbacks projected in the sessions ahead back towards the recent multi-year base just shy of 0.6900. At this point, only a daily close back above 0.7385 would undermine the bearish structure.

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  • R2 0.7385 – 4Dec high – Strong
  • R1 0.7334 – 10Dec high – Medium
  • S1 0.7221 – 10Dec low – Medium
  • S2 0.7172 – 9Dec low – Strong

AUDUSD – fundamental overview

More aggressive calls for an RBA rate rise next year from a couple of major investment houses were emboldened earlier today, with the release of  stellar employment report out of Australia. Aussie gains have been somewhat tempered by ongoing Yuan devaluation and a bout of risk off trade, though the currency is a good deal higher on the day in early Thursday trade. The market will continue to monitor risk flows for the remainder of the day, while also taking in US data in the form of initial jobless claims and import prices. Despite the recent bid, dealers do cite formidable offers up towards 0.7400.

USDCAD – technical overview

The strong uptrend remains well intact, with the market taking out the previous 11-year peak from September, and surging to fresh multi-year highs through the major psychological barrier at 1.3500. The bullish break is a significant medium-term development and could now open the door for the next upside extension exposing 1.4000 in the weeks ahead. Any corrective setbacks should be well supported ahead of 1.3000, while ultimately, only back below 1.2800 would compromise the constructive structure.

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  • R2 1.3700 – Figure – Medium
  • R1 1.3623 – 8Dec/2015 high – Strong
  • S1 1.3496 – 8Dec low – Medium
  • S2 1.3457 – Previous Peak – Strong

USDCAD – fundamental overview

Despite further broad based declines in the US Dollar on Wednesday, the Canadian Dollar still managed to remain weighed down near recent 11-year lows, with the Loonie underperforming against its peers. The Canadian Dollar is one of the weakest currencies over the past 5 days, with the currency getting hit on softer economic data and ongoing weakness in OIL prices. Talk of position squaring into next week’s FOMC rate decision could be helping the Loonie a bit, though the currency will likely need a major bounce in OIL prices to inspire any form of a meaningful recovery into the end of the week. Looking ahead, Canada capacity utilization and the house price index are due, along with US initial jobless claims and import prices.

NZDUSD – technical overview

Any rallies continue to be very well capped, with the market confined to a broader downtrend. From here, look for the formation of a meaningful lower top at 0.6893, in favour of an acceleration to the downside and bearish resumption to fresh multi-year lows. Ultimately, only a daily close above 0.6893 will negate and potentially force a shift in the structure.

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  • R2 0.6893 – 16Oct high– Strong
  • R1 0.6788 – 4Dec high– Medium
  • S1 0.6700 – Figure – Medium
  • S2 0.6571 – 9Dec low – Strong

NZDUSD – fundamental overview

An exciting early Thursday session for the New Zealand Dollar, which saw whipsaw trade on the back of a less than straightforward RBNZ rate decision. While the central bank went ahead and cut rates by 25bps to 2.50%, it also struck an upbeat chord, suggesting this would be it as far as its easing cycle was concerned. Comments to talk down recent Kiwi strength may have helped to cap gains into the rally, while a bout of risk off trade this week and ongoing weakness in commodities has also prevented the currency from running too far. Looking ahead, US initial jobless claims and import prices are due, though broader risk flows will likely dictate direction for the remainder of the day.

US SPX 500 – technical overview

Signs of potential exhaustion following an impressive recovery rally off the August lows. The market has stalled out above 2100, shy of the 2137 record peak from earlier this year, with the latest break back below 2040 strengthening the case for some form of a lower top and additional setbacks ahead. Look for a daily close below 2003 to confirm and accelerate, while only back above 2117 negates and exposes a direct retest of the record high.

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  • R2 2117.00 – 3Nov high – Strong
  • R1 2097.00 – 3Dec high – Medium
  • S1 2035.00 – 9Dec low – Medium
  • S2 2003.00 – 16Nov low – Strong

US SPX 500 – fundamental overview

A round of across the board less dovish than expected central bank policy decisions could perhaps be sending a message to stock market participants that an era of ultra loose monetary policy accommodation is coming to an end. To this point, stocks haven’t been too worried about the prospect of higher rates in the US, which should be an equity bearish development, in light of the removal of policy that incentivizes investment in risk assets. But, market participants could now finally be waking up to the fact that central banks are no longer willing or able to support policies fueling dangerous bubbles, undermining recovery prospects. The economic calendar on Thursday is exceptionally thin and this may leave the market thinking more about next week’s major event risk, in the form of the FOMC policy decision.

GOLD (SPOT) – technical overview

Signs of a potential base off fresh multi-year lows in the previous week, with a stretched market finally deferring to an overdue, healthy recovery. While the broader downtrend remains intact for the moment, a break and daily close back above 1100 will do a good job of alleiviating immediate downside pressure, opening the door for a more meaningful recovery. However, inability to establish above 1100 could open a fresh drop below 1046 and towards the major psychological barrier at 1000.

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  • R2 1112.00 – 5Nov high – Strong
  • R1 1098.00 – 16Nov high – Medium
  • S1 1046.00 – 3Dec/2015 low – Medium
  • S2 1000.00 – Psychological – Very Strong

GOLD (SPOT) – fundamental overview

Despite the US Dollar in strong demand as the Fed prepares for liftoff, GOLD is finding formidable support into this latest dip, given the struggling global economy and uncertainty in the air, particularly now that accommodative central bank policies are so extended and additional stimulatory options are limited. Longer term macro players have also been accumulating the metal as a hedge against an overinflated equity market that could be on the verge of a major capitulation. This has helped GOLD stay somewhat supported, despite broader weakness in the commodity sector. Dealers now cite sell-stops below 1040 and buy stops above 1100.

Feature – technical overview

USDZAR has broken to yet another fresh record high, with the market taking out the previous peak, opening the door for the next major upside extension. From here, look for the rally to extend towards psychological barriers at 15.5000 in the sessions ahead, while any setbacks should be very well supported ahead of 13.8920. Ultimately however, only back below 13.0120 would negate the highly constructive outlook.

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  • R2 15.5000 – Psychological – Strong
  • R1 15.0590 –9Dec/Record – Strong
  • S1 13.8920 – 20Nov low – Medium
  • S2 13.8620 – 5Nov low – Strong

Feature – fundamental overview

When your currency is already making record lows, it’s never helpful to sack your finance minister, which is exactly what President Zuma did on Wednesday. The news caught markets off guard and easily offset any positives from the better than expected South Africa retail sales showing and as expected inflation readings. This, along with a fresh wave of liquidation in global equities, triggered a surge in USDZAR through major psychological barriers at 15.00. USDZAR already posted a fresh record high earlier in the week on news from the SARB that South Africans were moving assets out of the country at the fastest rate ever. Clearly, it’s going to take a lot more from the SARB and local economy if the currency wants to truly avoid further record low declines. The combination of rising South African inflation, a struggling economy, declining commodities prices, rating agency downgrades and Federal Reserve on the verge of raising rates, is not a pretty combination for the Rand, and this should continue to pressure the emerging market currency.

Peformance chart: Five day performance v. US dollar

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