Rate Differentials, Risk Off Drive Early 2016 Flow

GBPUSD – technical overview

The latest break below 1.4895 has confirmed another lower top at 1.5240, within a very well defined downtrend off the 2015 high. This now opens the next major downside extension, exposing a retest of the 2015 low at 1.4566 in the days ahead. Any rallies should be very well capped ahead of 1.5000, while ultimately, only a break above 1.5250 would delay prospects for additional declines and compromise immediate downside pressure.

• R2 1.4835 – 31Dec high – Strong
• R1 1.4800 – Figure – Medium
• S1 1.4693 – 4Jan low  – Medium
• S2 1.4566 – 13Apr/2015 low  – Strong

GBPUSD – fundamental overview

Some hawkish weekend comments from Fed Vice Chair Fischer and Fed Mester, have kept the market thinking about the risk for 100bps of Fed hikes this year, with the yield differential theme not going anywhere and forcing the Pound to yet another fresh multi-day low against the Buck. The Pound has been a major underperformer in recent weeks on a repricing of BOE expectations, with softer UK data resulting in a scaling back of the BOE rate hike timeline. Meanwhile, increasing fear of a potential Brexit has also added to the downside pressure. Looking ahead, we get UK manufacturing PMIs, mortgage approvals and consumer credit, followed by US ISM manufacturing and construction spending. On the official circuit, Fed Williams is slated to speak late in the day.

USDJPY – technical overview

Rallies continue to be vey well capped, with risks are tilted to the downside. The latest break below 120.00 opes a fresh downside extension towards next medium-term support in the 118.00 area. At this point, only back above 123.76 would negate and force a shift in the structure.

• R2 120.65 – 3oDec high – Strong
• R1 120.46 – 4Jan high – Medium
• S1 119.00 – Figure – Medium
• S2 118.06 – 15Oct low – Strong

USDJPY – fundamental overview

The major pair is more concerned with a bout of risk off flow at the moment, with Monday’s drop in Asian equities opening the door for sell-stop hunting below 120.00. A downbeat China Caixin PMI print has been sourced as some of the driver behind the Yen demand, with elevated concern over the China growth outlook weighing on risk assets. Meanwhile, BOJ Governor Kuroda comments that the central bank will take further steps if necessary, haven’t done anything to cap Yen gains thus far. Hawkish weekend comments from Fed Vice Chair Fischer and Fed Mester have been supporting the broader US Dollar market but have perhaps also been weighing on this pair despite the favourable USD yield differentials, with the negative risk implication of higher US rates putting more pressure on risk assets and thereby, fueling additional Yen demand. Looking ahead, we get US ISM manufacturing and construction spending. On the official circuit, Fed Williams is slated to speak late in the day.

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.

• 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 was able to find a little relief in December, following a less dovish ECB meeting, allowing the SNB to hold steady and avoid a deeper push into negative interest rate territory. Still, the SNB will need to be careful of risk off flow into 2016, with higher rates in the US to potentially act as a disincentive to be long risk, which in turn, could weigh on EURCHF. This in conjunction with any Euro weakness could prove to be a double headed dragon the SNB will have a very difficult time battling. Dealers cite major sell-stops below 1.0700.

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.

• R2 0.7327 – 31Dec high – Strong
• R1 0.7301 – 4Jan high – Medium
• S1 0.7208 – 4Jan low – Medium
• S2 0.7181 – 22Dec low – Strong

AUDUSD – fundamental overview

The Australian Dollar hasn’t been able to ignore a wave of risk liquidation in early 2016, with elevated concern over the China outlook fueling a good portion of the downturn in stocks. The latest disappointing China Caixin PMI showing is rattling investor confidence and in turn weighing on the correlated Australian Dollar. Softer Aussie manufacturing readings early Monday have also contributed to Aussie downside pressure. Meanwhile, some hawkish weekend comments from Fed Vice Chair Fischer and Fed Mester are supporting the US Dollar, with the comments reminding investors of the potential for a more aggressive path to Fed policy normalisation in 2016. Looking ahead, we get US ISM manufacturing and construction spending. On the official circuit, Fed Williams is slated to speak late in the day.

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 at 1.4001 thus far, just shy of the 2004 peak of 1.4007. Technical studies are however in the process of unwinding a bit from severe overbought territory, and there is risk for additional corrective weakness in the sessions ahead before the uptrend reasserts. Still, any setbacks should be very well supported ahead of 1.3400, while ultimately, only back below 1.3000 would compromise the constructive structure.

• R2 1.4001 – 18Dec/2015 high – Strong
• R1 1.3940 – 29Dec high – Medium
• S1 1.3778 – 17Dec low – Medium
• S2 1.3673 – 15Dec low – Strong

USDCAD – fundamental overview

A modest recovery in the price of OIL has helped stabilise the price of the Canadian Dollar in recent sessions, though the Loonie remains pressured near recent 11-year lows as risk off flow and yield differentials with the US Dollar keep the currency weighed down. Softer China data and hawkish Fed comments from Vice Chair Fischer and Mester have pushed USDCAD back above 1.3900 in early Monday trade, with the market closing on a retest of the recent peak at 1.4001. Looking ahead, we get Canada manufacturing PMIs, US ISM manufacturing and construction spending. On the official circuit, Fed Williams is slated to speak late in the day.

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 in the 0.6900 area, in favour of an acceleration to the downside and bearish resumption to fresh multi-year lows. Ultimately, only a daily close above 0.6900 will negate and potentially force a shift in the structure.

• R2 0.6893 – 16Oct high– Strong
• R1 0.6835 – 4Jan high– Medium
• S1 0.6721 – 21Dec low – Medium
• S2 0.6681 – 18Dec low – Strong

NZDUSD – fundamental overview

A rally in the New Zealand Dollar in the final days of December is getting exposed into the new year, with medium-term players taking advantage of the push towards 0.6900 to aggressively sell on bearish macro themes. A combination of a worrying China outlook, liquidation in risk assets, expectations for a more aggressive rate hike cycle from the Fed, and thinner trade on a New Zealand public holiday, have all been fueling Kiwi’s intensified round of selling on Monday. On the domestic front, inflation is still subdued, while the dairy sector continues to face headwinds, despite a modest recovery in recent months. Looking ahead, we get US ISM manufacturing and construction spending. On the official circuit, Fed Williams is slated to speak late in the day.

US SPX 500 – technical overview

Signs of exhaustion following an impressive multi-year rally to a fresh record high in 2015. The market has finally stalled out at 2137, with the recent break back below 2000 strengthening the case for the formation of a major top. Look for this bearish price action to pave the way for the next downside extension towards medium-term support in the 1870 area. Any rallies should be well capped below 2100, while ultimately, only back above 2117 negates.

• R2 2117.00 – 3Nov high – Strong
• R1 2083.00 – 29Dec high – Medium
• S1 2017.00 – 22Dec low – Medium
• S2 1993.00 – 14Dec low – Strong

US SPX 500 – fundamental overview

It seems reality is finally setting in for stock market participants into 2016, with any bullishness from the Fed’s confidence in initiating liftoff, offset by harsher realities. The fact that the Fed will be looking to raise rates four times this year should be somewhat concerning to a market that has been supported to record highs over the past several years on near zero interest rate policy. This in conjunction with broader weakness in commodities, stress in the high yield market and a still struggling global economy make for a policy divergence that could ultimately be a most unwelcome development for risk assets in 2016. The latest disappointing China PMI results only add to downside pressure in the early week. Looking ahead, we get US ISM manufacturing and construction spending. On the official circuit, Fed Williams is slated to speak late in the day.

GOLD (SPOT) – technical overview

The market hovers just over the recent multi-year at 1046, with a break below to end a period of bearish consolidation, opening the door for the next major downside extension to critical psychological barriers at 1000. However, there are signs of a potential bottom carving out, though a push back above 1100 would be required to strengthen this outlook and force a shift in the structure.

• 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 favourable US Dollar fundamentals as the Fed finally initiates liftoff, GOLD is finding formidable support into this latest dip, given the struggling global economy and uncertainty in the air, particularly now that Fed is reversing course and other central banks are fully extended with accommodative measures. Longer term macro players have been accumulating the metal as a hedge against an overinflated equity market that could be on the verge of major capitulation, while increased risks to the China outlook is also factoring. Dealers cite major buy stops above $1100.

Feature – technical overview

USDMXN has recently broken to yet another fresh record high, with the market taking out the previous peak from September. Daily studies are however looking at little stretched at record levels, which could warn of limited upside or a potential correction before any meaningful bullish resumption. Still, setbacks should be very well supported ahead of previous resistance in the 16.9000 area, while only back below 16.3270 would compromise the highly constructive outlook.

• R2 17.5000 – Psychological – Strong
• R1 17.4680 –14Dec/Record – Strong
• S1 16.9000 – 16Dec low – Medium
• S2 16.3270 – 15Oct low – Strong

Feature – fundamental overview

Unlike the Fed, the December move by Mexico’s central bank to raise rates is less than ideal and carries much greater risk, as the local economy contends with well below forecast GDP and record low inflation. This in conjunction with a Peso at record lows, has not been a welcome recipe for the central bank, which has for now, opted to prioritize dealing with the declining currency over softer growth and subdued inflation. But the higher rates go in Mexico, the more of a strain on the local economy. And with the Banxico committed to following the Fed, this presents exceptional challenges going forward, especially if the Fed keeps with its timeline of 100 basis points of hikes in 2016. Throw in ongoing risks to commodities and a very real threat of risk liquidation in 2016, and more record lows are to be expected for the Peso, despite higher Mexico rates.