Next 24 hours: Are Markets Expecting Too Much from Yellen?
Today’s report: Central Bank Strategies Increasingly Ineffective
We have gone through a period of many years where any deterioration in risk sentiment has been more than offset by accommodative central bank policy gestures. But in 2016, it is becoming clear central banks have exhausted these gestures, with the limitations of monetary policy being realized.
Wake-up call
Chart talk: Major markets technical overview video
- industrial production
- UK trade
- 10-year JGBs
- SNB battle
- business confidence
- BoC Lane
- 10% overvalued
- Sovereign funds
- demand soars
- USDTRY
Suggested reading
- A Dying Breed: Currency Traders Left Out, L. Nguyen, Bloomberg (February 8, 2016)
- The Blame Game, Modern Markets Initiative (February 5, 2016)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The latest break above a multi-week range top at 1.1060 is a significant development and takes the immediate pressure off the downside. While the broader downtrend is still firmly intact, scope now exists for fresh upside in the sessions ahead towards a measured move objective at 1.1410. Look for setbacks to be supported ahead of 1.0900.
EURUSD – fundamental overview
The Euro continues to find a good deal of support on the back of risk liquidation flow, with the single currency tracking higher against the Buck into Tuesday. Still, any meaningful rallies are likely to met with resistance from an ECB battling deflation and well prepared to ramp up dovish rhetoric signaling additional accommodation over the coming days. Looking ahead, the key focus on Tuesday’s calendar will be German industrial production and trade, along with US JOLT job openings. Otherwise, risk sentiment flows and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
GBPUSD – technical overview
The recent reversal off a near 7-year low at 1.4080 has opened the door for a bounce that has room to extend into the 1.4800-1.5000 area over the coming sessions before the market considers a lower top and meaningful bearish resumption. Look for any setbacks to be well supported above 1.4350, with only a daily close below to put the immediate pressure back on the downside.
GBPUSD – fundamental overview
Although the other major currencies have managed to hold up well in the early week, even finding bids against the Buck, this has not been the case for the Pound, which continues to struggle from a more dovish BOE and ongoing Brexit fear. Just last week, the BOE effectively upgraded its dovishness after downgrading growth forecasts and seeing the lone hawk on the MPC defecting to join in with a unanimous vote to leave policy on hold. Ongoing weakness in the price of OIL has also weighed, though with Governor Carney still expecting the next rate move to be up, and with other currencies getting hit harder in the face of risk liquidation, setbacks have been somewhat supported. Looking ahead, UK trade is the main event on Tuesday’s calendar. In the US, US JOLT job openings is the only notable standout. Otherwise, risk sentiment flows and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
USDJPY – technical overview
The latest breakdown below critical support in the form of the December 2014 low at 115.57 is a significant development and now opens the door for deeper setbacks, potentially all the way down into the 105.00s. While it would be premature to call for a retest of the 105.00s, the monthly chart is showing scope for a retracement back towards this area, which should not be ruled out. Overall, the broader, longer-term uptrend remains intact and this round of weakness is ultimately expected to be supported in favour of the next major higher low in favour of a bullish resumption. But for now, the pressure is firmly on the downside.
USDJPY – fundamental overview
It has been an inauspicious start to this new era of Bank of Japan negative interest rate policy. An initial welcome Yen decline in the aftermath of the BOJ decision the other week has been completely negated and then some, with USDJPY dropping to fresh multi-month lows through psychological barriers at 115.00. 10 year JGB yields have dropped to negative for the first time on record and all of this happening with the Yen finding unwelcome bids. It has become quite clear the Yen has not lost its traditional correlation with safe haven flow and it is looking like it will take either a massive rebound in stocks or a fresh response from the BOJ to alter the Yen’s high flying trajectory. Looking ahead, US JOLT job openings is the only notable release for the remainder of the day. Otherwise, risk sentiment flows and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
EURCHF – technical overview
A period of multi-week consolidation has finally been broken, with the market clearing critical range resistance at 1.1050 to signal a bullish continuation. Given the fact that the previous consolidation range was about 350 points, the push above 1.1050 opens a measured move upside extension of the equivalent size, projecting gains towards 1.1400. Any setbacks should be very well supported ahead of 1.0900, while only below 1.0715Â negates the constructive outlook.
EURCHF – fundamental overview
Clearly, the SNB strategy of weakening the Franc has been highly effective these past several months. But now with risk liquidation flow intensifying and with the other traditional safe haven currencies rallying sharply to their detriment, the SNB battle may start to get tougher. We have already seen EURCHF come under some pressure off recent highs from the other week and should other central banks ramp up their own dovish rhetoric, this could make the Franc more attractive again. The SNB has been committed to offsetting Franc inflows at every turn, and it will be interesting to see what this next turn brings. Looking ahead, we get Swiss employment data today.
AUDUSD – technical overview
The market has entered a period of correction out from the recent multi-year low at 0.6827. However, any additional upside should be limited to the 0.7265 area, with a lower top sought out ahead of a fresh downside extension and bearish continuation below 0.6827 and towards the next key barrier at 0.6500 further down. Ultimately, only back above 0.7385 would force a shift in the bearish structure.
AUDUSD – fundamental overview
Aussie NAB business conditions came in steady, while business confidence dropped back a tad in early Tuesday trade. Overall, these indicators have held up rather well despite challenges in the economy. Nevertheless, the broader intensification in risk off flow is the overwhelming driver of price action at the moment and this has been weighing on the correlated Australian Dollar. Looking ahead, US JOLT job openings is the only notable release for the remainder of the day. Otherwise, risk sentiment flows and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
USDCAD – technical overview
The market has entered a period of intense correction following the recent surge to a near 13 year high at 1.4690. This most recent setback below 1.3800 opens the door for a deeper drop towards 1.3500, which coincides with medium-term rising trend line support. At this point, only back above 1.4103 would suggests the correction has run its course, with the market poised for bullish resumption.
USDCAD – fundamental overview
Last week’s discouraging Canada employment data has been followed up in the early week with renewed downside pressure on the price of OIL and an intensification of risk liquidation flow. This is not the kind of recipe that welcomes Canadian Dollar gains, and unsurprisingly, the Loonie is back under pressure. On Monday, Bank of Canada Lane was out highlighting the limitations of monetary policy, making it clear that the burden of economic recovery did not rest squarely on the central bank’s shoulders. While Lane conceded the BoC could accept a slower return to its inflation target, in an effort to offset adverse constraints on the economy, he also stressed the fact that financial stability was not the central bank’s primary mandate. Looking ahead, lack of data on the Canada calendar will leave the market focused on US JOLT job openings.  Otherwise, risk sentiment flows, OIL direction and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
NZDUSD – technical overview
The market has entered a period of correction following an intense wave of declines in early 2016. Still, overall, the broader downtrend remains intact and any rallies should be well capped below 0.6800 in favour of a fresh lower top and the next downside extension towards the 2015 multi-year low at 0.6130. Only back above 0.6900 would force a shift in the structure.
NZDUSD – fundamental overview
Although New Zealand has been feeling the forces of an earthquake on Tuesday, it is the more figurative earthquake of rapidly deteriorating global risk sentiment that it impacting the correlated Kiwi rate. The RBNZ has already expressed its discomfort with Kiwi at elevated levels and this has been backed up by the IMF, saying Kiwi may still be overvalued by about 10%, while adding the RBNZ should stand ready to ease further. All of this has weighed on the currency in the early week, though setbacks have been somewhat mitigated by the fact that the Fed may be forced to scale back with its rate normalisation timeline. Looking ahead, US JOLT job openings is the only notable release for the remainder of the day. Otherwise, risk sentiment flows and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
US SPX 500 – technical overview
Signs of a critical structural shift 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 the critical August base at 1834 strengthening the outlook. From here, any rallies are expected to be well capped below previous support at 1993, in favour of the next major downside extension towards 1700. Only a daily close back above 1993 will take the pressure off the downside.
US SPX 500 – fundamental overview
Intensified selling in bank stocks, chatter of sovereign wealth funds selling off overweight financial positions and JGB yields to negative, have all been adding to the exodus from the equity market this week, with setbacks likely to continue if participants feel central banks no longer can do much to support a faltering global economy. It is becoming increasingly apparent in 2016 that even if the Fed opts to scale back its rate hike timeline, this might not be as supportive as many had thought. The fact that central bank strategies are exhausted coupled with the threat of rising inflation in the US is not something that will get investors too excited going forward. Looking ahead, US JOLT job openings is the only notable release for the remainder of the day. Otherwise, risk sentiment flows and positioning into tomorrow’s Fed Chair Yellen semi-annual testimony will factor.
GOLD (SPOT) – technical overview
The market continues to show signs of a major structural shift, with the impressive recovery from the multi-year low in late 2015 at 1046 now extending above the critical October 2015 peak at 1192. From here, there is risk for additional upside into next medium-term resistance at 1232, though with daily studies looking extending, don’t rule out the possibility for a quick retracement back into the 1150 area before the market begins its next ascent. Ultimately, only back below 1100 negates the constructive outlook.
GOLD (SPOT) – fundamental overview
GOLD is finally shining again and is becoming increasingly attractive in the current market environment. The intense wave of risk liquidation has catapulted the metal on its status as a hedge against uncertianty. Meanwhile, the recent pickup in US wage growth is starting to sound some alarm bells over the prospect of rising inflation in a still struggling global economy that can’t handle higher rates. So right now, it’s looking like nowhere to go but GOLD.
Feature – technical overview
USDTRYÂ has entered a period of consolidation after pulling back from the recent record high from 2015. Overall, the structure remains highly consecutive, with dips well supported for now into the 2.9000 area. Look for any additional setbacks to continue to be well supportive above 2.9000 on a daily close basis in favour of an eventual resumption of the uptrend and retest of the 3.0750 record high. Ultimately, only back below 2.7580 would negate the highly constructive outlook.
Feature – fundamental overview
The recovery in the Lira over the past several days off recent record lows is finally showing signs of potentially waning. Clearly the Lira wasn’t able to do anything with the better than expected Monday round of Turkish industrial production, as it was distracted by the more distressing macro flows. Overall, with global risk sentiment shaky, local inflation at elevated levels, and rate differentials favouring the US Dollar, any additional Lira gains should prove hard to come by in the days ahead.