Special report: What’s Behind This Latest Pound Decline?
Next 24 hours: Tale of Two Halves
Today’s report: Getting Ugly Into the Mid-Week
Asian markets have wasted no time in picking up where things left off into the Tuesday close, with risk assets continuing to feel the heat, led by massive declines in the Pound, trading to its lowest levels against the Buck since June 1985. Looking ahead, we get a Draghi speech, US ISM non-manufacturing and the Fed Minutes.
Wake-up call
Chart talk: Major markets technical overview video
- bank bailout
- redemption freezes
- safety bids
- SNB fighting
- election
- OIL drop
- Weaker GDT
- Fed Minutes
- Risk offÂ
- USDMXN
Suggested reading
- Podcast on Italian Banks and Brexit, T. Keene, Bloomberg Surveillance (July 5, 2016)
- EU Models for a Post-Brexit UK, M. Sandbu, Financial Times (July 5, 2016)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The recent break below key support at 1.1098 puts the pressure on the downside, exposing a drop to next medium-term support at 1.0823, which guards against the critical December 2015 multi-year base at 1.0521 further down. At this point, a daily close back above 1.1200 would be required to alleviate immediate downside pressure.
EURUSD – fundamental overview
It seems the Euro is finally starting to price in the potential fallout from Brexit, with the systemic threat opening fresh offers from leveraged and macro funds. Meanwhile, troubles in the European banking sector haven’t done anything to help the Euro’s cause with talk of Monte Paschi needing a bailout increasing the level of intensity in an already intense environment. HFTs have stepped in on the offer following this latest breakdown in the Pound and the market will continue to track Brexit headlines and risk sentiment over the coming sessions. ECB Draghi will also be on the wires Wednesday, with the central banker’s speech getting a lot of attention. As far as economic releases go, we get German factory orders, US ISM non-manufacturing, US trade and the Fed Minutes.
GBPUSD – technical overview
The drop below the previous multi-year base from earlier this year at 1.3836 has accelerated declines to +30 year lows, with market taking out critical psychological barriers at 1.3000. At this point, technical studies are extended across the board, though the intensity of the downtrend could open more weakness below 1.3000 in the sessions ahead. Any corrective rallies should be well capped and it will now take a break back above the previous weekly high at 1.3533 to alleviate immediate downside pressure.
GBPUSD – fundamental overview
The Pound was already smacked down to fresh +30 year lows in Tuesday trade before taking another beating into early Wednesday. The thinner liquidity didn’t do much to help the UK currency, with a good portion of Asia out on holiday. Systemic risk associated with Brexit has been revisited in a big way in the early week, with escalating financial concerns in both the UK and Europe fueling declines. Algos, HFTs and momentum funds have been having a field day, with Cable dropping to its lowest levels since June 1985. The BOE has already stepped in, making it quite clear more accommodation is forthcoming, while also reducing capital requirements at the banks in an effort to prevent credit tightening. Certainly news of UK real estate funds freezing client redemptions is also playing a big part in the currency rout. Looking ahead, it’s doubtful the economic calendar will play any role influencing direction, though if anything is to have an impact, it will be US ISM non-manufacturing and the Fed Minutes.
USDJPY – technical overview
The downtrend remains firmly intact with the market collapsing to fresh 2016 lows below critical psychological barriers at 100.00, exposing next key medium-term support in the form of the June 2013 base at 93.80. Daily studies are however unwinding from oversold territory, which could warn of additional consolidation before the market considers any additional meaningful declines. Still, any rallies should now be well capped below 106.00.
USDJPY – fundamental overview
With no signs of any response from the BOJ and Brexit fallout once again intensifying, it’s no surprise to see this latest downturn in the major pair, with the Yen continuing to correlate well with risk off flow and flight to safety bids. Additional measures from the BOE, news of redemption freezes at UK real estate funds and worry over potential bailouts in the European banking sector are all contributing to the latest Yen rally. Still, it’s worth noting the acceleration of Yen gains in early Thursday trade could also be a function of lighter trade with many Asian countries out on holiday. Looking ahead, risk flow will continue to dictate trade, while on the calendar, we get US ISM non-manufacturing, US trade and the Fed Minutes.
EURCHF – technical overview
Dips continue to be very well supported despite last week’s intense decline, with the market unable to establish a daily close below 1.0700. From here, there is risk for a more meaningful bounce that extends back to the range highs in the 1.1130 to 1.1200 area. Only a daily close below 1.0700 negates.
EURCHF – fundamental overview
SNB sight deposit data has confirmed what the market already knew, which was that the SNB has been on the bid supporting the EURCHF rate in the midst of the intense post Brexit risk off flow. The sight deposit data also shows the highest levels since the SNB abandoned the EURCHF floor back in 2015. Overall, the SNB has done a good job offsetting this latest wave of unwanted inflow into the Franc post Brexit. But all of this uncertainty has made the Swiss Franc increasingly attractive even with 50 year Swiss yields sitting in negative territory. Of course, the SNB will be in deeper trouble if this risk off price action intensifies in the days ahead.
AUDUSD – technical overview
The latest topside failure suggests the market is looking to carve a lower top below the 2016 high at 0.7835, in favour of the next major downside extension. Look for a break below 0.7145 to confirm the 0.7647 lower top, opening the door for an acceleration towards the 2016 low at 0.6827 further down. A daily close above 0.7600 would be required to alleviate immediate downside pressure.
AUDUSD – fundamental overview
Plenty of negatives both at home and abroad for the Australian Dollar this week. The uncertainty surrounding the Australian election has been accompanied by softer Aussie retail sales and trade and an RBA still open to additional rate cuts. Meanwhile, Tuesday’s pullback in OIL and risk off flow from Brexit fallout and systemic risk has also weighed on the correlated commodity currency. If there are any positives right now for the Australian Dollar, they are the fact that the RBA was less dovish than it could have been this week and the price of GOLD continues to surge. On the face of it, the Aussie weakness has actually not been all that bad when considering all of the negative storylines in recent sessions. Looking to the economic calendar, we get US ISM non-manufacturing, US trade and the Fed Minutes. Still, most of the price action will centre on broader risk flow.
USDCAD – technical overview
The market could finally be in the process of establishing a meaningful base following this latest impressive reversal out from multi-month lows below 1.2500. A higher low looks to be carving at 1.2655 with a break back above 1.3189 to confirm the higher low and basing outlook, opening an acceleration of gains towards 1.3500 further up. Only back below 1.2655 negates.
USDCAD – fundamental overview
It would have been impossible for the Canadian Dollar to ignore this latest pullback in risk and drop in the price of OIL. Both of these developments have opened renewed downside in the Loonie, with USDCAD now closing in on key resistance up at 1.3189. Sizable stops are reported above 1.3200 and if broken, there is talk of additional demand towards 1.3500. Looking ahead, we get Canada trade, US trade, US ISMÂ non-manufacturing and the Fed Minutes.
NZDUSD – technical overview
The rally to fresh 2016 highs has stalled out, with the market pulling back after trading up just shy of 0.7300. From here, look for a daily close below 0.6963 to officially confirm the bearish shift and open a further drop to next key support at 0.6675 further down. Only back above 0.7300 negates.
NZDUSD – fundamental overview
Falling OIL prices and risk off flow from Brexit fallout were already weighing on Kiwi in Tuesday trade, with the commodity currency finding additional offers in the aftermath of another disappointing GDT auction. Also seen taking some of the air out of recent gains have been PM Key comments suggesting additional rate cuts from the RBNZ would be warranted. Key is an ex-currency trader which makes any comments relating to monetary policy that much more significant. Dealers now cite more sell-stops below 0.7000. Looking ahead, notable standouts on the economic calendar include US ISM non-manufacturing, US trade and the Fed Minutes.
US SPX 500 – technical overview
Setbacks continue to be very well supported, with the market racing back through 2100 after taking out critical support the other week. Still, while the market holds below 2112 on a daily close basis, there is risk for another topside failure. However, a daily close back below 2065 will be required to strengthen the toppish outlook and accelerate declines.
US SPX 500 – fundamental overview
The legitimacy of this latest recovery rally is in serious doubt given some very light volume behind the move and many unanswered questions over the outlook for the UK and global economy in the aftermath of the unsettling Brexit vote. The expectation is that this event could now pose a systemic threat to the global economy. And even if governments and central bank’s try to prop the market up as they have done since the 2008 financial crisis, with monetary policy tools exhausted, there isn’t a lot of incentive left in the tank. This could open the door for another topside failure over the coming sessions, ultimately exposing an eventual retest of the 2016 lows just shy of 1800. Looking ahead, we get US ISM non-manufacturing and the Fed Minutes.
GOLD (SPOT) – technical overview
The recent break above the 2015 peak at 1307 strengthens the case for a longer term base with the market confirming a medium-term higher low in the 1200 area, opening the door for the next major upside extension towards a measured move at 1400. Any setbacks should be very well supported ahead of 1250.
GOLD (SPOT) – fundamental overview
GOLD has been very well supported in 2016, with the yellow metal finding solid demand from medium and longer-term players on the back of fears over the limitations of exhausted monetary policy, a downturn in risk sentiment and extended global equities. All of this will almost certainly continue to keep the commodity in demand, with a fresh batch of interest stemming from this latest uncertainty surrounding Brexit and systemic threat. Interestingly, despite last week’s recovery in risk sentiment, the yellow metal remained well supported, perhaps offering a red flag warning to the rest of the market not to throw too much weight behind any upticks in sentiment.
Feature – technical overview
USDMXNÂ has recently broken to a fresh record high, with the market trading up to as high as 19.5190 thus far. From here, look for any setbacks to be very well supported ahead of 18.0800 in favour of the next major upside extension through 19.5190 and towards major psychological barriers at 20.000 further up. Only a daily close back below 18.0780 would take the immediate pressure off the topside.
Feature – fundamental overview
It hasn’t been a fun few sessions for the central bank of Mexico, with the latest round of risk liquidation fueling renewed declines in the Peso, already back to levels seen into last Thursday’s aggressive 50bp rate hike. If Governor Carstens had any hopes for more sustained Peso gains from the hike, those hopes have now been wiped out, with the currency trading back towards its record lows from late June. This could mean more rate hikes in the months ahead to stem the depreciation in the Peso, though the higher rates go, the more of a strain on the local economy. This puts the Banxico between a rock and a hard place.