Sterling Collapses in Razor Thin Liquidity Conditions

GBPUSD – technical overview

The latest break below 1.2800 opens the door for the next major downside extension exposing fresh +30 year lows into the 1.2000 to 1.2500 area in the days and weeks ahead. At this point, any rallies are classified as corrective, with only a break back above 1.3533 to negate the downtrend and take the overall pressure off the downside.

• R2 1.2622 – 7Oct high – Strong
• R1 1.2500 – Psychological – Medium
• S1 1.2000 – Psychological – Medium
• S2 1.1841 – 7Oct/+30 year low – Strong

GBPUSD – fundamental overview

Though the move hasn't been as severe as the SNB flash crash in January 2015, the shock collapse in the Pound in early Asia trade has shaken markets in a big way on this NFP Friday. There is very little out there in terms of good colour, with the move happening in super thin liquidity conditions. Some of the talk out there has the old fat finger behind the move, with GBPJPY seen as the culprit. Others have cited an intensification of Brexit fear on comments from France PM Hollande who has been talking very tough, saying “there must be a threat, risk, and price to be paid, otherwise the EU will be in a negotiation that cannot end well.” Still, it's hard to believe such a violent move could be attributed to official comments as this isn't the first time we've heard such harsh words on Brexit and the thin liquidity and fat finger story could just as easily be the driver. Looking ahead, more volatility expected with the market taking in UK industrial production, manufacturing production, trade and NFPs.

USDJPY – technical overview

Despite the latest impressive rally through 104.00, overall, the pressure still remains on the downside with a lower top sought out at 104.32 in favour of the next major downside extension below the recent yearly and multi-month low at 98.99. At this point, only a break and daily close back above 104.32 would delay this outlook and give reason for pause. Below 99.00 exposes the next major support level in the 95.00 area.

• R2 104.32 – 2Sep high – Strong
• R1 104.16 – 6Oct high – Medium
• S1 103.35 – 6Oct low – Medium
• S2 102.67 – 5Oct low – Strong

USDJPY – fundamental overview

Many have been attributing a near 1000 point collapse in GBPJPY today to a fat finger that has in turn opened renewed downside pressure in USDJPY. Clearly the setbacks in the major pair have been marginal relative to GBPJPY, though the collapse in the Pound has invited some risk off flow that is supporting the Yen. Looking ahead, plenty of volatility is to be expected as the market continues to digest the overnight developments associated with the Sterling flash crash, while the market will also be needing to think about a highly anticipated monthly employment report out of the US.

EURCHF – technical overview

Not much doing here over the past several days, with the market confined to a range trade, roughly between 1.0800 and 1.1000. At this point, a daily close above 1.1000 or back below 1.0800 will be required for clearer directional insight. Until then, look for dips to be supported and rallies well capped.

• R2 1.1014 – 24Jun high – Strong
• R1 1.1000 – Psychological – Medium
• S1 1.0893 – 3Oct low – Medium
• S2 1.0778 – 16Jun low – Strong

EURCHF – fundamental overview

Thursday’s super subdued Swiss inflation readings are just one more reason the SNB is committed to preventing additional appreciation in the Swiss Franc. Overall, SNB smoothing activity to prop the EURCHF rate has been helping to elevate the cross, but at the same time, any upside moves haven’t been sustainable with the cross rate continuing to get sold aggressively into rallies towards 1.1000. Ultimately, this is a market going nowhere right now and it seems stops need to get taken out below 1.0750 or above 1.1000 for clearer insight. US stocks have been supporting EURCHF but are now looking extended which could invite additional Franc demand if the market continues to roll over from record highs in the sessions ahead.  Certainly the wave of uncertainty from this latest decline in the Pound could be an added headache for the SNB.

AUDUSD – technical overview

The market has struggled on rallies above 0.7700 and this suggests the rate could be 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 back below 0.7421 to strengthen this outlook and accelerate declines towards 0.7000 in the days ahead. Ultimately, only back above 0.7758 will negate the bearish outlook and invite a retest of the 2016 highs.

• R2 0.7711 – 29Sep high – Strong
• R1 0.7645 – 5Oct high – Medium
• S1 0.7561 –7Oct low – Medium
• S2 0.7531 – 20Sep low – Strong

AUDUSD – fundamental overview

The Australian Dollar has done its best to hold up this week on local data, but has been weighed down overall on external factors. While this week’s Aussie retail sales and trade were better than expected, the combination of strong US data, market calls for a sooner Fed hike, a GOLD slump and this latest collapse in the Pound, have all been more than offsetting any positive flow. Looking ahead, the market will continue to keep an eye on Sterling developments, while also preparing for today’s highly anticipated monthly employment report out of the US.

USDCAD – technical overview

This market looks to be in the process of carving out a longer-term base off the 1.2461, 2016 low. Look for any additional weakness to be supported ahead of 1.2655 in favour of the next major upside extension through 1.3300 and towards a measured move objective into the 1.3500-1.4000 area. Ultimately, only back below 1.2655 would delay the constructive outlook.

• R2 1.3281 – 27Sep high – Strong
• R1 1.3249 – 6Oct high – Medium
• S1 1.3110 – 4Oct low – Medium
• S2 1.3048 – 29Sep low– Strong

USDCAD – fundamental overview

The Canadian Dollar hasn’t been able to benefit much from the push back above $50 in the price of OIL. Instead, the currency is more worried about this week’s IMF growth downgrade and a deterioration in sentiment abroad as systemic risk creeps back in. The slump in the price of GOLD hasn’t helped the Loonie’s cause, while this latest Sterling flash crash is only fueling more broad based demand for the US Dollar. Looking ahead, it’s going to be a busy day for the Canadian Dollar as the market continues to contend with all that’s going on out there while also taking in the double headed monster of monthly employment reports out of Canada and the US.

NZDUSD – technical overview

Finally signs of a potential top after the market stalled out at 2016 highs ahead of major psychological barriers at 0.7500. Daily studies had already traded up into overbought territory warning of the reversal and this latest bearish reversal strengthens the toppish outlook. Look for a daily close back below 0.7100 to strengthen the structural shift and accelerate declines.

• R2 0.7311 –4Oct high – Strong
• R1 0.7209 – 5Oct high  – Medium
• S1 0.7100 – Figure – Medium
• S2 0.7087 – 8Aug low – Strong

NZDUSD – fundamental overview

This has been a pivotal week for the New Zealand Dollar, with setbacks intensifying as the currency drifts further away from recent 2016 highs. The combination of softer Kiwi data, as reflected by this week’s discouraging GDT auction, and solid US economic data, pointing to a sooner Fed rate hike, have been the primary drivers behind the commodity currency’s underperformance. While the Fed is now looking to hike, the RBNZ is still in a position where it is seriously considering additional cuts. Meanwhile, Kiwi setbacks have extended into Friday as risk comes off on account of this latest Sterling flash crash. Looking ahead, the market will continue to respond to the Pound drop while also positioning for a highly anticipated monthly employment report out of the US.

US SPX 500 – technical overview

Signs of a potential top after the market recently broke below critical support at 2147. This now opens the door for a meaningful period of weakness exposing a more pronounced decline towards the June base at 1990. Look for any rallies to now be well capped ahead of 2180, with only a daily close back above this level to compromise the newly adopted bearish outlook. Below 2108 accelerates.

• R2 2194.00 – 15Aug/Record high – Strong
• R1 2180.00 – 222Sep high – Medium
• S1 2108.00 – 12Sep low – Medium
• S2 2073.00 – 6Jul low– Strong

US SPX 500 – fundamental overview

It all feels like it’s starting to come to a head for the US equity market. In recent weeks, we have been hearing a lot about the limitations of monetary policy and systemic risk to the global markets, while at the same time getting a healthy dose of hawkish Fed speak and strong US data. The September low at 2108 will be the critical level to watch. If the market holds above this level, then it can be argued central banks and governments are still helping to artificially support asset prices. If however the market turns lower in the sessions ahead and breaks down below 2108, we could see a major intensification of declines. This is an unpleasant prospect in the face of a still recovering US economy and global economy dealing with plenty of headaches, not the least of which includes ongoing fear of fallout from Brexit. Looking ahead, all eyes will be on today’s highly anticipated monthly employment report.

GOLD (SPOT) – technical overview

Despite the latest major setback, the overall structure remains highly constructive with the market in the process of carving out a longer-term base. Look for additional weakness to be very well supported above 1250, with only a close back below this level to negate the bullish outlook and give reason for pause.

• R2 1302.50 – 1Sep low – Strong
• R1 1277.20 – 5Oct high – Medium
• S1 1250.00 – Psychological – Strong
• S2 1234.95 – 7Jun low – Strong

GOLD (SPOT) – fundamental overview

Broad based US Dollar demand on hawkish Fed speak and strong US data have been cites as a major driver behind GOLD’s sharp declines this week. But overall, 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, extended global equities and systemic risk. All of this will almost certainly continue to keep the commodity in demand, with many market participants fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. But for today, the big focus will be on the US employment report. If the data is stronger than expected, there is risk for another GOLD drop. If however the data disappoints, we could very well see a sharp recovery, much like the one seen this past June, following the disappointing May employment report.

Feature – technical overview

USDMXN is in the process of correcting off fresh record highs from late September. While there is still scope for additional declines in the sessions ahead, ultimately, the uptrend remains intact and a higher lower is now sought out ahead of a bullish resumption and break to another record high through major psychological barriers at 20.0000. At this point, only back below 17.9030 would compromise the highly constructive outlook.

• R2 19.9250 – 26Sep/Record high – Strong
• R1 19.6685 – 30Sep high – Medium
• S1 18.9995 – 3Aug high – Medium
• S2 17.9030 – 16Aug low – Strong

Feature – fundamental overview

The Mexican Peso has been holding up relatively well in recent days, particularly after the currency had sunk to fresh record lows in late September. It seems the Banxico’s efforts to dissuade the market from selling Pesos have been effective, at least in the short term, after the central bank raised rates last week. Meanwhile, a major bank is calling for more tightening in financial conditions from the Banxico over the coming months so that investors will be increasingly uncomfortable holding more expensive short Peso exposure. Still, the impact of higher rates on a struggling local economy is not ideal, while risk for liquidation in global equities on a fear of higher US rates is also something that could easily offset these Banxico moves and once again invite renewed downside pressure on the risk correlated EM currency. Certainly today’s fallout in the Pound only adds to pressure on risk correlated emerging market FX.