Why It’s Premature to Downgrade the US Dollar

GBPUSD – technical overview

Inability to establish below 1.2000 followed by this latest intense push back above 1.2300 suggests the market could be in the process of establishing a longer-term base off the +30 year low from October 2016 at 1.1840. Look for a daily close back above 1.2500 to strengthen this outlook. Ultimately however, we would need to see a clear break above 1.2800 to officially signal a more significant shift in the structure.

• R2 1.2433 – 5Jan high – Strong
• R1 1.2416 – 17Jan high – Medium
• S1 1.2233 – 13Jan high – Medium
• S2 1.2121 – 13Jan low – Strong

GBPUSD – fundamental overview

Although the UK PM followed through with a hard Brexit speech, softer undertones and welcome clarity on the path forward were enough to give the Pound a major boost from its sub-1.2000 weekly lows. But it wasn’t only the Brexit speech that catapulted the Pound close to 3% higher on Tuesday, Donald Trump’s talking down of the US Dollar and a hotter UK CPI print were other drivers that contributed to the impressive gains. Looking ahead, the market will continue to digest Brexit, while shifting its eyes back to the economic calendar which features UK employment, US CPI, US industrial production, US NAHB housing and more Fed speak, including an appearance from the Fed Chair herself.

USDJPY – technical overview

Daily studies have been unwinding from stretched levels which suggests additional upside could be limited in favour of a more significant healthy corrective pullback. The recent bearish break below 116.00 confirms and could open a deeper drop towards 111.45. But ultimately, any setbacks are expected to be well supported ahead of 110.00 in favour of that next higher low and bullish resumption towards 120.00.

• R2 115.51 – 14Jan high – Strong
• R1 114.28 – 17Jan high – Medium
• S1 112.57 – 18Jan low – Medium
• S2 111.45 – Previous High – Strong

USDJPY – fundamental overview

The Yen’s rally in 2017 isn’t all that surprising when you consider the broad based sell off in the US Dollar. Donald Trump’s talking down of the Buck on Tuesday has only added to Yen gains. At the same time, it would be hard to dismiss underlying fundamentals here, with monetary policy divergence and favourable US Dollar yield differentials not to be ignored. These latest comments out from Fed officials serve as a reminder of this fact after the traditionally more dovish Fed Brainard acknowledged the possibility of needing to hike rates more, and Fed Williams highlighted the possibility for three rate hikes in 2017 even without accounting for fiscal stimulus. Looking ahead, we get US CPI, US industrial production, US NAHB housing and more Fed speak, including an appearance from the Fed Chair herself.

EURCHF – technical overview

A recent close below 1.0800 which had been defined as the bottom of a multi-week range strengthens the bearish outlook and opens the door for additional declines towards the 2016 low at 1.0624. At this point, a daily close back above 1.0900 would be required to take the immediate pressure off the downside.

• R2 1.0900 – 8Dec high – Strong
• R1 1.0763 – 30Dec high – Strong
• S1 1.0675 – 2Jan low – Strong
• S2 1.0624 – 24Jun/2016 low – Strong

EURCHF – fundamental overview

The SNB has unquestionably had a challenging time of late, with the central bank forced to contend with an ongoing wave of demand for the Swiss Franc. The central bank has been committed to its mandate of ensuring the Franc does not appreciate further through monetary policy and intervention tools. Though despite all efforts, the Franc continues to want to appreciate against the Euro. It seems the strategy has been to buy Euro when risk comes off and to do nothing when risk is back on and natural flows should be CHF bearish. But the trouble is, even with global equities elevated, the Franc is still not depreciating as much as the SNB would like to see and if global risk sentiment deteriorates, it could invite a massive wave of demand for the Franc that the SNB will be unable to offset.

AUDUSD – technical overview

The market has entered a healthy corrective phase after setbacks stalled shy of key medium-term support at 0.7145 in late December. Still, overall, rallies continue to be very well capped, with only a daily close back above 0.7800 to compromise this outlook.

• R2 0.7582 – 15Nov high – Strong
• R1 0.7569 – 17Jan high– Medium
• S1 0.7459 – 16Jan low – Medium
• S2 0.7430 – 12Jan low – Strong

AUDUSD – fundamental overview

The Australian Dollar has been an outperformer in 2017, benefitting from broad based US Dollar weakness, rallying base metals and elevated risk markets. At the same time, the market may soon start to find offers from medium-term players still looking at the monetary policy divergence theme and more hawkish Fed trajectory. There has also been an added wave of uncertainty this year, with systemic risk associated with Brexit, worry about the Trump administration and fear of a slowing China all arguing for a less optimistic take on the Australian Dollar going forward. Looking ahead, we get an important US CPI reading, US industrial production, US NAHB housing and more Fed speak, including an appearance from the Fed Chair herself.

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 on a daily close basis above 1.3000 in favour of the next major upside extension towards a measured move objective into the 1.4000 area. Ultimately, only a daily close below 1.3000 would delay the constructive outlook.

• R2 1.3295 – 11Jan high – Strong
• R1 1.3190 – 17Jan high – Medium
• S1 1.3019 – 17Jan low – Medium
• S2 1.3000 – Psychological – Strong

USDCAD – fundamental overview

The Canadian Dollar’s run in early 2017 has been super impressive, with the Loonie mostly benefitting from a market that is reconsidering its macro view on the US Dollar, especially after President-elect Donald Trump offered his opinion on the Buck on Tuesday. OIL’s ability to hold up on dips has also been a prop to the Loonie. However, overall, yield differentials and monetary policy divergence have not gone away and could very well once again invite renewed sell interest in the Canadian Dollar. With that said, we’ve already been hearing about the emergence of heavy buy interest in USDCAD around 1.3000. Looking ahead, we get a highly anticipated Bank of Canada interest rate decision. The BoC is widely expected to leave rates unchanged while taking a cautious approach given all of the mixed signals of late. On the one side, recent GDP data has been concerning, while on the other side, trade data and employment readings have come in much stronger. The Canadian Dollar will also need to pay attention to developments south of the border which include CPI, industrial production, US NAHB housing and more Fed speak, featuring an appearance from the Fed Chair herself.

NZDUSD – technical overview

Despite this latest upside correction, the overall pressure remains on the downside with the market expected to be very well capped on rallies ahead of 0.7300. As such, expect the market to stall out over the coming sessions. Back below

• R2 0.7239 – 14Dec high – Strong
• R1 0.7220 – 17Jan high – Medium
• S1 0.7100 – Figure – Medium
• S2 0.7076 – 16Jan low– Strong

NZDUSD – fundamental overview

The economic calendar out of New Zealand feels like it has been on sabbatical, with the Kiwi rate far more dependent on external flows. A wave of profit taking on US Dollar longs in early 2017 has helped to give the currency a bit of a boost, with the commodity currency extending gains Tuesday after Donald Trump bashed the Dollar. Another source of Kiwi demand on Tuesday came from a positive GDT auction result. Still, overall, medium-term players continue to look for opportunities to sell Kiwi into rallies. Concerns over the impact of the Trump presidency on the commodity bloc currencies, fear of a slower China, worry over a potential bubble in equity markets and systemic risk associated with a hard Brexit are all negatives for the local currency. Looking ahead, we get an important US CPI reading, US industrial production, US NAHB housing and more Fed speak, including an appearance from the Fed Chair herself. Another Kiwi negative driver in 2017 has been talk of AUDNZD related interest with this market showing signs of recovery off longer-term cyclical lows.

US SPX 500 – technical overview

While this latest surge back to a fresh record high could compromise what has been the possibility for a toppish structure, the risk is still tilted to the downside if the market fails to sustain gains beyond 2200 over the coming weeks. But ultimately, at this point, any topside failure will also need to be met with a break back below 2180 to once again encourage the possibility for a significant bearish structural shift. Next resistance comes in at 2300, while initial support comes in at 2232, with a break below to take the immediate pressure off the topside.

• R2 2300.00 – Psychological – Strong
• R1 2282.00 – 6Jan/Record high – Medium
• S1 2232.00 – 30Dec low – Strong
• S2 2180.00 – 5Dec low– Strong

US SPX 500 – fundamental overview

The ongoing support for US equities has been more than impressive, particularly at a time when the Fed is embarking on a more hawkish path to policy normalisation and the Trump administration could bring in policies that threaten prospects for global growth. This leaves financial markets vulnerable to any shocks and exposed to intense periods of additional risk liquidation going forward, especially at a time when monetary policy around the rest of the globe is exhausted with very little left in the tank. Another source for investor concern could come from the inflation front, as any signs of hotter CPI would likely unnerve investors that don’t want the Fed to be forced into raising rates. Today’s CPI data will therefore be watched closely. Other data pout of the US today includes industrial production and NAHB housing. We also get more Fed speak, including a speech from the Fed Chair herself.

GOLD (SPOT) – technical overview

The market has bounced out from critical 1120 area support in the form of a 78.6% fib retracement off of the 2015-2016 low-high move, with the hold above this level keeping the longer-term basing outlook intact. Daily studies are confirming, looking increasingly constructive. Monday’s daily close above 1200 strengthens the bullish shift in structure and opens the door for a push back towards the 2016 peak at 1375 in the weeks ahead. Any dips from here should be well supported with only a break back below 1120 to negate.

• R2 1233.10 – 16Nov high – Strong
• R1 1221.10 – 22Nov high – Medium
• S1 1162.95 – 5Jan low – Medium
• S2 1122.75 – 15Dec low  – Strong

GOLD (SPOT) – fundamental overview

Solid demand from medium and longer-term players continues to emerge despite an intense round of setbacks in late 2016, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, systemic risk and a bet that record low inflation will turn up even faster in a Trump presidency. 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.

Feature – technical overview

USDTRY has exploded to the topside, with the market extending its violent run of fresh record highs, closing in on critical psychological barriers at 4.0000. The parabolic price action has however inspired the onset of a necessary corrective pullback to allow for severely stretched studies to unwind. The market is extended across the major time frames, with the weekly and monthly charts severely overbought. A break and close back below 3.7000 will likely trigger a more significant correction.

• R2 4.0000 – Psychological – Strong
• R1 3.9410 – 11Jan/Record High – Medium
• S1 3.7200 – 13Jan low – Medium
• S2 3.7000 – Psychological – Strong

Feature – fundamental overview

The rout to record lows in the Turkish Lira finally tested the nerves of President Erdogan who lashed out at the FX market this past Thursday, aliking USD bulls to ‘terrorists with Dollars.’ Erdogan went on to warn that the CBRT had the ability to ‘wreck this game.’ The decision to skip last week’s one week repo auction, a reduction in interbank borrowing limits and the introduction of FX swaps for Turkish banks are more signs of the government’s attempts to make a serious effort at cooling down  the Dollar run. Of course, broad based selling in the US Dollar in early 2017 has also been a welcome development for the ailing emerging market currency. But ultimately, with the outlook so grim in Turkey, more action from the central bank will probably be required, most likely in the form of an aggressive rate hike. The CBRT next meets on January 24th.