FX Volatility Picks Up…But Not on Account of Trump

GBPUSD – technical overview

The market has come back under pressure since stalling out several days back ahead of critical resistance in the form of the December 2016 peak at 1.2775. A daily close below 1.2347 will end a period of choppy consolidation and open the door for an acceleration of declines back towards the major base from October at 1.1841. Ultimately, rallies should continue to be very well capped with only a break above 1.2775 to compromise the overall bearish outlook.

• R2 1.2570 – 24Feb high – Strong
• R1 1.2471 – 27Feb high– Medium
• S1 1.2363 – 1Mar low – Medium
• S2 1.2347 – 7Feb low – Strong

GBPUSD – fundamental overview

The Pound is back under pressure this week and could see an acceleration of declines if reported sell-stops below 1.2350 and 1.2300 are taken out. This latest round of weakness has come from ramped up odds for a Fed rate hike in March, with the market now pricing a 70% chance. Meanwhile, though Trump didn’t offer much detail, his mention of legislation to produce $1 trillion investment in infrastructure has also weighed on the Pound. Clearly the UK currency is also still riddled with its own risk in the form of Brexit and potential negative implications, which should be yet another weight on the currency going forward. As far as today’s calendar goes, UK manufacturing PMIs and consumer credit are due, followed by a healthy US calendar featuring personal income, personal spending, personal consumption, ISM manufacturing and more Fed speak.

USDJPY – technical overview

The short-term pressure remains on the downside in light of a recent break of multi-session consolidation that projects weakness into the 109.50 area in the days ahead. At this point, it would take a push back above 115.62 to officially alleviate short-term downside pressure and as such, any rallies are expected to stall out ahead of 115.00.

• R2 113.78 – 21Feb high – Strong
• R1 113.62– 1Mar high – Medium
• S1 112.75 – 1Mar low – Medium
• S2 111.59 – 7Feb low – Strong

USDJPY – fundamental overview

Flows in the Yen have been all about external drivers, namely yield differentials, Trump reflation bets and surging global equities, which have been Yen bearish, and Trump protectionism and fear of impending risk off flow, which have been Yen supportive. In the initial aftermath of this latest Trump address, the Yen has come under pressure, with the market focusing on Trump’s infrastructure legislation comments. Meanwhile, ramped up Fed funds futures are also driving Yen weakness, with the market now pricing a 70% chance for a March hike. Looking ahead, the market will continue to digest Trump and the Fed policy trajectory, while taking in a healthy US calendar that features personal income, personal spending, personal consumption, ISM manufacturing and more Fed speak.

EURCHF – technical overview

A recent close below 1.0800 which had been defined as the bottom of a multi-week range has strengthened the bearish outlook, opening the door for additional declines below the 2016 low at 1.0624 and towards psychological barriers at 1.0500 further down. A descending triangle formation on the daily chart is strengthening the bearish outlook. At this point, a daily close back above 1.0763 would be required to take the immediate pressure off the downside.

• R2 1.0763 – 30Dec high – Strong
• R1 1.0708 – 3Feb high – Medium
• S1 1.0632 – 21Feb low – Medium
• S2 1.0624 – 24Jun/2016 low – Strong

EURCHF – fundamental overview

The SNB is in a quiet battle with the market, forced to contend with an ongoing wave of demand for the Swiss Franc in a less certain global environment, especially with the weapon of monetary policy worn down. The central bank has been committed to its mandate of ensuring the Franc does not appreciate further. But despite all efforts, the Franc continues to want to appreciate. It seems the central bank’s strategy has been to sell Francs 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, arguably reflecting global appetite for risk, the Franc barely depreciating, if at all. This is an added concern with the SNB’s holding of US equities at record highs. Of course, the reemergence of Eurozone political risk as reflected through elections in France, Holland and Italy, and renewed Greek debt concerns, are only further contributing to SNB stress, with the Franc finding even more demand on the back of these developments. So if equities start to come off and demand for the Franc ramps up, this SNB headache could turn into a migraine.

AUDUSD – technical overview

The market has entered a healthy bullish 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 on a medium-term basis, with only a daily close back above 0.7800 to compromise this outlook. Look for a daily close below 0.7600 to officially put the pressure back on the downside.

• R2 0.7741 – 23Feb high – Strong
• R1 0.7700 – 1Mar high– Medium
• S1 0.7637 – 1Mar low – Medium
• S2 0.7606 – 7Feb low – Medium

AUDUSD – fundamental overview

Firmer Aussie sovereign bond yields, supported base metals and an ongoing push in global equities have all already been helping to keep the Australian Dollar well supported in 2017 and now we have this latest super impressive Aussie GDP and manufacturing PMIs that have given the currency more of a boost. Still, with the market running so far and fast, with Fed policy divergence a major potential weight and with risk rising for some form of a correction in the stock market, the commodity currency could be vulnerable to weakness going forward. Looking ahead, the market will continue to digest Trump and the Fed policy trajectory, while taking in a healthy US calendar that features personal income, personal spending, personal consumption, ISM manufacturing and more Fed speak.

USDCAD – technical overview

The market remains very well supported on dips ahead of what should be the next major upside extension back towards the December peak at 1.3600. The recent close above 1.3200 strengthens this outlook with next key resistance at 1.3388 further up. Only a close below 1.3000 forces a shift in the constructive outlook.

• R2 1.3388 – 20Jan high – Strong
• R1 1.3354 – 19Jan high – Medium
• S1 1.3213 – 7Feb high – Medium
• S2 1.3165 – 28Feb low – Strong

USDCAD – fundamental overview

The Canadian Dollar has seen a reversal of fortune over the past week, with the currency underperforming across the board. It seems positioning ahead of today's Bank of Canada decision had been one of the drivers behind the Loonie declines. Meanwhile, trading desks have also talked of a build up in Canadian Dollar long exposure in recent weeks, reaching levels where participants have been reconsidering long Canadian Dollar exposure. Of course, ramped up Fed rate hike odds and Trump talk on infrastructure spending have also contributed to the flow. Looking ahead, the Bank of Canada decision will be the major focus, though a healthy US calendar featuring personal income, personal spending, personal consumption, ISM manufacturing and more Fed speak should not be overlooked.

NZDUSD – technical overview

Despite this latest upside correction in 2017, the overall pressure remains on the downside with the market expected to be very well capped on rallies into the 0.7400 area. The weekly chart is reflective of this fact as it looks like we are seeing the formation of a major top off the 2016 high. As such, expect the market to continue to roll over in favour of that next lower top. This latest weekly close below 0.7200 helps to strengthen the bearish outlook.

• R2 0.7300 – Figure – Strong
• R1 0.7247 – 23Feb high – Medium
• S1 0.7130 – 22Feb low – Strong
• S2 0.7100 – Figure– Medium

NZDUSD – fundamental overview

There has been a notable shift in sentiment towards the New Zealand Dollar in recent days. Softer local data, a more dovish RBNZ, a rotation into AUDNZD and hawkish Fed speak pointing to a March hike are some of the major drivers behind the Kiwi bearishness. Of course, an ongoing bid for equities and rallying commodities have been helping to slow Kiwi declines. But ultimately, if the US Dollar pushes back to focusing on Trump reflation and hawkish Fed policy, and if US equities falter, we could very well see a more intense liquidation of Kiwi longs. Looking ahead, the market will continue to digest Trump and the Fed policy trajectory, while taking in a healthy US calendar that features personal income, personal spending, personal consumption, ISM manufacturing and more Fed speak.

US SPX 500 – technical overview

The latest break to yet another record high following a healthy period of consolidation, has opened the door for the next big push towards 2400. While technicals are severely stretched and there are definitive signs of exhaustion on the horizon, given the intensity of this uptrend, a break back below 2300 would be required at a minimum to alleviate immediate topside pressure.

• R2 2400.00 – Psychological – Strong
• R1 2373.00 – 1Mar/Record high – Medium
• S1 2351.00 – 24Feb low – Medium
• S2 2304.00 – 26Jan high– Strong

US SPX 500 – fundamental overview

The record run in US equities has been more than impressive, particularly at a time when the Fed is embarking on a hawkish path to policy normalisation and the Trump administration is lacking the type of stability that would inspire confidence. This leaves financial markets vulnerable to any shocks and exposed to intense periods of risk liquidation going forward. The fact that monetary policy around the rest of the globe is exhausted with very little left in the tank to artificially support risk assets is yet another major concern. Throw in systemic risk from Brexit and Eurozone structural issues, stretched valuations, and a market that hasn’t dipped 1% in an disturbingly uncomfortable amount of time and the picture gets even uglier. Of course, expectation of fresh tax reform and the revival of the Trump reflation play have contributed to this latest record high push, but overall, there are plenty of red flags out there, warning of a major capitulation ahead. It’s almost as if investors are now climbing a very dangerous stock market ladder more because they’re being chased by red flags below, than on an actual desire to go higher. Looking ahead, the market will continue to digest Trump and the Fed policy trajectory, while taking in a healthy US calendar that features personal income, personal spending, personal consumption, ISM manufacturing and more Fed speak.

GOLD (SPOT) – technical overview

The market has been very well supported since basing out around 1120 in 2016. This latest break to 1260 confirms a fresh higher low at 1216 and opens the next major upside extension towards a measured move into the 1300 area. Only back below 1216 would delay the constructive outlook, while ultimately, below 1180 would be required to negate.

• R2 1300.00 – Measured Move – Strong
• R1 1264.10 – 27Feb high – Medium
• S1 1226.10 – 21Feb low – Medium
• S2 1216.80 – 15Feb low  – Strong

GOLD (SPOT) – fundamental overview

Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty and systemic risk. All of this should 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

USDMXN has been in the process of correcting out from recent record highs earlier this year. The market has now dropped back into critical support in the 19.00-20.00 area and is expected to be well supported around this area (61.8% fib retrace, 200-Day SMA) in favour of a resumption of the uptrend and push back through the record high just over 22.00. Ultimately, only back below 19.00 would give reason for pause and open the possibility for a more meaningful structural shift.

• R2 21.3940 – 11Nov high – Strong
• R1 20.5480 – 17Feb high – Medium
• S1 19.6080 – 61.8% Fub – Strong
• S2 19.5050 – 200-Day SMA – Strong

Feature – fundamental overview

The Peso has been getting a lot of help of late. A unanimously decided Banxico rate hike, reduction in Peso shorts and more conciliatory talk out of the White House have already been helping to rally the currency out from record lows against the Buck. And now this latest Banxico announcement of plans to hold FX hedge auctions in March is giving the Peso an additional boost, with USDMXN sinking back below the psychological barrier at 20.00 and towards its longer run 200-Day moving average. Still, the Peso is far from out of the woods, with Trump uncertainty running high and the Fed on it policy normalisation path. Of course, the fact that global equities look like they could come off the rails is yet another serious variable that could undermine any recovery in the Peso and emerging market FX. Looking out, the market is pricing another 100bps of Banxico hikes in 2017.