Special report: Yellen, Markets, Paradigm Shift
Today’s report: Is the Fed Overpromising Once Again?
We're into Friday and it's been a different kind of week, at least the way things have been going over the past several months. This week wasn't about politics – not US politics, Eurozone politics or UK politics. This week was about an FX market moving on its most traditional driver of monetary policy and interest rate expectations.
Wake-up call
Chart talk: Major markets technical overview video
- Yellen
- Article 50
- Yen declines
- SNB’s job
- soft data
- OIL weakness
- Bearish rotation
- Fed’s bluff
- Elevated uncertainty supports metal
- USDMXN
Suggested reading
- Interview With Howard Marks, B. Ritholtz, Masters in Business (February 22, 2017)
- The Next Market To Break, E. Swarts, Market Anthropology (March 1, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
A recent breakdown below 1.0620 suggests the market could be in the process of rolling back over in favour of a retest in the days ahead of the 14 year low from January at 1.0341. Consider the possibility of a lower top in place at 1.0830 to be confirmed on a break below 1.0341, exposing the next drop through the massive parity barrier. Look for a a daily close below 1.0500 to further strengthen the bearish outlook, while only back above 1.0680 would compromise the bearish prospect.
EURUSD – fundamental overview
The focus this week has been on Fed policy expectations and despite Eurozone data impressing, the Euro has been weighed down on a dramatic ramping up of March Fed hike bets, from under 40% last week to about 90% into Friday. Economic data out of the Eurozone on Friday is second tier and won’t factor into price action. We also get an important US ISM non manufacturing release into North America but this too will likely be brushed aside. The focus on Friday will be on what the Fed Chair has to say in her speech on the economic outlook in Chicago. If the Fed Chair’s tone is consistent with what the market has been hearing from other Fed officials in recent days, the Euro could easily drop some more and settle below this critical support at 1.0500. If on the other hand the Fed Chair tempers the market’s aggressive expectations, the Euro could recover into the close.
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. This latest daily close below 1.2347 ends a period of choppy consolidation and likely opens the door for an acceleration of declines back towards the 1.2000 area, just over the major +30 year base from October 2016 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.
GBPUSD – fundamental overview
In a week where currencies are lower across the board against the Buck, the Pound stands out as the relative underperformer, with the UK currency seemingly less desirable as the market is forced to contend with the prospect of a now imminent triggering of Article 50. Of course the significantly ramped up Fed rate hike odds, sitting at a near certain 90% chance for a March hike into Friday, make the divergence between the Pound and Dollar all the more striking, resulting in setbacks that could now invite a retest of 1.2000 in the sessions ahead. Today’s UK services PMIs and US ISM non-manufacturing are likely to take a backseat, with the market focusing in on the Fed Chair’s speech late in the day, which could either confirm market expectations or temper them. If Yellen confirms hawkish bets, the Pound could easily accelerate to the downside. At the same time, if she strikes a more cautious chord, look for a Sterling recovery into the close on some broad based US Dollar profit taking.
USDJPY – technical overview
Despite this latest bounce, the short-term pressure remains on the downside in light of a recent break of multi-session consolidation that projects weakness below 110.00 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.
USDJPY – fundamental overview
The Yen has come under pressure this week on the back of ramped up Fed rate hike odds which sit at a near certain 90% chance for a March hike into Friday. But there is risk this run up in USDJPY could easily stall out later today when considering the intensity of the latest US Dollar push and the fact that Janet Yellen could temper the market’s aggressive expectations for a March hike. Moreover, with the US equity market finally pausing for a breather and possibly warning of additional corrective activity, this could very well translate into a more aggressive flow into the Yen on its traditional safe haven lure. Even if Yellen’s speech confirms the ramped up Fed odds, any Dollar demand on the back of this development could also be offset if the stock market gets spooked by the prospect for higher rates. US ISM non manufacturing is also out on Friday but will almost certainly take a backseat to the Fed Chair’s speech.
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.
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 only further contributes 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 impressive rally in 2017 has finally stalled out into significant medium-term resistance ahead of 0.7800. The latest break back below 0.7600 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7100 area in the days ahead. Intraday rallies should now be very well capped ahead of 0.7700, while ultimately, only back above 0.7779 would compromise the outlook.
AUDUSD – fundamental overview
Thursday’s Aussie trade data miss was perhaps a bit of a catalyst for a selloff in the Australian Dollar, though setbacks really intensified on the back of ramped up Fed rate hike odds and a concurrent pullback in the US equity market. And early Friday, we’ve already seen more reason to sell Aussie after Australia performance of services dropped back below the 50 boom/bust line. The Australian Dollar had been a clear outperformer in 2017 into this week, but could face more headwinds going forward if the Fed actually follows through with its rate hike guidance and risk markets start to come off. Looking ahead, US ISM non manufacturing will be brushed aside, with the market anxious to hear what Janet Yellen has to say in her speech on the economic outlook late in the day.
USDCAD – technical overview
The market remains very well supported on dips, with the latest bounce out from 1.3000 warning of a more significant bullish resumption. Any setbacks should now be very well supported into the 1.3200 area in favour of an eventual push back through the multi-day peak at 1.3599 further up.
USDCAD – fundamental overview
The Canadian Dollar didn’t get much help from a stronger Canada GDP print on Thursday, with the data offset by a Bank of Canada that had already warned of a stronger Q4 reading and ongoing ramped up US March rate hike expectations. US data didn’t do any favours for the Loonie either, with initial jobless claims producing its lowest print since 1973. Looking ahead, absence of Canada data will leave US ISM non manufacturing as the only notable standout on today’s calendar. However, even this first tier release will likely be brushed aside as the market squares in on Janet Yellen’s speech late in the day. It’s worth noting that although OIL movement hasn’t factored much of late, the pullback on Thursday may have inspired additional Loonie offers.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high. As such, expect the market to continue to roll over in the days ahead, with setbacks projected towards medium-term support in the 0.6600s. Only back above 0.7400 compromises the outlook.
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 ramped up Fed rate hike odds 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, US ISM non manufacturing is due but will be brushed aside as the market focuses in on Janet Yellen’s highly anticipated economic outlook speech.
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 through 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 2350 would be required at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
US equities haven’t been bothered by anything over the past several years, with even rate rises from the Fed doing nothing to dissuade equity investors. Instead, the focus has been on a still exceptionally low rate environment supportive of higher stocks and Trump policies that will fuel additional upside in the market. Many market participants have dismissed the idea that the reversal of Fed policy would have negative impact on stocks, citing recent price action as a testament to this fact. But the reality is that the reversal of policy is still likely to weigh heavily on the market if the market sees that the Fed is committed to holding to its rate hike projections. The market hasn’t believed the Fed will hike at a consistent pace, given that the only consistency investors have seen is the Fed’s consistency to back away from hawkish guidance. So one or two hikes here and there with the expectation the Fed will continue to underdeliver continues to be supportive of stocks. But if the market actually starts to believe the Fed may stick with projections, we could see a more significant reaction to the downside. Of course, investors will be expecting the Fed Chair tempers rate expectations later today, ready to buy into this dip. If she doesn’t, the selloff in stocks could intensify.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out around 1120 in 2016. This latest break to 1260Â 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.
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.
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 this month is giving the Peso an additional boost, with USDMXN trying to settle back below the psychological barrier at 20.00. 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 more than 75bps of Banxico hikes in 2017.