Next 24 hours: No Relief for Australian and Canadian Dollars
Today’s report: Pound Leads Major Currency Surge Against Buck
Into Wednesday, the story has been about renewed demand for the Pound and some broader based weakness in the US Dollar. It's no surprise then to see the UK currency outperforming, with the relative strength coming from the PM May announcement of a snap election on June 8th. Eurozone CPI and the Fed Beige Book ahead.
Wake-up call
Chart talk: Major markets technical overview video
- weekend risk
- Hard negotiations
- JGB purchases
- risk sentiment
- Iron ore
- Loonie underperforming
- solid GDT
- Goldman dissapoints
- Uncertainty
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- UK Election Sends Pound Higher, R. Blitz, Financial Times (April 18, 2017)
- Goldman’s Edge Cuts Both Ways, L. Abramowicz, Bloomberg (April 18, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
Inability to establish above resistance at 1.0875 several days back has kept the pressure on the downside, with the market stalling out into medium-term range resistance and rolling back over. While this could be a minor setback ahead of the next upside extension, it could also be the start to a resumption of the broader downtrend. At this point, a break back above 1.0900 or below 1.0500 will be required for clearer directional insight.
EURUSD – fundamental overview
The Euro hasn’t been bothered by French election risk into the mid-week, with the single currencies rallying sharply on Tuesday on the back of more bearish US Dollar calls from US administration protectionism and upgraded global growth forecasts. Comments from the Treasury Secretary that the US does not have a strategy of talking the Dollar down haven’t been taken too seriously. Meanwhile, the rally in the Pound was also seen helping to influence the Euro’s bid tone. Still, it will be interesting to see if the demand for the single currency persists into the latter half of the week as the market becomes more jittery about the weekend event risk in France. The prospect of an anti EU ballot into the second round of the elections would be unnerving to the Euro and this is a prospect that shouldn’t be so easily dismissed just yet. Looking ahead, we get Eurozone trade and CPI, followed by the Fed Beige Book later in the day. We also get some ECB and Fed speak.
GBPUSD – technical overview
This latest break back above the December 2016 peak is a significant development as it potentially ends a period of bearish consolidation, warning of the formation of a more meaningful longer-term base. Still, it will be interesting to see how the market responds above 1.2775 and if it can hold above the level in the sessions ahead. If the market holds above 1.2775 in the sessions ahead, it could pave the way for the next major upside extension into the 1.3500 area. If the market is unable to hold above 1.2775 it will suggest a false break and could open renewed downside. In the interim, key levels to watch above and below come in at 1.3000 and 1.2616 respectively.
GBPUSD – fundamental overview
The UK PM’s call for a snap election on June 8th has been a welcome development, at least initially, for the Pound, with the UK currency skyrocketing through major resistance on Tuesday on the expectation the election outcome will result in a more cohesive, unified May government that will be able to negotiate a more palatable Brexit. Still, while the polls show good odds for this to play out for May, there is uncertainty around the election and there remains uncertainty over how negotiations with the EU will go. All of this should keep the Pound from wanting to run too far and fast just yet. Looking ahead, absence of first tier UK data will leave the market focused on snap election developments. US Treasury Secretary Mnuchin was back on the wires saying the US does not have a strategy to talk the Buck lower, but the market hasn’t been paying much attention.
USDJPY – technical overview
The recent break of a multi-week range low at 111.60 marked an end to a 400 point bearish consolidation that has now opened this next major downside extension towards a 400 point measured move that targets 107.60 in the sessions ahead. Look for any rallies to be well capped ahead of  110.00, while ultimately, only a daily close back above 112.20 would take the immediate pressure off the downside.
USDJPY – fundamental overview
It will be interesting to see if a move back into negative territory on Japanese 10 year yields forces the BOJ to reduce JGB purchases. This puts the central bank in an uncomfortable position as such a move would also inspire additional demand for the Yen. The Yen has managed to find some offers into Wednesday, getting help from a pickup in risk appetite and rebound off the weekly lows in US equities. Meanwhile, the US Treasury Secretary has said there is no strategy to talk down the US Dollar, which has been mostly shrugged off but could also be driving some Yen weakness. But overall, the combination of broad based US Dollar weakness and threat of additional risk liquidation flow, seems to support the possibility for additional Yen upside (USDJPY lower) ahead. As far as today’s calendar goes, we get the Fed Beige Book and some Fed speak. The Yen will also be monitoring any developments on the geopolitical front.
EURCHF – technical overview
Rallies continue to be very well capped, with the market adhering to a broader downtrend of lower tops and lower lows. The most recent rally has stalled at 1.0826 where a fresh lower top is now sought ahead of the next major downside extension below the 2016 base at 1.0624 and towards 1.0400 further down. Only back above 1.0826 delays the bearish outlook.
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 appetite for risk, the Franc hasn’t been able to weaken all that much. There have been some signs of the SNB perhaps making a little headway on reports of a boost in SNB reserves, but a meaningful pullback in risk markets could easily offset that advantage.
AUDUSD – technical overview
The impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent 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 0.7000 area in the days ahead. However, the market will need to see a daily close below previous support at 0.7475 to strengthen the bearish outlook. In the interim, any rallies should be well capped below 0.7700.
AUDUSD – fundamental overview
The Australian Dollar continues to take its hits despite some broad based US Dollar selling, with the commodity currency unable to avoid focusing on a more dovish RBA Minutes earlier this week, along with falling iron ore prices and some cross related selling against its Kiwi cousin after New Zealand GDT auction results were solid. Earlier, comments from the US Treasury Secretary that there was no strategy to talk down the US Dollar could also be weighing on Aussie, though these comments have been mostly shrugged off by the market. Looking ahead, we get some Fed speak and the Fed Beige Book.
USDCAD – technical overview
The market remains very well supported on dips, with this year’s bounce out from the 1.3000 area warning of a more significant bullish resumption. Any setbacks should now be very well supported above 1.3200 on a daily close basis in favour of an eventual push back through the multi-day peak at 1.3599 and towards 1.4000 further up. Ultimately, only back below the 2017 low at 1.2969 would force a meaningful shift in the structure.
USDCAD – fundamental overview
The combination of weakness in the price of OIL, softer commodities in general, and last week’s Governor Poloz comments warning the Bank of Canada could not just follow the US on rates, have been preventing the Loonie from joining in on the party against the US Dollar. Over the past week, the Canadian Dollar is the only developed currency down against the Buck. And into Wednesday, the US Treasury Secretary’s comment that the administration has no strategy to talk down the Buck could be further contributing to Loonie offers. Looking ahead, absence of first tier data on the Canada calendar will leave the market focused on the price of OIL, the Fed Beige Book and some Fed speak.
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
The New Zealand Dollar got a welcome boost on Tuesday from a fresh wave of US Dollar selling and a well received GDT auction which came in at 3.1% versus 1.6% previous. The fact that the auction result was in positive territory was also a big deal given how much these readings have struggled of late. Still, the overhang of geopolitical risk and worry over a potential capitulation in global equities are things that will keep the market from wanting to get too bullish the risk correlated currency. Moreover, with commodities coming under pressure, the outlook for Kiwi is far less rosy than the other non-USD major currencies. Looking ahead, we get some Fed speak and the Fed Beige Book.
US SPX 500 – technical overview
An extended run to record highs is finally showing signs of exhaustion in 2017, with the market rolling over, taking out critical short-term support at 2350. This now opens the door for a possible acceleration of declines towards 2270 in the sessions ahead, with a daily close below 2320 to strengthen the outlook for a more significant structural shift. In the interim, rallies should be well capped below 2380.
US SPX 500 – fundamental overview
Bulls remain in control overall despite recent setbacks, though there have been legitimate cracks at the surface in recent days. This month’s Fed Minutes citing equity overvaluation and possible balance sheet shrinkage later this year haven’t been stock market positive, while the rise in geopolitical tension and these latest sup-par earnings from Goldman Sachs are only adding to the strain. Furthermore, the market is waking up to the fact that the new US administration’s alternative take on diplomacy could make for a less predictable path for equity markets. Stocks will continue to monitor these developments going forward.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016. This latest break to another yearly high through 1265 strengthens the outlook, confirming the next higher low at 1195, while opening the door for the next major upside extension towards a measured move into the 1335 area. Look for any setbacks to be well supported ahead of 1230, with only a break back below 1195 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Meanwhile, a bout of US Dollar selling (bullish gold on inverse correlation) has also kicked in as the market gives more serious consideration to US policies that are likely to direct the US Dollar lower.
Feature – technical overview
USDTRYÂ has been in a period of choppy consolidation since topping out at a fresh record high earlier this year. At this point, the structure continues to favour the topside, with scope still existing for a bullish continuation to yet another record high. At a minimum, a break and close back below 3.5580 would be required to potentially force a shift in the outlook and open the door for a more significant bearish corrective phase.
Feature – fundamental overview
The currency market is still taking time to digest the latest result in the Turkish referendum which produced a narrow “Yes” victory for President Erdogan. On the one hand, the result can be viewed as Lira supportive as it reduces political uncertainty which should translate into more stable economic policy. On the other hand, the move to grant an unlimited amount of power to the President could pose risk on the global stability front, which would be viewed as Lira bearish. And so, the Lira has been mostly sideways in the aftermath. Of course, geopolitical risk, the US administration’s protectionist policies and possible vulnerability in global equities are other themes that need to be considered with respect to the outlook for the emerging market currency.