Next 24 hours: Commodity FX Fights Back
Today’s report: Thin Holiday Trade Kicks Off Busy Week
Many markets are closed for Labour Day holidays and trading conditions are super thin to start the week. We have just come out of an April which saw the major currencies track higher against the US Dollar, with the Pound and Euro outperforming, while the commodity bloc currencies were lower against the Buck.
Wake-up call
Chart talk: Major markets technical overview video
- hot CPI
- Tough talk
- US shutdown
- nice boost
- China PMIs
- falling OIL
- Cross related
- No distress
- Macro players
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Mexican Manufacturers Betting on NAFTA, J. Webber, Financial Times(April 28, 2017)
- Investors Have Hard Time Looking Truth in the Face, J. Zweig, WSJ (April 28, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market has now cleared major resistance at 1.0906, breaking to a fresh 2017 high, while confirming a higher low at 1.0570. The break strengthens the case for a major bottom and opens the next upside extension towards the 1.1400 area. Setbacks should be very well supported, with only a break back below 1.0570 to compromise the constructive outlook. On a short-term basis, there is room for a corrective decline to fill last Monday’s gap open, with a higher low then sought out in the 1.0700 area.
EURUSD – fundamental overview
It will be a slow start to the week for the Euro, with many markets closed for the Labour Day holiday. Overall, the single currency has been very well bid, trading just off fresh 2017 highs and coming out the month of April where it was just behind the Pound. The reduction of structural risk from the France election catapulted the Euro in the previous week, while a subsequent release of hotter inflation data helped to keep the currency well supported on dips. Meanwhile, the protectionist policy outlook for the US administration continues to inspire profit taking on long USD exposure. The big event this week will be the Fed decision, though we also get first-tier Eurozone data and an important US NFP release late in the week. As far as today goes, we haven’t seen much of a reaction to the news the US government has reached a deal to avoid a shutdown through September. Later on, we get a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due. The market will also be thinking about the upcoming Sunday election in France which has Macron winning out handily at this point, clearly reflected in the subdued implied volatility.
GBPUSD – technical overview
This latest push through 1.2775, 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. The break ends a multi week consolidation mostly ranging between 1.2000-1.2700 with the bullish move paving the way for a measured moved upside extension equal in size back into the 1.3500 area in the days ahead. Still, there is rise for a short-term pullback, though any declines are now classified as corrective and should be well supported ahead of 1.2500 in favour of a higher low and bullish resumption.
GBPUSD – fundamental overview
The Pound was the star performer in the month of April, with gains exceeding 3% against the US Dollar on the month. This was the strongest performance for the currency in quite some time, reflecting a potential shift in sentiment towards the UK currency. Though a recent run of softer economic data (retail sales and GDP) and some hard back and forth between EU officials and the May government have soured the tone a little, the Pound has managed to hold up well. The market has been focused on bigger picture themes at the moment, with the June snap election expected to unify the May government, helping the country to move forward without being held back by government infighting. As far as today goes, the UK is closed for holiday, which will keep trade light early on. We haven’t seen much of a reaction to the news the US government has reached a deal to avoid a shutdown through September. Later on, we get a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due.
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 the next major downside extension towards a 400 point measured move that targets 107.60 in the sessions ahead. As such, look for the current rally to be capped below 112.20 on a daily close basis in favour of a lower top and bearish resumption to fresh 2017 lows. Only a daily close above 112.20 will take the immediate pressure off the downside.
USDJPY – fundamental overview
News the US government will avoid a shutdown this week, buying time until September, has helped to prop up the major pair in some thin Monday holiday trade. Overall, all of the moves in the Yen right now are directly correlating with the market’s risk appetite. And so, with US equities leading the charge back to record highs this week, the market is once again selling Yen, even in the face of impressive rallies in the other major currencies against the Buck. Looking ahead, if US equities continue to push, expect the Yen to inversely correlate (USDJPY higher), if on the other hand US equities show signs of weakness, the Yen is likely to rally. As far as today goes, we get a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due.
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 rallies have stalled above 1.0800 and a fresh medium-term lower top is sought below 1.0900 ahead of the next major downside extension through the 2016 base at 1.0624 and towards 1.0400 further down. Ultimately, only back above 1.0900 would negate the overall bearish outlook.
EURCHF – fundamental overview
There is  no doubt that among those who have been celebrating the results of last week’s election in France, officials at the SNB are right up there. The SNB has been battling the market for months in an effort to prevent the Franc from appreciating, seemingly drawing an unofficial line in the sand around EURCHF 1.0600. The SNB’s efforts have been met with an aggressive wave of consistent demand for the safe haven Franc, despite the incredible disincentive of negative rates. But the Macron victory has reduced quite a bit of risk in the Eurozone this week, helping to drive the Euro higher as many market participants feel better about moving back into the Euro and using it as a legitimate funding currency. The EURCHF rate has pushed to a fresh 2017 high and will be looking to see if it can overcome a key obstacle at 1.0900. Still, while the SNB can relax a little, it shouldn’t relax too much as the threat of a highly extended global equity market that could be inching closer to a major capitulation, should be keeping the central bank on high alert. If such an event were to occur, it would be difficult to see a scenario where the SNB could fight against such widespread demand for the Franc.
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 0.7500 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. This week’s drop below 0.7475 strengthens the bearish outlook and any rallies should be very well capped ahead of that previous support now turned resistance at 0.7600.
AUDUSD – fundamental overview
The Australian Dollar managed to outperform its commodity currency peers in April, but was still down over 2% against the Buck on softer commodities, fear over US protectionism, geopolitical risk, cross related selling against the major currencies and a less favorable yield differential outlook. The currency has managed to find some support since last Thursday, with some more mild bids coming in early Monday despite a softer round of PMI data out of China. As far as today goes, we haven’t seen much of a reaction to the news the US government has reached a deal to avoid a shutdown through September. Later on, we get a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due. The market will also be thinking about tomorrow’s RBA decision in which the central bank is expected to leave rates on hold with a neutral bias.
USDCAD – technical overview
The uptrend in this market remains firmly intact, getting added confirmation following this latest break to a fresh 2017 high and through a key peak from December 2016 at 1.3600. Any setbacks should now be very well supported above 1.3224 on a daily close basis in favour of an eventual push towards the next measured move upside extension objective in the 1.4000 area. Ultimately, only back below 1.3224 would give reason for pause and delay the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar was the hardest currencies in the developed currency basket in the month of April, with a good deal of that weakness coming from the new US administration's protectionist policies that will make trading with the US more difficult for its partners. The Loonie sits at fresh 2017 lows into May after dropping +2.50% in April. Last week we heard about the US imposing tariffs on Canada, and despite the more conciliatory talk between the two nations later in the week, with the President agreeing to renegotiate NAFTA, the Loonie hasn’t been able to catch a bid. Weakness in the commodity sector has already been a major drag, with the price of OIL dropping back below $50, only adding to the strain. As far as today goes, we haven’t seen much of a reaction to the news the US government has reached a deal to avoid a shutdown through September. Later on, we get Canada manufacturing PMIs and a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due.
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, with outlook strengthened on this week’s breakdown to a fresh 2017 low. 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 0.7100 compromises the outlook.
NZDUSD – fundamental overview
The New Zealand Dollar came under quite a bit of pressure in April, sinking to fresh 2017 lows, with setbacks in commodities and worry over the implications of protectionist US policy weighing on the commodity currency. The setbacks have also come at a time when Kiwi would normally be supported on drivers like a rally in the major currencies against the Buck (ex-Yen) and perhaps more importantly, a rally in US equities back to fresh record highs. Kiwi was the second worst performer in the developed currency group in April. Meanwhile, strong cross related selling against the developed currencies has further contributing to Kiwi declines. As far as today goes, we haven’t seen much of a reaction to the news the US government has reached a deal to avoid a shutdown through September, while softer China PMIs also haven’t really factored into price action. Later on, we get a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due. On Tuesday, Kiwi will be interested to see what comes of the RBA decision while also taking in the GDT auction.
US SPX 500 – technical overview
The market was unable to break down below major support at 2320, leaving the pressure on the topside and opening the door for this latest run back to record highs. At this point, a push through 2400 will open the door for the next major upside extension towards 2500, while at a minimum, a break back below 2368 would be required to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
Bulls remain in firm control despite the emergence of legitimate cracks at the surface in the month of April. April’s Fed Minutes citing equity overvaluation and possible balance sheet shrinkage later this year weren’t exactly stock market positive, while the rise in geopolitical tension and sup-par Goldman Sachs earnings are only increasing stress. 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. But again, for now, only tiny cracks, with investors still comfortable playing the game of trading sideways (not down) on stress and then rallying to fresh record highs on any signs of an elimination of the stress, given the artificial rate environment. Macron’s victory in the first round of the French election significantly reduced systemic risk and was been primarily responsible for late April surge. As far as today goes, we haven’t seen much of a reaction to the news the US government has reached a deal to avoid a shutdown through September. Later on, we get a healthy run of data out of the US, with personal income, personal spending, core PCE, ISM manufacturing and construction spending due. Of course, later this week we get the Fed decision and monthly jobs report.
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 on dips, 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) in 2017 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
USDTRY 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 daily close back below 3.5000 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 Lira got another boost last week after the CBRT surprised the market with another tightening move by way of “late liquidity window” (LLW), the highest of the four rates the central bank uses. The CBRT raised the LLW by 50bps, this after analysts were split on no change or a possible 25bp bump. The move suggests the central bank may be more serious about tackling inflation, which could make the Lira a little more attractive going forward. The hawkish decision was also followed up with an upbeat Minutes highlighting reduced risk to the economy and a better growth outlook. But overall, 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. 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 going forward.