Next 24 hours: OIL Bounce Boosts Commodity FX
Today’s report: US Dollar and Grains of Salt
The US Dollar has enjoyed a nice run this week, with most of the gains attributed to hawkish Fed speak that continues to back up forward guidance. At the same time, it's important the Dollar run is taken with a grain of salt. An ECB Draghi speech stands out on a light Wednesday calendar.
Wake-up call
Chart talk: Major markets technical overview video
- ECB Draghi
- Brexit negotiations
- Geopolitical risk
- breathing easier
- Iron-ore recovery
- FBI director
- RBNZ decision
- Bluff calling
- Macro players
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- VIX Drops in Becalmed Markets, D. McCrum, Financial Times (May 9, 2017)
- Think China Home Prices Can’t Topple?, N. Gopalan, Bloomberg (May 9, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market has recently 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 at this point are to be expected but should also be very well supported ahead of 1.0700, with only a break back below 1.0570 to compromise the constructive outlook. But there is risk the market does trade down towards 1.0730 in an effort to fill a recent gap before pushing back up again.
EURUSD – fundamental overview
The focus has shifted back to monetary policy and yield differentials and the market has been responding to this latest slew of Fed speak that continues to point to the central bank keeping with its projection for two more rate hikes this year. We will get more Fed speak in the sessions ahead, but a speech from ECB Draghi will headline Wednesday risk as the market looks for any signs of more hawkishness from the ECB President. We have been hearing hawkish talk from various ECB officials including Mersch and Weber, despite the ECB leaning to the accommodative side at its most recent meeting. So any updates on this front today, particularly with French political risk out of the way, will likely have an influence on price action. Other standouts today include US import and export data, the US monthly budget statement and some more Fed speak. It’s worth noting that some have attributed a minor recovery on Wednesday to the news of the firing of the FBI director.
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 continues to hold up well, with market participants now considering a legitimate bottom in place and targeting moves back towards the 1.3500 area. Meanwhile, economic data has been solid of late, highlighted by last week’s run of PMIs. Of course, the upcoming election and Brexit negotiations are things that should keep bulls from getting too aggressive, though there has been a clear shift in sentiment towards the UK currency from sell rallies to buy on dips. Looking ahead, absence of first tier UK data will leave the market thinking about BOE Super Thursday. But for today, we get US import and export data, the US monthly budget statement and some more Fed speak. It’s worth noting that some have attributed an early Wednesday bid tone to the news of the firing of the FBI director.
USDJPY – technical overview
The recent break and daily close back above 112.20 takes the immediate pressure off the downside, with the market also pushing through falling trend-line resistance from January. This opens the door for additional upside in the sessions ahead, though ultimately, a push through 115.60 will be required for a more constructive outlook. In the interim, the market is confined to neutral territory. Back below 112.09 would put the pressure back on the downside.
USDJPY – fundamental overview
Dovish Kuroda comments, elevated equities and a Fed that appears to be on track for two more hikes this year have all been supporting the major pair, contributing to an intense Tuesday slide in the Yen. Still, there are other forces at play which could invite renewed Yen demand. The reports of North Korea preparing for another nuclear test and news of the firing of the FBI director have not been risk positive developments and any intensification on this front could easily open a flight to safety that once again fuels a pullback in the major pair. As far as today’s calendar goes, we get US import and export data, the US monthly budget statement and some more Fed speak.
EURCHF – technical overview
The latest break back above 1.0900 takes pressure off the downside and could be warning of a more significant structural shift. Next key resistance comes in at 1.1000, with the psychological barrier coinciding with a high from August 2016. The establishment above 1.1000 would strengthen the bullish outlook and open the door for fresh upside. Back below 1.0780 would now be required to put the pressure on the downside.
EURCHF – fundamental overview
Now that Macron has been confirmed as the next President of France, the SNB will need to focus elsewhere for catalysts that support its efforts to weaken the Franc. Macron’s win has been a big help to an SNB committed to weakening its overvalued currency, with the central bank continuing to add to its cushion in the aftermath. But with global risk sentiment highly elevated, as reflected through stock markets, and geopolitical tension on the rise, there should be worry that any capitulation on that front could invite massive safe haven Franc demand the central bank will be unable to offset. For now, the SNB is hoping the ECB will take on a more hawkish policy approach, with ECB Weber and Mersch helping that cause of late. Today, the SNB will be wanting to hear what Draghi has to say about it all.
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. Last 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
Overall, the Australian Dollar has suffered of late on a drop in commodities prices and worry over the impact of the US administration’s protectionist policies. Of course, this week’s horrid retail sales print and an Australian Federal Budget showing a wider deficit haven’t done Aussie any favours. Into Wednesday, there has been some relief, with profit taking on shorts, a recovery in iron ore, firmer China CPI (but PPI was softer) and news of the firing of the FBI director propping the beleaguered currency. As far as today’s calendar goes, we get US import and export data, the US monthly budget statement and some more Fed speak.
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. But the market is looking super stretched at the moment which has invited this short-term correction. Still, any setbacks should now be very well supported in the 1.3500 area 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
Finally some welcome relief for the Canadian Dollar which has managed to hold off from extending declines, at least for the moment. The Loonie has been hit hard in recent weeks on a confluence of drivers including lower OIL, tariffs from the US and troubles at a Canada mortgage lending giant. Last Friday’s softer components within the US jobs report managed to offset weakness in the Canada employment report, inspiring a mild run of profit taking on US Dollar longs, while stability in the price of OIL and the news of the firing of the FBI director have helped the Canadian Dollar from dropping to another yearly low. Looking ahead, absence of first tier Canada data will leave the market watching OIL prices, while also taking in US import and export data, the US monthly budget statement and some more 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, 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
Last week’s run of data out of New Zealand was solid, as highlighted by the GDT auction, employment and inflation expectations. This has helped to prop an ailing Kiwi, weighed down on broader risk associated with declining commodities and worry over the impact of the US administration’s protectionist policies. Meanwhile, softer components in last Friday’s US jobs report, a run to fresh record highs in US equities, and this latest news of the FBI director firing have offered additional support. Looking ahead, the calendar is rather light for the remainder of the day, with only US import and export data, the US monthly budget statement and some more Fed speak standing out. But early Thursday, we get the RBNZ decision which is sure to inspire a fresh round of volatility as the market looks to see if recent developments will result in a less dovish central bank. No change on policy is expected and it will be about the tone and hints at forward gudiance.
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 to a fresh record high. The push back above 2400 opens a measured move extension to 2480. At this point, a break back below 2368 would be required at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
The US equity market has done a good job proving it doesn’t care about anything accept interest rates. There have been many risks thrown at the market in recent years and each time, investors are able to easily shrug off these risks, content to build long exposure with rates exceptionally low and nowhere else to put capital to work. The fact that the Fed has begun the reversal of policy is of no consequence at this point, with negligible rate increases to date, doing nothing to dissuade the market, with valuations remaining attractive. Of course, the market has also grown accustomed to relying on Fed misguidance that has only emboldened the bullish case. Still, with asset prices where they are right now and with the Fed showing it may actually follow through with guidance in 2017, there is risk it could all come crashing down, with upside possibly limited towards 2500 before a major capitulation. It’s worth highlighting the rise in geopolitical risk, something that should be another red flag, particularly when one considers the new US administration’s alternative take on diplomacy.
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. As such, look for the latest round of setbacks to be well supported above the previous higher low at 1195, with only a break back below 1195 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
The US Dollar recovery in recent sessions has contributed to this latest decline, with setbacks accelerating after the Fed downplayed a recent run of softer data, giving the Buck an added boost. Meanwhile, a broad based capitulation in commodities markets is adding to downside pressure. Still, 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.
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, despite the latest pullback, 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
A lot of positives for the Lira of late including S&P affirming Turkey’s ratings (the rating agency was considering a downgrade) and string of hawkish CBRT moves by the CBRT. And yet, with all of this out of the way and the CBRT likely to take a break from its tightening frenzy, downside Lira risk is starting to resurface. Remember, 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. While the result can be viewed as Lira supportive as it reduces political uncertainty which should translate into more stable economic policy, it also has granted an unlimited amount of power to a volatile and controversial political figure which could in turn pose risk on the global stability front. Another major factor that could weigh on the emerging market currency going forward is US Dollar yield differentials if the Fed continues to show that it is likely to follow through with two more hikes this year, especially at a time when emerging market currencies are sensitive to a possible equity market rotation and geopolitical tension.