Special report: BOE Super Thursday Preview
Next 24 hours: Central Banks Disappoint Expectations for Change
Today’s report: Volatility Risk Heats Up on Super Thursday
Currencies have been confined to tight ranges into Thursday, with the lack of volatility attributed to a quiet Wednesday calendar and positioning into a more active latter portion of the week. The only exceptions are the New Zealand and Canadian Dollars, both hit, on dovish policy and bank downgrades respectively.
Wake-up call
Chart talk: Major markets technical overview video
- Draghi disappoints
- Super Thursday
- negative drivers
- SNB activity
- Cross demand
- Moody’s downgrades
- RBNZ surprises
- forward misguidance
- Bigger picture
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Moon's South Korean Ostpolitik, Y. Young-Kwan, Project Syndicate (May 9, 2017)
- Why Everyone Is Watching the VIX Now, J. Ferro, 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 Euro didn’t get any help from the ECB President on Wednesday, with Draghi echoing recent rhetoric despite expectation the central banker would offer up new hints on monetary policy direction. Meanwhile, a wave of hawkish Fed speak into this week continues to weigh on the single currency off its post French election yearly high. Looking ahead, the calendar is rather light, with most of today’s focus in the UK given the first tier data there and BOE Super Thursday. But we do get German wholesale prices, the ECB economic bulletin, US initial jobless claims, US producer prices and some more Fed speak.
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
A period of subdued price action for the Pound could be coming to an end, with things heating up in a big way today. Initially, the market will take in UK industrial production and trade, before turning its attention to the Super Thursday headline event. The Times MPC have come out with their vote for a 6-3 hold and there is now speculation we could see another dissenter later today, joining up with Forbes and voting for a hike. But it’s unlikely the BOE will be wanting to rock the boat too much given an upcoming election and tough Brexit negotiations ahead. Additionally, with other central banks still leaning to the accommodative side, it would be strange to see Carney and co deviating from this course. US initial jobless claims, US producer prices and some more Fed speak are also scheduled on Thursday.
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 this week, contributing to an intense 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, most of the focus will be on the BOE decision, though we also get US initial jobless claims, US producer prices 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, though Draghi offered no such help on furthering that cause on Wednesday.
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 Thursday there has been some relief, with profit taking on shorts, a recovery in iron ore, and cross related Aussie demand post the dovish RBNZ decision helping to keep Aussie supported. As far as today’s calendar goes, most of the focus will be on the BOE decision, though we also get US initial jobless claims, US producer prices 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
The Canadian Dollar has been doing its best to avoid another drop to fresh 2017 lows, but isn’t getting any help on this front into Thursday. The latest news of Moody’s downgrades at the Canadian Banks has opened a renewed wave of selling. This only adds to a confluence of negative drivers including lower OIL, tariffs from the US and troubles at a Canada mortgage lending giant. Wednesday’s OIL recovery had been helping to restore demand for the Canadian Dollar before the rating agency news wiped out those gains. Looking ahead, we get the Canada new housing price index along with US initial jobless claims, US producer prices 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
The RBNZ did a good job of catching the market off guard early Thursday. Participants were expecting the central bank to adopt a more hawkish tone given a recent run of economic data and reduced risk abroad, but the central bank failed to meet this expectations. Instead, the RBNZ lefts rates unchanged with a clear message that it would be remaining on hold for a considerable period of time and it had no interest to hike rates with inflation still subdued. Moreover, Governor Wheeler expressed his pleasure in seeing the Kiwi rate lower, which should help to support inflationary pressures. We did see a bounce after the currency dropped to a fresh 2017 low, with many attributing the demand to offsetting comments from the assistant governor who was not happy about the drop in the exchange rate. Looking ahead, most of the focus will be on the BOE decision, though we also get US initial jobless claims, US producer prices and some more Fed speak.
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 to 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.