Today’s report: The Anatomy of this Week’s Price Action
It's been an interesting week in FX. The US Dollar has made a comeback, up across the board, though the biggest gains haven't been against the commodity currencies which have been underperformers on the whole. The big gains have been against the Swiss Franc and Euro. US CPI and retail sales ahead.
Wake-up call
Chart talk: Major markets technical overview video
- dovish Draghi
- Not-so Super
- negative drivers
- US equities
- commodity bounce
- OIL recovery
- dovish RBNZ
- Red flags
- Global uncertianty
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Should Traders Worry about Lack of Worry?, L. Burton, The Telegraph(May 9, 2017)
- Gilts on Hold, Hold Hold, J. Ferro, Bloomberg Gadfly (May 11, 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. However, additional corrective setbacks should not be ruled out, with the market possibly wanting to fill a gap down to the 1.0730 area in search of its next higher low. Ultimately, only below a previous higher low at 1.0570 negates the newly adopted constructive outlook.
EURUSD – fundamental overview
The Euro run has stalled out, with the market initially pulling back on the fact post French election after pricing in the Macron victory in the lead up. Setbacks have extended this week on the combination of ongoing hawkish Fed speak and a let down from ECB Draghi, who was unwilling to make any commitments with respect to policy reversal. The market has not reacted much to Friday’s more or less consensus German CPI and German GDP readings and won’t be too occupied with Eurozone industrial production. The key focus will be in the US, with an important round of data due, including CPI, retail sales and Michigan sentiment.
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
Thursday wasn’t a good day for the Pound, though when once considers the moderate setbacks, the UK currency did hold up rather well. Nevertheless, the initial batch of discouraging industrial and manufacturing production set the tone for the day, with the BOE then coming out, delivering a sub-super Thursday decision. The market was looking ready to build on this impressive recovery, expecting a more upbeat and hawkish tune from Carney and co. but instead got a central bank expressing worry about avoiding a Brexit cliff edge and not willing to make any commitments about policy normalization. The only Pound supportive headline from the risk was the BOE’s concession that policy may need to be tightened by a greater extent than implied by the market curve. But again, this was overshadowed by the rest of the message which leaned to the dovish side. It’s also worth noting that positioning in the Pound is now even for the first time since 2015, something that on the one hand suggests we have seen the worst, but at the same time, opens the door for a bit more of a back and forth around 1.3000. Certainly there is still downside risk with the election next month and with Brexit negotiations in their infancy. Looking ahead, we get US CPI, retail sales and Michigan sentiment.
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 earlier in the week, 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 slide in the Yen. But this slide has come to a halt and there are other forces at play which could invite renewed Yen demand. Most importantly, any signs of risk liquidation on any catalyst is likely to open that renewed Yen demand (USDJPY lower). At the same time, the US Dollar has enjoyed a broad recovery over the past week, but medium-term price trends warn of the possibility for another big drop in the Buck, which could benefit the Yen on the broad based USD weakness. As far as today’s calendar goes, the key focus will be on a batch of US data that includes CPI, retail sales and Michigan sentiment.
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
The Australian Dollar has done a good job holding up on a relative basis, despite setbacks against the US Dollar over the past week. What’s even more impressive is that Aussie has done this in the face of horrid retail sales and an Australian Federal Budget showing a wider deficit. It seems the currency has been more influenced by a rebound in commodities prices, with the OIL recovering nicely and base metals also moving up. Meanwhile, the fallout from the surprisingly dovish RBNZ decision has also inspired cross related Aussie demand, yet another supportive factor this week. Still, overall, the commodities recovery remains in question, the Fed is on course for two more hikes this year and the rotation from the commodity bloc into the Euro and Pound as risk is reduced in Europe could all continue to weigh on Aussie. Looking ahead, we get US retail sales, CPI and Michigan sentiment.
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, though it hasn’t been easy. The latest news of Moody’s downgrades at the Canadian Banks has opened a renewed wave of selling after the Loonie was already dealing with fallout from troubles at a mortgage lending giant and tariffs imposed by the US. The one saving grace this week has been the OIL recovery, which to this point has somewhat offset weakness. Looking ahead, the key focus will be on the price of OIl and a batch of important US data including retail sales, CPI and Michigan sentiment.
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 this week. 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. Looking ahead, most of today’s focus will be on commodities market performance and a batch of US data including retail sales, CPI and Michigan sentiment.
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. Not much reaction to the latest data showing a slightly narrower (Lira supportive) Turkey deficit.