Special report: UK Employment – Watch the Wages
Next 24 hours: Yen Absorbs US Equity Rout Flow
Today’s report: Political Event Risk Consumes Market
The FX market can't get away from politics in 2017, with this latest US administration-Russia controversy rattling the Buck. Of course, a wave of softer US economic data has also resulted in yet another reconsideration of the Fed rate hike timeline in 2017, with doubts over the Fed's ability to hike back on the rise.
Wake-up call
Chart talk: Major markets technical overview video
- CPI data
- UK employment
- White House
- tough spot
- consumer confidence
- Production cut
- GDT auction
- Stocks off
- Safe haven
- USDSGDÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Taking Eurozone Growth Seriously, J. O’Neill, Project Syndicate(May 16, 2017)
- Chili Mafia’ Being Hunted by Indonesian Police, K. Salna, Bloomberg (May 16, 2017)
Chart talk: Technical & fundamental highlights
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EURUSD – technical overview
The surge continues with the market extending its run in 2017 to fresh highs. The latest break above the previous 2017 high at 1.1020 confirms a fresh higher low in place at 1.0840 and opens a measured move extension to 1.1200 in the sessions ahead. Overall, the market is showing signs of the formation of a meaningful base, with the recovery off the multi-year low from January pointing to additional upside towards 1.1500. At this point, only back below 1.0840 will take the immediate pressure off the topside.
EURUSD – fundamental overview
The persistent barrage of attacks on the US administration are taking their toll on a US Dollar already contending with a softer run of data and scaled back Fed rate hike bets. Meanwhile, the Euro continues to benefit from significantly reduced structural risk in the zone, more upbeat data and taper talk. All of this has fueled an intense rally in the single currency, which has emerged as an outperformer in the FX market. Looking ahead, the market will digest this latest Eurozone CPI reading to see if it further confirms the likelihood of the ECB moving in the policy reversal direction. Absence of first tier data out of the US will leave the market focused on headlines out of the White House and what are sure to be a string of tweets from the President.
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
Wage growth has been a concern in the UK and this comes into focus today with the release of the latest round of UK employment data. The Pound has enjoyed a nice run in recent weeks, though the UK currency is proceeding with more caution ahead of 1.3000 with plenty of risk still out there associated with the upcoming UK election and Brexit negotiations. The market has now priced out the worst case Brexit scenario which has helped to inspire the recent breakout, while the wave of broad based US Dollar weakness on US political turmoil and softer US economic data have only further supported the Pound’s run. Still, the market appears to be comfortable settling into this new area, not wanting to run too far and fast just yet. If wage growth remains subdued today, it will likely open some profit taking on longs, while anything on the hotter side could trigger a run through that 1.3000 barrier. Absence of first tier data out of the US will leave the market focused on headlines out of the White House and what are sure to be a string of tweets from the President.
USDJPY – technical overview
The run off the 2017 low has stalled out, with the market rolling over well ahead of major resistance in the form of a previous range high from earlier this year at 115.60. Look for a daily close back below 112.00 to put the pressure back on the downside, exposing a possible retest of the yearly low. At the same time, inability to establish below 112.00 will leave the outlook balanced, with the market likely to consolidate. Ultimately, a push back above 115.60 would be required to trigger a bullish shift.
USDJPY – fundamental overview
The Yen hasn’t been able to ignore the latest swirl of controversy surrounding the White House, with tension heating up on reports the President compromised a federal investigation involving Russia. There has been a consistent attack on the White House since the President has taken office and investors are starting to show they are concerned. The combination of the risk off flow and broad based US Dollar weakness on the back of this development and an already soft patch of US data have opened a more pronounced Yen rally into Wednesday. Dealers are talking stops below 112.00 and given the absence of first tier US data today, the political headlines and President’s tweets are likely to command most of the attention.
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
The SNB got a lot of help from reduced risk in the Eurozone following the France election, clearly taking advantage of the momentum through additional efforts to weaken the Franc 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 as per reports the central bank is preparing for a taper, and today’s Eurozone CPI data will be something the central bank has an eye on, clearly hoping the data comes in on the hotter side.
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. The drop below 0.7500 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 hasn’t been all that bothered by the early Thursday Westpac consumer confidence miss and this latest wave of risk off flow on the back of controversy out of the White House. Instead, the price action reflects a market that is now more consumed with the idea of selling the US Dollar across the board irrespective of any traditional correlations with risk off flow. Of course, rallying commodities prices have also helped to offset the risk off flow, with Aussie looking to work its way back out from multi-day lows. Dealers do however cite solid demand from medium-term accounts in the 0.7500-0.7600 area. Absence of first tier data out of the US will leave the market focused on headlines out of the White House and what are sure to be a string of tweets from the President.
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 ahead of 1.3400Â 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 is finally recovering off 2017 lows after getting hit hard on the combination of US tariffs, rating agency downgrades, troubles at a mortgage lending giant and a drop in the price of OIL. But, a recovery in the price of OIL (latest run on Russia-Saudi Arabia talk of production cuts extending into 2018), soft batch of US data since last Friday, comments from BOE Governor Poloz that risk associated with mortgage lending giant Home Capital Group has been contained and more controversy out of the White House relating to leaks have definitely helped to inspire some profit taking on Canadian Dollar shorts. Absence of first tier data out of the US will leave the market focused on Canada manufacturing data, headlines out of the White House and what are sure to be a string of tweets from the President.
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 latest GDT auction showing has extended the streak of positive results to five, while New Zealand producer prices have also come in on the firmer side, helping to give Kiwi an added boost today. The commodity currency is already benefiting from the intense wave of negative US sentiment that has rocked the US Dollar across the board. Interestingly, even the sell off in US equities has failed to weigh on the risk correlated currency. Of course, the concurrent recovery in in commodities prices is also offsetting. Still, there are many out there doubting the presumption that the negative developments out of the US should be contained to the US and these players are happy to sell Kiwi into rallies. Absence of first tier data out of the US will leave the market focused on headlines out of the White House and what are sure to be a string of tweets from the President.
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. We have seen some profit taking into Wednesday on this latest controversy out of the White House, though the setbacks have been marginal at this point. 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
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. Certainly the US Dollar back under pressure in recent days is adding to the metal’s bid tone as well.
Feature – technical overview
USDSGD has been trending lower in 2017, making a series of lower highs and lower lows. The most recent lower top comes in at 1.4220 and a fresh lower top is now sought out ahead of this level, possibly around 1.4130 in favor of the next major measured move downside extension into the 1.3700 area. At this point, only back above 1.4220 negates the bearish outlook.
Feature – fundamental overview
The Singapore Dollar has done a fabulous job overlooking today’s non-oil domestic export data which came in quite weak. For now, it seems the currency is more focused on the broader macro flows and fallout from an intense wave of US Dollar selling on the back of softer US economic data and this latest controversy out of the White House. Looking ahead, the market will continue to focus on these broader flows with no local data of note until next weeks Q1 GDP release.