Next 24 hours: Yen Up, Pound Down, Everything Else Flat
Today’s report: Traders Reflect on What Was and What Will Be
The economic calendar for Monday is exceptionally thin and most of the day will most likely be spent digesting fallout from the UK election and Friday's rout in US tech stocks that was not replicated by the other major US indices.
Wake-up call
Chart talk: Major markets technical overview video
- Macron
- soft Brexit
- policy decisions
- intervention efforts
- holiday trade
- Healthy employment
- FOMC
- investor bets
- Risk off
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Fed Caught in Data Tug-Of -War, R. Wigglesworth, Financial Times (June 8, 2017)
- The Fed’s Evolving Approach to Raising Rates, M. El-Erian, Bloomberg (June 9, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market is showing signs of short-term exhaustion after extending its 2017 run. But with the medium-term structure still quite bullish, any setbacks that we do see in the sessions ahead should ideally be well supported in favour of the next higher low and bullish continuation towards key resistance around 1.1365, which represents the August 2016 peak. Only a break back below 1.1110 would now take the immediate pressure off the topside.
EURUSD – fundamental overview
Macron is now expected to secure a huge majority in parliament as per the weekend results, though this appears to have been widely anticipated, having no material impact on the Euro into Monday. Overall, the Euro remains well bid, but has retreated off recent 2017 highs following last week’s more dovish than expected ECB decision. Although the central bank removed some easing language, the fact that it downgraded inflation forecasts and failed to make any mention of policy reversal, was enough to inspire some profit taking. Still, for the moment, the Euro remains an attractive buy on dips given what should be a move to policy reversal in the months ahead and given broader macro flow that is very much against the US Dollar right now on the back of scaled back Fed odds, US administration protectionism and controversy in the White House. Looking ahead, today’s economic calendar is exceptionally thin and the market may start to position into Wednesday’s critical FOMC decision.
GBPUSD – technical overview
The latest round of setbacks are viewed as corrective with the market expected to be very well supported on dips into the 1.2500s in favour of a higher low and bullish continuation towards a measured move extension objective at 1.3500 in the weeks ahead. A breakout above critical resistance at 1.2775 back in April triggered a structural shift in the major pair warning of a longer-term base. Only a break back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
Setbacks in the Pound have stabilised following Friday’s intense selloff on the surprising election result which now has the PM scrambling to form a government and her position within that government as well. There has been news over the weekend that the PM will now be pushing for a softer Brexit which has been helping to prop the UK currency some more. However, overall, there is plenty of uncertainty outstanding that could make for rocky waters ahead. At the moment, the PM is looking to finalise a deal which will get the Conservatives backing from the DUP, something that would invite additional bids. Not to be forgotten in all of the post election craze is the economic data, which produced disappointing UK industrial and manufacturing production results on Friday. Trade data was however better than expected and helped to offset. Looking ahead, the economic calendar is exceptionally thin and most of the price action will revolve around headlines on the political front and perhaps some positioning into Wednesday’s FOMC decision.
USDJPY – technical overview
A recent recovery run off the 2017 low has stalled out, with the market sharply reversing course to the downside. This latest daily close back below 112.00 now exposes a possible retest of the yearly low at 108.13. In the interim, look for any rallies to be well capped ahead of 112.00, though only a break back above the recent high at 114.37 will negate the outlook and take the pressure off the downside.
USDJPY – fundamental overview
As is traditionally the case with this funding currency, most of the flow will be predicated on risk sentiment, with any deterioration fueling Yen demand and any increased risk appetite inspiring Yen declines. However, later this week, the other major driver of direction will come into play, with the FOMC and BOJ policy decisions due. At the moment, the market is still not sure whether the Fed will signal it is done for the year after it hikes as widely expected on Wednesday. Whatever the Fed signals will unquestionably have a material impact on this major pair. The Bank of Japan is out on Friday and we have been hearing chatter of the need for a more official conversation on policy reversal, which could be something else to watch this week.
EURCHF – technical overview
A recent break above 1.0900 has taken the short-term 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 force a meaningful shift in the structure and open the door for longer-term upside. At the same time, while the market holds below 1.1000 the overall trend is still bearish and a break back below 1.0800 would renew downside pressure.
EURCHF – fundamental overview
The combination of artificially supported, record high US equities and rising geopolitical tension should be a worry for the SNB as any capitulation on the equity front is likely to invite massive safe haven Franc demand the central bank will be unable to offset, irrespective of negative rate policy. For now, the SNB is hoping global sentiment will remain artificially elevated and the ECB will take on a more hawkish policy approach in the months ahead. But the key focus for this market going forward will unquestionably be on the performance in US equities given the influence on broader sentiment. Any signs of intensification to the downside will likely invite a pickup in Franc demand and unwanted downside pressure on EURCHF.
AUDUSD – technical overview
An 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. Ultimately, any moves to the topside are classified as corrective with a fresh lower top sought out and only a break back above 0.7611 to negate the outlook.
AUDUSD – fundamental overview
Aussie volumes have been thinner Monday on account of holidays in Australia for the Queen’s birthday. Overall however, The Australian Dollar has been one of the stronger performers in the developed currency basket over the past week, with Aussie getting an additional boost from a balanced RBA decision, better than expected Australia GDP and impressive China trade data, all in the previous week. Stability in commodities prices has also been helping to prop, along with an ongoing bid in US equities. However, there has been the emergence of offers from medium-term players into this rally, with these accounts still feeling quite skeptical about the outlook for China, elevated equities and choppy commodities prices. Looking ahead, the economic calendar is exceptionally thin with most of the direction to likely be predicated off broader macro flow.
USDCAD – technical overview
The uptrend in this market remains firmly intact, getting added confirmation following the May break to a fresh 2017 high, beyond a previous peak from December 2016 at 1.3600. A period of healthy correction has now ensued and the market will be trying to carve the next higher low, with any additional weakness likely to be limited in favour of a push towards the next measured move upside extension objective in the 1.4200 area. Ultimately, only back below 1.3224 would give reason for pause and delay the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar got a nice boost on Friday on the back of the well received Canada employment data, which came in better than forecast, while also producing an impressive full time employment component. Meanwhile, OIL setbacks have stabilised for the moment, helping to keep the Loonie supported for the time being. Looking ahead, the focus will be on the price of OIL in the early week, before attention then shifts to the US side of the border as the market takes in a critical Wednesday FOMC policy decision. If the Fed surprises the market and still leaves the door open for additional rate hikes in 2017, this could open renewed downside pressure on the Canadian Dollar.
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 a recent break to fresh 2017 lows. However, the recent break back above 0.7100 does take the immediate pressure off the downside, with scope for this corrective run to extend before the market rolls back over. But any upside from here should be well capped below 0.7300. A break back below 0.7035 strengthens this outlook and should accelerate declines.
NZDUSD – fundamental overview
New Zealand Dollar demand off recent 2017 lows has picked up, helped along by negative US Dollar sentiment in 2017, more stable commodities prices and an upbeat batch of recent Kiwi data including consumer confidence, GDT auction results, firmer producer prices and trade data. Meanwhile, local dairy giant Fonterra came out recently, announcing it was raising its milk price forecasts to give the currency another prop. But at the same time, with global equities continuing to look like they have run too far and with many out there worried about an intense wave of risk off flow ahead, these players are happy to sell Kiwi into rallies. Looking ahead, the economic calendar is exceptionally thin, and most of the focus will be on broader risk appetite, sentiment in the aftermath of the UK election and positioning ahead of Wednesday’s critical FOMC decision.
US SPX 500 – technical overview
The market has been unable to break down below major support at 2320 thus far, leaving the pressure on the topside and the door open for that next big record push towards a measured move extension at 2480. However, if setbacks intensify and the market breaks down and closes below 2320, this will signal a shift in the structure and suggest a meaningful top is finally in place ahead of a more significant corrective decline.
US SPX 500 – fundamental overview
There has been a lot of talk about a potential top in the US equity market, with the rally pushing to record highs at an unnerving pace in the face of some disturbing fundamentals including exhausted (and reversing) Fed policy and rising geopolitical risk. And certainly this ongoing turmoil surrounding the US President has made things even more tense. But overall, the US equity market has done a good job proving it can easily buy back into any dip and keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on its forward guidance. The economic calendar is exceptionally thin in the early week, but with a critical FOMC decision capable of shaking things up on Wednesday, we could see investors start to position ahead of the major event.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016, putting in a series of higher lows and higher highs. This latest break to a fresh 2017 high confirms that next higher low in the 1215 area and opens an upside extension towards the 2016 peak at 1375 further up. At this point, only a break back below 1215 would 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 2017 is adding to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid, gold may continue to find bids on risk off macro implications.
Feature – technical overview
USDZAR has been under pressure in recent weeks, though setbacks have managed to stall ahead of the 2017 low thus far. At this point, while additional setbacks are favoured, with the downtrend still intact, a break back above 13.21 would negate the bearish outlook and open the door for a bullish resumption.
Feature – fundamental overview
The South African Rand has done a good job holding up in the aftermath of Friday’s Moody’s downgrade with a negative outlook. Moody’s cited a weakening South Africa institutional framework, reduced growth prospects and the erosion of fiscal strength as the primary drivers behind its decision. However, the market was readying for the possibility of a two notch downgrade and the ability for the country to escape this outcome, has been helping to offset weakness in the aftermath. It would seem though that with all the political mess in the country and concern over the overall health of the economy, the greater risk from here is for Rand weakness. Remember, a lot of Rand strength in 2017 has come from broad US Dollar weakness and equity market strength. But with the Fed capable of inviting renewed interest in the US Dollar later this week, and US equities looking increasingly vulnerable at lofty heights, the case for Rand declines becomes even more compelling.