Today’s report: When Monetary Policy Reversal Goes Global
There’s been a clear wave of USD selling this week, particularly against many of the developed currencies, on the back of ramped up hawkishness. The development is a significant one as it has not only resulted in a Dollar rout, but has also started to weigh on global sentiment.
Wake-up call
Chart talk: Major markets technical overview video
- CPI prints
- BOE Haldane
- risk off
- major headwind
- AUDUSDChina PMIs give Australian Dollar fresh legs
- top performance
- Positioning data
- Policy reversal
- Macro backdrop
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Even Central Bankers Hate Low Volatility, R. Burgess, Bloomberg (June 28, 2017)
- Development of a “Perfect Storm?, R. Huebscher, Advisor Perspectives (June 28, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
This latest break to fresh 2017 highs beyond 1.1300 confirms a higher low at 1.1110 and sets the stage for this next upside extension, which takes us into a critical longer-term resistance zone in the 1.1500-1.1700 area. Technically, after consolidating between 1.1100 and 1.1300, the push projects a measured move in the sessions ahead to 1.1500. At this point, it would take a break back below 1.1110 to negate the constructive outlook.
EURUSD – fundamental overview
There has been no let up in the Euro buying into Friday, with the single currency extending its impressive 2017 run. This latest round of gains has clearly been driven on momentum and technical buying, but hotter than expected CPI readings out of Germany and France on Thursday have only given the major pair more fuel for the rally. US economic data was actually quite solid when considering revisions, with GDP pushing up above forecast. But this did nothing to prevent the Euro from building on the run. Looking ahead, key standouts on today’s calendar include German retail sales, German unemployment, US PCE, US personal spending, Chicago PMIs and Michigan confidence.
GBPUSD – technical overview
The market has entered a period of choppy consolidation over the past several sessions but is now expected to be very well supported on dips 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 back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
The big news for the Pound this week was the shifting outlook from Governor Carney who came out decidedly more hawkish as he discussed policy reversal and the conversation of raising interest rates. Carney’s words catapulted the Pound back towards 1.3000, with BOE Haldane following up Carney with some more hawkish talk of his own on Thursday, to keep the run going, with the Pound looking to establish above the 2017 peak at 1.3050. Meanwhile, solid US data did nothing to slow the pace of Sterling gains. Still, with UK political uncertainty and Brexit hanging in the balance, it’s quite possible the Pound will start to have a much tougher time trying to extend gains significantly beyond 1.3000. Looking ahead, key standouts on today’s calendar include UK GDP, US PCE, US personal spending, Chicago PMIs and Michigan confidence.
USDJPY – technical overview
Despite the latest recovery rally, the overall pressure remains on the downside. In the interim, look for any additional upside to remain capped below 113.00, 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
The more hawkish policy trajectories at the Fed, ECB and BOE have unquestionably impacted the Yen over the past week, with the Japanese currency tracking lower as yield differentials widen in favor of the US Dollar, Euro and Pound. Meanwhile, US equities continue to be supported at every turn, refusing to show any signs of sustained weakness, contributing further to Yen weakness on the traditional inverse correlation with risk. Thursday’s pullback in stocks did inspire some renewed Yen demand and if stocks extend declines, it could get things moving more significantly back in the Yen’s favour (USDJPY lower). Looking ahead, we get a healthy batch of US data featuring personal spending, PCE, Chicago PMIs and Michigan confidence.
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
Overinflated, record high US equities 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 have an extremely difficult time offsetting, irrespective of the central bank’s commitment to negative rate policy. The SNB is hoping global sentiment will remain artificially elevated and the ECB will continue to paint a more hawkish picture. But it looks like it really should come down to 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
Despite the latest rally, the market continues to be very well capped into medium-term resistance around 0.7800. Ultimately, any moves to the topside are therefore classified as corrective with the market expected to stall out and roll over again. Look for a break back below 0.7536 to strengthen this outlook and accelerate declines.
AUDUSD – fundamental overview
The Australian Dollar has done a fabulous job holding up, even in the face of some risk off flow, helped along by developments that include a more balanced RBA policy outlook, solid local data a jump in the price of iron ore and this latest strong China PMI data. This week’s hawkish comments from ex-RBA member Edwards have also been a source of Aussie gains after Edwards outlined the possibility the RBA could hike eight times over the next two years, bringing the cash rate up to 3.50%. Still, with the currency running so far and fast and with medium-term players looking to take advantage of a run into more significant longer term resistance in the 0.7800 area, it’s possible Aussie will stall out sooner than later, especially if there are any signs of the onset of a more significant liquidation in risk correlated assets. Looking ahead, we get a healthy batch of US data featuring personal spending, PCE, Chicago PMIs and Michigan confidence.
USDCAD – technical overview
The latest round of setbacks have taken the pressure off the topside for now, with the market trading back into a longer-term range. The recent break below 1.3200 has opened the door for a more pronounced decline into major psychological support at 1.3000. Ultimately however, the longer-term uptrend remains intact and setbacks should be well supported around the 1.3000 barrier. Still, we would now need to see a bounce in the sessions ahead and break back above 1.3348 to strengthen the constructive outlook.
USDCAD – fundamental overview
This latest wave of central bank hawkishness has not been lost on the Bank of Canada by any stretch, with BoC Governor Poloz putting a stamp on the central bank’s shifting outlook earlier this week. Odds for a 2017 BoC hike have ramped up considerably in recent days and this has been a major prop for the Loonie, with one Canadian bank even calling for a rate hike as soon as the upcoming meeting on July 12th. Of course, talking the Loonie without talking OIL is a hard thing to do, and this week’s healthy recovery in the commodity has provided another excuse to pile into Canadian Dollar longs. Looking ahead, there will plenty of reason to expect another active session, with Canada GDP due along with a batch of US data that features personal spending, PCE, Chicago PMIs and Michigan confidence.
NZDUSD – technical overview
Despite the intense surge over the past several days, the overall pressure remains on the downside with the market expected to be very well capped in the 0.7300s. 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. Only a clear break back above 0.7400 would compromise the outlook, while back below 0.7186 strengthens the bearish case.
NZDUSD – fundamental overview
The New Zealand Dollar has put in an impressive rally over the past several days, but is starting to look tired, with local data not as impressive and elevated global risk sentiment increasingly vulnerable. The one saving grace right now is the broad based US Dollar selling, helped along by a wave of hawkishness from other major central banks that is offsetting the Fed’s commitment to keeping with its normalisation timeline. Still, when considering positioning data that shows speculative Kiwi longs at their highest level in over four years, it would seem the currency could be getting close to some form of a top. Looking ahead, we get a healthy batch of US data featuring personal spending, PCE, Chicago PMIs and Michigan confidence.
US SPX 500 – technical overview
The record run continues with the intense bullish momentum intact and the door open for that next push towards a measured move extension at 2480. Any setbacks have been exceptionally mild thus far and at a minimum, a break back below 2400 would be required to take the immediate pressure off the topside. But only a break below 2320 would signal a meaningful shift in the structure.
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 (reversing) Fed policy and rising geopolitical risk. And certainly this ongoing turmoil and gridlock surrounding the US administration 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 forward guidance. This bet will be put to the test in an even bigger way going forward, as the Fed continues to stick to its policy timeline, while other central banks follow suit making the prospect of higher rates more of a reality. The major takeaway is that central banks are sending a clear message it’s finally time to start erring on the side of policy normalization.
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 1214 would compromise the constructive outlook with setbacks ideally seen well supported in the 1230s.
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 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. Look for a break back above 13.21 to negate the bearish outlook and open the door for a bullish resumption.
Feature – fundamental overview
Overall, the South African Rand has done a good job holding up when considering a run of domestic woes including a prosecutor report critical of the SARB, regulatory dispute between miners and the government, a Moody’s downgrade and drama surrounding the Zuma no confidence court ruling and Rand rigging hearings. But it seems these troubling fundamentals coupled with a weaker growth outlook, depressed commodities prices and a more hawkish Fed are starting to weigh on the Rand, with the greater risk from here for additional weakness. Remember, US equities are also exceptionally elevated and at risk for capitulation, yet another risk that could expose the emerging market currency to additional pressure going forward.