Next 24 hours: No Big Surprises from Fed Minutes
Today’s report: Currencies Ready to Gear Up Post US Holiday
FX markets were mostly comfortable pausing for a rest on Tuesday, using the US holiday as an excuse to keep things calm. Still, this didn't stop the Euro and Pound from extending declines a little more, perhaps on softer Eurozone producer prices and dovish BOE Vlieghe speak respectively.
Wake-up call
Chart talk: Major markets technical overview video
- producer prices
- BOE Vlieghe
- Strong ISM
- SNB
- RBA disappoints
- Poloz
- GDT auction
- Fed Minutes
- Global uncertainty
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- The Insidious Threat of Data Mining Bias, K. Longmore, Quantify (May 24, 2017)
- Why Japanese Investors Should Say Oui Again, M. Ashworth, Bloomberg (July 3, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
This latest break to fresh 2017 highs beyond 1.1300 has confirmed a higher low at 1.1110 opening this latest extension towards 1.1500, which also coincides with critical longer-term resistance in the 1.1400-1.1700 area. But daily studies are looking stretched, suggesting any additional upside could be difficult, with the greater risk building for some form of a meaningful bearish reversal in the sessions ahead. Still, the uptrend in 2017 is well intact and a break below back below a confirmed higher low at 1.1110 would be required to shift the broader focus back to the downside.
EURUSD – fundamental overview
Perhaps Tuesday’s softer Eurozone producer prices contributed to a mild continuation of declines, though overall, there wasn’t much going on in the major pair, with the US out on holiday. But activity is expected to pick up from now into the end of the week, as US participants return to the desks. We have seen the Euro stall out a bit since rallying to fresh 2017 highs in the previous week after Draghi came out surprisingly hawkish. Some traders assign the Euro pullback to nothing more than a healthy correction ahead of a continuation of gains, while others are more skeptical, looking at this week’s solid US ISM manufacturing data as something that will support the Fed’s bias to push forward with another rate hike in 2017. We’ll get more insight into the Fed thought process later today with the FOMC Minutes due. Also out on Wednesday are some Eurozone services PMIs, Eurozone retail sales and US factory orders.
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. Still, in the shorter-term, choppy consolidation in the 1.2500-1.3000 area should not be ruled out before the market ultimately breaks higher.
GBPUSD – fundamental overview
Softer UK manufacturing PMIs earlier this week have been followed up by a miss on construction PMIs, with the data disappointments putting renewed downside pressure on the Pound following an impressive rally. Meanwhile, BOE Vlieghe has does nothing to help the UK currency’s cause after saying a rate hike right now would be a mistake. Looking ahead, we get some UK services PMIs, followed by US factory orders. But the big event of the day, which comes late, is the release of latest FOMC Minutes.
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 114.00, 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 in recent days, 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. However, there is risk all of this central bank hawkishness spooks the global equities market, which could inspire renewed Yen demand on traditional correlations (USDJPY lower). Looking ahead, the market will return to fuller trade with the US back in the swing. Key standouts on the calendar include US factory orders and the anticipated FOMC Minutes late in the day.
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 negative rate policy and intervention efforts. 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
Most currencies were confined to tight ranges on Tuesday, seemingly preferring to wait for fuller trade to resume after the US holiday. But this wasn’t the case for the Australian Dollar, which underperformed on the day despite a well received Aussie retail sales report early on. But Tuesday proved to be all about the RBA decision and the central bank’s inability to offer a more upbeat hawkish outlook that many had been expecting. This caught the market off guard, with the thinner trade perhaps contributing to the slide. Medium-term accounts have also been factoring into some of the weakness in recent sessions, with these players recognizing risk to the correlated China economy if global equities begin to falter. As far as today goes, we get US factory orders, followed by the more highly anticipated FOMC Minutes.
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 through major psychological support at 1.3000. Ultimately however, the longer-term uptrend remains intact and setbacks should be well supported below the 1.3000 barrier. Still, we would now need to see a bounce in the sessions ahead and break back above 1.3044 at a minimum to strengthen the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar is now the only currency tracking higher against the Buck over the past week, with the Loonie continuing to benefit from hawkish Bank of Canada speak and an impressive recovery in the price of OIL. Still, the Loonie’s run is now looking like it could be overdone, with dealers talking profit taking, even in the face of higher OIL. Looking ahead, it’s Canada’s turn at an empty calendar, with the focus on US factory orders and a more highly anticipated FOMC Minutes later in the day.
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 longer-term 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 in recent weeks, but is starting to show signs of exhaustion. Monday’s round of broad based US Dollar demand, helped along by an impressive US ISM manufacturing reading served as an initial weight, while on Tuesday, despite some positive components, the GDT produced another negative print. Meanwhile, fear of vulnerability in global equities is acting as an additional strain for Kiwi. As far as today goes, we get US factory orders, followed by the more highly anticipated FOMC Minutes.
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
The US equity market has done a good job proving it’s easily supported into any dip and can keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on forward guidance. But this bet will be put to the test in a big way going forward, with the Fed upgrading its commitment to policy normalisation and other major central bank jumping on the monetary policy reversal bandwagon. The major takeaway is that central banks are sending a clear message that an era of artificial support is finally coming to an end. Looking ahead, the stock market will get more insight into the monetary policy picture with the FOMC Minutes due later in the day.
GOLD (SPOT) – technical overview
The market has come under intense pressure since rallying to a fresh 2017 high in June, with setbacks accelerating. However, overall, setbacks have been very well supported for many months now, with the yellow metal putting in a series of higher highs and higher lows since basing out in 2016. As such, look for additional declines to be limited, with the market ideally holding above the previous higher low at 1214 on a daily close basis ahead of the next major upside extension and bullish resumption.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about 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
USDZARÂ is showing signs of the formation of a meaningful base since bottoming out around 12.30 earlier this year. The latest push back above 13.21 strengthens this outlook and sets the stage for a continuation of gains towards next key resistance at 13.71 further up. Any setbacks should ideally be well supported ahead of 12.55, with only a break back below this level to negate the constructive outlook.
Feature – fundamental overview
The South African Rand is finally succumbing to a wave of negative drivers including domestic woes and US Dollar supportive yield differentials. On the local front, the focus right now is on the ANC conference, which is trying to figure out who will succeed President Zuma as party leader in December. The government has also been under intense pressure, given an endless stream of corruption accusations. The debate on the opposition motion of no-confidence in Zuma also hangs in the balance and is scheduled for next month. Throw in persisting recessionary forces in South Africa and the prospect for a material reversal in elevated global equities and it all points to the greater risk for Rand weakness going forward.