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Today’s report: Is the US Dollar Run Done?
The US Dollar has seen a modest recovery over the past week, though the rally stalled out on Wednesday as the US market returned to the desks post holiday. Wednesday's FOMC Minutes failed to produce any fireworks and the Buck was left consolidating into Thursday.
Wake-up call
Chart talk: Major markets technical overview video
- ECB speak
- softer PMIs
- Geopolitical risk
- SNB strategy
- Weak copper
- OIL declines
- negative GDT
- CB support
- macro dynamics
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Keep Eye on Sovereign Debt, A. Gallo, Bloomberg (July 5, 2017)
- Shaking Russia's Weak Economic Hand, K. Rogoff, Project Syndicate (July 5, 2017)
Chart talk: Technical & fundamental highlights
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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
We have seen the Euro stall out a bit since rallying to fresh 2017 highs in the previous week after ECB President 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 another Fed rate hike this year and possible risk liquidation to weigh more heavily going forward. This week’s economic data hasn’t been entirely Euro supportive either, while we’ve also been getting some dovish speak, most recently from ECB Coeure. The Fed Minutes failed to produce any surprises and the market will digest today’s calendar which includes German factory orders, German construction PMIs, US ADP employment, US initial jobless claims, US trade, US ISM non manufacturing and some more ECB and Fed speak.
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
Wednesday was a quiet day for the Pound, with the UK currency confined to a tight range, seemingly content on consolidating a minor bout of declines off highs in the previous week that stalled just shy of the 2017 peak. So far this week, data on the whole has been less than supportive of the Pound, highlighted by softer PMIs and some dovish BOE speak. The market was waiting for the release of the late Wednesday FOMC Minutes, which ultimately failed to produce any surprises. Looking ahead, absence of UK data will leave the Thursday focus on releases out of the US that feature ADP employment, initial jobless claims, trade and ISM non manufacturing. We also get some more Fed speak.
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). The news of North Korea’s successful long-range missile test hasn’t really had any meaningful impact. Looking ahead, the Thursday focus will be on releases out of the US that feature ADP employment, initial jobless claims, trade and ISM non manufacturing. We also get some more Fed speak.
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
The Australian Dollar took a healthy hit earlier this week after the RBA failed to deliver a more upbeat, hawkish policy decision many were expecting. Weakness in copper prices, falling coal exports to China and worry over a capitulation in risk assets are also other factors keeping Aussie weighed down into the latter portion of the week. The Fed Minutes have come and gone without a hitch, though impressive Thursday Aussie trade data is helping to prop. Looking ahead, the focus shifts to Thursday’s US calendar which features ADP employment, initial jobless claims, trade and ISM non manufacturing. We also get some more Fed speak.
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 continues to be the star performer in the FX market and the only developed currency to trade higher against the Buck over the past week. While we did see some minor setbacks on Wednesday, the Loonie was able to hold within a stone’s throw of this week’s 2017 high against the Buck. Clearly the repricing of Bank of Canada rate expectations has been playing a major part in all this, with BoC Poloz flagging the central bank’s hawkish shift. Interestingly, even a sharp setback in the price of OIL on Wednesday failed to materially weigh on the Canadian Dollar. Still, the Loonie’s run is now looking like it could be overdone, with dealers talking profit taking interest from various accounts. Looking ahead, we get Canada building permits and Canada trade, along with a batch of US data featuring ADP employment, initial jobless claims, trade and ISM non manufacturing. We also get some more Fed speak.
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. This week’s wave of broad based US Dollar demand and another negative GDT auction showing have factored into the mild Kiwi selloff. Meanwhile, fear of vulnerability in global equities is acting as an additional strain for Kiwi. Wednesday’s Fed Minutes have come and gone without a hitch and now the focus shifts to Thursday’s US calendar which features ADP employment, initial jobless claims, trade and ISM non manufacturing. We also get some more Fed speak.
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.
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 on the domestic front, with the currency dropping to a seven week low against the Buck. Wednesday’s Rand slide has been attributed to jitters at the ANC conference after the ruling party proposed nationalising the central bank and expropriating land without compensation. The proposals are viewed as quite radical, something that is unsettling to an investor base already nervous about a never ending string of corruption charges surrounding Zuma. 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.