Next 24 hours: Yellen Disappoints, Stocks Surge, Loonie Explodes
Today’s report: UK Jobs, Bank of Canada Decision, Yellen Testimony
Activity has picked up into Wednesday, with EURUSD pushing to a fresh 2017 high, taking EURJPY and EURCHF along for the ride. The Euro has already nudged up to another high on Wednesday and it’s going to be a busy day with UK jobs, the BoC decision and Yellen testimony ahead.
Wake-up call
Chart talk: Major markets technical overview video
- industrial production
- BOE Broadbent
- Risk liquidation
- SNB activity
- NAB readings
- policy decision
- card spending
- Yellen testimony
- macro backdrop
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Low Volatility in Context, D. McCrum, Financial Times (July 11, 2017)
- Winds Shift for Emerging-Market Debt, L. Abramowicz, Bloomberg (July 10, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
This recent break to fresh 2017 highs beyond 1.1300 has confirmed a higher low at 1.1110 opening the current extension into critical longer-term resistance in the 1.1500-1.1700 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 back below 1.1300 would be required to take the immediate pressure off the topside.
EURUSD – fundamental overview
There were no specific fundamental drivers credited for Tuesday’s Euro run to another 2017 high, with most of the rally driven off momentum from a currency that has benefited a great deal in 2017 from broad US Dollar weakness and anticipation for a reversal in European Central Bank monetary policy. But whatever Eurozone data we have seen this week has been solid and we’ll get some more today, with Eurozone industrial production due. Of course, the main focus for the day will be the Fed Chair Yellen testimony. It’s worth noting the Fed Beige book is out late in the day.
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
The Pound continues to pull away from 1.3000, extending its recent run of declines driven off a soft run of economic data, political worry with PM May under the gun and Brexit negotiation uncertainty. On Tuesday, BOE Broadbent failed to offer any updated outlook on monetary policy, instead leaving the market to worry, as he focused on the damage Brexit would have on trade with the EU. Looking ahead, Wednesday should be an interesting day for the Pound with UK employment data due, followed by anticipated Fed Chair Yellen testimony later in the day.
USDJPY – technical overview
Despite the recent recovery rally, the market remains confined to a multi-day range. Look for any additional upside to remain capped ahead of 115.00, with only a clear break back above 115.50 to ultimately negate the outlook and shift the focus to the topside.
USDJPY – fundamental overview
The combination of some renewed demand for US Dollar and an ongoing bid in US equities have helped to keep the major pair propped up, with the market rallying back to multi-day highs in the 114.00 area. Yield differentials are also playing their part, particularly with the BOJ making it clear it isn’t going to be falling into line with other major central banks adopting more hawkish policy outlooks. Still, dealers do report solid offers from macro accounts, with these players worried about signs of an imminent liquidation in US equities, which could invite a fresh wave of Yen demand (USDJPY) on traditional correlations with safe haven flow. Looking ahead, all eyes will be on the Fed Chair Yellen testimony. The Fed Beige Book is also out later in the day.
EURCHF – technical overview
The market has pushed up to a fresh 2017 high through a critical psychological barrier at 1.1000 which could now open the door for an extension to retest the major peak from 2016 at 1.1200. However, inability to hold above 1.1000 in the sessions ahead would suggest a false break and put the pressure back on the downside for an acceleration of declines towards 1.0600.
EURCHF – fundamental overview
The SNB has got to be pleased with this latest run of Franc declines, though there is still risk the Franc will come storming back. 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 as has been seen over the past two weeks through Draghi and the ECB Minutes. But it looks like it could come down to the performance in US equities given the influence on broader sentiment. Any signs of risk liquidation 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 0.7570 to strengthen this outlook and accelerate declines.
AUDUSD – fundamental overview
The Australian Dollar has done a good job holding up on dips, despite last week’s RBA decision, a big let down for hawks. A recovery in commodities and solid local data are doing a good job offsetting bearish flow for the moment. Remember, last week Aussie retail sales were impressive, while this week, Aussie confidence and business conditions readings have also come in above forecast. We’ve also seen the Australian Dollar benefit from this latest run of Kiwi declines. Looking ahead, the primary focus will be the Fed Chair Yellen testimony. The Fed’s Beige Book is due late in the day but isn’t expected to be a market mover.
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 1.3000 has opened the door for a more pronounced decline to fresh 2017 lows below the barrier. Ultimately however, the longer-term uptrend remains intact and with technical studies looking stretched, risk is building for an imminent bullish reversal. Still, we would now need to see a bounce in the sessions ahead and break back above 1.3015 at a minimum to strengthen the constructive outlook.
USDCAD – fundamental overview
The market has all but priced in a rate hike from the Bank of Canada later today, in light of recent central bank rhetoric and a solid run of economic data. There has been a mild bout of profit taking on Canadian Dollar longs into the risk, though the gains have held up well, helped along by Tuesday’s OIL bounce. Still, when considering a +6% rally in the Loonie since May, subdued inflation, depressed OIL and macro risk, it’s surprising to see the market has been so confident with its rate hike assessment. The policy decision will be the main event of the day for the Canadian Dollar, though Fed Chair Yellen testimony could have a major impact as well. The later release of the Fed Beige Book is likely to get much attention.
NZDUSD – technical overview
Despite the intense surge in recent weeks, 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 is showing signs of exhaustion after a nice multi-day run. Last week’s wave of US Dollar demand and another negative GDT auction triggered an initial round of Kiwi selling, with setbacks accelerating on Tuesday on the back of a weak New Zealand credit card spending reading and tripped sell stops below 0.7250. Meanwhile, fear of a vulnerable equity market is acting as an additional strain on the risk correlated Kiwi. As far as today’s price action goes, the primary focus will be the Fed Chair Yellen testimony. The Fed’s Beige Book is due late in the day but isn’t expected to be a market mover.
US SPX 500 – technical overview
Any setbacks have been exceptionally mild thus far and at a minimum, a daily close back below 2400 would be required to take the immediate pressure off the topside, though only a break below 2320 would signal a meaningful shift in the structure. But for now, until we see a daily close below 2400, the market is capable of extending its record run towards the next measured move extension target at 2480 further up.
US SPX 500 – fundamental overview
The US equity market has done a good job proving it can hold up 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 banks 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, which isn’t a great thing for stocks. Investors will be looking for more hints later today when the Fed Chair gives her testimony.
GOLD (SPOT) – technical overview
The recent breakdown below a previous confirmed higher low at 1214 compromises the constructive outlook, with the move potentially flagging deeper setbacks below 1200 ahead. The market will now need to establish back above 1230 to reverse the bearish momentum, while inability to do so opens the door for a significant bearish structural shift. Â
GOLD (SPOT) – fundamental overview
Despite the latest sharp round of setbacks, 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 supported around 1200, 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 will hold up 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 multi-day lows against the Buck in the previous week. The latest Rand slide has been attributed to jitters from last week’s 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 political uncertainty, including a never ending string of Zuma corruption charges. Throw in persisting South Africa recessionary forces, yield differentials shifting in favor of the major central banks and the prospect for a material reversal in elevated global equities and it all points to the greater risk for additional Rand weakness going forward.