Today’s report: Is the US Dollar Headed for Secular Decline?
We come into Friday with the US Dollar back under pressure and at risk for a significant acceleration to the downside if we get more Fed officials backing up Yellen's decidedly less hawkish testimony this week, or another round of soft US economic data.
Wake-up call
Chart talk: Major markets technical overview video
- Jackson Hole
- trader caution
- caught between
- risk appetite
- China imports
- OIL prices
- house prices
- Fed bets
- Macro players
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- A Volvo Moment for Antimicrobial Resistance, J. O’Neill, Project Syndicate (July 12, 2017)
- London Opens Door to Saudi Aramco, F. Fortuna, Financial Times (July 13, 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 1.1313 would be required at a minimum to take the immediate pressure off the topside.
EURUSD – fundamental overview
The Euro has eased of its 2017 high from earlier this week though setbacks have been less Euro specific and more a product of the rest of the currency market catching a bid against the US Dollar in the aftermath of a more cautious Fed Chair testimony. There is still plenty of demand into dips with the market not as excited about being long Dollars. Thursday’s news ECB Draghi would be talking at this year's Jackson Hole symposium also helped to prop the Euro, with the market speculating the forum would be used as an opportunity to set out the parameters of ECB tapering. There are sell-stops reported below 1.1300 and only a clear break there would get the market thinking more seriously about a potential top. Looking ahead, the calendar features Eurozone trade, Fed speak and a batch of US data that includes CPI, retail sales, industrial production, Michigan confidence and business inventories.
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 has managed to extend gains into Friday, with the UK currency building momentum from strong UK employment data and the Fed Chair’s decidedly less hawkish testimony earlier this week. Economic data on Thursday was not a factor, with the UK calendar empty and US releases coming in mostly in line. There continues to be solid offers above 1.3000, with many accounts not yet convinced the Pound extend this rally much further right now with political uncertainty and Brexit negotiations hanging in the balance. Looking ahead, it’s going to be another quiet calendar day in the UK, though we do get some Fed speak and a healthy batch of US data that includes CPI, retail sales, industrial production, Michigan confidence and business inventories.
USDJPY – technical overview
Despite the recent recovery rally, the market remains confined to a multi-day range. The latest topside failure above 114.00 strengthens this outlook, leaving the door open for a drop back towards range support in the 108.00s, also coinciding with the 2017 low from April. Ultimately, it would take a clear break through 115.50 to negate this outlook and shift the focus back on the topside.
USDJPY – fundamental overview
The Yen has managed to make a modest recovery as market participants price a less hawkish Fed in the aftermath of this week’s less hawkish Yellen testimony. At the same time, setbacks have been supported on the back of a concurrent wave of risk on flow as the global equities market feels better about monetary policy leaning back to the lower for longer side. Looking ahead, Friday’s calendar features Fed speak and a healthy batch of US data including CPI, retail sales, industrial production, Michigan confidence and business inventories.
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
It feels like the SNB is committed to keeping active whenever there’s negative sentiment in the market, in an effort to keep the Franc from appreciating. But this is a hard job, and so, whenever there’s a surge in risk appetite, it gives the central bank an opportunity to step aside and let natural flows take their course. This means the Franc remains offered into rallies but is also subject to some strength with the SNB taking its foot off the pedal. Overall, inflated, record high US equities should be a worry for the SNB as any capitulation on this 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. For now, 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.
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
Another injection of bids into the Australian Dollar this week, mostly on the back of Yellen testimony that was decidedly less hawkish and taken as risk supportive in correlated equities markets. Overall, the Australian Dollar has already done a good job holding up on dips, despite last week’s RBA decision, which was a big let down for hawks. A recovery in commodities, impressive China trade and solid local data have been a big help to Aussie as well. Remember, last week Aussie retail sales were impressive, while this week, Aussie confidence, business conditions and consumer inflation expectations have also come in above forecast. We’ve also seen the Australian Dollar benefit from this latest run of Kiwi declines on heavy cross related AUDNZD demand. Looking ahead, Friday’s calendar features Fed speak and a healthy batch of US data including CPI, retail sales, industrial production, Michigan confidence and business inventories.
USDCAD – technical overview
There has been a clear shift in the outlook for this market over the past several days, with declines holding below 1.3000 and the market extending to fresh 2017 lows in the 1.2600s thus far. Technical studies are tracking in oversold territory, though a bounce may not come until the market retests the 2016 low at 1.2461. A break back above 1.3015 would be required to take the pressure off the downside.
USDCAD – fundamental overview
The Canadian Dollar surprised many this week, extending it’s 2017 run, rocketing to fresh highs, despite the market having already priced in the Bank of Canada’s first hike in 7 years. Taking a page out of the Fed’s book, the Bank of Canada downplayed subdued inflation, while communicating the economy had also adjusted to lower OIL prices. The central bank stopped short of offering more detailed insight on the path forward, leaving it up to data and macro developments, but despite all of this being telegraphed, there has been continued demand. A lot of this has to do with this week’s contrasting tone from the Fed Chair after Yellen voiced inflation concerns and said it wouldn’t take many more hikes to get policy to neutral. Looking ahead, all’s quiet on the Canada calendar and the focus will be on risk sentiment, the price of OIL, some Fed speak and data out of the US that features CPI, retail sales, industrial production, Michigan confidence and business inventories.
NZDUSD – technical overview
Despite an impressive rally in recent weeks, the market remains confined to a longer-term range, with strong resistance into the 0.7400-0.7500 area. As such, look for this most recent topside failure to produce a more pronounced bearish reversal taking the market back down towards the 2017 low in the 0.6800s. Only a clear break back above 0.7500 would compromise the outlook, while back below 0.7200 strengthens the bearish case.
NZDUSD – fundamental overview
The New Zealand Dollar had been underperfoming quite a bit into this week before finally catching a very strong bid in Thursday trade. Initially, it was Wednesday’s decidedly less hawkish Yellen testimony that generated some demand for the Kiwi rate on the back of broad based US Dollar outflow. But on Thursday, the combination of impressive China trade data and a report showing cooling New Zealand house price inflation were what sent the currency racing to multi-week highs before finally stalling just shy of the 2017 peak on offers from players looking to sell an extended market into a longer-term range resistance. Looking ahead, Friday’s calendar features Fed speak and a healthy batch of US data including CPI, retail sales, industrial production, Michigan confidence and business inventories.
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. Until then, 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. Janet Yellen played right into the market’s hand this week, when the Fed Chair’s overall tone was quite a departure from recent messages since the June Fed meeting. Yellen was decidedly less hawkish, expressing upgraded concerns about low inflation, while also adding rates would only need to go a little higher before policy was at a neutral level. At this point, it might not be enough to completely remove hawkish prospects, though it’s clearly inviting additional demand with hawks forced to reconsider their bets.
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. 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 Rand finally got a break from all the political and economic turmoil that had been weighing on the currency in recent days, instead benefiting from a fresh wave of broad based US Dollar selling and demand for risk assets in the aftermath of this week’s decidedly less hawkish Yellen testimony. Yellen’s concerns about inflation and comments relating to rates only needing to go a little higher to get to neutral gave the market the green light to sell Dollars and buy back into emerging markets on the lower for longer Fed policy outlook implications. Meanwhile, there was some good news on the local front with South African mining production coming in much higher than expected, helping to keep the Rand recovery in play. Still, looking out, it’s hard to be too dismissive of the South African political uncertainty, including a never ending string of Zuma corruption charges. Throw in persisting South African recessionary forces, yield differentials shifting in favor of the major central banks and the still looming prospect for a material reversal in elevated global equities and it all points to the greater risk for additional Rand weakness going forward.