Today’s report: US Dollar Decline Extends into Excessive Zone
We're into Friday and with the exception of the Pound, the major currencies continue to extend gains against the Buck. On Thursday, the US Dollar took its hits from a post ECB push and news of the US special counsel expanding its investigation of the President. But it’s all starting to feel like it could be a bit much.
Wake-up call
Chart talk: Major markets technical overview video
- cautious ECB
- retail sales
- BOJ
- SNB
- RBA Debelle
- Canada CPI
- external drivers
- counsel investigation
- Shaky backdrop
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Passive Assets To Cool As QE Ends?, R. Hargreaves, Value Walk (July 20, 2017)
- Does the Fed Chair Need an Economics Background?, S. Fleming, FT (July 19, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
This run of 2017 highs has finally extended into a major longer-term range resistance zone in the 1.1500 to 1.1700 area. This comes at a time when daily studies are looking stretched, suggesting any additional upside could be difficult, at least over the short-term, with the greater risk building for some form of a meaningful bearish reversal. Still, a daily close below 1.1480 would be required at a minimum to take the immediate pressure off the topside and trigger a correction.
EURUSD – fundamental overview
The ECB decision has come and gone and if you didn’t know what happened, you would have thought Draghi outlined a formal plan for the removal of stimulus while signaling a rate hike in the months ahead. And yet, this wasn’t the case. The decision produced a very balanced, cautious outlook, with the ECB seemingly well aware of the tight rope act given market sensitivity. And yet, irrespective of this fact, the market chose to see what it wanted, which was a hawkish leaning central bank that would soon be making an announcement on tapering. The Euro pushed through stops above 1.1600, with the acceleration helped along on news of US special counsel Robert Mueller expanding his investigation to the business transactions of Donald Trump and some of his advisors. Looking ahead, the calendar is empty and broader macro themes and flows will dictate direction into the weekly close.
GBPUSD – technical overview
Although the market has managed to extend to a fresh 2017 high this week, rallies above 1.3000 haven’t been sustainable, with the market once again dropping back below the psychological barrier. On a medium to longer-term basis, the breakout in April through 1.2775 does suggest the market has put in a meaningful base off the October 2016 +30 year low at 1.1840. Still, on a short-term basis, there is risk for more choppy consolidation in the 1.2500 to 1.3000 area before seeing that next big push to a measured move extension objective at 1.3500.
GBPUSD – fundamental overview
Although the Pound managed to trade to a 2017 high this week, it’s the only major currency to trade lower against the US Dollar over the past week. Interestingly, a better than expected UK retail sales print and another wave of broad based US Dollar declines in Thursday trade failed to result in a higher Cable rate, with the Pound closing lower on the day. It seems there are bigger worries at the moment, especially after this week’s inflation data came in surprisingly soft. Meanwhile, political uncertainty and the Brexit negotiation overhang are outstanding variables that should keep the Pound from getting excited about wanting to run too far and fast right now. Looking ahead, UK public finance data is the only notable data due today.
USDJPY – technical overview
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
Thursday’s Bank of Japan decision leaned to the dovish side after the central bank pushed out the date it expected to meet its inflation target. Meanwhile, US equities continued to extend gains to record highs. And yet, despite all of this, the Yen wasn’t able to weaken, closing flat on the day as the trend of broad based US Dollar weakness could not be ignored. Looking ahead, there is no data of note and the focus will be on US Dollar and US equity market sentiment.
EURCHF – technical overview
The market has pushed up to a fresh 2017 high through a critical psychological barrier at 1.1000, opening the door for an extension to retest the major 2016 peak at 1.1200. Only a break back below 1.0980 would take the pressure off the topside.
EURCHF – fundamental overview
Elevated risk sentiment is a big friend to an SNB committed to doing what it can to discourage appreciation in the Franc and this along with hawkish ECB expectations and ongoing SNB activity have helped to push this exchange rate back above the 1.1000 psychological barrier. However, the SNB could have a much tougher battle on its hands in the days ahead if it wishes to keep the Franc from appreciating. Any capitulation in US equities is likely to rattle global sentiment and invite an intense wave of unwanted Swiss Franc demand on the safe haven flow.
AUDUSD – technical overview
The latest surge through major resistance in the 0.7800 area suggests the market could be in the process of carving out a meaningful longer-term base. The next major resistance level comes in at 0.8163, the high from May 2015. A clear break above there would confirm the bullish structural shift. However, shorter-term technicals are now well overextended and risk is building for a healthy bearish reversal in the sessions ahead. A daily close below 0.7898 would set up this anticipated pullback.
AUDUSD – fundamental overview
The Australian Dollar has emerged as a major outperformer in the FX market over the past week, with the currency exploding through critical resistance at 0.7800 on the back of US Dollar bearish developments, a hawkish RBA Minutes, solid data and rallying commodities prices. There have however been some bearish developments into the latter half of the week including this latest appearance from RBA Debelle. The central banker has taken the wind out of Aussie’s sails early Friday after downplaying the RBA Minutes while also expressing a displeasure with the higher Aussie rate. Other factors already weighing into Friday were technical overextension, reports out of Westpac and Nomura questioning recent Aussie moves and a Reuters poll producing lower Aussie GDP forecasts. Thursday’s Aussie jobs data proved to be a wash with full time jobs jumping but the headline number coming in softer. Looking ahead, there is no data of note and the focus will be on an RBA Debelle speech and broader macro themes.
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 1.2500s 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 daily close back above 1.2700 would now be required to take the immediate pressure off the downside.
USDCAD – fundamental overview
The Canadian Dollar has extended its impressive run in 2017, with the currency up nearly 9% since trading at 2017 lows in early May. The Bank of Canada’s hawkish policy shift that resulted in its first rate hike in seven years comes at a time when the Fed has been sounding less hawkish, US economic data isn’t pretty and the US administration continues to battle intense headwinds. Still, with the Loonie running so far and fast and with the Bank of Canada not having the benefit of taking in Yellen’s testimony last week before hiking rates, it wouldn’t be unrealistic to start hearing messages from the BoC in the days ahead that follow Yellen and also lean back to the less hawkish side. Looking ahead, Friday will be a busy day for the Loonie, with the currency taking in Canada retail sales and CPI data. Of course, as always, OIL direction should also be monitored.
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 latest run to stall out in favour of a more pronounced bearish reversal. Only a clear break back above 0.7500 would compromise the outlook, while a daily close back below 0.7334 strengthens the bearish case.
NZDUSD – fundamental overview
The New Zealand Dollar has extended its run to a fresh 2017 high, though the gains have come much more from external drivers than from New Zealand supportive fundamentals. Remember, earlier this week, New Zealand CPI came in soft and although the GDT auction ticked back into positive territory, the results were hardly impressive. But with the US Dollar getting hit hard across the board, with US equities at record highs and with commodities in recovery mode, all of this has more than offset any of the Kiwi negatives as far as its relationship with the US Dollar goes. Looking ahead, there is no data of note and the focus will be on US Dollar and US equity market sentiment.
US SPX 500 – technical overview
The market continues to extend its record run, trading into a key measured move extension objective at 2480. Setbacks continue to be quite shallow and only a daily close back below 2400 would take the immediate pressure off the topside.
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 last 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. Meanwhile, the market continues to shrug off a downturn in US economic data and a never ending string of turbulence out of the White House. Thursday’s news of US special counsel Robert Mueller expanding his investigation to the business transactions of Donald Trump did nothing to rattle the market.
GOLD (SPOT) – technical overview
Setbacks have been well supported ahead of 1200, with the latest push back above 1230 setting the stage for a bullish resumption towards 1300. Only below 1200 would compromise the constructive outlook.
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 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. A recent push back above 13.00 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 market was not expecting any changes from the SARB on Thursday and was surprised when the central bank cut rates for the first time in 5 years. The deteriorating growth outlook had the central bank wanting to lean in this direction and an improving inflation outlook allowed the central bank to make the move. This opened renewed downside pressure on the Rand, with the flows from the rate cut offsetting another wave of broad based US Dollar weakness. Overall, the risk continues to tilt to the downside for the emerging market currency when considering political instability, a never ending string of Zuma corruption charges, 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.