Next 24 hours: US Dollar Rally You Say?
Today’s report: Manic Markets in Thinner August End Trade
An interesting 24 hours for markets and perhaps we're also seeing the impact of a thinner final week of August, with many out there off the desks. The swings have been quite manic, with risk off early Tuesday and back on into Wednesday. US ADP and US GDP readings ahead.
Wake-up call
Chart talk: Major markets technical overview video
- safe haven
- Brexit overhang
- mirroring risk
- SNB benefits
- construction work
- current account
- building permits
- ADP employment
- Macro players
- USDSGD
Peformance chart: Five day performance v. US dollar
Suggested reading
- Happy Japan Losing Appetite for Reform, L. Lewis, Financial Times (August 28, 2017)
- Goldman’s Quant Unit Rebuilt on Lessons Learned, C. Stein,  Bloomberg (August 3, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
A period of consolidation has come to an end, with the market choosing to break in the direction of the trend, pushing to fresh 2017 and +2.5 year highs. The bullish move could now open the door for an acceleration towards the 1.2150 area, a measured move extension projection following this latest 250 point consolidation, mostly between 1.1700 and 1.1900. Still, weekly studies remain quite overbought and warn that additional upside should be limited for the time being, to allow for these studies to unwind, which could expose the market to a more sizable correction lower in the days ahead. A daily close below 1.1900 would be required however to take the immediate pressure off the topside.
EURUSD – fundamental overview
The Euro extended its impressive run early Tuesday, with risk off flow from the North Korea provocation fueling the gains, while month end flow ahead of the US debt ceiling deadline also contributed. But as appetite for risk came back, the single currency was sold, closing back around Tuesday opening levels. In a strange twist, the Euro has been correlating with safe haven flow as many out there are less enthused about the US Dollar amidst all of the instability surrounding the US administration, soft US Dollar policies and geopolitical tension. Looking ahead, today’s calendar features Eurozone confidence, German CPI, US ADP and US GDP readings.
GBPUSD – technical overview
The market has been very well supported back down into previous resistance at 1.2775. From here, look for the market to continue to be well supported, with any additional weakness limited to the 1.2600s in favour of an eventual push back up to fresh 2017 highs and towards the next key objective in the 1.3500-1.4000 area further up. Still, there is risk for an extended period of choppy consolidation before the bullish continuation plays out, which means rallies could be well capped below 1.3100.
GBPUSD – fundamental overview
The Pound isn’t really doing much at the moment, with the UK currency taking a backseat and also caught between flows. On the one side, the aggressive decline in the US Dollar has been supporting the Pound in 2017, while the worst of Brexit has also been priced out. On the other side, UK economic data has been softer of late and the fact that worst case Brexit is probably out of the way doesn’t mean there still isn’t a long road ahead. The EU has been talking tough and refuses to move forward with negotiations until more clarity is offered on the divorce bill, the Irish border and EU citizen rights. Looking ahead, we get UK mortgage approvals, consumer credit and a speech from BOE Charlotte, followed by US ADP employment, US GDP readings and a Fed Powell speech.
USDJPY – technical overview
The market has done a fabulous job adhering to a range trade this year, with rallies well capped above 114.00 and dips supported down into the 108.00s. The latest round of setbacks have been exceptionally well supported ahead of the 2017 low range bottom at 108.13 and this could open the door for a resumption of the range trade, for that next big push back towards the 114.00 area. Still, while the market holds below 111.00 the pressure remains on the downside.
USDJPY – fundamental overview
Wednesday’s Japan retail sales beat isn’t doing much to have any impact on the market, with the clear driver of price action coming from risk sentiment. The major pair had dropped sharply early Tuesday on the North Korea provocation but was able to recover sharply as this risk faded away. Looking ahead, the market’s appetite for risk should continue to be a primary influence, though we also get some first tier US data including ADP employment and GDP readings. On the official circuit, Fed Powell is slated to speak later in the day.
EURCHF – technical overview
The market recently pushed up to a fresh 2017 and multi-month high through massive resistance in the form of the 2016 peak at 1.1200, taking the rate above 1.1500 and to its highest level since the collapse of January 2015. However, daily studies are unwinding from extended readings, warning of an additional corrective reversal in the sessions ahead, possibly back into previous resistance turned support around 1.1200, before the market considers a higher low and resumption of gains through 1.1539 and towards 1.2000.
EURCHF – fundamental overview
The sell-off in the Franc in recent weeks has been a welcome development for the SNB, with the central bank committed to weakening its overvalued currency. In early August, the EURCHF rate traded to its highest level since the great collapse of January 2015. However, the SNB may have also been taking extra measures to weaken the Franc in anticipation of a tougher battle ahead. A more intensified capitulation in US equities is likely to rattle global sentiment and invite a wave of unwanted Swiss Franc demand on the safe haven flow. And so, building a cushion in anticipation of this risk may have been a part of the central bank’s strategy.
AUDUSD – technical overview
Daily studies have been in the process of turning down after the market recently surged through the critical 0.8000 barrier to a fresh +2 year high. From here, there is risk for a deeper drop back towards a previous resistance turned support zone in the 0.7500 area. Rallies are now viewed as corrective, with a lower top sought out ahead of the next downside extension towards 0.7500. A break below 0.7800 will strengthen this outlook. Only a daily close back above 0.8000 would force a rethink.
AUDUSD – fundamental overview
Wednesday’s round of Aussie data was solid, with construction work blowing away consensus calls and building approvals coming in above forecast. The Australian Dollar had already been bid up late Tuesday as risk appetite returned to markets following the North Korea provocation and the local data only helped to drive the recovery back towards 0.8000. Still, overall, the RBA isn’t comfortable with the exchange rate at elevated levels and has differed to a more balanced policy approach to keep Aussie from running too far. This could invite renewed offers into this psychological area around 0.8000. Looking ahead, it will be important to keep an eye on risk sentiment. We also get US ADP, US GDP readings and a Fed Powell speech.
USDCAD – technical overview
Stretched medium-term technical studies are still warning of the possibility for a more significant bullish reversal to allow for these studies to unwind. A recent break above 1.2500 strengthens this outlook, opening the door for an eventual return towards the 38.2% fib retrace off the 2017 high-low move, which comes in at 1.2940. Only a daily close below 1.2400 would compromise the recovery prospect and put the pressure back on the downside.
USDCAD – fundamental overview
This week’s drop in the price of OIL has been one source of renewed Canadian Dollar selling, while a late Tuesday rally in the Buck as geopolitical tension settles post this latest North Korea provocation has also contributed to some Loonie declines. But overall, the Canadian Dollar has been exceptionally well bid in recent months, with the currency benefiting in recent from a more hawkish Bank of Canada outlook and expectation the Fed won’t lean as hawkish going forward. Looking ahead, we get the Canada current account, US ADP, US GDP readings and a Fed Powell speech.
NZDUSD – technical overview
Daily studies have turned down after the market pushed up to a plus two year high through 0.7500 in late July. A recent break below 0.7200 has opened the door for a more meaningful reversal, that could be setting the stage for a drop all the way back down towards the 2017 low in the 0.6800s. From here, look for any rallies to be well capped below 0.7300 on a daily close basis in favour of the next downside extension towards the psychological barrier at 0.7000.
NZDUSD – fundamental overview
Wednesday’s New Zealand building permits came in better than previous but were still well into negative territory and didn’t do anything to factor into trade. Instead, most of the recent minor bid has come from a recovery in risk sentiment post the North Korea provocation. But overall, the New Zealand Dollar has come under pressure in August, backing well off the late July plus two year high above that major psychological barrier at 0.7500. Last week’s news of the New Zealand government cut of growth forecasts and budget surpluses intensified declines. Meanwhile, economic data out of New Zealand has already been less impressive, as highlighted by recent GDP, CPI and employment readings, which is forcing the RBNZ to reconsider what had been a more hawkish stance. Of course, the RBNZ has also been talking down the Kiwi rate and this in conjunction with a more compromised risk environment offer an added layer of bearish Kiwi drivers. Looking ahead, it will be important to keep an eye on risk sentiment. We also get US ADP, US GDP readings and a Fed Powell speech.
US SPX 500 – technical overview
After extending the record run in early August, the market has finally relented, acknowledging the need for a period of corrective decline to allow for highly extended longer-term studies to unwind. Still, while the market holds above 2400 on a weekly close basis, the uptrend remains firmly intact. A weekly close below 2400 would be required to signal the possibility for a more meaningful top and bearish structural shift.
US SPX 500 – fundamental overview
The US equity market continues to be well supported on dips. But at the same time, there is a growing sense investors could be getting ready for a more significant reversal, with the record run so extended and prices deviating from fundamentals. Moreover, the fact that Fed monetary policy is reversing could be resonating a little more, with Fed balance sheet reduction coming into play as soon as next month and another rate hike still on the cards this year. It's too early to tell, though another topside failure followed by a break and drop below 2400 could open the door for what has been a highly anticipated intensified liquidation. Looking ahead, we get US ADP, US GDP readings and a Fed Powell speech.
GOLD (SPOT) – technical overview
Setbacks have been well supported, with the latest push to a fresh 2017 high just over 1300 setting the stage for a bullish continuation towards the 2016 peak at 1375 further up. A higher low is now in place around 1265 and only back below this level would offset this latest wave of bullish momentum.
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 well supported, 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 has added 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 for an extended period, GOLD will hold up on risk off macro implications.
Feature – technical overview
USDSGDÂ has been under pressure in 2017, with the market recently dropping down to a fresh yearly low at 1.3507. However, stretched studies are warning of the possibility for a meaningful bullish reversal to allow for these studies to unwind. Setbacks have also stalled out around an important 78.6% fib retracement off the 2016 to 2017 low to high move. Look for a break back above 1.3700 to encourage the recovery outlook, while only a close below 1.3500 negates.
Feature – fundamental overview
The Singapore Dollar has enjoyed a nice recovery in 2017. US Dollar selling has been a major supporter of the currency’s strength and we have seen some more of this on the back of White House instability, a dovishly perceived Jackson Hole speech from the Fed Chair, worry over the US debt ceiling negotiations outcome and Hurricane Harvey. Meanwhile, last Friday’s much better than expected Singapore industrial production data and this latest North Korea provocation have further contributed to Singapore Dollar demand, with USDSGD dropping to a fresh 2017 low. But going forward, the Singapore Dollar’s run may be limited. US economic data is mostly moving back in the right direction, which could speed up the Fed’s monetary policy reversal process and fuel USDSGD demand as yield differentials widen in favor of the Buck.