Next 24 hours: A Delayed Reaction to Friday Jobs Report?
Today’s report: North Korea Keeps at it, RBA Holds
Markets are back into the full swing today as North America returns from the long holiday weekend. The big focus in the early week has been a fresh batch of risk off flow from geopolitical risk associated with North Korea provocations. Earlier, the RBA left policy on hold.
Wake-up call
Chart talk: Major markets technical overview video
- Traders weighing
- Brexit negotiations
- Geopolitical tension
- Franc appreciation
- RBA holds
- hike odds
- Election risk
- North Korea
- macro backdrop
- USDSGD
Peformance chart: Five day performance v. US dollar
Suggested reading
- Financial Crisis: A Decade of Debt, D. McWilliams, Financial Times (September 4, 2017)
- Back to Bond School, M. Ashworth,  Bloomberg Gadfly (September 4, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market has finally entered a period of correction after racing to a fresh +2.5 year high shy of 1.2100. Medium term studies have been tracking in overbought territory, warning of the need for a period of weakness and scope exists for additional setbacks over the coming sessions. Still, while above 1.1663, the uptrend remains firmly intact, with the market looking to put in a higher low above the level ahead of a bullish continuation. Only back below 1.1663 would trigger a more significant bearish shift.
EURUSD – fundamental overview
The Euro hasn’t really gone anywhere since last Friday which is understandable considering Monday’s holiday in North America. But we left off last Friday with the single currency back under pressure despite a most disappointing US jobs report, with any demand from the US data more than offset by reports the ECB may wait until December before making a final decision on tightening. There has been elevated concern over the strength of the Euro in recent weeks and this news has only added to that strain after the major pair had recently traded up to +2.5 year highs. Looking ahead, Tuesday’s calendar features Eurozone services PMIs, Eurozone retail sales and US factory orders. We also get Fed speak from Brainard, Kashkari and Kaplan.
GBPUSD – technical overview
The major pair 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
We’ve reached a point where there is strong two way demand in the Cable rate, ultimately leaving the major pair to chop around. On the one side, the Pound has been supported by broad based US Dollar weakness in 2017, with last Friday’s disappointing US jobs report and worry over the US debt ceiling offering additional reasons to be buying the UK currency. On the other side, UK data has also been struggling and Brexit uncertainty persists. On Monday, UK construction PMIs came in soft, putting in their worst showing since August 2016. Meanwhile, on the Brexit front, there has been a growing tension between EU and UK officials on the divorce bill, rights of EU citizens and the status of the UK Ireland border. So on net, this reconciles the choppy sideways price action at the moment. Looking ahead, we get UK services PMIs and US factory orders. We also get Fed speak from Brainard, Kashkari and Kaplan.
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 on a daily close basis, the pressure remains on the downside.
USDJPY – fundamental overview
The major pair continues to track with risk sentiment and into this week, risk sentiment has been in deterioration mode on the back of rising geopolitical tension stemming from North Korea provocations. After already seeing the major pair gap open lower on the weekend news, downside pressure has picked up again into Tuesday as fresh reports surface North Korea has started moving its ICBM in preparation of a possible launch before Saturday. Of course, risk off on geopolitical threats has not been the type of thing that has been sustainable in recent years. Still, with a new US administration at the helm and with the stress of monetary policy reversal upon us, perhaps this type of risk will start to have a more meaningful impact. Looking ahead to the data for the remainder of the day, US factory orders are the only notable standout, though we do get a batch of Fed speak from Brainard, Kashkari and Kaplan.
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, medium-term studies are unwinding from extended readings, warning of an additional consolidation 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. An 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. Looking ahead, Swiss data isn’t usually much of a factor when it comes to price action, but with GDP and CPI due, it will be worth keeping an eye.
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
Solid Aussie export data helped to prop the Australian Dollar early Tuesday, though the market has bigger fish to fry as it digests this latest central bank decision. The RBA left rates on hold as widely expected, maintaining an overall balanced outlook. However, there has been a clear message of discomfort with the elevated Aussie exchange rate, which could the Australian Dollar well capped going forward. As far as the remainder of the day goes, the market will continue to react to the decision while monitoring risk sentiment and reflecting on RBA Governor Lowe speak at the RBA dinner. The US data docket is light, with only factory orders standing out. But we do get a batch of Fed speak from Brainard, Kashkari and Kaplan.
USDCAD – technical overview
Despite this latest breakdown to a fresh 2017 and +2 year low, stretched medium-term technical studies continue to warn of the possibility for a significant bullish reversal to allow for these studies to unwind. Right now, the market would need to hold above 1.2400 on a daily close basis to encourage this prospect, while back above last week’s high at 1.2663 will strengthen the outlook.
USDCAD – fundamental overview
It’s an important week ahead for the Loonie, which posted yet another 2017 high (USDCAD +2 year low) on the back of the combinations of last week’s very impressive, above forecast Canada GDP reading and a disappointing US jobs report. Data has been fairly upbeat in Canada in recent months and this has helped to increase the odds for another Bank of Canada rate hike this year. The central bank will meet on Wednesday to discuss. Right now, there is a 40% chance the Bank of Canada will hike. Later this week, we get Canada’s monthly employment report. As far as today goes, absence of Canada data will leave the focus on risk sentiment, the price of OIL, US factory orders and a batch of Fed speak from Brainard, Kashkari and Kaplan.
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
The New Zealand Dollar had a major reversal of fortune in August, backing well off the late July plus two year high above that major psychological barrier at 0.7500. Last month’s news of the New Zealand government cut to growth forecasts and budget surpluses intensified declines. Meanwhile, economic data out of New Zealand has been less than impressive, as highlighted by recent GDP, CPI and employment readings, which is forcing the RBNZ to reconsider what had been a more hawkish stance. The market is also starting to think about the upcoming New Zealand election, with polls showing a very tight race as Labour climbs neck and neck. Back in April, Labour’s finance spokesperson had proposed including the goal of maximum employment in the RBNZ mandate, which would keep the central bank from moving on policy reversal. This is yet another possible strain on the Kiwi rate. The only supportive driver right now is the broad based selling in the US Dollar, though even last Friday’s major letdown in the US jobs report failed to prop Kiwi all that much. Looking ahead, the focus will be on global sentiment, US factory orders and a batch of Fed speak featuring Brainard, Kashkari and Kaplan.
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 normalising could be resonating a little more, with Fed balance sheet reduction coming into play and another rate hike still on the cards this year. We’ve also seen a strong trend of stocks rallying on softer US data given the implication it will slow the Fed’s normalisation process. But if the market fails to extend its record run post Friday’s US jobs report which only gives the Fed more reason to err back on the side of accommodation, it could suggest the strong uptrend may be coming to an end. Meanwhile, geopolitical risk is heating up following the weekend North Korea provocation and fresh reports of another missile test in the days ahead. To this point, geopolitical risk hasn’t been much of a threat to stocks, but if this keeps up, the US administration may respond more forcefully which would be a negative for the equity market.
GOLD (SPOT) – technical overview
Setbacks have been well supported, with the latest surge to fresh 2017 highs through 1300 setting the stage for a bullish continuation to 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, soft US Dollar policy talk, worry over the US debt ceiling negotiations outcome. But going forward, the Singapore Dollar’s run may be limited. Despite last Friday’s US jobs report setbacks, US economic data is moving back in the right direction which could speed up the Fed’s monetary policy reversal process and fuel renewed USDSGD demand as yield differentials widen in favor of the Buck. We are already seeing signs of this as the market bounces from last week’s yearly low that was unable to break back below a major psychological barrier at 1.3500. Dealers now report buy stops above 1.3700.