Next 24 hours: Bank of Canada Marching to the Beat of its own Drum
Today’s report: US Dollar Breaks from Traditional Correlation
Risk sentiment continues to deteriorate, with geopolitical tension escalating as North Korea provocations persist. This has been no help to a US Dollar that is a traditional beneficiary of safe haven demand, with the market reluctant to be holding USDs given all of the negative US drivers in 2017.
Wake-up call
Chart talk: Major markets technical overview video
- Euro non-committal
- Brexit uncertainty
- Geopolitical tension
- cushion building
- Aussie GDP
- BoC decision
- dovish Brainard
- Worry builds
- Demand ramps
- USDSGD
Peformance chart: Five day performance v. US dollar
Suggested reading
- Hold the Mail on Japan Post, N. Gopolan, Bloomberg (September 4, 2017)
- Stiffest Headwinds Are Ahead, R. Vlastelica,  MarketWatch (September 5, 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
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. Last Friday, the Euro sold off after reports hit the wires the ECB may wait until December before making a final decision on tightening. These setbacks came at a time when the Euro had an opportunity to build on gains, but was reluctant to do so despite the disappointing US jobs report. Since then, market participants have been happy to settle in and wait for more clarity from tomorrow’s ECB decision before making any fresh bets. Geopolitical tension is also being monitored closely, although it hasn’t factored much in the major pair. As far as today goes, German factory orders, the US trade balance, US ISM non manufacturing and the Beige Book are the notable standouts.
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 1.3200.
GBPUSD – fundamental overview
We’ve reached a point where there is strong two way demand in the Cable rate, ultimately leaving the major pair in a lot of choppy up and down. 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, worry over the US debt ceiling, hurricane season and dovish Fed comments (most recently from Fed Brainard) 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, and on Tuesday UK services PMIs were below forecast. 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, absence of first tier UK data will leave the focus on US releases that include trade, ISM non manufacturing and the Beige Book.
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 and scope exists for an accelerated drop below 108.00.
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 as North Korea prepares for another possible missile launch before Saturday and the US reaches out to lend a helping hand to South Korea and Japan. 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, sentiment flow will be front and center, though we also get a healthy batch of data out of the US that includes trade, ISM non manufacturing and the Beige Book.
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
Medium term studies have been in the process of unwinding 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 below 0.8066 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, a balanced RBA decision (that lacked an upgraded worry over the elevated Aussie exchange rate) and fresh wave of US Dollar outflow helped to prop the Australian Dollar on Tuesday, with the currency pushing back above 0.8000 for the first time since August 1. Tuesday’s sub par US data and dovish Fed Brainard comments were attributed to some of the US Dollar selling, while others assigned the price action to US involvement with North Korea and some post holiday reaction to last Friday’s weak US jobs report. However, offers continue to emerge on rallies above the psychological barrier, with risk off flow from geopolitical tension and today’s softer than expected Aussie GDP print, weighing the market back down. Looking ahead, the focus will be on broader sentiment and a batch of US data that features trade, ISM non manufacturing and the Beige Book.
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 break back above 1.2500 to encourage this prospect. But on the other side, only a daily close below 1.2300 would negate the recovery outlook.
USDCAD – fundamental overview
The surging Loonie posted yet another 2017 high (USDCAD +2 year low) on the back of the combination of last week’s very impressive, above forecast Canada GDP reading, dovish Fed Brainard comments, more soft data out of the US and a surge in the price of OIL. Overall, the economic docket has been more 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 later today to discuss. Right now, there is a 40% chance the Bank of Canada will hike. At the same time, Canadian Dollar longs will need to be careful. With so many positives already priced and with the Canadian Dollar appreciation to likely make the Bank of Canada more uncomfortable, we could see a central bank that makes an effort to tone down any hawkishness when it meets. Later this week, we get Canada’s monthly employment report. As far as today goes, aside from the BoC decision, traders will be watching sentiment flow, the price of OIL, Canada trade and a US economic calendar that features trade, ISM non manufacturing and the Beige Book.
NZDUSD – technical overview
Medium term 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 warns of the possibility 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 0.7400 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, with another soft round of US data and dovish Brainard comments fueling a minor recovery. Looking ahead, the focus will be on global sentiment and a batch of US data that features trade, ISM non manufacturing and the Beige Book.
US SPX 500 – technical overview
After extending the record run in early August, the market has cooled off, acknowledging the need for a period of consolidation at a minimum 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. 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 the market’s failure to extend its record run post last Friday’s US jobs report (which only gives the Fed more reason to err back on the side of accommodation) and dovish Fed Brainard comments, could suggest the strong uptrend may be coming to an end. Meanwhile, geopolitical risk is heating up following the weekend North Korea provocation. News of another missile test in the days ahead and a US response that involves support to South Korea and Japan is making investors increasingly uneasy. Market participants will keep an eye on these developments and will also want to see what comes of today’s run of US data that includes trade, ISM non manufacturing and the Beige Book.
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. Look for any dips to be well supported now around 1300.
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 weekly 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, disappointing US data and dovish Fed Brainard comments. Meanwhile, data out of Singapore has been solid, with this week’s PMI readings coming in above forecast. But going forward, the Singapore Dollar’s run may be limited. Signs of distress in risk markets on the emergence of geopolitical tension and in anticipation of Fed policy normalization could ultimately invite renewed USD bids in the days ahead, with safe haven flow and yield differentials inspiring the Singapore Dollar outflow. Dealers continue to talk about demand in the 1.3500 area and some heavy buy stops above 1.3700.