Special report: US GDP Preview – What to Watch
Next 24 hours: US Dollar Running Out of Gas?
Today’s report: Something of a Rare Sight
It's been something of a rare sight to see the US Dollar put in any period of consistent gains in 2017, and yet, that's what we've been seeing. Wednesday's run of Dollar gains was attributed to the combination of excitement around US tax reform and a robust durable goods reading.
Wake-up call
Chart talk: Major markets technical overview video
- German CPI
- Strong CBI
- reflation trade
- rallying stocks
- yield differentials
- BoC Poloz
- RBNZ holds
- red flags
- Buy siders
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Britain’s Path to a 19% Corporate Tax Rate, N. Lewis, Forbes (September 26, 2017)
- Low Inflation is No Mystery, B. Wesbury,  First Trust (September 25, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has broken down below an important support level around 1.1825, representing the 50-Day SMA and a neckline of a head and shoulders top off the recent +2.5 year high. This is the first time the market has traded back below the 50-Day SMA since the Euro broke out earlier this year and the measured move extension off the head shoulders top projects a possible acceleration into the 1.1500s. Next support comes in at 1.1663 and only a break back above 1.2000 will negate the current outlook favouring a deeper correction.
EURUSD – fundamental overview
The Euro has come under added pressure this week after ECB Draghi caught the market off guard on Monday, saying the Euro recovery needed to translate into stronger inflation, while substantial accommodation was still needed. The comments come in the aftermath of a less than impressive weekend election result for Germany’s Merkel and rising political unrest in Europe as reflected in Spain. The single currency has since taken out a healthy round of sell stops below 1.1820 that could now open the door for a more meaningful decline, especially with the Fed looking like it will follow through with another rate hike in 2017. Wednesday’s excitement around US tax reform has also been weighing on the Euro as the US reflation trade comes back into favour, while a robust US durable goods reading has given the Buck even more of a boost into the latter portion of the week. Looking ahead, key standouts for the day include ECB speak, German consumer confidence, Eurozone confidence indicators, German CPI, US GDP, US initial jobless claims and some more Fed speak.
GBPUSD – technical overview
The rally in this market has been impressive since it broke out above critical resistance at 1.2775 earlier this year. The breakout suggested the major pair had put in a longer term base and was in the process of turning back up, with an initial objective around 1.3500. That objective has now been met and exceeded, leaving daily studies unwinding from stretched readings and at risk for a period of corrective weakness. The recent breakdown below 1.3450 sets up the possibility for a drop back into the 1.3200s before the market considers a higher low and resumption of the uptrend.
GBPUSD – fundamental overview
The Pound has taken a bit of a back seat this week, mostly playing a game of follow the leader as it tracks lower with the Euro and the rest of the currency market against a recovering US Dollar. But there have been some negative drivers on the UK front in recent days that include a Moody’s downgrade and renewed concern over Brexit. On Wednesday, the Pound traded lower against the Buck, but was able to hold up on a relative basis after UK CBI readings came in strong. Overall however, it’s been mostly about the strength of the US Dollar on the back of a more hawkish leaning Fed, prospect of the revival of the Trump reflation trade and solid US data, as reflected through this latest robust US durable goods reading. Looking ahead, absence of first tier UK data will leave the focus on a BOE Carney appearance, US GDP, US initial jobless claims and some more Fed speak.
USDJPY – technical overview
The market has seen an impressive recovery out from a recent 2017 low at 107.32. This sets up the possibility for a bullish shift and run up towards multi-day range resistance in the 114.50 area. However, overall, the major pair remains confined to this broader range, which also means additional upside could be limited to the 114.00s in favour of yet another topside failure and bearish reversal.
USDJPY – fundamental overview
The market is keeping a close eye on developments relating to North Korea, though it’s looking like nothing more than a big war of words at this point, which is helping to prop up the major pair, especially with the Buck back in demand on expectation for a more hawkish Fed trajectory, revival of the Trump reflation trade and robust US durable goods reading. Of course, the ongoing record run in US equities is yet another supportive factor behind the major pair’s push higher. Looking ahead, the calendar is quiet in the European session. Looking ahead, the market will continue to monitor broader sentiment while taking in US GDP, US initial jobless claims and some more Fed speak.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high beyond 1.1600. The bullish break could now get the uptrend thinking about a test of that major barrier at 1.2000 further up. In the interim, look for any setbacks to be very well supported ahead of 1.1200, while only back below the figure would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB kept with its general policy line when it met this month and there were no major waves from the event risk. The one notable exception was the language relating to the strength of the Franc, with the SNB viewing the Franc as “highly valued” rather than significantly overvalued. This was a downgrade to the level of concern over the currency’s strength, but again, not much of a reaction. Overall, the sell-off in the Franc in 2017Â has been a welcome development for the SNB. Still, the central bank will need to be careful as the record run in the US stock market has been a big boost to the SNB’s strategy. Any signs of capitulation on that front, will likely invite a very large wave of demand for the Franc, which could put the SNB in a more challenging position to weaken the Franc.
AUDUSD – technical overview
Despite rallying to a fresh +2 year high in September, the market has been unable to hold onto gains, quickly reversing course and trading back below 0.8000. There is now risk for the formation of a more meaningful top. This would be confirmed if the market establishes a daily close below 0.7800. Back above 0.8126 would negate and keep the pressure on the topside.
AUDUSD – fundamental overview
Overall, there have been signs of the market feeling worried about Aussie trading at elevated levels as the RBA leans a little more to the dovish side, while the Fed has surprised in the opposite direction after last week’s meeting. Wednesday’s excitement about US tax reform has weighed even more heavily on Aussie, as it brings back the US Dollar supportive Trump reflation trade, while a robust US durable goods print and falling iron ore prices are other factors dragging Aussie lower. Risk sentiment has however held up well, with US equities at another record high, which could be the one thing saving the risk correlated Aussie from falling off a cliff right now. Looking ahead, the market will continue to monitor broader sentiment while taking in an RBA Debelle speech, US GDP, US initial jobless claims and some more Fed speak.
USDCAD – technical overview
Despite this latest intense 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. But right now, the market would need to break back above 1.2500 to really encourage this prospect.
USDCAD – fundamental overview
It hasn’t been a good run of developments for the Canadian Dollar since the Bank of Canada opted to catch the market off guard and hike rates for a second consecutive time this month. We’ve since seen a discouraging employment report, soft manufacturing data, weaker exports, a retail sales miss and below forecast inflation readings, all of which pointed at the fact that the Bank of Canada may have been too aggressive. If this wasn’t enough reason to be selling the Canadian Dollar, Governor Poloz gave even more on Wednesday after backing all of this up with a more cautious tone that had many seriously reconsidering long Canadian Dollar exposure with that next BoC rate hike sounding much further away. At the same time, the Fed’s more hawkish leaning decision, revival of the Trump reflation trade and robust US durable goods reading are giving the US Dollar a bid of its own. The only supportive development for the Loonie has been a rally in the price of OIL this week, though this hasn’t done much to help. Looking ahead, absence of first tier data out of Canada leaves the focus on US GDP, US initial jobless claims and some more Fed speak.
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
As was widely expected, the RBNZ came out and left rates on hold early Thursday. The central bank’s policy statement offered very little new insight, though the Kiwi rate may have received some support from a less aggressive jawboning of the Kiwi rate in light of the recent pullback. Still, Governor Spencer’s cautious tone was enough to keep the currency under pressure and expectations leaning to the dovish side going forward. The cautious outlook makes sense when you break it down as there have been too many negative drivers for the market to ignore, which should continue to inspire offers. New Zealand government growth and budget cuts, discouraging economic data and this lingering uncertainty around the election result should continue to weigh. The only saving grace for the Kiwi rate in 2017 has been the intense distaste for US Dollar. But even here, we are starting to see some demand for the Buck on optimism around US policy reform, solid US data and a more hawkish leaning Fed. Looking ahead, the market will continue to monitor broader sentiment while taking in an RBA Debelle speech, US GDP, US initial jobless claims and some more Fed speak.
US SPX 500 – technical overview
The market continues to shrug off overextended longer term technical readings, once again pushing up to fresh record highs. The latest break now opens the door for the possibility of a measured move upside extension into the 2550 area. At this point, it would take a clear break back below 2417 at a minimum to take the pressure off the topside and suggest we could finally be seeing the onset of a bearish structural shift.
US SPX 500 – fundamental overview
The US equity market continues to be well supported on dips, pushing further into record high territory. It seems the combination of blind momentum and expectation of favourable US policies are helping to keep the move going into this week. But at the same time, there is a nervous tension out there as the VIX sits at unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, wage growth still subdued, balance sheet reduction coming into play and another rate hike still on the cards this year. But for now, it’s more of the same. It will take a breakdown in this market back below 2400 to turn heads.
GOLD (SPOT) – technical overview
Setbacks have been well supported over the past several months, with the market continuing to put in higher lows and higher highs, opening a recent push to a fresh 2017 high up around 1357. And so, look for the latest round of weakness to once again be well supported on the dip, with a higher low sought out ahead of 1250 ahead of the next major upside extension and bullish continuation towards a retest of the 2016 peak at 1375 further up. Ultimately, only a drop back below 1200 would negate the 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 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. Dealers are now reporting demand in size ahead of 1260.
Feature – technical overview
USDZARÂ has been confined to a consolidation over the past several months, with the market unwilling to establish any new directional bias at the moment. In the interim, rallies are expected to be well capped towards 13.71, while dips should be supported towards 12.55. We have recently seen a bounce out from the range lows, which has opened the door for this bigger recovery back towards the 13.71. But only a clear break above 13.71 or back below 12.55 would force a shift in the structure.
Feature – fundamental overview
The Rand has been struggling of late, as ongoing tension on the political front prevents the emerging market currency from making any headway. Most recently, South Africa’s anti-graft strike, organized by the nation’s largest labour organisation and also supported by the Communist Party is the source of the latest drama. The political mess has made the Rand one of the least attractive emerging market currencies out there at a time when risk correlated currencies are coming back under pressure on the reemergence of US Dollar demand from a more hawkish leaning Fed, solid US data and the revival of the Trump reflation trade. The only saving grace for the Rand has been last week’s SARB policy decision which failed to live up to expectations for another rate cut, after the central bank seemed to downplay risks, opting for a more balanced outlook. But even still, the emerging market currency is under pressure. Throw in the prospect for a capitulation in an extended US equities market and the outlook continues to favour additional Rand weakness.