Today’s report: Quarter End A Friend of the Trend
Nothing on the Thursday calendar screamed out to sell the US Dollar and if anything, there was even more reason to buying the Buck on the back of better than expected GDP, solid trade data and hawkish Fed speak. In the end, it seemed to come down to quarter end flow.
Wake-up call
Chart talk: Major markets technical overview video
- quarter end
- UK GDP
- BOJ Summary
- SNB strategy
- Iron ore
- Poloz backtrack
- Ailing Kiwi
- Trump reflation
- Macro backdrop
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Worries Behind Turkey’s Boom, D. McCrum, Financial Times (September 27, 2017)
- How Far Hedge Funds will Go for 2%, L. Abramowicz,  Bloomberg (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
Fallout from the German election and more dovish ECB speak early in the week had been responsible for added downside pressure in the Euro, already feeling the heat from a more upbeat outlook for the US Dollar on the back of a more hawkish leaning Fed, solid US data and a revival of the Trump reflation trade. But on Thursday, the market got back to that trend of selling the Buck, which helped to fuel a Euro recovery, primarily driven off month end, quarter end flow. Data out of Europe didn’t hurt the cause either, with German CPI pleasing and Eurozone confidence surging to 10 year highs. Looking ahead, it will be interesting to see how things play out, with the longer-term flow pointing to a resumption of US Dollar selling, but shorter term developments clearly expressing a different view. As far as today’s docket goes, we get German retail sales, Eurozone inflation readings, US core PCE and more central bank 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. A recent Moody’s downgrade and renewed concern over Brexit have added to some of this week’s downside pressure. Still, the UK currency has been supported on dips, getting some help from UK CBI readings and Thursday’s broad based US Dollar selloff on quarter end flow. But the US Dollar has been making some headway of late on the back of a more hawkish leaning Fed, revival of the Trump reflation trade and solid US data, as reflected through this week’s durable goods and GDP. Looking ahead, we get UK GDP, some BOE and Fed speak and US core PCE.
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
Local data and developments haven’t meant much in Japan, with the market shrugging of this week’s news of a snap election and Friday’s huge Japanese docket including the BOJ Summary of Opinions. One member even expressed that more easing would be necessary and the market didn’t do much with the news. Japanese data was also offsetting with CPI and industrial production impressing, while household spending and retail sales let down. The real driver of this pair is coming from external factors, including broader risk sentiment and developments on the US front. A ongoing bid in US equities at record highs and US Dollar positives, including a more hawkish leaning Fed, solid US data and a revival of the Trump reflation trade, have been behind a lot of this week’s bid, though much of this has been wiped out after the US Dollar took a big hit Thursday on quarter end flow. Looking ahead, key standouts on the calendar include US core PCE 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. The added 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 slide in iron ore prices on worry of reduced Chinese demand, robust US durable goods and solid US GDP 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, key standouts on the calendar include US core PCE 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 1.2520 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 healthy US data (durable goods, GDP) are giving the US Dollar a bid of its own. The only supportive development for the Loonie into Friday has been the month end, quarter end flow that has resulted in some broad based US Dollar selling. Looking ahead, we get Canada industrial and raw materials prices, US core PCE 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
This week’s RBNZ policy hold and cautious outlook from RBNZ Spencer make good sense when you break it down as there have been too many negative drivers for the market to ignore, which should continue to inspire Kiwi offers and underperformance. 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 as reflected by Thursday’s month end, quarter end flow. But even on this front, there is no denying fundamentals that have been more supportive of the Buck of late, which include a revival of the Trump reflation trade, solid US data and a more hawkish leaning Fed. Looking ahead, key standouts on the calendar include US core PCE 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 into 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 the recently more upbeat SARB decision and some month end quarter end selling of the Buck. 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.