Today’s report: FX Watching Stocks, Waiting on Euro
The US Senate passed the 2018 budget resolution which paves the way for tax reform and the market has been excited with the news, with US equity futures extending the wild record run. On the FX front, the market is waiting to see which way the Euro breaks.
Wake-up call
Chart talk: Major markets technical overview video
- Article 155
- Sour notes
- Japan election
- SNB strategy
- China nervousness
- First tier
- Labour
- Tax reform
- macro funds
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- I Think We Got Away with It, P. Hurtado, Bloomberg (October 19, 2017)
- Spain Moves to Suspend Catalan Autonomy, J. Han, Financial Times (October 19, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The uptrend in 2017 has stalled out for after the market triggered a head and shoulders topping formation and dropped back below the 50-Day SMA for the first time since the Euro broke out earlier this year. The measured move extension off the head shoulders top projects a decline to 1.1555. What’s even more interesting right now is if the market breaks down below 1.1660, we could see the formation of an even bigger head and shoulders top projecting a measured move downside extension into the 1.1200s. There is however a lot of support in the 1.1600s including the mentioned neckline, 100-Day SMA and Ichimoku cloud bottom. Inability to establish below 1.1660 will keep the 2017 uptrend intact.
EURUSD – fundamental overview
The saga in Spain drags on and could result in the triggering of Article 155, which has been a strain to the Euro. Still, this event will likely drag on for a number of weeks before we get any real clarity. PM Rajoy is expected to request the invocation of Article 155 at the cabinet meeting on October 21st and the Senate is then scheduled on the 24th of the month. The Euro is also under pressure on US Dollar demand from the news the US Senate passed the 2018 budget resolution which paves the way for Dollar supportive tax reform. Overall, the major pair is still uptrending and is waiting for the next break for additional clarity. Dealers report stop orders above 1.1910 and below 1.1660. As far as today’s calendar goes, we get German producer prices, the Eurozone current account and US existing home sales followed by the Fed Chair later in the day.
GBPUSD – technical overview
The market has eased off quite a bit since topping out at a fresh 2017 high in September, with the price dropping back into the 1.3000 area thus far. However, setbacks should be limited to the psychological barrier from here, with the greater risk for the formation of that next meaningful higher low ahead of a continuation of the newly formed uptrend in 2017. Look for a daily close back above 1.3300 to confirm the constructive outlook and accelerate gains. Until then, there is risk for some more short-term choppy consolidation.
GBPUSD – fundamental overview
The Pound remains under pressure into Friday with the UK currency weighed down by a lack of progress on Brexit negotiations, softer UK retail sales and news of the US Senate passing the 2018 budget resolution, paving the way for US Dollar supportive tax reform. On the Brexit front, the Times has reported UK Brexit Secretary Davies has told officials to step up contingency plans for a no-Brexit deal, which is only adding to the tension. Dovish leaning speak from BOE Cunliffe hasn’t done anything to help the Pound either. Looking ahead, the Pound will continue to monitor Brexit headlines from the EU Summit. We also get UK public finances, US existing home sales and an appearance from the Fed Chair late in the day.
USDJPY – technical overview
The market has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips well supported below 108.00. The recent run up has been showing signs of stalling out yet again into the resistance zone. But a drop back below 111.65 will be required to strengthen the bearish prospect. If on the other hand the market pushes back through 113.44, it will expose a direct retest of the top of the range at 114.50.
USDJPY – fundamental overview
Upcoming Japan elections haven’t been a factor here, with the market already pricing a strong LDP victory. But the Yen has come under some pressure on US demand from favourable USD yield differentials. The news of the US Senate passing the 2018 budget resolution, paving the way for US Dollar supportive tax reform, has given USDJPY a nice boost in early Friday trade, with the major pair already pushing up on the back of an ongoing record run in the US equity market. Looking ahead, the light economic calendar will leave the risk sensitive Yen monitoring political developments out of Spain and the EU Summit before taking in US existing home sales and a Fed Yellen appearance late in the day.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high. 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 1.1400, while only back below 1.1200 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB kept with its general policy line when it met last 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 2017 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. Interestingly, the latest surge in stocks has failed to bolster the exchange rate.
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 opening the door for the next downside extension towards 0.7500. Look for rallies to now be well capped ahead of 0.8000, with only a close back above the psychological barrier to put the pressure back on the topside.
AUDUSD – fundamental overview
The bias in iron ore futures remains to the downside and there is a growing concern out from China over the outlook for the global economy and risk for an event that could send the markets into a tailspin. The rally in US equity futures to fresh record highs hasn’t done anything to help Aussie, with the currency trading lower on the back of the worry from China and rally in the US Dollar in response to the US Senate passing of the 2018 budget resolution paving the way for US Dollar supportive tax reform. Remember, any rally from the better than expected headline Aussie jobs data was also deceptive given that the data was not a strong beneath the surface as evidenced by the gain in part time jobs. Looking ahead, we get US existing home sales and an appearance from the Fed Chair late in the day.
USDCAD – technical overview
Despite the September breakdown to a fresh 2017 and +2 year low, stretched medium-term technical studies continue to warn of the possibility for a more significant bullish reversal as oscillators turn up again. From here, there’s room for a push to retest key resistance in the form of the August peak at 1.2780, while any setbacks should be well supported ahead of 1.2300.
USDCAD – fundamental overview
The Canadian Dollar slide has slowed down this week on extended NAFTA negotiations. Still, overall, the Loonie has been having a harder time of late as the market prices a scaled back outlook at the Bank of Canada in the aftermath of a wave of data that has called recent rate hikes into question. At the same time, things have been looking up for the US Dollar, with the Buck getting help from a Fed keeping to its policy normalisation timeline and a US government inching closer to US Dollar supportive tax reform. Looking ahead, Canada will be in the spotlight with some important economic data out in the form of retail sales and CPI. We also get US existing home sales and an appearance from the Fed Chair.
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. Any rallies should now be very well capped ahead of 0.7300.
NZDUSD – fundamental overview
The New Zealand Dollar has come under intense pressure this week, with the currency crushed in the aftermath of the surprise NZ First decision to back Labour. All of the uncertainty over the new government’s policies is adding to the strain that has already been on the Kiwi rate on the back of a deteriorating economic outlook in New Zealand. The relative underperformance has fueled notable Kiwi weakness against its Aussie cousin, with larger players stepping into long AUDNZD exposure. The market will continue to take it all in, while also focusing on US Dollar supportive developments out of the US following the news of the US Senate passing of the 2018 budget resolution that paves the way for tax reform. As far as the calendar goes, we get US existing home sales and a Yellen speech late in the day.
US SPX 500 – technical overview
The market continues to shrug off overextended longer term technical readings, once again pushing up to fresh record highs. Interestingly, the market broke out in August after a 75 point consolidation, which projected a measured move to 2565. This could warn of some form of a reversal to come, though we would need to see a drop back below 2500 at a minimum to take the immediate pressure off the topside. Until then, the record run continues into unchartered territory.
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 tax policy are helping to keep the move going. But at the same time, there’s 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, 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. At this point, it will take a breakdown in this market back below 2500 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 this most recent dip to round out that next higher low around 1260 in favour of a 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
USDZAR has been confined to some range trade for much of this year, with rallies well capped ahead of 14.00 and dips supported into the 12.30 area. The most recent run up has once again stalled out into the range resistance suggesting we could see another drop to the range lows. A break and close back below 13.16 will strengthen this bearish outlook.
Feature – fundamental overview
Expectations for a November rate cut in South Africa have been cut down after Wednesday’s SA CPI readings rose by more than forecast. This isn’t a positive development for the South African economy with the greater need for flexibility on rates on the basis of a near zero growth and a negative output gap. Meanwhile, the Rand remains exposed to ongoing tension on the political front which will only bid into year-end on account of the upcoming ANC leadership election and risk of credit rating downgrades. The only supportive Rand driver at the moment seems to be coming from the record run in US equities, which is a positive for risk correlated emerging market currencies. However even here the Rand should be sitting uneasy as the prospect for a capitulation is looking increasingly realistic on overbought technicals and an unstable political backdrop around the globe.