Today’s report: Charts go Head to Head with Big Money Bets
We come into Friday with the US Dollar up across the board, even against US equities, albeit marginally, but something we haven't seen a lot of the past several years. Looking at today's calendar, the focus will be on the US Q3 advanced GDP.
Wake-up call
Chart talk: Major markets technical overview video
- dovish ECB
- negotiation uncertainty
- risk sentiment
- SNB headwinds
- Political turmoil
- soured BoC
- Kiwi confidence
- Fed Chair
- Macro backdrop
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Central Bankers’ Blues, R. Armstrong, Financial Times (October 26, 2017)
- Japan is Booming, Except it’s Not, J. Snider, Alhambra Partners (October 25, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
Thursday’s breakdown below the 1.1660 neckline has triggered the formation of a big H&S top on the daily chart that now projects additional weakness in the days ahead all the way down to 1.1230. The market will initially be looking to get down to testing an initial, smaller H&S top objective that was triggered days back on September 26, that targets 1.1555. Still, confirmation is important in technical analysis, and it will be worth waiting to see where the market settles on Friday for a clearer directional indication. A close below 1.1660 will encourage the bearish prospect, while a close back above 1.1660 will undermine it.
EURUSD – fundamental overview
It was all downhill for the Euro in the aftermath of a decision that did a good job letting down hawkish expectations after the central bank sent a message that was more about reduction than taper. Draghi made this distinction very clear while adding QE wouldn't stop suddenly and a large majority of the board favored keeping stimulus open ended. In the end, the ECB reduced QE to Euro 30B a month for a nine-month extension, while not looking to put a stamp on an end date just yet. And if that wasn't enough disappointment for hawks, there was a final blow from Draghi that the decision should be taken as still dovish, non-tapering action, with the option available to increase and extend QE if needed. The Euro weakness was accompanied by ongoing US Dollar demand across the board, with some attributing this to chatter that Yellen would not be in the race for Fed Chair, leaving better odds for the more hawkish leaning Taylor. Looking ahead, we get second tier data out of Europe and the focus will be on follow up decision ECB speak from Praet, Nowotny, Angeloni and Weidmann. Then into the US, the market will be watching the US Q3 advanced GDP. But we would caution against taking too much from this data, still likely to feel the effects of the hurricanes.
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, while there is risk for another drop, setbacks should be limited below the psychological barrier, 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 1.3338 to confirm the constructive outlook and accelerate gains. Ultimately, only back below 1.2775 would delay the outlook.
GBPUSD – fundamental overview
The Pound has come back under pressure into Friday, with all of those Wednesday UK GDP gains wiped out on the back of ongoing broad based demand for the US Dollar that has been accelerated following Thursday’s dovish ECB message and Euro fallout. The UK currency was actually already offered pre-ECB, with many market participants also worrying about the upside potential for a currency that already has a priced in rate hike next week, yet still faces a lot of uncertainty on the Brexit negotiation front. Most recently, Bundesbank Dombret’s comments that banks need to prepare for Brexit negotiation failure but that “a hard Brexit would be economically manageable,” is not something that is helping the Pound either. Looking ahead, the market will be watching the US Q3 advanced GDP. But we would caution against taking too much from this data, still likely to feel the effects of the hurricanes. Instead, keep an eye out for the Fed Chair appointment and any additional headlines relating to US tax reform or Brexit.
USDJPY – technical overview
The major pair 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 market has been in rally mode over the past several days, taking the rate back into the range highs. At this point, look for the market to adhere to the range and stall out yet again for the start to a drop back towards the range low.
USDJPY – fundamental overview
The price action here continues to be driven off the broader macro themes, with risk sentiment at the top of the list. The ongoing record run in US equities has helped to drive the major pair back towards some important resistance in the 114.00s, though we did get a small wave of offers after US equities sold off a bit this week on weak US earnings and fear of overextension. Some of those big ticket items the Yen is monitoring at the moment include renewed provocations out from North Korea, US tax reform progress and the next Fed Chair appointment. Earlier today, Japan CPI came in broadly in line and wasn’t expected to make any waves. Looking ahead, the focus will be on fallout from the ECB and a US docket that includes Q3 advanced GDP.
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 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB will need to be careful right now as its strategy to weaken the Franc could face headwinds from both the US equity market and the ECB. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. But any signs of capitulation on that front, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc. The Franc has dropped to another yearly low against the Euro this week on what could be ramped up SNB activity. This would make even more sense into Friday, after the ECB delivered a very dovish, Euro bearish monetary policy decision. And so, we speculate the SNB could be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead.
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 0.7800, with only a close back above the psychological barrier to put the pressure back on the topside. Wednesday’s break back below 0.7734 has strengthened the bearish outlook.
AUDUSD – fundamental overview
The Australian Dollar hasn’t been having a great time of late and is taking another hit into Friday from the political front, on news Australia’s High Court has disqualified deputy PM Joyce (4 other Senators as well) for violating a dual citizenship clause, which means the Australian government losing a one seat majority in the House of Representatives and by-election. This comes at a time when the Australian Dollar has already been contending with fallout from this week’s softer CPI, dovish RBA Debelle comments, slumping iron ore and ongoing broad based demand for the US Dollar. Looking ahead, Aussie will monitor this latest political turmoil, broader themes including renewed provocations out from North Korea, US tax reform progress, the next Fed Chair appointment, and some US GDP data.
USDCAD – technical overview
Clear signs of basing in this pair, with the recovery from plus two year lows back in September extending through an important resistance point in the form of the August peak. This sets the stage for additional upside in the days and weeks ahead, with the immediate focus now on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported ahead of 1.2500.
USDCAD – fundamental overview
As much as this risk was flagged from our end, the market was still caught off guard by the dovish shift at the Bank of Canada meeting on Wednesday. The Canadian Dollar has been hit hard, extending a run of recent declines that have come since economic data has deteriorated in the aftermath of the central bank’s aggressive move of consecutive rate hikes in 2017. The BoC warned it would remain cautious when considering future rate hikes while also citing concern over the stronger currency. Another looming threat to the Canadian Dollar at the moment is the NAFTA uncertainty and possibility the agreement will be terminated as per President Trump’s threats. Market odds for a December BoC hike have since declined and are now sitting down around 40%% from what had been about 80% in early September. Looking ahead, absence of first tier data on the Canada calendar will leave the market focus on broader themes including renewed provocations out from North Korea, NAFTA headlines, US tax reform progress, the next Fed Chair appointment, and some US GDP.
NZDUSD – technical overview
Medium term studies have turned down sharply after the market pushed up to a plus two year high through 0.7500 in late July. A recent break below 0.7000 has now opened a more meaningful reversal looking to retest the 2017 low at 0.6818. Any rallies should now be very well capped ahead of 0.7200.
NZDUSD – fundamental overview
The New Zealand Dollar continues to struggle in the aftermath of a surprise election result that saw the emergence of Labour. Overall, the currency had already been under pressure in the lead up to the election, with economic data heading the wrong way and the market pricing a less hawkish RBNZ path forward. The PM elect was on the wires this week shaking things up some more after outlining the intention to ‘review and reform’ the Reserve Bank Act. We have seen some bids as the rate retests the 2017 low from May, with the market perhaps finding support on uncertainty surrounding US tax reform and the next Fed Chair appointment. At the same time, stronger US economic data and a pullback in US equities are not supportive developments for the risk correlated commodity currency. Looking ahead, the market focus on broader themes including renewed provocations out from North Korea, US tax reform progress, the next Fed Chair appointment, and some US GDP.
US SPX 500 – technical overview
The market continues to shrug off overextended technical readings, with any setbacks quickly supported for fresh record highs. At the same time, it’s worth noting that the market broke out in August after a 75 point consolidation, which projected a measured move to 2565. And now that this 2565 measured move objective has been met and slightly exceeded, it could warn of some form of a reversal to come, though we would need to see a daily close back below 2544 at a minimum to take the immediate pressure off the topside. Until then, the record run continues into unchartered territory, with the focus on the next major barrier at 2600.
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. US earning season, tax reform updates and who President Trump appoints as the next Fed Chair continue to be the primary focus into Friday. Today’s GDP data will also be watched but is expected to be impacted from the hurricanes.
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 breaking out of a period of multi-month consolidation, with the price surging to fresh 2017 highs beyond 14.00, suggesting the run could have a lot more to go. The next major level of resistance comes in at 14.76, the high from August 2016. Setbacks should be well supported from here ahead of 13.65.
Feature – fundamental overview
The South African economy is in greater need for flexibility on rates on the basis of a near zero growth and a negative output gap, though rising inflation is forcing the SARB to think about going in the opposite direction. Meanwhile, the Rand remains exposed to ongoing tension on the political front which will persist into year-end on account of the upcoming ANC leadership election. Wednesday’s Budget Statement dealt the emerging market currency another big blow, with the Rand sinking to a fresh 2017 low on the revelation of sharp revisions to debt and deficit projections, highlighting risk for further downgrade. The only supportive Rand driver at the moment has come 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 backdrop around the globe.