Today’s report: Week in Review and Looking Ahead
The FX market is getting ready to close out a week that didn't manage to produce all that much in terms of market moving influence. Looking back, the economic calendar had already warned of a more subdued week of trade, with very little in the way of first tier releases.
Wake-up call
Chart talk: Major markets technical overview video
- EC upgrade
- Brexit talks
- tax reform
- SNB exposure
- SOMP
- Soaring OIL
- FinMin comments
- red flags
- Macro accounts
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Bond Investors Are Stock Investors’ Latest Concern, S. Gandel, Bloomberg (November 9, 2017)
- A Year in the Life of Forex, R. Blitz, Financial Times (November 9, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The recent breakdown below 1.1660 has triggered the formation of a major H&S top on the daily chart that now opens the door for a possible measured move downside extension into the 1.1200s. Next key support comes in the form of the psychological barrier at 1.1500. Any rallies should be very well capped below 1.1800, with only a break back above 1.1880 to suggest we’ve seen the end to the correction.
EURUSD – fundamental overview
While we haven’t seen much movement in the Euro this week, the single currency did manage to put in a decent recovery on Thursday, pushing back above 1.1600 and well off the weekly low. There were a number of drivers contributing to the bounce which included hawkish leaning ECB speak, upgraded European Commission GDP forecasts for the Eurozone and some more uncertainty over US tax reform. Looking at the calendar for today, there isn’t much out there. The focus will be on an ECB Mersch speech, US Michigan confidence readings and broader macro themes.
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. Ultimately, only a weekly close back below 1.2775 will delay the constructive outlook. At the same time, the market is capable of chopping around some more and it’s going to take a run back above 1.3338 is required to send a signal the market is ready to start moving back up.
GBPUSD – fundamental overview
Thursday’s Brexit negotiations failed to produce any meaningful headlines and the Pound was left trading on the broader macro flow. This helped to support the Pound into dips on Thursday, with this flow coming from renewed uncertainty over the effectiveness of the US tax reform. Today we get back to the Brexit negotiations, with Barnier and Davis meeting this morning before holding a press conference. At the moment, the market is waiting on a formal divorce package so that talks can move onto the next phase relating to trade and the transition period. The goal is that the divorce bill agreement will come by the end of the month and PM May is under pressure to make this happen, reportedly considering upping the EUR20B already offered. The Pound will also need to be watching the economic calendar, taking in a batch of data that includes UK industrial and manufacturing production, UK trade and NIESR GDP estimates. Later in the day, we get US Michigan confidence.
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 lows. A daily close back below 113.00 would strengthen this outlook.
USDJPY – fundamental overview
Overall, risk sentiment will likely continue to influence the next big move here. And for now, a lot of that sentiment hinges on what comes of US tax reform. The market is still unsure how effective the reform will be and the more skeptical and disappointed the market is, the more it will weigh on both the US Dollar and equity market, something that is very supportive of the Yen on traditional correlations. At the moment, the Senate’s tax plan reveal proposed to delay corporate tax cuts until 2019, while the House Ways & Means Committee approved tax plan amendments, which includes increase in proposed repatriation tax rates. A lot is still up in the air and this should be the primary focus into the weekly close. Other things to watch include any fallout from President Trump’s Asia tour and US Michigan confidence.
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. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to the US equity market. But any signs of capitulation on that front or any signs of more dovishness from the ECB, 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.  And so, we speculate the SNB continues to 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 be well capped ahead of 0.7800, with only a close back above the 0.7900 to put the pressure back on the topside.
AUDUSD – fundamental overview
The Australian Dollar hasn’t gone anywhere this week, but remains weighed down overall on the back of the recent recovery in the US Dollar and diverging monetary policy, with the Fed on track to follow through with guidance and the RBA moving in the other direction, given the ongoing strain of low inflation and tepid wage growth. Today’s RBA SOMP has confirmed the central bank’s more cautious outlook, after revealing downward revisions to GDP growth and inflation. But given that this was anticipated, there hasn’t been any real movement. We have seen some support this week from renewed uncertainty over US tax reform and this will be what the market will be focused on as the week comes to a close. We also get US Michigan confidence readings.
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
The Canadian Dollar has come under pressure in recent weeks after the bank of Canada was forced to reconsider its more upbeat outlook following what appeared to be an aggressive move of consecutive rate hikes. But we have since seen the Loonie mount a recovery, that has been driven off three developments. Data over the past week or so has been better, reflected through employment stats and Ivey PMIs, Poloz was on the wires this week with a more measured, less concerned speech that comforted Canadian Dollar bulls, and the price of OIL has rocketed back to plus 2 year highs in response to the latest reform measures in Saudi Arabia. Of course, doubts over the effectiveness of US tax reform are also contributing to the Loonie recovery as well. Still, we believe the Canadian Dollar has more room to decline. While data over the past week has improved, data overall has deteriorated in the aftermath of the central bank’s aggressive move of consecutive rate hikes in 2017. Moreover, while Poloz was less dovish than the tone from the latest BoC meeting, this was to be expected as the central banker was going to do his best to justify the recent consecutive rate hikes. Looking ahead, absence of first tier data out of Canada will leave the focus on US tax reform updates and US Michigan confidence. We would also remind that the fate of NAFTA is a big deal and a theme that could also have a negative impact on the Loonie into 2018.
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 opened a more meaningful reversal to retest the 2017 low at 0.6818. Any rallies should now be very well capped ahead of 0.7200 ahead of the next downside extension below 0.6818 that would target 0.6500.
NZDUSD – fundamental overview
The New Zealand Dollar hasn’t been able to muster much of a rally since Thursday’s RBNZ meeting which revealed a bump up in the rate hike path a quarter earlier than previous estimates, to Q2 2019. Overall however, it seems the market isn’t too excited about the prospect for an accelerated rate hike timeline in 2019 when it is contending right now with a less than impressive run of data, and a new government that the market is still trying to figure out. Earlier today, we saw some more Kiwi offers float in on FinMin comments that the RBNZ’s dual mandate could result in looser policy and that the central bank’s 2% inflation target would be up for discussion. We have seen some Kiwi support this week from renewed uncertainty over US tax reform and this will be what the market will be focused on as the week comes to a close. We also get US Michigan confidence readings.
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 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 establishing above 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, expectation US tax reform will ultimately work out well and the appointment of Jerome Powell as the next Fed Chair are helping to keep the move going. But at the same time, there’s a clear 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. For today, the market will continue to focus on tax updates, while also monitoring and headlines from President Trump’s Asia tour and taking in Michigan confidence.
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. October’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.