Next 24 hours: The Warm Blanket Comfort of FX
Today’s report: Month End Flow, Brexit, Tax Reform
Into Thursday, the developed currencies have been mostly sideways on the week. The exceptions are the Pound, up well over 1% against the Buck on Brexit optimism, and the Loonie, down over 1%, hit by lower OIL prices and we believe, worry about the fate of NAFTA.
Wake-up call
Chart talk: Major markets technical overview video
- Eurozone CPI
- Brexit bill
- China PMIs
- SNB strategy
- building approvals
- Lower OIL
- business confidence
- red flags
- Macro accounts
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- The Charts to Watch Out For, A. Giustiniano, Financial Times (November 29, 2017)
- Invest in Bitcoin, Even If It’s a Bubble, L. Bershidsky,  Bloomberg (November 28, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The recent break back above 1.1880 is a significant development, as it undermines the prospect for a deeper correction, while opening the door for a more immediate resumption of a well defined uptrend that has taken form in 2017. Look for any setbacks to be well supported ahead of 1.1700, for the next major upside extension beyond the current yearly high of 1.2093 and towards the 1.2500 area further up. Only a daily close back below 1.1700 will delay this outlook.
EURUSD – fundamental overview
There hasn’t been all that much going on with the Euro this week, though the single currency has done a good job absorbing a wave of post US Thanksgiving holiday setbacks on tax reform optimism and a less dovish Fed outlook. German CPI has also ticked up, giving the Euro an added prop into Thursday. Looking at today’s calendar, the market will be watching any updates out of Germany relating to the fate of the government, while taking in data that includes German retail sales, German unemployment, Eurozone unemployment, Eurozone CPI, US initial jobless claims, US personal income, personal spending and US core PCE. Month end flows and the tax reform vote should not be overlooked.
GBPUSD – technical overview
The market has broken out to the topside, signaling the end to a range that had defined price action since early October. The push back above 1.3340 now suggests the market is poised for a continuation of the 2017 uptrend, with a higher low possibly in place at 1.3027, to be confirmed on a break of the 2017 high at 1.3658, opening the door for a push over the coming weeks and months back above 1.4000. Any setbacks should not be well supported ahead of 1.3000, though ultimately, only back below 1.2775 would negate the constructive outlook.
GBPUSD – fundamental overview
Plenty of optimism surrounding the Pound right now, with the UK currency bid up this week as Britain and the EU look to move past the Brexit bill and onto the next stage of the negotiation process. The Brexit bill terms have not been formalized as of yet, leaving some room for disappointment, though all things point to any outstanding issues relating to the actual bill number and Northern Ireland getting worked out. As far as the economic calendar goes, absence of first tier data in the UK will leave the focus on a US docket that includes initial jobless claims, personal income, personal spending and core PCE. Month end flows and the tax reform vote should not be overlooked.
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 latest break below 111.65 reaffirms this outlook, encouraging the next big drop all the way back to the range lows in the 107-108 area. Look for rallies to be well capped below 113.00.
USDJPY – fundamental overview
Month end flow and some upbeat China PMI data have been cites as drivers behind some of the bid in the major pair on Thursday. But overall, the Yen continues to trade off broader external themes. The big ones have been Yen supportive which is why we have seen a pullback in USDJPY over the past few weeks. These include broad based negative sentiment for the US Dollar, geopolitical tension with North Korea and worry about the outlook in China and potential for a major risk off event. While there has also been some US Dollar demand from this week’s tax reform optimism, the gains have been marginal and fresh offers are reported into rallies. Technicals are also influencing price action here, with the market looking like it wants to adhere to a range trade that is calling the rate back down to the 107.00s. Looking ahead, key standouts come in the form of US releases that include initial jobless claims, personal income, personal spending and core PCE. Month end flows and the tax reform vote should not be overlooked.
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 the US equity market. 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, 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
The market has been under a lot of pressure over the past several weeks, extending declines into the 0.7500s thus far. It’s worth noting technical studies are in the process of unwinding from oversold readings, resulting in this latest minor bounce. But overall, the pressure is on the downside and rallies are viewed as corrective while below 0.7900.
AUDUSD – fundamental overview
The Australian Dollar hasn’t been able to take much advantage of a recent slide in the US Dollar as worry out of China over a frothy equity market and renewed geopolitical tension with North Korea hang over the risk correlated currency’s head. However, into Thursday, Aussie is doing its best to regain its footing, taking it what it can from an upbeat set of China PMIs and better local data in the form of private capex and building approvals. Looking ahead, key standouts come in the form of US releases that include initial jobless claims, personal income, personal spending and core PCE. Month end flows and the tax reform vote should not be overlooked.
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 Loonie is still worried about a Bank of Canada that may have been too aggressive with consecutive rates hikes this year and overall economic data that has deteriorated since. Meanwhile, the Loonie didn’t get much of a boost from a rally in OIL prices to +2 year highs in recent days, and is finding offers as the commodity sells off. We believe some of the additional relative weakness in the Canadian Dollar is also coming from stress associated with the outlook for NAFTA, a storyline that should get more attention into 2018. Looking ahead, absence of first tier data out of Canada, will leave the focus on a US docket that includes initial jobless claims, personal income, personal spending and core PCE. Month end flows and the tax reform vote should not be overlooked.
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 that has accelerated declines to fresh 2017 lows below 0.6800. This sets the stage for a fresh downside extension to support from May 2016 at 0.6676, though with daily studies turning up from oversold, the market is taking time to allow those studies to unwind a bit so the market can carve out a lower top. While below 0.7200, the structure remains bearish.
NZDUSD – fundamental overview
The New Zealand Dollar hasn’t been able to hold onto a run of gains from earlier this week, with the currency coming under more pressure on Thursday after business confidence readings sunk to their lowest levels since March 2009. Overall, we would caution against getting optimistic about Kiwi’s prospects. Economic data has been less than impressive on the whole and this should keep the RBNZ erring on the side of accommodation. Looking ahead, key standouts come in the form of US releases that include initial jobless claims, personal income, personal spending and core PCE. Month end flows and the tax reform vote should not be overlooked.
US SPX 500 – technical overview
The market continues to shrug off overextended technical readings, with any setbacks quickly supported for fresh record highs. The next key level of resistance comes in the form of a measured move extension off of a 40 point consolidation that had taken place in early November, with the extension objective coming in at around 2640. At this point, it would take a break back below 2557 at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
The US equity market continues to be well supported on dips, pushing further into record high territory. It seems, on a macro level, 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.
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
USDTRY has extended its record run, with the market contemplating the establishment above major psychological resistance at 4.0000. At the same time, with medium technical studies looking extended, risk is building for a healthy corrective reversal in the sessions ahead. Ultimately, any setbacks should be well supported ahead of 3.6500, with only a break back below this level to force a shift in the structure.
Feature – fundamental overview
This latest run of broad based US Dollar selling has been a big relief for the CBRT, with the central bank in a nasty battle, trying and stop the Lira from a continued decline to fresh record lows. The Turkish central bank is in that awful position of needing to decide between reacting to a free fall in the currency through tightening measures or reacting to a sluggish economy that is strained by the removal of any accommodation in place. Of course, the situation is even more stressful for the CBRT, with President Erdogan consistently calling for more accommodation. Tensions with the US in recent week’s revolving around Turkish businessman Reza Zareb, accused of evading sanctions against Iran, have only intensified negative sentiment towards the emerging market currency, while inspiring a wave of Lira outflows. Zareb was back in US court for the firs time in months on Wednesday, testifying against his alleged accomplice in the sanctions-evasion plot. There have been calls for as much as 400bps of rate hikes, but the CBRT isn’t expected to make any decisions until it gets a look at the November CPI release due December 4th.