Today’s report: Riskless Investment in Risky Assets
This week’s story has been one in which the Pound has outperformed on Brexit outlook optimism, the Euro has held up well, and the commodity currencies have been going the other way, seemingly on concerns about global risk appetite and weakness in the commodities sector.
Wake-up call
Chart talk: Major markets technical overview video
- manufacturing PMIs
- Northern Ireland
- traditional correlations
- SNB strategy
- upbeat data
- GDP, employment
- FinMin Robertson
- red flags
- Macro accounts
- USDTRYÂ
Suggested reading
- Building a Video Game to Beat Alzheimer’s, A. Ahuja, Financial Times (November 28, 2017)
- Bitcoin is Sucking All the Oxygen, T. Culpan,  Bloomberg (November 29, 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
The Euro has continued to hold up well into Friday, despite challenges for the single currency in which it has been contending with Dollar demand on tax reform optimism and a less dovish Fed outlook. Thursday’s softer Eurozone CPI data wasn’t any help either, but despite all of this, the Euro still looks like it will be making that next big move to the topside. Overall, data in the Zone has been positive, while ECB officials have been increasingly upbeat. At the same time, the US administration will be moving on to protectionist, soft US Dollar policy into 2018, something that should rally the Euro whether it likes it or not. Looking ahead, we get some Eurozone manufacturing PMIs, US ISM manufacturing and more updates relating to the US Senate tax vote.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 in place at 1.3027, to be confirmed on a break of the 2017 high at 1.3658. This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018. Any setbacks should now be well supported into that previous range resistance now turned support at 1.3340.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 if PM May can’t work out a solution on Northern Ireland come Monday. But as of now, all things point to the outstanding issues getting worked out. As far as the economic calendar goes, we get UK manufacturing PMIs, US ISM manufacturing and more updates on US tax reform from the Senate floor.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 113.50.USDJPY – fundamental overview
Month end flow and another record run in US equities have helped to prop up the major pair into Friday. The Yen continues to trade off broader macro themes and traditional correlations. Some of these themes include a 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 are expected to be contained 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 ISM manufacturing and updates from the Senate floor vote on US tax reform.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 against the Pound and Euro, 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. Thursday’s solid private capex and building approvals readings have been followed up by strong manufacturing PMIs early Friday, but this hasn’t done much for the ailing Aussie on the bigger picture concerns. Meanwhile, China Caixin PMI data was a miss, which also isn’t a help. Looking ahead, key standouts come in the form of US ISM manufacturing and an update from the Senate floor on tax reform.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 1.2600.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 a bit this week. 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, the Canadian Dollar has a big day ahead, with Canada employment and GDP due. Meanwhile in the US, we get ISM manufacturing and more updates from the Senate floor relating to the tax reform vote.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 looking stretched, the market is taking time to allow those studies to unwind before making the next move. 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 after business confidence readings sunk to their lowest levels since March 2009 on Thursday and FinMin Robertson warned of a growth slowdown on Friday. 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 ISM manufacturing and an update from the Senate floor on tax reform.US SPX 500 – technical overview
The market continues to shrug off overextended technical readings, with any setbacks quickly supported for fresh record highs. Still, technical readings are tracking well overbought and are in desperate need for a period of healthy corrective action.Ultimately however, it will 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
The CBRT 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. 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. We did hear from Erdogan’s advisor the other day, who said the CBRT could take more action, something that would give the CBRT a green light to move ahead. Nevertheless, the fact that the CBRT is faced with constant pressure from the President, does not make for an ideal situation.