Next 24 hours: Quiet But Not Calm
Today’s report: FX Traders Tentative with US Dollar Bets
Wednesday's economic calendar isn't exactly a barnburner, though it probably won't matter, with the market distracted by the bigger picture story at the moment, which is the deterioration in global sentiment. The US Dollar has managed to find some demand, though the gains have been mild.
Wake-up call
Chart talk: Major markets technical overview video
- ECB Weidmann
- BOE positioning
- global sentiment
- Unwelcome inflow
- Aussie data
- trade deficit
- GDT
- policy normalization
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Inflation’s Role in Recent Market Turmoil, C. Giles, Financial Times (February 6, 2018)
- The Stock Market is A Lot Like Bitcoin, L. Bershidky, Bloomberg  (February 6, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has entered a period of consolidation off the recent 2018 high, though overall, the uptrend remains firmly intact and there is still room to run. The break of the 2017 high set up a bullish continuation and the next major measured move upside extension into the 1.2700 area, which coincides with monumental resistance in the form of a falling trend-line off the record high from 2008. In the interim, any setbacks should be very well supported ahead of 1.1900.
EURUSD – fundamental overview
The Euro is holding up well in the face of last week’s bullish US Dollar developments including a more confident inflation outlook from the Fed and subsequent in rise in US hourly earnings. The ensuing wave of risk off flow in markets is also seemingly benefitting the Euro, as market participants look to diversify flight to safety flow away from the Buck in light of US administration soft US Dollar policy. Tuesday’s central banker comments were offsetting, with ECB Weidmann warning against any overoptimism with respect to the Eurozone recovery, while Fed Bullard made a point to highlight his belief that nominal wages weren’t a good predictor of inflation. Looking ahead, we get German industrial production, European Commission economic forecasts, speeches from ECB’s Nouy and Lautenschlaeger, and a possible outcome relating to the German coalition government. In the US, the calendar is rather quiet, with only speeches from Fed’s Kaplan, Dudley and Evans standing out.
GBPUSD – technical overview
Daily studies are in the process of unwinding from overbought levels. There is scope for a drop back towards the 2017 high in the 1.3660 area, after the market triggered a double top formation. But any setbacks are viewed as corrective, with the overall structure showing signs of a longer term bottom.
GBPUSD – fundamental overview
The Pound has taken some hits on a number of fronts over the past week or so. On the local front, we’ve seen some softer UK data, renewed Brexit bumps and pressure on the PM to resign. Meanwhile, the US Dollar has been trying to make a comeback following a hawkish inflation slant in the FOMC decision, subsequent jump in US hourly earnings and resulting run of flight to safety bids. Looking ahead, absence of first tier data on the Wednesday calendar will leave the focus on positioning into tomorrow’s anticipated Bank of England decision, scattered central bank speak from Fed’s Kaplan, Dudley and Evans, and any headlines relating to 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 come back down towards the range base and could be looking to turn back up, though at this point, it would be premature to rule out deeper setbacks. While the market holds below 111.50, there is still scope for a fresh downside extension to challenge the extreme range base in the form of the 2017 low around 107.30.
USDJPY – fundamental overview
Overall, the Yen has been well bid in early 2018, mostly on the back of a soft US Dollar campaign and some hawkish leaning tweaks to BOJ policy. This latest downturn in global risk sentiment could invite additional Yen demand on the traditional correlation, with the Yen in position to outperform the Dollar, at least for a while. Looking ahead, absence of first tier data on Wednesday, will leave the focus on scattered central bank speak and performance in US equities.
EURCHF – technical overview
Despite this latest round of setbacks, overall, the market continues to trend higher, recently extending gains to a fresh multi-month high. The bullish price action has the market thinking about a retest of that major barrier at 1.2000 further up. In the interim, look for the current round 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 in 2018. 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 US equities. But any signs of capitulation on that front into this new year, 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. Recent outperformance in the Swiss Franc despite flows which should have otherwise been supportive of a higher EURCHF, could already be offering up a red flag.
AUDUSD – technical overview
An impressive recovery out from the December low has finally stalled out, with the market rolling over after clearing the 2017 high. This latest daily close back below 0.7957 strengthens this outlook and opens the door for a renewed wave of declines back towards 0.7500. At this point, only a daily close back above 0.8000 would delay.
AUDUSD – fundamental overview
Most of the latest setbacks in the Australian Dollar have come from this week’s softer Aussie trade and retail sales data and doubts out from the RBA statement relating to wage growth, inflation and household consumption. The weakness comes at a time when the US Dollar is also trying to make a comeback following the upbeat inflation tone in the latest Fed decision and rise in US hourly earnings. Of course, a downturn in global equities is also not Aussie supportive and we could see additional downside pressure if this keeps up. Looking ahead, absence of first tier data on Wednesday, will leave the focus on scattered central bank speak and performance in US equities.
USDCAD – technical overview
Despite the latest round of setbacks, there are signs of basing in this pair, after the recovery from plus two year lows back in September extended through an important resistance point in the form of the August peak. This sets the stage for additional upside, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported above 1.2250. Back above 1.2591 will strengthen the outlook.
USDCAD – fundamental overview
Softer data out of Canada on Tuesday, kept the Loonie under pressure, with a discouraging trade print and drop off in Ivery PMIs behind the flow. This follows last week’s more upbeat Fed inflation tone and rise in US hourly earnings, which had already opened renewed downside pressure on the Canadian Dollar. Overall, Canada’s recovery is already somewhat fragile, and this coupled with an unstable macro picture and plenty of uncertainty around the fate of NAFTA, should be keeping the Canadian Dollar pressured, especially after the Bank of Canada opted to go ahead with another rate hike last month, which will only add to the strain if the global sentiment picture deteriorates even further. Looking ahead, we get Canada building permits and some central bank speak from various Fed officials.
NZDUSD – technical overview
An impressive run has finally stalled out into formidable internal resistance. Overall, the risk is tilted to the downside and it will take a clear establishment back above 0.7400 to delay the bearish outlook and risk for another reversal. A daily close below 0.7220 will strengthen the bearish outlook.
NZDUSD – fundamental overview
Most of the Kiwi strength over the past several weeks has been driven off broad based US Dollar weakness, record stocks and recovering commodities prices. But with US equities showing signs of rolling over, sentiment at risk of deteriorating, and the US Dollar recovering in the aftermath of this more hawkish Fed read and tick up in hourly earnings, it all could be warning of the start to renewed weakness. Kiwi has however done a fabulous job outperforming against its peers, with the combination of softer data out of Australia and Canada and this latest impressive jump in the GDT auction and stronger New Zealand jobs report driving the relative strength. Looking ahead, absence of first tier data on Wednesday, will leave the focus on scattered central bank speak and performance in US equities. Early Thursday, we get the RBNZ decision.
US SPX 500 – technical overview
A severely overbought market has finally at long last relented, allowing for stretched readings to unwind. There’s plenty of room for these setbacks to extend following the break back below the 2675 area January low, with the market at risk for a further intensification of declines. Any rallies should now be very well capped ahead of 2800.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX starts to rise from 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 the Fed finally following through with forward guidance. Certainly, the more hawkish tone from last week’s otherwise uneventful Fed meeting and subsequent jump in hourly earnings, are the types of things that could weigh more heavily on sentiment in the sessions ahead.
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. Look for the current run to break through and establish above massive resistance in the form of the 2016 high at 1375, with the push to suggest a major bottom has formed, opening the door for a much larger recovery in the months ahead. Any setbacks should now be well supported ahead of 1300.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players persists, 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 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. The 2016 high at 1375 is a massive level that if broken and closed above, could be something that triggers a widespread panic and rush to accumulate more of the hard asset.
Feature – technical overview
Bitcoin has come under intense pressure since topping out at a record high just shy of 20,000 in December. The market has now exceeded a measured move downside objective that had targeted a drop to $7,000, with deeper setbacks now on the cards for a move to retest the September 2017 peak around $5,000. At this point, it will take a break back above $10,000 at a minimum, to take the pressure off the downside.
Feature – fundamental overview
The crypto asset has come under intense pressure in early 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market has also been on a euphoric ride, with the run gaining too much momentum as latecomers look to get in on the action, often a sign of a bubbling asset. Bitcoin has struggled on the transaction side as well, with transactions per second a major drawback, along with a mining community that has been less willing to process transactions due to the lower fees. The Lightning network is expected to ramp up transaction speed as it is integrated, which could be a big help to Bitcoin, though it seems the combination of a massive bubble, more regulatory oversight and a market that is still trying to convince of its proof of concept, could be at risk for even deeper setbacks. Throw in a capitulation in global equities and downturn in sentiment, and the picture looks even gloomier.