Today’s report: US Dollar and Global Equities – Where We’re Headed
The market is finally entering a long overdue period of necessary adjustment, after benefiting from the artificial support of central banks and governments for a near decade. The wheels were already in motion, though ramped up policy normalizations and rising inflation have converged to kick it all into a much higher gear.
Wake-up call
Chart talk: Major markets technical overview video
- political risk
- Brexit speech
- US protectionism
- unwelcome demand
- Aussie weighed
- Canada GDP
- Macro themesÂ
- Red flags
- Metal demand
- BITCOINÂ
Suggested reading
- Brexit and the Irish Border, J. Sinclair, Financial Times (March 1, 2018)
- Investors Should Fear a Steeper Yield Curve, C. Lieberman, Bloomberg  (March 1, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The major pair has stalled out after trading up to a +3 year high above 1.2500. Daily studies have been in the process of rolling over from stretched readings and this latest daily close below 1.2200 now opens the door for a deeper correction towards the the 2018 low around 1.1915. Ultimately however, the overall pressure remains on the topside, with dips expected to be limited to the 1.1900 area, ahead of the next extension towards monumental resistance in the form of a falling trend-line off the 2008 record high, currently in the 1.2600s.EURUSD – fundamental overview
Key standouts on today’s calendar come in the form of German retail sales, Eurozone producer prices and US Michigan confidence. But more of the focus for the Euro will be on politics and the US Dollar side of things. As far as politics go, we get the German grand coalition vote and Italian election risk over the weekend. The German vote isn’t expected to produce any surprises, though things are a little less clear on the Italian front. However, while there is systemic risk associated with the fallout in Italy, for the moment, such risk could very well be contained, with global markets distracted by the bigger picture items, including the US inflation outlook and US administration’s protectionist policies. Next week, we get an important ECB decision.GBPUSD – technical overview
The market has entered a corrective phase since pushing to a 2018 high at around 1.4350 and rallies should be well capped ahead of the 2018 high for additional corrective activity. There is still scope for additional declines into the 1.3400-1.3600 area, though setbacks should then be very well supported in favour of that next meaningful higher low and bullish continuation.GBPUSD – fundamental overview
EU Barnier did some decent damage to the Pound this week. On Tuesday the official said the UK would not be allowed to cherry pick the aspects of the EU it liked when leaving the bloc, and then on Wednesday he said a transition deal period for the UK was not guaranteed. The Pound has also suffered at the hands of more tension in Theresa May's cabinet and some unsettling headlines relating to two large UK retailers. All of this comes at a time when the US Dollar is reasserting on the back of rising inflation expectations in the US that are pushing yield differentials in the Buck’s favour. Today, we get UK construction PMIs and US Michigan confidence, though the focus will be on Theresa May’s Brexit speech, a BOE Carney appearance and bigger picture flows relating to the US Dollar outlook and fallout from these latest headlines surrounding the US administration’s protectionist agenda.USDJPY – technical overview
A multi-month range trade was broken in February after the market sunk below 107.30. This has opened the door for deeper setbacks in the days ahead, possibly down towards the 102-103.00 area, an area that coincides with a measured move extension target and the 78.6% fib retrace off the 2016 low to high move. At this point, a daily close back above 107.91 would be required to take the immediate pressure off the downside.USDJPY – fundamental overview
Overall, the Yen has been well bid in early 2018, with the Dollar taking a big hit from US administration soft Dollar policy early on and risk for a capitulation in global equities driving additional Yen demand in recent weeks. Though we did see a healthy rebound in risk appetite off the 2018 lows, there has also been a clear downturn in 2018, which could invite additional Yen demand if the market rolls over again. Traditional flows are supportive of USDJPY weakness in such a backdrop, with risk off taking precedence over any Dollar demand from yield differentials, at least for a period of time. Looking ahead, US Michigan confidence is the only notable release, though bigger picture flows relating to the US Dollar outlook and fallout from these latest headlines surrounding the US administration’s protectionist agenda, will be enough to make for a volatile close to the week.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, 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
The market has been in the process of rolling over after failing to sustain a break above the 2017 high. The recent daily close below 0.8000 strengthens this outlook and opens the door for a renewed wave of declines towards 0.7500. At this point, only a daily close back above 0.8000 would delay.AUDUSD – fundamental overview
The Australian Dollar has come under pressure in recent days, mostly on the back of this resurgence in broad based US Dollar demand as US inflation metrics start to rise faster than expected. Of course, this week’s Aussie private capex miss hasn’t done anything to help Aussie’s cause and with risk sentiment showing signs of rolling back over, setbacks could intensify. As per the February RBA decision, the central bank has been taking a more cautious approach, which lends further support to the case for Aussie weakness. Indeed, soft US Dollar policy and a US administration protectionist agenda have been a drag, but the hotter US inflation and risk off flow will likely more than offset and Dollar weakness from these other drivers. Looking ahead, US Michigan confidence is the only notable release, though bigger picture flows relating to the US Dollar outlook and fallout from these latest headlines surrounding the US administration’s protectionist agenda, will be enough to make for a volatile close to the week.USDCAD – technical overview
There are signs of basing after months of downside pressure. 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 1.2450.USDCAD – fundamental overview
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 keep the Canadian Dollar pressured, especially after the Bank of Canada opted to go ahead with another rate hike in January, which will only add to the strain if the global sentiment picture deteriorates even further. Meanwhile, the US Dollar continues with its broad recovery as the market takes the prospect for additional rate hikes more seriously, following Fed Chair Powell’s testimony this week, despite some less Dollar supportive remarks. Looking ahead, Canada GDP data will be a big focus here. We also get US Michigan confidence. Of course, this ramped up US protectionism will only intensify the stress associated with NAFTA and this could easily overshadow any positives that might come from a solid Canada growth print.NZDUSD – technical overview
The market looks to be in the process of rolling over, with the daily chart showing a possible double top formation. Right now, it will take a clear break above 0.7400 to take the pressure off the downside. Until then, there is risk for continued weakness back towards 0.6900, with a break of the double top neckline at 0.7178 to trigger the bearish formation and strengthen the outlook.NZDUSD – fundamental overview
In February, the RBNZ took on a more dovish outlook and this coupled with signs of rising inflation in the US and the possibility for equity market capitulation, could easily offset any demand from alternative flows, to usher in a wave of Kiwi underperformance. Looking ahead, US Michigan confidence is the only notable release, though bigger picture flows relating to the US Dollar outlook and fallout from these latest headlines surrounding the US administration’s protectionist agenda, will be enough to make for a volatile close to the week.US SPX 500 – technical overview
A severely overbought market is finally showing signs of relenting, 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 Fed’s more hawkish tone and subsequent jumps in hourly earnings, CPI, and core PCE are the types of things that could weigh more heavily on sentiment in the sessions ahead if there is more evidence confirming this bias.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 some more chop followed by an eventual push above massive resistance in the form of the 2016 high at 1375. This will then open the door for a much larger recovery in the months ahead. In the interim, setbacks are expected to be well supported around 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 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 daily close back above $13,000 at a minimum, to take the pressure off the downside.Feature – fundamental overview
The crypto asset has come under pressure in 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market is also coming back to earth after a euphoric 2017 run that had bubble written all over. 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 has been a welcome development and will ramp up transaction speed, which has been behind some of the recovery off the 2018 low, though it seems the combination of a massive bubble, more regulatory oversight, a market that is still trying to convince of its proof of concept, and the threat of a reduction in global risk appetite, could all suggest even deeper setbacks ahead.