Next 24 hours: Bank of Canada Backs Off
Today’s report: Volatility Expected as Calendar Heats Up
The economic calendar heats up from now into the end of the week, with the market taking in a healthy batch of first tier releases and central bank meetings. For today, the key standouts will be Eurozone GDP, US ADP employment and trade and the Bank of Canada policy decision.
Wake-up call
Chart talk: Major markets technical overview video
- Eurozone GDP
- Brexit divide
- Risk appetite
- unwelcome demand
- Aussie GDP
- policy decision
- Macro themesÂ
- Red flags
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Yield Curve Still Best Recession Predictor, G. Robb, Market Watch (March 5, 2018)
- Madison Would Like a Few Words on Trade Wars, N. Feldman, Bloomberg (March 5, 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 consolidating off stretched readings, though setbacks continue to be exceptionally well supported into dips. A daily close back above 1.2400 will suggest the market wants to extend the run up through the 2018 high and towards a massive falling trend-line off the record high, which comes in around 1.2650. But if the market can’t hold above 1.2400 and rolls back over, look out for a drop below 1.2155 to accelerate setbacks towards a retest of the 2018 low around 1.1915.EURUSD – fundamental overview
There’s been a lot of indecision in the market, with participants unsure which way to position right now. The weekend political fallout in Europe was a wash, with the German coalition vote going off as expected, though hiccups out of Italy, kept the Euro from putting in any relief rally. At the same time, US protectionist rhetoric has been inviting renewed Euro demand, though with recent economic data suggesting the Fed could move more aggressively on rates, there doesn’t seem to be a strong desire to be extending what has already been a healthy run in the Euro in recent months. Looking at today’s calendar, we get Eurozone GDP, US ADP employment and US trade. Fed Bostic and Dudley are scheduled to speak, though the market isn’t expected to make any big moves on the speeches. We also haven’t seen any big fallout in markets on news of the Cohn resignation.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
The Pound has been better bid this week, on the back of those comments from UK PM Theresa May that the government was close to a transition deal. However, lack of substance to back this up, could leave the currency exposed to another downturn at any moment. We don’t get any first tier economic data out of the UK today, and the focus will be on some US ADP employment data and US trade. Fed Bostic and Dudley are scheduled to speak, though the market isn’t expected to make any big moves on the speeches. We also haven’t seen any big fallout in markets on news of the Cohn resignation.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 hit from US administration protectionism and soft Dollar policy and hints of capitulation in global equities also factoring into the flow. Though we have seen 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 ADP employment and trade stand out. Fed Bostic and Dudley are scheduled to speak, though the market isn’t expected to make any big moves on the speeches. We also haven’t seen any big fallout in markets on news of the Cohn resignation.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
This week’s RBA decision has come and gone, with the central bank risk going by with little to no reaction from the Australian Dollar. This does however make sense with the RBA leaving policy on hold while maintaining a cautious outlook as was widely anticipated. Overall, the Australian Dollar has come under pressure in recent days, mostly on the back of some renewed demand for the US Dollar, though risk off flow from US administration protectionist rhetoric has also factored. Earlier today, Aussie GDP data was a wash after the softer headline print was offset by an upward revision. Looking ahead, US ADP employment and trade stand out. Fed Bostic and Dudley are scheduled to speak, though the market isn’t expected to make any big moves on the speeches. We also haven’t seen any big fallout in markets on news of the Cohn resignation.USDCAD – technical overview
There are signs of basing after months of downside pressure, with the market racing back above critical resistance at 1.2921. Look for any setbacks from here to be very well supported ahead of 1.2600, in favour of the next higher low and bullish continuation well beyond 1.3000.USDCAD – fundamental overview
The latest round of US protectionist rhetoric, including tension surrounding NAFTA, have not been kind to the Canadian Dollar, with the currency sliding to its lowest levels since July 2017. On Monday, President Trump said NAFTA was a bad deal for the USA, while adding that tariffs on steel and aluminum would only be withdrawn if a new, fair NAFTA agreement was reached. All of this comes at a time when Canada’s recovery is already somewhat fragile, and this coupled with an unstable macro picture should keep the Canadian Dollar pressured, especially after the Bank of Canada opted to go ahead with another rate hike in January. Looking ahead, it will be interesting to see what comes of today’s Bank of Canada decision. We also get US ADP employment and US trade, along with Fed speak from Bostic and Dudley.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 adopted a more dovish leaning outlook and this coupled with signs of rising inflation in the US and increased tension around fallout from US protectionist measures, could easily offset any demand from alternative flows that might otherwise be supportive of the Kiwi rate. Looking ahead, US ADP employment and trade stand out. Fed Bostic and Dudley are scheduled to speak, though the market isn’t expected to make any big moves on the speeches. We also haven’t seen any big fallout in markets on news of the Cohn resignation.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. Of course, the added wrench of ramped up US protectionism should only intensify the negative sentiment. The resignation of Cohn is reportedly a direct offshoot.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.