Next 24 hours: Change is Gonna Come
Today’s report: Perspective: Fed, US Dollar and BOE
The market opted to sell the US Dollar in the aftermath of the Fed decision. And yet, when we break it down, we aren’t convinced a sell the Dollar reaction is entirely justified. Looking ahead, all eyes on the Bank of England decision.
Wake-up call
Chart talk: Major markets technical overview video
- manufacturing PMIs
- BOE decision
- double dose
- SNB decision
- employment data
- NAFTA risk
- RBNZ holds
- trade tension
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- China As Seen from A Glass House, S. Roach, Project Syndicate (March 20, 2018)
- Kudlow’s Strong Dollar Easier Said Than Done, B. Carlson, Bloomberg (March 20, 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 an initial retest of the 2018 low around 1.1915.
EURUSD – fundamental overview
The Euro has rallied up in the aftermath of a Fed decision that delivered as expected on the rate side, with the first hike in 2018. The market has chosen to initially react to a downgrade in the language relating to the pace of growth and the Fed’s decision to hold with 3 total rate hikes in 2018. Still, the Fed did upgrade actual growth forecasts while increasing rate hikes looking out beyond 2018. The added wrench of ramped up US protectionism could also be factoring into Euro bids and negative USD sentiment, with US President Trump expected to announce sanctions on China later today. As far as the economic calendar goes, we get Eurozone and German manufacturing PMIs, German IFO readings and US initial jobless claims.
GBPUSD – technical overview
The market has entered a consolidative 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 1.3600 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 racing higher this week, with the UK currency not paying much attention to softer inflation readings, instead choosing to focus on the Brexit transition deal, stronger UK earnings and broad based US Dollar weakness in the aftermath of the latest Fed decision. The expectation heading into today’s BOE decision is that the central bank will now lean more to the hawkish side, possibly signaling a rate hike as soon as May. Still, there are plenty of holes in the transition deal, while Carney and co may be less inclined to talk ramped up normalization with these kinks needing to be worked out and with inflationary pressures abating on the back of the appreciation in the Pound.
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
The Yen has been bid up in the aftermath of the Fed decision, with the currency market’s bearish USD reaction and concurrent pullback in stocks fueling the demand for the Japanese currency. There has also been added tension around US protectionism, with President Trump expected to announce sanctions on China later today. As far as the calendar goes, US initial jobless claims are the only standout.
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 1.1448 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. .
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 managed to shrug off a mixed jobs report, with the commodity currency recovering on the back of broad based US Dollar weakness post Fed decision. Overall however, the Australian Dollar has been very well offered into rallies, with the currency weighed back down on an escalation in global trade tension and White House drama. US protectionism, tariffs and soft Dollar policy are additional variables in the equation and ultimately, any signs of capitulation in risk assets, will be what drives this market, with the Australian Dollar at risk for additional declines. Looking ahead, we get US initial jobless claims and a possible announcement from President Trump relating to China sanctions.
USDCAD – technical overview
There are signs of basing after months of downside pressure, with the market racing back above critical resistance at 1.2921. A fresh higher low has been confirmed, with the market extending its 2018 run and now open for a push into a measured move extension objective around 1.3200. At this point, setbacks should be well supported above 1.2800.
USDCAD – fundamental overview
The Canadian Dollar has managed to find some relief this week, with the Loonie initially recovering on short term profit taking before accelerating in the aftermath of the market’s dovish read of the Fed decision. But overall, this minor recovery shouldn’t come as a surprise and the Canadian Dollar continues to stand out as a relative underperformer in 2018. A softer run of recent Canada data and NAFTA uncertainty should continue to weigh, with medium term players expected to step in and take advantage of the Loonie recovery to build into existing short exposure. Looking ahead, we get a BoC Wilkins speech and US initial jobless claims. But most of the focus will likely be on global sentiment and the news of the US sanctions on China.
NZDUSD – technical overview
The market looks to be in the process of rolling over, with the daily chart showing a possible topping 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 below 0.7154 to trigger the bearish formation and strengthen the outlook.
NZDUSD – fundamental overview
No change to RBNZ policy as widely expected and overall, rallies are still expected to be well capped, particularly in light of the central bank’s recent adoption of a more dovish leaning outlook. This coupled with signs of rising inflation in the US and increased tension around fallout from White House exits and US administration protectionist measures, could easily offset any demand from alternative flows that might otherwise be supportive of the Kiwi rate. Certainly recent local data has not done anything to help Kiwi’s cause, with last week’s softer GDP print followed up by another discouraging GDT auction result this week that produced the third consecutive negative print. As far as today’s calendar goes, we get US initial jobless claims and a possible announcement from President Trump relating to China sanctions.
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, any signs the Fed is continuing to consider a more aggressive policy normalization than what is currently being priced, will only add to downside pressure. Of course, the added wrench of White House drama including a revolving door of personnel and ramped up US protectionism, should only intensify the negative sentiment if things continue along this path.
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 is helping to 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 result in even deeper setbacks ahead.