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Today’s report: Risk Assets Recover as Trade War Threat Downplayed
There’s been a recovery in global sentiment into Thursday, with investors feeling a little better about the geopolitical climate as the threat of an all out trade war is downplayed. Still, we expect rallies in risk assets to continue to be well capped in 2018.
Wake-up call
Chart talk: Major markets technical overview video
- factory orders
- services PMIs
- BOJ speak
- SNB policy
- Aussie data
- Canada trade
- Fourth consecutive
- Policy normalisation
- Metal demand
- Crypto headwinds
- Ethereum exposed
Suggested reading
- Central Bankers Face Cryptocurrency Problem, G. Jackson, Financial Times (April 4, 2018)
- China’s Financial Opening Not What It Seems, N. Polk, Bloomberg (April 4, 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, with setbacks exceptionally well supported into dips. A break back above 1.2550 will open a continuation of the uptrend, through the 2018 high and towards the next major level of resistance in the form of falling trendline resistance off the record high from 2018, which comes in just over 1.2600. However, there has been some short term pressure on the downside and a daily close below 1.2155 could warn of a more meaningful top, opening a deeper pullback to more significant support down towards the December 2017 low at 1.1720.
EURUSD – fundamental overview
The market has been more consumed with the prospect of all out trade wars, with officials out of China and the US attempting to downplay fears on Wednesday. This has put the price action here in the backseat, with the major pair already not doing much in 2018, confined to a consolidation. The Euro has come under some mild pressure of late, though stops will need to get taken out below 1.2155 to inspire a bigger move. On Wednesday, Eurozone inflation data was higher, while unemployment came down. But none of this factored much into price action. US ADP employment data helped to offset any demand from the stronger Eurozone data as well. Looking ahead, German factory orders, European retail sales and a batch of PMIs are unlikely to inspire much volatility. Into North America, we get the US trade balance and initial jobless claims.
GBPUSD – technical overview
Setbacks have been very well supported in 2018, with the market confined to a well defined uptrend. A break above the 2018 high at 1.4346 will confirm the next meaningful higher low at 1.3712, opening a measured move upside extension to the 1.5000 area. However, the major pair may not be ready to extend the run just yet in 2018, with a recent bearish reversal ahead of the 2018 high opening the door for another round of setbacks, possibly back down towards some rising bull channel trendline support in the 1.3600s.
GBPUSD – fundamental overview
Things have been quiet for the Pound this week, with the market entering a period of sideways trade after stalling out in the previous week ahead of the 2018 high. On Wednesday, softer UK construction PMIs weighed a bit, though the market continues to take a backseat to broader risk sentiment flow and the prospect of global trade wars. Looking ahead, we get some UK services PMIs, followed by what is becoming a more important US trade balance reading and some US initial jobless claims data.
GBPUSD – Technical charts in detail
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 a measured move extension target of 100.00 after the market had consolidated for much of 2017 between 107.00 and 114.00. At this point, a daily close back above 107.91 would be required at a minimum to take the immediate pressure off the downside.
USDJPY – fundamental overview
Most of the price action here continues to centre around global risk appetite and traditional correlations with the Yen. On Wednesday, downplayed risk of trade wars helped to bolster sentiment, which resulted in a mild wave of US Dollar demand on the back of the recovery in risk sentiment. However, the geopolitical tension continues to run high overall and a resumption of risk off flow could return at any moment, fueling renewed Yen demand. On the local front, recent developments have also been more supportive of the Yen after BOJ Kuroda commented earlier this week that the central bank was discussing a QQE exit internally, and ex-BOJ chief economist Hayakawa said the BOJ would tweak the YCC parameters within a year. Looking ahead, the US trade balance and initial jobless claims are the only notable standouts.
USDJPY – Technical charts in detail
EURCHF – technical overview
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 1.1652 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 faces 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 a more intensified liquidation on that front into Q2 2018, 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 local currency.  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 challenging period.
AUDUSD – technical overview
The market has been in the process of rolling over after failing to sustain a break above 0.8100 earlier this year. This has set up a sequence of lower tops and lower lows on the daily chart, with deeper setbacks seen towards the 0.7500 barrier over the coming sessions. A break back above 0.7917 would be required to negate the structure and force a shift in the outlook.
AUDUSD – fundamental overview
The Australian Dollar hasn’t been getting much help from local data, after Thursday’s AIG and CBA PMI readings both strengthened, while Aussie trade data was pretty much in line with expectation. Overall, it seems the Australian Dollar is more focused on the broader macro themes of increasingly favourable US Dollar yield differentials, geopolitical tension and sliding base metals. This should continue to keep the risk correlated commodity currency well capped into rallies. Looking ahead, the US trade balance and US initial jobless claims are the only notable standouts on the Thursday calendar.
USDCAD – technical overview
There are signs of basing after months of downside pressure, with the market recently pushing back above critical psychological resistance at 1.3000. Look for any setbacks to now be well supported ahead of 1.2500, with a higher low sought out in favour of the next major upside extension through 1.3125 and towards 1.3500 further up.
USDCAD – fundamental overview
While there has been some optimism on the global trade front, which has contributed to the Canadian Dollar’s recovery, there is still plenty of tension in the air and the fate of NAFTA lingers into this second quarter. Deteriorating global sentiment, on the back of central bank policy normalisations and this added strain of US protectionism, should continue to invite Canadian Dollar selling into rallies. Looking ahead, we get Canada trade data along with the US trade balance and US initial jobless claims.
NZDUSD – technical overview
The market looks to be in the process of topping out, with the daily chart slowly rolling over in 2018. Rallies are now expected to be very well capped below 0.7400, with only a break back above the figure to negate. Look for deeper setbacks in the sessions ahead, with a break back below 0.7154 to strengthen the outlook and accelerate declines towards 0.7000.
NZDUSD – fundamental overview
The New Zealand Dollar came under pressure into the end of the first quarter, with broad based Dollar demand and a deterioration in global risk sentiment contributing to the downside pressure. Local data has also not been Kiwi supportive over the past couple of weeks either, highlighted by a discouraging GDP print and fourth consecutive negative reading at the GDT auction. We have seen some demand into Thursday as global trade war fears are downplayed, though this risk is still very much alive and should continue to weigh on sentiment. Looking ahead, the US trade balance and initial jobless claims stand out.
US SPX 500 – technical overview
A severely overbought market is finally showing signs of rolling over off the January record high, allowing for stretched monthly readings to unwind. Any rallies should now be very well capped ahead of 2800 in favour of continued weakness towards the 2015 high at 2138.
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 reversal of monetary policy is the central theme driving this downturn in sentiment, with geopolitical risk and the threat of global trade wars nothing more than one of many stories that will be used to reconcile weakness in a market doing what it is already fated to do, as policy normalisations ramp up in 2018 after a near decade of unprecedented accommodation to artificially prop the global economy. Listen in to our latest special report.
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.
BTCUSD – 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 recent highs at 12,000, which also coincide with the top of the Ichimoku cloud, to take the pressure off the downside.
BTCUSD – 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.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
Ether continues to extend declines since topping out at a record high back in January, with setbacks extending to fresh 2018 lows below 400. Key short term resistance comes in at 590 and a break back above this level will be required at a minimum to take the immediate pressure off the downside. Until then, the market will consider another extension, with the recent daily close below 450 exposing a measured move decline targeting 310.
ETHUSD – fundamental overview
Setbacks in the price of ETH have been more intense than those of Bitcoin in 2018. Though both markets are going through a period of shakeup following bubble activity in 2017, there has been a bigger exodus from ETH, with this cryptocurrency more heavily correlated to global sentiment. The reduction in risk appetite has put a strain on the investment in projects on the blockchain and with most of the blockchain projects built on the Ethereum protocol, it makes sense to see this market more negatively impacted than bitcoin, which is considered to be the store of value digital currency.