Next 24 hours: Tariffs Weigh on Risk Appetite and US Dollar
Today’s report: Sentiment Sours on Renewed Trade Tension
The new week has gotten off to a slow start, with markets consolidating Friday moves, which saw the US Dollar trying to reassert. The big story as the week gets going is the news that the US administration will proceed with a second batch of tariffs on China.
Wake-up call
- Eurozone inflation
- Moody’s upbeat
- US tariffs
- SNB Jordan
- trade tension
- still waiting
- dairy sector
- Fed model
- institutional demand
- brighter prospects
- Sentiment downturn
Peformance chart: Performance v. US dollar since weekly open
Suggested reading
- The No. 1 Lesson of the Lehman Collapse: QE Worked, M. Winkler, Bloomberg (September 13, 2018)
- It’s the US Jobs Market, Stupid, J. Authers, Financial Times (September 13, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
A market correction out from the 2018 low in August could be on the verge of becoming an uptrend, with the price poking back above the Ichimoku cloud for the first time since it broke down in April. This would be a significant development and could get the major pair thinking back to earlier this year when it was making +3 year highs in the 1.2550 area. Look for a break above the August high at 1.1734 to strengthen the outlook. Meanwhile, only back below 1.1500 would negate the outlook.
EURUSD – fundamental overview
There were reports on Friday that a ‘handful’ of ECB members were looking for a more cautious tone in last week’s ECB decision and this could have been behind some of the Friday pullback. But overall, there wasn’t much else going on to inspire fresh directional insight and mostly, it felt more like profit taking off the weekly high than anything else. There has been a downturn in sentiment into Monday on the news of the US proceeding with another round of tariffs on China, though the news is having less of an impact on the Euro. Looking ahead, key standouts come in the form of Eurozone CPI and US Empire manufacturing.
EURUSD – Technical charts in detail
GBPUSD – technical overview
The market has been trying to work off the 2018 low from August, with a recent poke above 1.3000 encouraging the possibility for a more meaningful recovery ahead. At the same time, setbacks will need to hold up around the 1.2800 area and push back through 1.3214 to strengthen this outlook. Inability to do so will expose a retest of the yearly low.
GBPUSD – fundamental overview
There has been a lot more optimism and a lot less fear and panic relating to the Brexit outlook in recent days and the Pound has been able to take advantage of this. Moody’s has come out saying the UK and EU are ‘more likely than not’ to reach a deal, while Brexit Secretary Raab has said there is a clear path towards a workable solution. Meanwhile, BOE Governor Carney was out issuing his warnings against a no deal outcome. We’ve also seen some better economic data out of the UK, as most recently reflected in last week’s employment data, while the Bank of England went ahead and upgraded its Q3 growth outlook. The other side of this coin has also helped the Pound, with the US Dollar coming under pressure last week, mostly on the back of softer inflation readings Wednesday and Thursday. As far as today’s calendar goes, absence of first tier data in the UK will leave the focus on US Empire manufacturing.
GBPUSD – Technical charts in detail
USDJPY – technical overview
Rallies continue to be very well capped, with the medium-term outlook still favouring lower tops and lower lows. Look for a daily close back below 109.78 to strengthen the bearish outlook, opening the door for the start to a move back down towards 108.00 which guards against the 104.60 area 2018 low. Only back above 113.20 would compromise the bearish structure.
USDJPY – fundamental overview
Overall, offers continue to cap USDJPY upside and there’s still plenty of risk for an intensified liquidation in stocks at a time when monetary policy accommodation has been exhausted. Moreover, the US administration remains committed to pushing forward with its protectionist agenda promoting a softer Dollar policy, which should also play a part in pressuring USDJPY to the downside. Certainly the latest news of the US pushing forward with another round of China tariffs has been supporting this outlook. On the domestic front, BOJ Abe has been quoted as saying he ‘doesn’t think easing should go on forever,’ wanting the central bank to works towards a price stability target. Looking ahead, the market will continue to monitor risk sentiment while taking in US Empire manufacturing.
EURCHF – technical overview
A recent breakdown to a fresh 2018 low has intensified downside pressure, exposing the possibility for a more significant bearish structural shift. Look for a daily close below 1.1200 to strengthen this outlook. Back above 1.1455 would be required to take the pressure off the downside.
EURCHF – fundamental overview
Last week, SNB Jordan was on the wires doing his thing, trying to talk down the Swiss Franc, this time encouraging broader policy normalizations, which would have the effect of weakening the Franc on the yield differential implication. Overall, the SNB remains uncomfortable with Franc appreciation and continues to remind the market it will need to be careful about any attempts at trying to force an appreciation in the currency. But the SNB will also need to be careful right now, as its strategy to weaken the Franc is facing headwinds from a less certain global outlook. Any signs of sustained risk liquidation between now and year end, will likely invite a very large wave of demand for the Franc that will put the SNB in the more challenging position of needing to back up its talk with action, that ultimately, may not prove to be as effective as it once was given where we’re at in the monetary policy cycle.
AUDUSD – technical overview
The market has entered a period of correction after sinking to fresh multi-month lows. There is room for the correction to extend to the topside, though ultimately, the downtrend remains firmly intact, with only a break back above the 0.7500 handle forcing a reconsideration.
AUDUSD – fundamental overview
The Australian Dollar is trying to work its way out from multi-month lows, with some broad based selling in the US Dollar helping to spur on an overdue correction. Last week’s softer round of US inflation data has been a primary driver behind the recovery. At the same time, there have been some offsetting flows as the week gets started, with the latest news of the US pushing forward with another round of tariffs on China weighing on the correlated Australian Dollar. Looking ahead, risk sentiment will be monitored, while on the data front, only US Empire manufacturing stands out.
USDCAD – technical overview
The uptrend has entered a corrective phase since topping out in June, which could still invite a deeper corrective decline before the next upside extension gets underway. Still, look for any weakness to be well supported ahead of 1.2500 with only a break back below this psychological barrier to negate the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar has been looking forward to a NAFTA deal getting done sooner than later, though talks continue to drag on and this latest news of the US administration pushing forward with another round of China tariffs has not helped matters. Still, the Loonie remains bid on dips at the moment, with the currency absorbing fallout from renewed broad based US Dollar weakness after the Buck took a hit from last week’s softer round of US inflation data. Looking ahead, we get Canada international securities transactions, along with US Empire manufacturing.
NZDUSD – technical overview
The market has entered a period of correction after sinking to a 2.5 year low. There is room for the correction to extend to the topside, though ultimately, the downtrend remains firmly intact, with only a break back above 0.6750 to force a reconsideration.
NZDUSD – fundamental overview
Last week’s solid New Zealand manufacturing PMI showing helped to add to Kiwi’s latest recovery, though the news that Fonterra will be will raising supply volumes at the GDT auctions over the next three months has offset. Overall, the New Zealand Dollar is trying its best to work its way out from another fresh 2.5 year low this week, on the back of a softer round of US inflation data that opened some broad based Dollar declines in the previous week. Looking ahead, risk sentiment will be monitored in light of the latest news of the US pushing forward with another round of tariffs on China, while on the data front, only US Empire manufacturing stands out.
US SPX 500 – technical overview
A market that has been extended on the monthly chart is at risk for a major correction, with the possibility for a massive double top formation. Any rallies should now continue to be very well capped around the record high from January, in favour of renewed weakness back below the 2530 area yearly low (double top neckline) and towards a retest of strong longer-term resistance turned support in the form of the 2015 high at 2140. Only a weekly close above 3000 would negate the outlook.
US SPX 500 – fundamental overview
Stocks have been bid right back to record highs in recent weeks, though investor immunity to downside risk is not as strong these days. The combination of Fed policy normalisation, US protectionism, ongoing White House drama and geopolitical tension are all warning of capitulation ahead, despite this latest run. The Fed has also finally acknowledged inflation no longer running below target in 2018, something that could very well result in less attractive equity market valuations given the implication on rates. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as this could be something that inspires a more aggressive decline in this second half of 2018.
GOLD (SPOT) – technical overview
Despite a recent run of of declines, the overall outlook remains constructive, with the market in the process of carving out a longer term base off the 2015 low. Look for any additional weakness to be well supported above 1150 on a daily close basis, in favour of the next major upside extension back towards critical resistance in the form of the 2016 high at 1375. Key resistance comes in at 1236, with a push back above to strengthen the outlook.
GOLD (SPOT) – fundamental overview
The yellow metal continues to be well supported on dips with solid demand from medium and longer-term accounts. These players are more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and trade war threats. All of this should 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.
BTCUSD – technical overview
The downtrend remains firmly intact, with the next lower top now sought out around $7,000 ahead of a retest and break below the current yearly low. Only a push back above $8,500 would ultimately negate and force a bullish structural shift, while below the yearly low could open a more intensified decline towards the September 2017 low around $2,975.
BTCUSD – fundamental overview
Overall, bitcoin is doing its best to try and hold up above $6,000 in 2018 after undergoing a massive decline off the record high from December 2017. At the moment, the market has found some stability around the $6,000 barrier, with buyers stepping in on the view that the regulatory challenges will eventually work themselves out, leaving a very bullish picture for a technology with tremendous potential.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
The market remains under pressure in 2018, extending its run of intense declines to fresh 2018 lows. The next level of major support comes in around $160, which goes back to the low from July 2017. Daily studies are however oversold, which could warn of a bigger corrective bounce before the next downside extension and bearish continuation. It would take a break back above $321 to officially take the pressure off the downside.
ETHUSD – fundamental overview
We’ve been seeing quite a bit of weakness in the price of Ether in 2018 and there is still legitimate risk for deeper setbacks, given technical hurdles within the Ethereum protocol, ongoing regulatory challenges and a global macro backdrop exposing risk correlated projects on the Ethereum blockchain. Meanwhile, monetary policy normalisations around the globe and an anticipated reduction in global risk appetite are placing a tremendous strain on ERC20 projects that have yet to even produce proper use cases and proof of concept.