Trade Deal Optimism Not Enough

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Today’s report: Trade Deal Optimism Not Enough

Optimism for a trade deal between the US and China has helped offset some bigger picture risk off flow this week, though we’re not sure it will be enough to prevent the US equity market from deeper setbacks. Friday's calendar features German industrial production, Eurozone GDP and the monthly employment report out of the US.

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Chart talk: Technical & fundamental highlights

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EURUSD – technical overview

The Euro sits at a critical inflection point right now, trying to figure out whether it wants to hold up into dips for the start to a resumption of that bullish breakout from back in 2017 that led to a +3 year high earlier this year, or if it wants to keep extending this run of declines. A lot of this will hinge on how the market trades in the sessions ahead. If the major pair can hold up into this latest bounce and push through 1.1500, it sets the stage for a bigger bullish move ahead. If however the market breaks back down below 1.1300, it will open the door for a retest of the 2018 low, below which exposes the possibility for an extension all the way down to 1.0800.

  • R2 1.1435 – 22Nov high – Strong
  • R1 1.1419 - 4Dec high – Medium
  • S1 1.1306- 30Nov low – Medium
  • S2 1.1268 – 28Nov low – Strong

EURUSD – fundamental overview

Developments out from the Italian budget saga have been looking up all week and both sides are optimistic with the progress being made. This comes at a time when the Euro has already been doing a better job of finding renewed bids on the back of broad based US Dollar weakness. Some of the big ticket negative Dollar drivers have been an expectation the Fed will be slowing down the normalization process and a US administration expected to continue to push forward with its soft Dollar policy initiative. Looking ahead, key standouts on the Friday calendar include German industrial production, Eurozone GDP, the monthly jobs report in the US, and US Michigan confidence.

EURUSD - Technical charts in detail

GBPUSD – technical overview

On a medium to longer term basis, the outlook is still looking constructive off the +30 year low from 2016, with a higher low sought ahead of the next major upside extension back towards and through the current 2018 high. Shorter-term however, the market is threatening a fresh downside extension below 1.2659. If the market breaks back down below the yearly low, it will open possibility for a measured move extension into the 1.2000s. Right now, a break back above the weekly high at 1.3000 would be required to alleviate immediate downside pressure.

  • R2 1.2928 – 22Nov high – Strong
  • R1 1.2850 – 29Nov high – Medium
  • S1 1.2700 – 6Dec low – Medium
  • S2 1.2659 – 4Dec/2018 low  – Strong

GBPUSD – fundamental overview

The Pound is coming off an impressive session of performance on reports Theresa May is "listening to colleagues and considering ideas" to make the Irish backstop "more palatable." We've also heard the PM is in talks to offer parliament a say over whether to extend the Brexit transition period beyond 2020 if needed, as an alternative to immediately defaulting into the Irish backstop. Overall, uncertainty continues to run high and is expected to continue to run high until next week's vote on the 11th is out of the way, if it even happens on the 11th, as per the latest reports. Looking ahead, we get the BOE/TNS inflation expectation survey, followed by the US jobs report and Michigan confidence data.

GBPUSD - Technical charts in detail

USDJPY – technical overview

Rallies continue to be very well capped on a medium-term basis, with the outlook still favouring lower tops and lower lows. Look for the next major downside extension towards critical support around 109.75. Ultimately, only a break back above 114.75 would negate the bearish outlook. Below 111.38 strengthens the bearish outlook.

  • R2 114.22 – 12Nov high  – Strong
  • R1 113.25 – 5Dec high – Medium
  • S1 112.00 – Figure – Medium
  • S2 111.38 – 26Oct low – Strong

USDJPY – fundamental overview

Comments from China MOFCOM spokesperson Gao Feng that Beijing is confident a trade will get done with the US over the 90 truce period, have helped to offset this latest wave of risk off flow in markets. Still, overall, we continue to see room for additional Yen appreciation (USDJPY weakness) over the coming weeks, with yield differentials moving back out of the Dollar's favour on account of the Fed's shifting outlook and on the expectation that the US administration will continue to push its protectionist platform that necessitates a soft Dollar policy. We also believe that lag effect from the Fed's initial rate hikes has yet to be felt and the reality of exhausted monetary policy will soon have a much heavier impact on risk sentiment, which should weigh on USDJPY. Looking ahead, the US jobs report and Michigan confidence are the only notable standouts.

EURCHF – technical overview

The market has been in the process of consolidating off the 2018 low, which coincided with critical support in the 1.1200 area. However, at this stage, there is no clear directional bias, with the price action deferring to a neutral state. Back above 1.1500 would get some bullish momentum going for a push to 1.2000, while back below 1.1200 would be quite bearish.
  • R2 1.1435– 16Nov high – Strong
  • R1 1.1359 – 22Nov high – Medium
  • S1 1.1254 – 24Sep low– Medium
  • S2 1.1224– 18Sep low – Strong

EURCHF – fundamental overview

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

Technical studies have been turning back up from stretched medium term readings, with the recent break back above 0.7300 suggesting a meaningful base could be in the process of carving out. This puts the shorter-term pressure back on the topside, with the focus on a push to the psychological barrier at 0.7500. A drop below 0.7165 would be required to shift the focus back on the downside.

  • R2 0.7394 – 4Dec high – Strong
  • R1 0.7274 – 6Dec high – Medium
  • S1 0.7192 – 6Dec low – Medium
  • S2 0.7165 – 13Nov low – Strong

AUDUSD – fundamental overview

The Australian Dollar has come under pressure after putting in a nice recovery rally out from multi-month lows, with the currency knocked back this week from this latest wave of risk off flow. However, optimism surrounding a US-China trade deal has since helped to inspire some renewed demand into the latest slide. Meanwhile, the Fed is sounding a lot less hawkish than it was earlier this year and additional signs this is the case, will move those yield differentials out of the US Dollar's favour, which should give Aussie some more support. Looking ahead, we get the US jobs report and Michigan confidence data.

USDCAD – technical overview

The market has been consistently sold into rallies, which could still invite a deeper decline before the next upside extension gets underway. Still, look for any weakness to be well supported, with only a break back below 1.2700 to negate the bigger picture constructive outlook.

  • R2 1.3500 – Psychological – Strong
  • R1 1.3445 - 6Dec/2018 high – Medium
  • S1 1.3300 – Figure – Medium
  • S2 1.3253 – 5Dec low – Strong

USDCAD – fundamental overview

The Canadian Dollar hasn't been able to shake the turmoil in the OIL market over the past several weeks, with the commodity sinking 35% after trading up to its highest levels since 2014 back in October. The slide in the black gold comes from a deterioration in global risk sentiment and trouble over at OPEC, where the group dynamics are falling apart. There will be another OPEC meeting today and the market will be paying close attention. The Canadian Dollar has sunk to a fresh 2018 low on account of the OIL slide and will have more to contend with than just OIL on Friday, with the Canada and US monthly employment reports out. We also get US Michigan confidence data as well.

NZDUSD – technical overview

The market has been in the process of recovering out from +2.5 year lows and is looking to extend the correction following the latest break back above consolidation resistance around 0.6725. This sets the stage for a push that could extend back towards the psychological barrier at 0.7000 before the market considers the legitimacy of the recovery and prospect for a more significant bullish structural shift or bearish resumption.

  • R2 0.7000 – Psychological – Strong
  • R1 0.6970 – 4Dec high – Medium
  • S1 0.6839 – 29Nov low – Medium
  • S2 0.6754 – 27Nov low – Strong

NZDUSD – fundamental overview

The New Zealand Dollar is holding up fairly well following a recovery out from multi-month lows, mostly on the back of broad based US Dollar weakness. We also finally got to see a positive GDT auction print earlier this week, the best print in many months for this series. And certainly, the comments relating to optimism over a US-China trade deal, have done nothing to hurt Kiwi following this latest minor pullback. Still, overall, risk sentiment continues to looking shaky, and we suspect offers will continue to pile in, offsetting any demand that stems from yield differentials moving back in Kiwi's favour. Looking ahead, we get the US jobs report and Michigan confidence data.

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 topping formation. Any rallies should now continue to be very well capped ahead of 3000, in favour of renewed weakness back below the 2530 area yearly low (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.

  • R2 2824 – 17Oct high – Strong
  • R1 2700 – Figure – Medium
  • S1 2603 – 29Oct low – Strong
  • S2 2594 – 3May low – Medium

US SPX 500 – fundamental overview

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 to record highs. The Fed has also finally acknowledged inflation no longer running below target in 2018, something that could very well result in even 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 the fourth quarter.

GOLD (SPOT) – technical overview

The market has been showing signs of wanting to turn back up on the daily chart. There are also signs that we could be seeing the formation of a more significant medium to longer-term structural shift that would be confirmed if this latest recovery can extend back through big resistance in the form of the 2016 high at 1375. Look for setbacks to be well supported ahead of 1200, with only a close back below 1150 to compromise the constructive outlook. A daily close above 1250 will strengthen the outlook.

  • R2 1266 – 9Jul high – Strong
  • R1 1245 – 6Dec high – Medium
  • S1 1196 – 13Nov low – Medium
  • S2 1160 – 16Aug/2018 low  – Strong

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

An extended period of range contraction has come to an end, with the market breaking down below the apex of a massive triangle formation in 2018. The decline has resulted in fresh yearly lows and warns of a deeper setbacks that could accelerate to the September 2017 low at 2,975. At this stage, it would take a break back above previous support in the 6,000 area to take the pressure off the downside.

  • R2 5,050 – 20Nov high – Strong
  • R1 4,480 – 29Nov high – Strong
  • S1 3,365– 7Dec/2018 low –Medium
  • S2 2,975 – Sep 2017 low  – Very Strong

BTCUSD – fundamental overview

Bitcoin is facing intense headwinds from broader risk liquidation themes and has sunk to fresh 2018 lows. The cryptocurrency has already been struggling to find its place in 2018, with the decentralised technology space still very young and yet to fully prove concept. The current backdrop of global sentiment deterioration only makes things more challenging in the space and we are seeing investors head for the exits as a result. This could open a bigger drop below $3,000 before the market looks for stability. Still, overall, the cryptocurrency and the technology it rests on continue to show a lot of potential looking out and we expect the market will regain composure once this sell-off plays out.

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 below 100. Medium term studies are however stretched, which could warn of the start to a correction. Still, it would take a break back above 200 right now to take the pressure off the downside. The next major downside extension target comes in at a 75, a measured move extension target following a recent $90 consolidation between 165 and 255.

  • R2 165 – Previous Support – Strong
  • R1 128 – 28Nov high – Strong
  • S1 83 – 7Dec/2018 low – Medium
  • S2 75 – Measured Move  – Strong

ETHUSD – fundamental overview

Overall, we've seen quite a bit of weakness in the price of Ether in 2018 and there's still legitimate risk for deeper setbacks below $100, given technical hurdles within the protocol, ongoing regulatory challenges and a global macro backdrop exposing risk correlated projects on the Ethereum blockchain. 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. At the same time, longer term prospects are looking quite bright and we expect significant demand will emerge well ahead of $50.

Peformance chart: 5-Day Performance v. US dollar

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