Next 24 hours: A Dose of Perspective
Today’s report: Big Bounce Lacks Bite
US equities put in a sharp recovery rally on Wednesday, surging from fresh yearly lows. The Dow Jones industrial average rocketed over a thousand points, translating to about 5%, the biggest daily point gain on record for this index. The post-Christmas rally was accompanied by a milder reaction in FX.
Wake-up call
- US downside
- Brexit uncertainty sidelined
- BOJ Minutes
- SNB headache
- USD selling
- OIL surge
- Yield differentials
- Fed model
- Hard asset
- Bitcoin outlook
- Ether trying
Peformance chart: 5-Day Performance v. US dollar
Suggested reading
- The World Will Pay for Not Dealing With Debt, S. Das, Bloomberg (December 23, 2018)
- US Markets: 2018 Naughty and Nice List, N. Bullock, Financial Times (December 26, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
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 above 1.1215 and push through 1.1500, it sets the stage for a bigger bullish move ahead. If however the market breaks back down below 1.1215, it will open the door for fresh 2018 lows, exposing the possibility for an extension all the way down to 1.0800.
EURUSD – fundamental overview
The Euro remains confined to a tight range off the recent 2018 low into this super thin year end holiday trade. But Euro setbacks from the USD yield differential/flight to safety combo in the aftermath of the latest Fed decision, have been well supported into dips. It seems as much as the Fed steered clear of delivering the dovish message the market wanted, all of the necessary components were there to allow for the Fed to cool off in 2019. This should continue to support the Euro, while the reemergence of soft Dollar policy into 2019, should also fuel the Euro. The Euro is also managing to take in flight to safety bids from the uncertainty around the partial government shutdown in the US. As far as today’s calendar goes, there are no first tier releases of note in the European session. Later on in the US session, we get initial jobless claims, consumer confidence and new home sales.
EURUSD – Technical charts in detail
GBPUSD – technical overview
The latest breakdown below 1.2660 has opened the door for a bearish continuation that could ultimately invite a retest of the +30 year low from October 2016 at 1.1840. However, at this stage, we still view the pullback in 2018 as a correction within a developing uptrend off the 2016 low and will be looking for a higher low to carve out well ahead of 1.1840, in favour of a push back to the topside. For this to play out, the market will ideally need to hold above some meaningful support in the 1.2300s. The 78.6% fib retrace off the major 2016 high to low move, which comes in at 1.2385 is the next big level below. A break back above 1.2760 will also now be required to take the immediate pressure off the downside.
GBPUSD – fundamental overview
Things have settled down for the moment as we wait for more clarity on Brexit, which may not come until after the holidays, with UK parliament out on break until January 7th. This has been helpful to the Pound, with the currency managing to work its way out from the recent 2018 low below 1.2500. A lot of the demand has come from the onset of some year end Dollar selling, as the market contends with a partial government shutdown in the US, while positioning for a possible Fed pause in 2019. As far as today’s calendar goes, there are no first tier releases of note in the European session. Later on in the US session, we get initial jobless claims, consumer confidence and new home sales.
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, below which exposes a deeper setback towards the 2018 low from March in the 104s.
USDJPY – fundamental overview
The BOJ Minutes warned about risks associated with prolonged periods of downside pressure on banks. Governor Kuroda followed up with comments that the BOJ would continue to examine developments in the unstable stock market, while adding that the changes were a function of altered perception of risk factors in the global economy. The major pair is correlating with the bigger picture drivers, with US Dollar yield differentials and risk sentiment dictating the flow. Renewed downside pressure in the US equities market has knocked USDJPY back down in recent weeks, while an expectation the Fed could bring the normalization process to a halt is another major driver of Yen demand. Tension between the President and Fed Chair and a partial government shutdown isn’t helping matters either. As far as today’s calendar goes, we get initial jobless claims, consumer confidence and new home sales.
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.
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 into 2019, 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
A recent recovery run has stalled out, with the market remaining under pressure, just off yearly and multi-month lows. Setbacks this year have been supported ahead of a critical psychological barrier at 0.7000, which could continue to keep the pair propped up into dips. This leaves the outlook somewhat neutral, with a clear break below 0.7000 or back above 0.7400 required for clearer directional bias.
AUDUSD – fundamental overview
Overall, while the Australian Dollar has been contending with risk off flow, the currency has also found offsetting demand into dips on the emergence of profit taking on long US Dollar exposure into year end. The market is expecting the 2019 Fed rate outlook to be decidedly less hawkish in light of recent developments. Gold prices are also starting to firm up, another offsetting positive for the commodity currency. As far as today’s calendar goes, we get US releases in the form of initial jobless claims, consumer confidence and new home sales.
USDCAD – technical overview
The market has extended its run through a major psychological barrier at 1.3500, breaking to fresh 2018 highs and looking for a push to that next critical level of resistance in the form of the 2017 high, up around 1.3800. However, medium-term studies suggest additional upside may be limited to this area, with risk for another sizable pullback. Still, a break back below 1.3323 would be required to take the immediate pressure off the topside.
USDCAD – fundamental overview
The Canadian Dollar has come under a lot of pressure over the past several weeks, with USDCAD to fresh yearly highs, on the back of a massive slide in the price of OIL. The only mitigating factor at the moment is the market’s selling of the US Dollar on uncertainty around the partial government shutdown and expectation the Fed will be decidedly less hawkish in 2019. On Wednesday, after sinking to another yearly low (USDCAD high), the Loonie recovered on the pop in stocks and OIL. As far as today’s calendar goes, we get US releases in the form of initial jobless claims, consumer confidence and new home sales.
NZDUSD – technical overview
The market has been in the process of cooling off after enjoying a healthy recovery rally out from +2.5 year lows. While the bigger picture outlook still shows the market in a downtrend, as per the weekly chart, there is a case to be made for a meaningful low in place at 0.6425. As such, look for the latest setbacks to be well supported ahead of 0.6600 in anticipation of additional upside, with only a break back below to put the focus back on the multi-month low from October at 0.6425.
NZDUSD – fundamental overview
The New Zealand Dollar has held up relatively well in the face of global risk liquidation. The commodity currency is trying its best to shrug off downside pressure in stocks, instead deferring to profit taking on USD longs from the partial government shutdown in the US and in anticipation of a possible Fed pause in 2019. As far as today’s calendar goes, we get US releases in the form of initial jobless claims, consumer confidence and new home sales.
US SPX 500 – technical overview
A market that has been extended on the monthly chart is at risk for a major reversal, with the possibility for a massive topping formation. Any rallies should now continue to be very well capped ahead of 2800, in favour of renewed weakness that targets an eventual retest of strong longer-term resistance turned support in the form of the 2015 high at 2140. The projection is based off a measured move extension derived from the previous 2018 low from February to the record high move.
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. 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 into 2019, 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 into 2019.
GOLD (SPOT) – technical overview
There are 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.
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
At this stage, any upside moves are classified as corrective ahead of the next downside extension and it would take a break back above previous support in the 6,000 area to take the pressure off the downside. Look for a lower top to carve out ahead of 6,000 for deeper setbacks into the 2,000-3,000 area, which coincides with the July and September 2017 lows respectively.
BTCUSD – fundamental overview
Bitcoin has gone through a tough 2018, with the cryptocurrency suffering on a number of fronts. 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 over the medium to longer term.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
Stretched medium-term studies have been turning back up, leading to this latest recovery. Still, it would take a sustained break back above previous support at 165 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.
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, 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 continue to emerge well ahead of $50.