Next 24 hours: Dollar Puts in Head Scratching Run
Today’s report: Where Things Stand into the New Year
We’re into 2019 and markets will start to work their way back into full form. Trading volume should pick up as many return to the desks, though we don’t believe we’ll be back to normal until next week. As things stand, the US Dollar is under pressure against the major currencies, as the market considers US specific downside risk.
Wake-up call
- manufacturing PMIs
- Brexit clarity
- traditional drivers
- SNB headache
- China outlook
- OIL collapse
- Yield differentials
- Fed model
- Hard asset
- Bitcoin outlook
- Demand emerges
Peformance chart: 2018 Performance v. US dollar
Suggested reading
- Five Doom Loops to Navigate in 2019, S. Das, Bloomberg (January 2, 2019)
- The Big Business Nobody Understands, C. Bastable, Bastable (December 29, 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 establish back above 1.1500, it sets the stage for a bigger bullish move ahead. If however the market is unable to establish above 1.1500, it will keep the overall pressure on the downside, with risk for a drop back below the 2018 low around 1.1215.
EURUSD – fundamental overview
While the ECB has stated it sees increasing downside risk to the Eurozone economy, it also continues to project more expansion. Meanwhile, there has been plenty more talk out from ECB officials about policy that is far too accommodative, with the central bank committing to not even considering a rate hike until deeper into this year. Meanwhile, the Fed is looking like it will be forced into an even more accommodative stance in 2019, White House drama continues to play out and the US administration is expected to keep pushing its protectionist agenda. These developments should prop up the Euro. Looking at the calendar, manufacturing PMI data out of the Eurozone and US stand out.
EURUSD – Technical charts in detail
GBPUSD – technical overview
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 and recover back through the September 2018 peak at 1.3300.
GBPUSD – fundamental overview
Theresa May is getting back to it as 2019 kicks off. The PM is hoping her holiday rest will give her enough energy to figure out a way to get her government to sign off on a Brexit deal in the week of the 14th. This is a risk that continues to hang over the Pound, though the UK currency has been getting some help from bearish US Dollar flow into the new year, with the Dollar facing headwinds from a Fed that could be forced into an even more accommodative stance in 2019, White House drama that refuses to go away, and US administration protectionism. As far as today goes, key standouts on the calendar come from manufacturing PMI readings out of the UK and US.
GBPUSD – Technical charts in detail
USDJPY – technical overview
Rallies continue to be very well capped, with the outlook still favouring a medium term downtrend that suggests we could see the run of declines continue back towards a retest and potential break of the 2018 low in the 104s. Next key support comes in the form of the May 2017 low at 108.12.
USDJPY – fundamental overview
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, a partial government shutdown in the US and worry about the US administration protectionism are also factoring into price action. Looking ahead, US manufacturing PMI data is the only standout on the Wednesday calendar. Japan was out on holiday today.
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 in 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
The market has come under a lot of pressure and sits at its lowest levels since February 2016. Setbacks have however been well supported into the 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 from faltering global equities and worry about the impact of US trade policy on China, the currency has also found offsetting demand into dips on the emergence of profit taking on long US Dollar exposure into 2019. 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. Looking ahead, US manufacturing PMI data is the only standout on today’s calendar.
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 1.3493 would be required at a minimum 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 posting a yearly high on the final day of 2018. Most of the Loonie’s slide has come from the dump in the price of OIL, though the risk correlated commodity currency has also suffered from faltering global equities. The only mitigating factor is the market’s selling of the US Dollar on uncertainty around the partial government shutdown, the global trade outlook and expectation the Fed will be decidedly less hawkish in 2019. As far as today’s calendar goes, key standouts come in the form of Canada and US manufacturing PMI readings.
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 0.6600 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 a possible Fed pause in 2019. Looking ahead, US manufacturing PMI data is the only standout on today’s calendar.
US SPX 500 – technical overview
There have been legitimate signs of a major longer term top, with deeper setbacks projected in the months ahead. 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 into 2019. The lag effect of Fed policy normalisation, US protectionism, ongoing White House drama and geopolitical tension are all warning of deeper setbacks ahead. The Fed has also finally acknowledged inflation no longer running below target, something that could very well result in even less attractive equity market valuations this year, given the implication on rates. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as the movement here is something that will continue to stress the market in 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 1200 to compromise the constructive outlook. Next key resistance comes in at the 1300 psychological barrier.
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 what could be the next downside extension and bearish continuation. It would take a break back above previous support in the 6,000 area to take the pressure off the downside. Next critical support comes in the form of the July and September 2017 lows, around 2,000 and 2,975 respectively.
BTCUSD – fundamental overview
Bitcoin has just 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 255 to take the pressure off the downside. Until then, risk remains for a lower top and bearish continuation to next major support in the 50-75 area.
ETHUSD – fundamental overview
We’re coming off a year of dramatic weakness in the price of Ether in 2018 and the cryptocurrency continues to face headwinds into 2019. Ongoing regulatory challenges and a global economic downturn are some of those headwinds that need to be considered. At the same time, longer term prospects are looking quite bright and valuations are increasingly attractive. There is a lot of demand for Ether that has been reported below 100 and ahead of 50.