Next 24 hours: GBP yield differentials looking more attractive
Today’s report: Little inspiration from China liquidity injection
We’re into the latter half of the week and things have been rather tame. The big event this week has already passed us by, with the Brexit vote behind us and Theresa May now working towards her Plan B that she’s scheduled to outline on Monday. Eurozone inflation readings and the Philly Fed stand out on Thursday’s calendar.
Wake-up call
- EURUSDEurozone inflation on tap
- Plan B
- Risk sentiment
- policy strategy
- China downturn
- OIL bounce
- global headwinds
- Fed model
- Hard asset
- Bitcoin outlook
- Demand expected
Peformance chart: 5-Day Performance v. US dollar
Suggested reading
- There’s Not Enough Debt in the World R. Burgess, Bloomberg (January 16, 2019)
- Wild Ride for the Australian Dollar, E. Dunkley, Financial Times (January 16, 2019)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro recently broke out from a period of extended consolidation off the 2018 low, setting the stage for a bullish structural shift. Look for the market to establish above 1.1500 over the coming sessions for confirmation, setting the stage for an acceleration towards next critical resistance in the 1.1815 area, which guards against a retest of the +3 year high from 2018 around 1.2550. Setbacks should now be well supported, with only a close back below 1.1300 to delay the constructive outlook.
EURUSD – fundamental overview
A round of softer Eurozone data in recent days, along with some dovish leaning ECB speak, have contributed to some mild setbacks, though dealers continue to report sizable demand on dips. The combination of a Fed that’s taking a full pause in 2019 more seriously, ongoing White House drama, and the US administration’s soft Dollar protectionist agenda are all suggesting the Euro could start to break out to the topside in the months ahead. Looking at today’s calendar, we get some ECB speak, Eurozone inflation readings, US initial jobless claims, the Philly Fed and some Fed speak.
EURUSD – Technical charts in detail
GBPUSD – technical overview
We 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. The recent break back above short-term resistance at 1.2815 helps to strengthen the bullish prospect. Next short-term resistance is up at 1.2928.
GBPUSD – fundamental overview
The Pound has done a good job holding up in the aftermath of the defeat of Theresa May’s Brexit deal. The deal got voted down by a landslide, to produce the the worst defeat on record for a sitting UK government. Corbyn’s motion of no confidence was unsuccessful, and the PM will have until Monday to figure out a plan B strategy. The market is hoping more progress will be made this time round, given an incentivized Brussels and Theresa May’s effort to launch cross-party talks this with senior parliamentarians. Overall, the fact that no deal risks have been reduced, is a major source of support for the beaten down UK currency. Looking ahead, headlines around the event will remain in the spotlight, while the market also takes in US initial jobless claims, the Philly Fed and some Fed speak.
GBPUSD – Technical charts in detail
USDJPY – technical overview
The major pair is in the process of consolidating the latest round of declines within a bigger picture downtrend. Look for any recovery rallies to be well capped ahead of 111.00 in favour of the next major downside extension below the 104.63, 2018 low. This would expose a very important psychological barrier at 100.00 further down.
USDJPY – fundamental overview
Overall, optimism around the latest trade talks between the US and China has faded, while investors are not getting the follow through in stocks they might have wanted to see following more dovish Fed leanings and a record setting liquidity injection out of China. All of this warns of additional Yen demand on these traditional correlations. Looking ahead, we get US initial jobless claims, the Philly Fed and some Fed speak.
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 1.1185 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
Despite the recent breakdown below the 2016 low, inability to establish below that low (around 0.6825), will keep the market from wanting to get overly bearish and could even warn of some form of a longer-term base. However, a drop back below the 2016 low again, would expose deeper setbacks towards the 2008 low around 0.6000. As far as the topside goes,the market would need to break back above 0.7400 to force a bullish shift in the structure.
AUDUSD – fundamental overview
Aussie has held up quite well into dips, with most of the demand coming from a broad based liquidation in USD longs. A possible Fed pause, ongoing drama at the White House and worry about US administration protectionism are all USD bearish drivers, while some better than expected data out of Australia last week has also helped to prop the commodity currency. Still, a concurrent round of selling in global equities and deterioration in risk sentiment are expected to keep Aussie from running up too much, especially with a lot of this risk off flow coming from worry around the outlook from China. The lack of enthusiasm around China’s record setting liquidity injection is a testament to this fact. Looking ahead, we get US initial jobless claims, the Philly Fed and some Fed speak.
USDCAD – technical overview
A period of intense correction has kicked in after a run to its highest levels since May 2017. Overall, the structure remains constructive, with dips expected to be well supported ahead of 1.3000 for renewed upside. Only back below the psychological barrier would compromise this view.
USDCAD – fundamental overview
The Bank of Canada was out last week leaving rates on hold, while citing the impact of lower oil. Still, the central bank balanced things out, with its expressed view that a slowdown in economic activity was expected to be temporary. Oil’s recovery from the dump we had seen in recent weeks has helped to reinforce the BoC’s view. Meanwhile, growing evidence of broad based renewed sell interest in the US Dollar has been another major contributing factor to the recent run of Loonie gains. The US Dollar has been sold on a combination of factors that include a less hawkish Fed, the US government impasse and soft Dollar US protectionism. Looking ahead, absence of first tier data out of Canada will leave the focus on US initial jobless claims, the Philly Fed and some Fed speak.
NZDUSD – technical overview
While the bigger picture outlook still shows the market in a downtrend, as per the weekly chart, there’s 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 0.6500 in anticipation of additional upside, with only a break back below 0.6500 to put the focus back on the multi-month low from October at 0.6425. A break back above 0.6970 will strengthen the constructive outlook.
NZDUSD – fundamental overview
The New Zealand Dollar held up relatively well in recent weeks. The commodity currency is benefitting from a less hawkish Fed outlook, ongoing White House drama, and soft Dollar protectionist US administration policy. Still, risk liquidation themes are a concern to a risk correlated commodity currency. Lack of positive momentum from US-China trade talks and a cooling China economy that hasn’t been too excited about this latest record setting liquidity injection are the type of things that will weigh on Kiwi. Meanwhile, on the local data front, the sharp contraction in REINZ house sales is adding to Kiwi offers on Thursday. Looking ahead, we get US initial jobless claims, the Philly Fed and some Fed speak.
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
The latest recovery rally has stalled out into a meaningful previous support zone, to keep the pressure on the downside, with risk for a bearish continuation to next critical support in the 50-75 area. At this point, it would take a sustained break back above 167 to take the immediate pressure off the downside.
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.