Next 24 hours: Month End Portfolio Rebalancings Not USD Friendly
Today’s report: Risk correlated markets turn down
Optimism around a US-China trade deal has been scaled back in a big way since the weekly open. This has invited downside pressure in the equity markets, while softer China PMI reads are adding to the deterioration in sentiment. On the FX front, the Pound continues to outperform on the significant reduction in tail risk associated with Brexit.
Wake-up call
- German inflation
- Brexit outlook
- optimism fades
- policy strategy
- PMI readings
- Cool inflation
- Risk sentiment
- investor appetite
- Hard asset
- further out
- real progress
Suggested reading
- Crypto Fans Need to Monitor Four Key Developments, A. Brown, Bloomberg (February 26, 2019)
- Why Everyone’s Talking About Chinese Tech Giant Huawei, N. Fildes, FT (February 26, 2019)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market looks to be in the process of carving out a meaningful base off the multi-year low from 2017, with a higher low sought out ahead of the next major upside extension back towards and through the +3 year high from 2018 around 1.2550. Look for the major pair to continue to be well supported on dips below 1.1300, with only a close back below the 2018 low at 1.1215 to compromise the outlook. A push above 1.1570 will strengthen the outlook.
EURUSD – fundamental overview
There continues to be quite a bit of demand into dips. This demand comes from larger macro names looking to play into the US administration’s soft Dollar policy and Fed policy shifting back to the accommodative side. Key standouts on the Thursday calendar include German inflation readings, some ECB speak, US initial jobless claims, US GDP, Chicago PMIs and a flurry of Fed appearances.
EURUSD – Technical charts in detail
GBPUSD – technical overview
The major pair has put in an impressive recovery in recent weeks, helping to support the case for a longer-term developing uptrend off the 2016 low, with a higher low sought out by the multi-month low from early January. Pullbacks are now viewed as corrective on the daily chart, with dips expected to be supported above the daily Ichimoku cloud top. The latest break back above the September 2018 high at 1.3300 strengthens the outlook, with the market also pushing back into the weekly Ichimoku cloud.
GBPUSD – fundamental overview
The Pound keeps getting a boost from the reduced prospect of a no deal Brexit in March, despite ongoing uncertainties. Whether Brexit is delayed or a second referendum happens are both viewed as risks decidedly more favourable to the outlook for the UK economy, and Pound by extension. The market will continue to monitor developments on the Brexit front, while also looking ahead to key standouts on the Thursday calendar that include US initial jobless claims, US GDP, Chicago PMIs and a flurry of Fed appearances.
USDJPY – technical overview
The major pair is in the process of correcting within a bigger picture downtrend. Look for the recovery rally to be capped below 111.50 on a daily close basis, 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, which guards against the 2016 low at 99.00. Ultimately, only back above 113.00 delays the bearish outlook.
USDJPY – fundamental overview
Risk markets aren’t feeling as good into the middle of the week, as more cold water is thrown on prospects for a trade deal with China. The US trade representative was on the wires after saying there would be “no agreement on anything until there’s agreement on everything.†Overall, the major pair should continue to track along with risk sentiment. After benefiting from a healthy rebound in stocks since the yearly open, the market could be getting ready to roll over again. We don’t see equities holding up in a world where risk assets are exposed to the realities of exhausted monetary policy and government stimulus post 2008 financial markets crisis. We’ve also seen plenty of headlines in recent days talking downward revisions to growth outlooks in major economies around the globe. Looking ahead, key standouts on the Thursday calendar include US initial jobless claims, US GDP, Chicago PMIs and a flurry of Fed appearances.
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
The market has been very well supported since breaking down in early January to multi-year lows. The price action suggests we could be seeing the formation of a major base, though it would take a clear break back above 0.7400 to strengthen this outlook. Look for setbacks to now be well supported ahead of 0.7000.
AUDUSD – fundamental overview
Aussie getting two way flow into this week. We’re seeing some US Dollar selling against the major currencies that is supporting into dips, though faded optimism around a US-China trade deal and some downside pressure in stocks has weighed on the risk correlated commodity currency. Softer China PMI readings are also factoring into some of the Thursday offers. Looking ahead, key standouts on the Thursday calendar include US initial jobless claims, US GDP, Chicago PMIs and a flurry of Fed appearances.
USDCAD – technical overview
A period of consolidation has kicked in after a run at the end of 2018 to its highest levels since May 2017. Overall, the structure remains constructive, with dips expected to be well supported ahead of a medium-term higher low from September 2018 around 1.2780.
USDCAD – fundamental overview
The Canadian Dollar took a hit earlier this week on President Trump comments calling for lower oil, but has since stabilised as the market is distracted with other themes. Wednesday’s Canada inflation data did come in on the softer side, but hasn’t hurt the Canadian Dollar all that much. Looking ahead, key standouts on the Thursday calendar include Canada industrial product and raw materials prices, the Canada current account, US initial jobless claims, US GDP, Chicago PMIs and a flurry of 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 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 push through 0.6970 will strengthen the constructive outlook.
NZDUSD – fundamental overview
Much like Aussie, Kiwi is getting plenty of two way flow this week. We’re seeing some US Dollar selling against the major currencies that is supporting into dips, though faded optimism around a US-China trade deal and some downside pressure in stocks has weighed on the risk correlated commodity currency. Looking ahead, key standouts on the Thursday calendar include US initial jobless claims, US GDP, Chicago PMIs and a flurry of Fed appearances.
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. Although we have seen attempts to push the market higher in early 2019, on the Fed’s more cautious outlook, exhausted monetary policy tools post 2008 crisis suggest the prospect for fresh record highs at this point in the cycle are not a realistic prospect. 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, with only a close back below 1250 to compromise the constructive outlook. The latest push through 1300 strengthens 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
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 170 to take the immediate pressure off the downside.
ETHUSD – fundamental overview
We’re coming off a year of dramatic weakness 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 in the weeks and months ahead. At the same time, longer term prospects are looking quite bright and valuations are increasingly attractive with adoption showing signs of ramping up again. There was a good wave of optimism out of the ETHDenver conference the other week that has also been sourced as a contributor to recent outperformance.