Winter is coming for global financial markets

Next 24 hours: Risk off ramps up

Today’s report: Winter is coming for global financial markets

Tight ranges and lack of FX volatility should not be mistaken for calm. We believe the opposite to be true and are seeing this manifest via an overheated equities market finding it increasingly difficult to ignore the realities of new downside risks to the global economy at a time when central bank resources to combat such risk are depleted.

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Wake-up call

Chart talk: Technical & fundamental highlights

EURUSD – technical overview

The major pair has extended its run of declines off the 2008 high, trading down to a fresh multi-month low in April. But with the downtrend looking exhausted, the prospect for a meaningful higher low is more compelling, with a higher low sought out above the multi-year low from 2017, ahead of the next major upside extension. Only a weekly close back below the psychological barrier at 1.1000 would compromise this outlook. Back above 1.1450 will strengthen the view.

  • R2 1.1324 – 12 April high – Strong
  • R1 1.1264 - 13 May high – Medium
  • S1 1.1108 - 23 May/2019 low – Medium
  • S2 1.1000 – Psychological – Strong

EURUSD – fundamental overview

There's been some selling of the Euro on reports the EU is reconsidering an excessive deficit recommendation procedure on Italy, though buyers have emerged into dips, with medium-term players anticipating the next big move being higher, not lower. US yield curve inversion and US administration soft Dollar trade policy should be bigger market drivers going forward, both of which are not supportive of the Buck. Looking at the calendar, we get the some German employment data and the ECB Financial Stability Review. Second tier releases in the US won't factor into price action.

EURUSD - Technical charts in detail

GBPUSD – technical overview

The major pair has put in an impressive recovery off the multi-month low in early January, helping to support the case for a longer-term developing uptrend off the 2016 low. Pullbacks are now viewed as corrective on the daily chart, with dips expected to be supported well ahead of the yearly low in the 1.2400s. Look for a weekly close back above 1.3000 to strengthen the outlook.

  • R2 1.2814 – 21 May high – Strong
  • R1 1.2758 – 20 May high – Medium
  • S1 1.2605 – 23 May low – Strong
  • S2 1.2581 – 2 January low  – Strong

GBPUSD – fundamental overview

Though the Pound is still struggling to muster positive momentum from last week's recovery rally, it has managed to find some demand into dips, on the back of US Dollar outflows from inverted yield curve implications and US administration soft Dollar trade policy. And while we have seen renewed fear associated with no-deal Brexit in the aftermath of the weekend European election result that had Nigel Farage coming out on top, comments from UK Chancellor Hammond, who said the House of Commons strongly opposed leaving the EU without a deal, should ultimately remind the market of the improbability of a disorderly result . There is no first tier data on the Wednesday docket.

USDJPY – technical overview

Another topside failure has led to a sharp pullback, with the market unable to establish above a formidable resistance zone in the 112s. The recent drop back below 110.00 strengthens the bearish case, exposing the next major downside extension towards a retest of the January flash crash low in the 104s. Any rallies should now be well capped below 112.00, with only a break back above the yearly high at 112.40 to delay the bearish outlook.

  • R2 110.96 – 6 May high – Strong
  • R1 110.00 – Psychological – Medium
  • S1 109.27– 24 May low – Medium
  • S2 109.02 – 13 May low – Strong

USDJPY – fundamental overview

Most of the movement in the major pair is being directed by investor appetite, with the Yen still tracking with traditional correlations. Risk sentiment has been trending lower of late and this is keeping the major pair under pressure into rallies. There is no first tier data on the Wednesday calendar.

EURCHF – technical overview

The market continues to do a good job adhering to a medium-term range, with rallies well capped towards 1.1500 and dips well supported into the 1.1200 area. At this stage, there is no clear trend, and it will take a sustained break back above 1.1500 or below 1.1200 for directional insight.
  • R2 1.1477 – 23 April/2019  high – Strong
  • R1 1.1330 – 14 May high – Medium
  • S1 1.1196 – 24 May low – Medium
  • S2 1.1163 – 29 March/2019 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 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 on dips 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 0.7070 to strengthen this outlook. In the interim, look for setbacks to continue to be well supported ahead of 0.6800.

  • R2 0.7000 – Psychological – Strong
  • R1 0.6960 – 14 May high – Medium
  • S1 0.6900 – Figure – Medium
  • S2 0.6865 – 17 May low – Strong

AUDUSD – fundamental overview

Recent weakness in the Australian Dollar has come from from a more dovish leaning RBA, calls from Bill Evans for 3 RBA rate cuts this year, and a downturn in global sentiment. At the same time, an inverted US yield curve and US administration soft Dollar trade policy are helping to keep the Aussie from wanting to materially extend its decline. Looking ahead, the market will continue to monitor developments on the trade front.

USDCAD – technical overview

Despite breaking to a fresh yearly high in recent days, overall, the market has entered a period of choppy consolidation in 2019. However, the longer-term structure remains constructive, with dips expected to be well supported for fresh upside back above the 2018/multi-month high at 1.3665. Back below the psychological barrier at 1.3000 would be required to delay the outlook.

  • R2 1.3522 – 24 April/2019 high – Strong
  • R1 1.3500 - Psychological – Medium
  • S1 1.3377 – 1 May low – Medium
  • S2 1.3336 – 18 April low – Strong

USDCAD – fundamental overview

The price of OIL has come back down quite a bit over the past week, which hasn't done any favors for the Canadian Dollar. Huge inventory builds numbers contradicted earlier expectations of a drawdown heading into the summer, that had been responsible for a run up that preceded latest price decline. Still, ongoing upbeat outlook sentiment from BoC Poloz and renewed broad based profit taking on US Dollar longs, have been supportive of the Loonie, keeping the Canadian Dollar from extending its 2019 run of declines. The Loonie will get a good look at that Governor Poloz outlook again today, with the Bank of Canada decision standing out as the major risk on the day.

NZDUSD – technical overview

Despite recent weakness, there's a case to be made for a meaningful low in place at 0.6425 (2018 low). As such, look for setbacks to be well supported above the latter, in anticipation of renewed upside, with only a close below to compromise the outlook. At the same time, a push back above 0.6700 will be required to take pressure off the downside.

  • R2 0.6615 – 10 May high – Strong
  • R1 0.6600 –  Figure – Medium
  • S1 0.6500 – Psychological – Medium
  • S2 0.6482 – 23 May/2019 low – Strong

NZDUSD – fundamental overview

The New Zealand Dollar suffered its way down to yearly lows last week, on the back of softer local data, a recent RBNZ rate cut, and downturn in global sentiment. Last Tuesday's GDT auction disappointment was also followed up with news of a downward revision to Fonterra's milk price forecasts. At the same time, the commodity currency did manage to get some help off the lows, on the back of broad based profit taking on US Dollar longs from a worrying inverted US yield curve and US administration soft Dollar trade policy. Looking ahead, the market will continue to monitor developments on the trade front.

US SPX 500 – technical overview

There have been signs of a major longer term top, after an exceptional run over the past decade. Any rallies from here, are expected to be very well capped, in favour of renewed weakness targeting an eventual retest of strong longer-term previous resistance turned support in the form of the 2015 high at 2140. The initial level of major support comes in around 2752, with a break below to strengthen the outlook. A sustained move above 3000 would be required to delay the outlook.

  • R2 2961 – 1 May/Record high – Very Strong
  • R1 2892 – 16 May high – Medium
  • S1 2786 – 25 May low – Medium
  • S2 2752 – 8 March low – Strong

US SPX 500 – fundamental overview

Although we've seen the market extend to another record high in recent days, mostly on the back of the Fed's dovish shift in 2019, exhausted monetary policy tools post 2008 crisis suggest the prospect for a meaningful extension of this record run at this point in the cycle is not realistic. Meanwhile, ramped up tension on the global trade front, should continue to be a drag on investor sentiment. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as the movement here is something that could be a major stress to the financial markets looking out.

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 a recovery out from sub-1200 levels can extend back through big resistance in the form of the 2016 high at 1375. In the interim, look for setbacks to be well supported, with only a close back below 1250 to compromise the constructive outlook.

  • R2 1325 – 25 March high – Strong
  • R1 1311 – 10 APril high – Medium
  • S1 1266 – 23 April/2019 low – Medium
  • S2 1233 – 14 December 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

The market has enjoyed a nice run since breaking out above a consolidation between Q4 2018 and Q1 2019. But the rally has now resulted in extended technical readings after racing through the July 2018 peak at 8,500. Next key resistance comes in at the 10k psychological barrier, which also happens to roughly coincide with the April 2018 high (9,980). But look for additional upside to be limited, to allow for these technical readings to unwind from stretched readings, before the market considers a meaningful push beyond 10k. Setbacks should ideally be supported ahead of 6,000.

  • R2 9,979 – April 2018 high – Strong
  • R1 8,949 – 27 May/2019 high – Medium
  • S1 7,432 – 23 May low – Medium
  • S2 7,000 – 17 May low – Strong

BTCUSD – fundamental overview

Bitcoin has enjoyed a stellar rally over the past few weeks, with demand increasing along the way. This month's resiliency in the face of the hack at a major exchange has given the crypto asset a huge credibility boost, while reports of mainstream adoption haven't hurt the cause either. Household names like Starbucks, Microsoft, TD Ameritrade and Whole Foods are all making moves in the space, while governments have been more receptive to working with the crypto asset.

BTCUSD - Technical charts in detail

ETHUSD – technical overview

The recovery has recently accelerated to a fresh 2019 high, surging through medium-term resistance at 255 and exposing next key resistance at 355. The upside break suggests the market is now looking to establish a meaningful base, in favour of bullish structural shift. Still, shorter-term, the run is looking stretched and before we see that test of 355, we could see rallies well capped into 300 to allow for extended readings to unwind before the market gets going again. Setbacks should now be well supported into the 200 area.

  • R2 300 – Psychological – Strong
  • R1 280 – 27 May/2019 high – Medium
  • S1 227 – 17 May low – Medium
  • S2 200 – Psychological  – Strong

ETHUSD – fundamental overview

There has been a lot more buzz around adoption as the price of Bitcoin surges, with many mainstream names coming out in support of blockchain integration. Demand for web 3.0 applications is on the rise, and the blockchain with the biggest front end application potential is Ethereum. We've started to see some catch up as well, with ETH finding relative strength off cycle lows versus its older cousin.  At the same time, worry associated with fallout in the global economy, is worry that should weigh more heavily on risk correlated crypto assets like ETH. And considering the possibility an overextended Bitcoin runs into profit taking, there is risk we soon see a healthy adjustment back to the downside.

Peformance chart: 5 Day performance v. US dollar

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