Special report: Why the Fed needs to be very careful
Today’s report: Catalyst not to be confused with cause
Investors will be contending with this latest fallout in US equities and massive downturn in global sentiment. Dips have been bought at every turn over the past decade, but there is a growing worry that this may no longer be the case, with so little left in the tank as far as central bank accommodation efforts and government stimulus tools go.
Wake-up call
- ECB Lagarde
- GBPUSDSoft CBI no bother to Pound
- Risk sentiment
- SNB challenge
- construction data
- weaker OIL
- NZIER projection
- record run
- hard asset
- institutional demand
- traditional markets
Suggested reading
- Don't Mistake This Stocks Selloff for a Panic, J. Authers, Bloomberg (February 26, 2020)
- An Update on the US Yield Curve, Fisher Investments (February 25, 2020)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The downtrend off the 2018 high is looking exhausted and the prospect for a meaningful higher low is more compelling. A higher low is now sought out above the multi-year low from 2017, ahead of the next major upside extension. Only a weekly close back below 1.0800 would compromise this outlook. Back above 1.1240 will strengthen the view.EURUSD – fundamental overview
The Euro has been getting a boost in recent sessions, with the single currency benefitting from solid economic data. On Tuesday, German GDP reads failed to disappoint, while France business and manufacturing confidence both exceeded expectations. ECB de Cos said central banks should ensure markets 'correctly incorporate climate risks when pricing financial instruments'. Key standouts on Wednesday’s calendar include an appearance from ECB President Lagarde and US new home sales.EURUSD - Technical charts in detail
GBPUSD – technical overview
The market has seen a recovery out from the lowest levels since 2016, with the price now pushing back above the weekly Ichimoku cloud to signal a bullish structural shift. Ultimately, only back below the 1.2500 handle would compromise the newly established constructive medium and longer-term outlook. Next key resistance comes in the form of the monthly high from September 2017 at 1.3658, with setbacks expected to be well supported ahead of 1.2800.GBPUSD – fundamental overview
Tuesday's softer UK CBI reads were no bother to the Pound, which was well bid on the day, on the back of broad based US Dollar outflows. It seems the market believes the Fed has more flexibility than the BOE, which has played favorably into GBP yield differentials. On the Brexit front, EU chief negotiator Michel Barnier said the trade deal with the UK 'will be associated with a fisheries agreement and a level playing field, otherwise there won't be any agreement at all'. The UK government said a 'key point of Brexit' is 'having its own legal autonomy.' Wednesday’s calendar is thin, with only US new home sales standing out.USDJPY – technical overview
The major pair has seen a contraction in range over the past several years. We're getting closer to the market breaking out of the range one way or the other, but until then, look for rallies to be well capped above 112.00 and below 105.00. A monthly close above the 2019 high at 112.40 would change the picture and suggest the major pair was seeing a bullish breakout.USDJPY – fundamental overview
The Yen has finally come back into favour after taking a beating in the previous week, with the currency unable to ignore traditional correlations with risk off. Overall, if the downside pressure on US equities persists, we suspect the Yen demand will become even more pronounced, despite concerns about the Japanese economy and potential recession. Wednesday’s calendar is thin, with only US new home sales standing out.EURCHF – technical overview
The market remains very well capped into offers and the medium-term picture continues to favour the downside. A break back above 1.1060 would be required to take the immediate pressure off the downside. Technicals are however looking extended and the market should be well supported ahead of 1.0500.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, and from a US administration that has put Switzerland on its currency manipulator watchlist. Any signs of risk liquidation in 2020, 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 under pressure over the past several months, but has also been well supported on dips. The price action suggests we could be seeing the formation of a major base, though it would take a clear break back above 0.7100 to strengthen this outlook. In the interim, look for setbacks to continue to be well supported above 0.6500 on a monthly close basis.AUDUSD – fundamental overview
The plunge in US equities has not been kind to the risk correlated Australian Dollar, with the currency trading back down to multi-year lows. Also seen hurting Aussie on Wednesday is the earlier release of a big miss in Australia's construction work done. Wednesday’s calendar is thin, with only US new home sales standing out.USDCAD – technical overview
The downturn in late 2019 has resulted in a medium-term shift in the trend, with the pressure back on the downside. The break back below major psychological support at 1.3000 now exposes deeper setbacks towards the 1.2782 low from September 2018. At this stage, the market would need to push back above the November 2019 high at 1.3328 to take the immediate pressure off the downside.USDCAD – fundamental overview
The price of OIL remains under pressure, which has kept the Loonie well offered. We have however seen some positives for the Canadian Dollar, with economic data coming in more supportive of late. Earlier this week, Canada wholesale sales beat estimates and also saw an upward revision to the previous print. Wednesday’s calendar is thin, with only US new home sales standing out.NZDUSD – technical overview
There's a case to be made for a meaningful bottom, with the market rallying out from longer-term cycle low area around 0.6200. As such, look for setbacks to be well supported in the days ahead, in anticipation of a continued recovery. Only a weekly close below 0.6200 would give reason for rethink. Back above 0.6800 strengthens the outlook and takes the medium to longer-term pressure off the downside.NZDUSD – fundamental overview
NZIER has come out with quarterly projections calling for a "short, sharp shock" to the New Zealand economy, as it contends with fallout from the coronavirus. Overall however, NZIER's outlook is consistent with the RBNZ, and they don't see a need for the another OCR cut. Still, Kiwi remains weighed down into Wednesday, unable to ignore the massive liquidation in US equities. Wednesday’s calendar is thin, with only US new home sales standing out.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 a major correction targeting an eventual test of the 2018 low at 2339. The initial level of major support comes in at 3070, with a break below to strengthen the outlook. A monthly close above 3400 would be required to compromise the outlook.US SPX 500 – fundamental overview
Although we've seen the market extending to fresh record highs in 2020, with so little room for additional central bank accommodation, given an already depressed interest rate environment, the prospect for a meaningful extension of this record run, on easy money policy incentives, should no longer be as enticing to investors as it once was. Meanwhile, tension on the global trade front, geopolitical risk, and worry associated with coronavirus fallout, should weigh more heavily on investor sentiment into 2020. 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
The 2019 breakout above the 2016 high at 1375 was a significant development, and suggests the market is in the early stages of a bullish move that follows a multi-month consolidation. The next major level of resistance comes in around 1700 (measured move extension target), while in the interim, look for any setbacks to be well supported above 1500.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
Setbacks should be very well supported in the 6,000 area, with a higher low sought out in favour of a bullish continuation back above the 2019 high and towards the record high from late 2017 further up. Ultimately, only a weekly close below 5,750 would compromise the constructive outlook. Back above 10,500 further encourages the bullish prospect.BTCUSD – fundamental overview
Bitcoin demand is expected to pick up in 2020, with market forces to likely make a stronger argument for the emerging cryptocurrency. In a world where rates are at historic lows and the equity market looks to be inching closer to major capitulation, the idea of owning a decentralised, limited supply currency, becomes increasingly attractive as a store of value. Moreover, there is plenty of development going on in the decentralised technology space, which should only add to the draw.BTCUSD - Technical charts in detail
ETHUSD – technical overview
The market is in the process of turning back up after stalling out in the latter half of 2019. Look for setbacks to be well supported above of previous resistance turned support at 180 on a weekly close basis, in favour of the next major higher low and bullish resumption back towards and through the 2019 high up at 363. Ultimately, only a weekly close below 180 would compromise the outlook.ETHUSD – fundamental overview
There is plenty of Ether demand built up, with so much optimism around prospects for the blockchain given all of the development going on in the decentralised finance space. At the same time, macroeconomics will likely play a negative role in 2020, at least relative to the price of Bitcoin, with Eth expected to underperform in a risk off backdrop, in light of Ethereum's higher sensitivity and correlation with risk themes.