Today’s report: Euro Outlook Less Certain into Month End
A lot of the focus in the FX market over the past 24 hours has been on the Euro and its aggressive slide. There have been two significant drivers behind the Euro decline and we discuss on today’s call. Friday’s economic calendar is stacked with first tier economic data which could make for a volatile month end Friday.
Wake-up call
Chart talk: Major markets technical overview video
- Brexit selling
- UK GDP
- Repatriation flow
- Asset rotation
- China data
- higher OIL
- business confidence
- dangerous optimism
- Macro players
- USDSGDÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Britain Plays Russian Roulette With Its Industry, C. Bryant, Bloomberg (March 30, 2017)
- Red Hot Quant Funds Cool Off, M. Celarier, Institutional Investor (March 29, 2017)
Chart talk: Technical & fundamental highlights
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EURUSD – technical overview
Inability to establish above resistance at 1.0875 has kept the pressure on the downside, with the market stalling out into medium-term range resistance and rolling back over. While this could be a minor setback ahead of the next upside extension, it could also be the start to a resumption of the broader downtrend. At this point, a break back above 1.0900 or below 1.0500 will be required for clearer directional insight.
EURUSD – fundamental overview
Two major setbacks for the Euro this week, with the single currency hit hard after looking like it could have been on the verge of a major bullish breakout on Monday. The first setback was the story that the ECB was concerned it has sent the wrong message to the market earlier this month, with the market falsely assuming the ECB had been suggesting there were more imminent plans to exit QE. The second setback came post Article 50 trigger, with an intense wave of buy the Pound on the fact fueling aggressive downside in the EURGBP rate. Of course, we also got solid US data, more dovish ECB speak and another round of hawkish Fed speak, though these developments seemed to have less of an impact. Looking ahead, the economic calendar is stacked. Key standouts include German retail sales, German unemployment, Eurozone CPI, US personal income, US personal spending, US core PCE, and Michigan confidence. Month end flow is always another source of volatility and should not be overlooked.
GBPUSD – technical overview
Despite the recent bounce, the market remains confined to a well defined downtrend while it holds below the December 2016 peak at 1.2775. Ultimately, rallies should continue to be very well capped ahead of 1.2775, with only a break above 1.2775 to compromise the bearish structure. Look for a daily close back below 1.2324 to strengthen the outlook, opening the door for a retest of the 2017 low just under 1.2000, which guards against the +30 year low from October 2016 at 1.1840.
GBPUSD – fundamental overview
It hasn't been all that surprising to see the Pound relatively unchanged post Article 50 invocation, with the event having been well telegraphed by the market. But there is still room for volatility going forward as negotiations kick off, which could be heated at the outset. The EU will be demanding an exit fee and won’t want to be discussing anything else until that’s out of the way, which could make the market nervous about holding Pounds. At the same time, Brexit downside has been priced and it’s unlikely the Pound suffers more than it has already on the back of this event. All of this could result in choppy up and down trade going forward. As far as today’s calendar goes, key standouts come in the form of UK nationwide house prices, the UK current account, UK GDP, US personal income, US personal spending, US core PCE, and Michigan confidence. Month end flow is always another source of volatility and should not be overlooked.
USDJPY – technical overview
The market has broken down below critical range support at 111.60 which could signal the end of a 400 point bearish consolidation that now opens the next major downside extension towards a 400 point measured move that targets 107.60 in the days ahead. Look for any rallies to be well capped ahead of  114.00, while ultimately, only back above 115.60 would force a bullish structural shift.
USDJPY – fundamental overview
The Yen has come back under pressure this week after the USDJPY rate was unable to breakdown below that critical psychological barrier at 110.00. It seems the primary driver behind this flow has been the resurgence in demand for US equities, which has had a favourable impact on risk correlated FX markets like USDJPY. At the same time, Yen declines have been supported somewhat on the back of Japan year end repatriation flow and and this latest news the Trump administration is assessing the scope of its power to punish countries it believes are intentionally undervaluing their currencies. But overall, it’s risk sentiment flow that should ultimately dictate direction here. If equities continue to surge, USDJPY should trade higher, while setbacks will likely inspire renewed Yen demand that could result in a breakdown below USDJPY 110.00. Looking ahead, key standouts on the calendar come in the form of US personal income, US personal spending, US core PCE, and Michigan confidence. Month end flow is always another source of volatility and should not be overlooked.
EURCHF – technical overview
Rallies continue to be very well capped, with the market adhering to a broader downtrend of lower tops and lower lows. The most recent rally has stalled at 1.0826 where a fresh lower top is now sought ahead of the next major downside extension below the 2016 base at 1.0624 and towards 1.0400 further down. Only back above 1.0826 delays the bearish outlook.
EURCHF – fundamental overview
The SNB is in a quiet battle with the market, forced to contend with an ongoing wave of demand for the Swiss Franc in a less certain global environment, especially with the weapon of monetary policy worn down. The central bank has been committed to its mandate of ensuring the Franc does not appreciate further. But despite all efforts, the Franc continues to want to appreciate. It seems the central bank’s strategy has been to sell Francs when risk comes off and to do nothing when risk is back on and natural flows should be CHF bearish. But the trouble is, even with global equities elevated, arguably reflecting appetite for risk, the Franc hasn’t been able to weaken all that much. There have been some signs of the SNB perhaps making a little headway on reports of a boost in SNB reserves, but a meaningful pullback in equities could easily offset that advantage.
AUDUSD – technical overview
The impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent break back below 0.7600 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7000 area in the days ahead. However, the market will need to hold below 0.7750 to keep the prospect of the bearish shift alive, with a subsequent break back below 0.7492 to confirm.
AUDUSD – fundamental overview
The Australian Dollar has done a very good job finding bids this week despite US Dollar demand elsewhere on the back of solid US data and more hawkish Fed speak. The primary driver of the Aussie outperformance comes from the healthy rebound in the US stock market, with the risk correlated currency benefiting from the resurgence in investor demand. Base metals and crude prices have also recovered, acting as another source of Aussie strength. Earlier today, slightly better than forecast China non-manufacturing PMIs were offset by softer Aussie private sector credit. Looking ahead, key standouts on the calendar come in the form of US personal income, US personal spending, US core PCE, and Michigan confidence. Month end flow is always another source of volatility and should not be overlooked.
USDCAD – technical overview
The market remains very well supported on dips, with the latest bounce out from 1.3000 warning of a more significant bullish resumption. Any setbacks should now be very well supported above 1.3200 on a daily close basis in favour of an eventual push back through the multi-day peak at 1.3599 and towards 1.4000 further up.
USDCAD – fundamental overview
Renewed volatility in the price of OIL this month has brought back that familiar correlation, where the Canadian Dollar tracks along with the commodity. And so, this week’s OIL surge has invited a decent round of Canadian Dollar demand, though overall, the Loonie is still confined to a multi-session range. Looking ahead, volatility is expected to pick up with an important Canada GDP print due along with a healthy batch of US releases including US personal income, US personal spending, US core PCE, and Michigan confidence. Month end flow is always another source of volatility and should not be overlooked.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high. As such, expect the market to continue to roll over in the days ahead, with setbacks projected towards medium-term support in the 0.6600s. Only back above 0.7400 compromises the outlook.
NZDUSD – fundamental overview
The New Zealand Dollar hasn’t able to benefit from the run up in stocks this week, with all of these flows absorbed by an Australian Dollar that has been the preferred proxy for risk in the FX market right now. This in conjunction with a recovery in the US Dollar on the back of solid US data and more hawkish Fed speak have kept the Kiwi rate focused on the downside. Earlier today, New Zealand business confidence readings came in a good deal softer than previous, which could be adding to selling pressure. Looking ahead, key standouts on the calendar come in the form of US personal income, US personal spending, US core PCE, and Michigan confidence. Month end flow is always another source of volatility and should not be overlooked.
US SPX 500 – technical overview
An extended run to record highs is finally showing signs of exhaustion in 2017, with the market rolling over, taking out critical short-term support at 2350. This now opens the door for an acceleration of declines towards 2300 in the sessions ahead, with a daily close below this psychological barrier to suggest the possibility of a more significant structural shift. In the interim, rallies should now be well capped below 2380.
US SPX 500 – fundamental overview
Investors were shaken earlier in the week after President Trump’s healthcare bill failed to pass, which cast doubts on his ability to deliver market supportive policies investors have been counting on. But there has been a renewed confidence into the latter half of the week on talk Trump will now be looking to push through tax cut and fiscal spending reform all at once, which has helped to inspire a fresh round of bids. Still, there is plenty of doubt that Trump will actually be able to follow through and the market also shouldn’t forget about the influence of Fed policy in the process of normalisation. Higher rates means less attractive valuations and considering where this market is trading, there is a strong possibility that a mass exodus could inspire an intensified liquidation.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out around 1120 in 2016. A recent bounce out from the 1200 area strengthens the outlook, opening the door for the next major upside extension towards a measured move into the 1330 area. Look for any setbacks to be well supported ahead of 1200, with only a break back below 1180 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty and systemic risk. All of this should continue to keep the commodity in demand, with many market participants fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Of course, declines in the US Dollar post a dovishly perceived FOMC decision and worry over Trump policies have fueled additional gains in the metal.
Feature – technical overview
USDSGD has been in the process of correcting out from the critical high 1.4545 from earlier this year, putting in a series of lower highs and lower lows. However, the market has finally traded down into a strong previous resistance turned support area in the 1.3900s that could warn of the resumption of the more prominent uptrend. Look for a daily close back above 1.4100 to strengthen prospects for a bullish reversal. Ultimately, while the market holds above 1.3800, risk is tilted to the topside.
Feature – fundamental overview
The Singapore Dollar has been bolstered on US Dollar negative themes for much of 2017. At the top of the list are the more dovishly perceived FOMC (despite higher rates), a diminished confidence in President Trump’s ability to deliver US Dollar supportive policies and concurrent conflicting, soft US Dollar protectionist Trump messages. Meanwhile, local Singapore data has been mixed and less relevant. But going forward, it will be very difficult for the Singapore Dollar to ignore the combination of still favourable US Dollar yield differentials, solid US economic data and risk for a deterioration in global sentiment, all weighing themes that could easily put the emerging market currency back under pressure. Dealers have also been talking of healthy US Dollar demand ahead of 1.3900.