Next 24 hours: Draghi Has Bulls Reconsidering Bets
Today’s report: Caught in the Political Crosswinds
Plenty of political crosswinds at the moment, all behind the most recent moves. But looking beyond the politics, the market will also be focused on digesting last week's Fed meeting, in which the central bank produced a more hawkish leaning decision.
Wake-up call
Chart talk: Major markets technical overview video
- Merkel victory
- Brexit overhang
- North Korea
- SNB
- broader themes
- Traders reconsidering
- election results
- red flags
- Macro players
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- A Big Double Cheese Non-Burger, G. Evans, Global Macro Monitor (September 20, 2017)
- The Coming Bear Market, R. Shiller,  Project Syndicate (September 21, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market is trading just off a fresh 2017 and +2.5 year high, with the uptrend firmly intact. However, in recent days, there have been signs of exhaustion. Weekly studies are in overbought territory and there’s scope for the onset of a healthy corrective decline to allow for stretched studies to unwind. Still, we would need to see a daily close back below 1.1824 at a minimum to strengthen this outlook. Until then, the focus remains on the topside and on the possibility for another round of gains up towards a measured move in the 1.2300s.
EURUSD – fundamental overview
The Euro continues to chop around, unsure of its next move, after recently trading up to a+2.5 year high. The weekend election result in Germany has produced yet another victory for Merkel, though the German Chancellor’s victory has been less than impressive and she will now be forced to make some interesting decisions with respect to her coalition after the SDP ruled out forming another coalition with the CDU/CSU. Meanwhile, the Spanish government’s attempts to stop the Catalan independence referendum on October 1st, have increased tension overall in the Eurozone. But even with all of this, the Euro continues to be well supported on dips in 2017, with the market seemingly convinced the US Dollar is doomed. Interestingly, even here, last week’s more hawkish leaning Fed decision has failed to weigh. Looking ahead, German ZEW readings are the only notable standout. Later on in the US, we get the Chicago Fed national activity index and Dallas Fed manufacturing. Fed’s Dudley and Evans are also slated to speak.
GBPUSD – technical overview
The rally in this market has been impressive since it broke out above critical resistance at 1.2775 earlier this year. The breakout suggested the major pair had put in a longer term base and was in the process of turning back up, with an initial objective around 1.3500. That objective has now been met and exceeded, leaving daily studies unwinding from stretched readings and at risk for a period of corrective weakness. Still, any setbacks should be well supported on dips into the 1.3000 area in favour of a continuation of the newly established uptrend, which now will be focused on 1.4000-1.4500.
GBPUSD – fundamental overview
The Pound has sold off ahead of the weekend, after PM May’s Brexit speech stoked concerns about her ability to gain the support of Euroskeptics within her party. But into the new week, the market has managed to shrug off these concerns, seemingly opting to wait things out for now until a clearer signal is given to the market with respect to the next directional move. The Pound has done a fabulous job recovering in 2017, though with Brexit uncertainty still hanging around and with the Fed coming out a little more hawkish, additional bids could have a tough time from here, with risk even building for another healthy pullback. Looking at today’s calendar, absence of first tier data in the UK, will leave the market focused on political crosswinds. Later in the day, we get the Chicago Fed national activity index and Dallas Fed manufacturing. Fed’s Dudley and Evans are also slated to speak.
USDJPY – technical overview
The market has seen an impressive recovery out from a recent 2017 low at 107.32. This sets up the possibility for a bullish shift and run up towards multi-day range resistance in the 115.00 area. However, the market will need to hold above 111.00 in the sessions ahead to strengthen this outlook. Until then, there is still risk for another bearish break and retest back down towards and below the 2017 low in the 107.00s.
USDJPY – fundamental overview
The latest provocation from North Korea has failed to materialise over the weekend, and this has helped to support the major pair a little into the Monday open. At the same time, there has been talk of PM Abe calling for a snap election, though this hasn’t done much to shake things up, with this market continuing to trade on traditional risk correlations. Of course, fallout from last week’s Fed meeting, in which the central bank produced a more hawkish leaning decision, will also be something to keep an eye on as the week unfolds. On the one hand, the decision is more supportive of the US Dollar on the yield front, but on the other hand, there are risk off implications that could benefit the Yen. Looking ahead, the only notable data due on Monday comes in the form of the Chicago Fed national activity index and Dallas Fed manufacturing. Fed’s Dudley and Evans are also slated to speak.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high beyond 1.1540. The bullish break could now get the uptrend thinking about a test of that major barrier at 1.2000 further up. In the interim, look for any setbacks to be very well supported ahead of 1.1200, while only back below the figure would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB kept with its general policy line when it met this month and there were no major waves from the event risk. The one notable exception was the language relating to the strength of the Franc, with the SNB viewing the Franc as “highly valued” rather than significantly overvalued. This was a downgrade to the level of concern over the currency’s strength, but again, not much of a reaction. Overall, the sell-off in the Franc in 2017Â has been a welcome development for the SNB. Still, the central bank will need to be careful as the record run in the US stock market has been a big boost to the SNB’s strategy. Any signs of capitulation on that front, will likely invite a very large wave of demand for the Franc, which could put the SNB in a more challenging position to weaken the Franc.
AUDUSD – technical overview
Despite rallying to a fresh +2 year high the other week, the market has been unable to hold onto gains, quickly reversing course and trading back below 0.8000. There is now risk for the formation of a more meaningful top. This would be confirmed if setbacks extend back below what looks to be neckline support at 0.7808. Back above 0.8126 would negate and keep the pressure on the topside.
AUDUSD – fundamental overview
The Australian Dollar has been quiet of late, with the currency taking a backseat to political crosswinds around the globe, which include the weekend election in New Zealand. Overall however, there have been signs of the market feeling a little worried about trading at elevated levels as the RBA leans a little more to the dovish side, while the Fed has surprised in the opposite direction after last week’s meeting. Risk sentiment is another factor here and how investor appetite holds up, will play an added role in determining direction. Looking ahead, the only notable data due on Monday comes in the form of the Chicago Fed national activity index and Dallas Fed manufacturing. Fed’s Dudley and Evans are also slated to speak.
USDCAD – technical overview
Despite this latest intense breakdown to a fresh 2017 and +2 year low, stretched medium-term technical studies continue to warn of the possibility for a significant bullish reversal to allow for these studies to unwind. But right now, the market would need to break back above 1.2415 to really encourage this prospect.
USDCAD – fundamental overview
It hasn’t been a good run of developments for the Canadian Dollar since the Bank of Canada opted to catch the market off guard and hike rates for a second consecutive time this month. We’ve since seen a discouraging employment report, soft manufacturing data, weaker exports, a retail sales miss and below forecast inflation readings, all of which suggest the Bank of Canada may have been too aggressive. At the same time, the Fed’s more hawkish leaning decision is also making the Canadian Dollar less attractive at current levels. And so, while the market has been buying Canadian Dollars in 2017 on what has been a dramatic turnaround in the BoC outlook, it now feels like a lot of this has been aggressively priced in, leaving room for some correction and profit taking. As far as today goes, absence of Canada data will leave the focus on US data in the form of the Chicago Fed national activity index and Dallas Fed manufacturing. Fed’s Dudley and Evans are also slated to speak.
NZDUSD – technical overview
Medium term studies have turned down after the market pushed up to a plus two year high through 0.7500 in late July. A recent break below 0.7200 warns of the possibility for a more meaningful reversal, that could be setting the stage for a drop all the way back down towards the 2017 low in the 0.6800s. From here, look for any rallies to be well capped below 0.7400 on a daily close basis in favour of the next downside extension towards the psychological barrier at 0.7000.
NZDUSD – fundamental overview
The New Zealand Dollar is under pressure into the new week after the election failed to produce a majority government. The National and Labour parties will be forced to seek a coalition government which adds to uncertainty in an already vulnerable New Zealand economy. Overall, the Kiwi outlook is less encouraging right now, as there have been too many negative drivers for the market to ignore, which should continue to inspire offers. New Zealand government growth and budget cuts, discouraging economic data and this lingering uncertainty around the election result should continue to weigh. The only saving grace for the Kiwi rate in 2017 has been the intense distaste for US Dollar. But even here, we are starting to see some demand for the Buck on optimism around US policy reform and on the back of a more hawkish leaning Fed decision. Looking ahead, the only notable data due on Monday comes in the form of the Chicago Fed national activity index and Dallas Fed manufacturing. Fed’s Dudley and Evans are also slated to speak.
US SPX 500 – technical overview
The market continues to shrug off overextended longer term technical readings, once again pushing up to fresh record highs. The latest break now opens the door for the possibility of a measured move upside extension into the 2550 area. At this point, it would take a clear break back below 2417 at a minimum to take the pressure off the topside and suggest we could finally be seeing the onset of a bearish structural shift.
US SPX 500 – fundamental overview
The US equity market continues to be well supported on dips, pushing further into record high territory. It seems the combination of blind momentum, diminished geopolitical risk and expectation of favourable tax reform are helping to keep the move going into this week. But at the same time, there is a nervous tension out there as the VIX sits at unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, wage growth still subdued, balance sheet reduction coming into play and another rate hike still on the cards this year. But for now, it’s more of the same. It will take a breakdown in this market back below 2400 to turn heads.
GOLD (SPOT) – technical overview
Setbacks have been well supported, with the latest surge to fresh 2017 highs through 1300 setting the stage for a bullish continuation to the 2016 peak at 1375 further up. A higher low is now in place around 1265 and only back below this level would offset this latest wave of bullish momentum.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to 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. Certainly the US Dollar under pressure in 2017 has added to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid for an extended period, GOLD will hold up on risk off macro implications. Dealers are now reporting demand in size ahead of 1260.
Feature – technical overview
USDZARÂ has been confined to a consolidation over the past several months, with the market unwilling to establish any new directional bias at the moment. In the interim, rallies are expected to be well capped towards 13.71, while dips should be supported towards 12.55. We have recently seen a bounce out from the range lows, which could open the door for a bigger recovery back towards the 13.71 range high in the days ahead. But only a clear break above 13.71 or back below 12.55 would force a shift in the structure.
Feature – fundamental overview
The Rand has been struggling of late, as ongoing tension on the political front prevents the emerging market currency from making any headway. This has made the Rand one of the least attractive emerging market currencies out there, at a time when many are buying back into the group. The only saving grace for the currency has been a SARB policy decision which failed to live up to expectations for another rate cut last week after the central bank seemed to downplay risks, opting for a more balanced outlook. Meanwhile, on the other side, we have seen demand for the US Dollar after last week’s Fed decision produced a more hawkish leaning result.