Next 24 hours: US Dollar Having its Moment
Today’s report: Political Uncertainty Factors Back into Flow
Political turmoil has come back into the spotlight in Europe over the past several days acting as a weight on the Euro, while last week's more dovish ECB Draghi comments have only added to downside pressure. Manufacturing data dominates the Monday docket.
Wake-up call
Chart talk: Major markets technical overview video
- Catalan referendum
- PM support
- Japanese Tankan
- SNB strategy
- Labour Day
- Canada GDP
- ISM manufacturing
- Blind momentum
- solid bids
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Policymakers Push Politicians Aside, R. Blitz, Financial Times (September 29, 2017)
- Short-Termism Poses Long-Term Drag on Growth, N. Smith,  Bloomberg (September 29, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has broken down below an important support level at 1.1825 that represented the 50-Day SMA and neckline of a head and shoulders top off the recent +2.5 year high. This has been the first time the market has traded back below the 50-Day SMA since the Euro broke out earlier this year and the measured move extension off the head shoulders top projects a possible acceleration into the 1.1500s. Next support comes in at 1.1663 and only a break back above 1.2000 will negate the current outlook favouring a deeper correction.
EURUSD – fundamental overview
The Euro has come under some pressure in early Monday trade as the market turns its attention to the weekend news of the government banned Catalan independence referendum result that produced a reported 90% support for leaving Spain. Political turmoil has come back into the spotlight in Europe over the past several days acting as a weight on the Euro, while last week's more dovish ECB Draghi comments have only added to downside pressure. At the same time, the US Dollar has been better bid in recent days, with the Fed leaning more hawkish, US data coming in on the stronger side and the market thinking about the Trump reflation trade. Looking ahead, we get Eurozone manufacturing data, Eurozone unemployment, ECP Praet, US ISM manufacturing, US construction spending and Fed Kaplan.
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. The recent breakdown below 1.3450 sets up the possibility for a drop back into the 1.3200s before the market considers a higher low and resumption of the uptrend.
GBPUSD – fundamental overview
The Pound remains under pressure since posting a fresh 2017 high the other week, with the UK currency contending with renewed political uncertainty, the Brexit hangover and more dovish leaning BOE Carney comments. The Pound is also feeling the weight of a resurgence in broad based demand for the US Dollar. Last week, BOE Carney said interest rate rises would be to a limited extent and gradual, if they even came, something that caught the market off guard. Meanwhile, support for the UK PM is reportedly fading after she raised the question of what could happen should there be no Brexit deal. UK Brexit Secretary Davies hasn’t helped the cause as he maintains a combative tone with EU officials. Looking ahead, key standouts on the calendar include UK and US manufacturing data and an appearance from Fed Kaplan.
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 114.50 area. However, overall, the major pair remains confined to this broader range, which also means additional upside could be limited to the 114.00s in favour of yet another topside failure and bearish reversal.
USDJPY – fundamental overview
The market continues to ignore local data results, with the better than expected Japanese Tankan survey doing nothing to factor into early Monday price action. The real driver of this pair comes from external factors, including broader risk sentiment and developments on the US front. An ongoing bid in US equities at record highs and US Dollar positives, including a more hawkish leaning Fed, solid US data and a revival of the Trump reflation trade, have been behind a lot of this latest rally. Looking ahead, key standouts on the calendar include US ISM manufacturing, US construction spending and some more central bank speak, this time from Fed Kaplan.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high beyond 1.1600. 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 in September, 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 the market establishes a daily close below 0.7800. Back above 0.8126 would negate and keep the pressure on the topside.
AUDUSD – fundamental overview
Australian markets are closed on Monday for the Labour Day holiday. Overall, there have been signs of the market feeling worried about Aussie 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 the September meeting. The added excitement about US tax reform has weighed even more heavily on Aussie, as it brings back the US Dollar supportive Trump reflation trade, while a slide in iron ore prices on worry of reduced Chinese demand and impressive US data are other factors dragging Aussie lower. Risk sentiment has however held up well, with US equities at another record high, which could be the one thing saving the risk correlated Aussie from falling off a cliff right now. It’s worth noting that China PMI data came in above forecast, but the market isn’t all that interested and there is plenty of speculation around the legitimacy of the data ahead of the upcoming national party congress. Looking ahead, key standouts on the calendar include US ISM manufacturing, US construction spending and some more central bank speak, this time from Fed Kaplan.
USDCAD – technical overview
Despite the September 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. Look for a daily close back above 1.2530 to encourage this prospect and accelerate the recovery to next key resistance at 1.2780 further up.
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 last month. Friday’s softer Canada GDP result will only make the Canadian Dollar less attractive after a string of discouraging data that’s included the employment report, manufacturing, exports, retail sales and below forecast inflation readings. Remember, Bank of Canada governor Poloz was also out last week singing a much different tune that is making last month’s rate hike look like a mistake. At the same time, the Fed’s more hawkish leaning decision, revival of the Trump reflation trade and healthy US data are giving the US Dollar a bid of its own. Looking ahead, we get Canada and US manufacturing releases and some Fed speak from Fed Kaplan.
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
Last week’s RBNZ rate hold and cautious outlook from RBNZ Spencer made good sense when breaking it down, as there have been too many negative drivers for the market to ignore, which should continue to inspire Kiwi offers and underperformance. New Zealand government growth and budget cuts, discouraging economic data and this lingering uncertainty around the recent election result should continue to weigh. The only saving graces for the Kiwi rate in 2017 have been the record run in US equities and an intense distaste for the US Dollar. But even on this front, while US equities continue to run, there is no denying fundamentals that have been more supportive of the Buck of late, which include a revival of the Trump reflation trade, solid US data and a more hawkish leaning Fed. Looking ahead, key standouts on the calendar include US ISM manufacturing, US construction spending and some more central bank speak, this time from Fed Kaplan.
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 daily close back below 2487 at a minimum to take the pressure off the topside, while a break all the way back below 2400 would be required to force 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 and expectation of favourable US policies 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 over the past several months, with the market continuing to put in higher lows and higher highs, opening a recent push to a fresh 2017 high up around 1357. And so, look for the latest round of weakness to once again be well supported on the dip, with a higher low sought out ahead of 1250 ahead of the next major upside extension and bullish continuation towards a retest of the 2016 peak at 1375 further up. Ultimately, only a drop back below 1200 would negate the outlook.
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. Rallies have bee well capped into 13.71, while dips have been supported towards 12.55. We have recently seen a bounce out from the range lows, which has opened the door for this bigger recovery back towards the 13.71. 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. The political mess has made the Rand one of the least attractive emerging market currencies out there at a time when risk correlated currencies are coming back under pressure on the reemergence of US Dollar demand from a more hawkish leaning Fed, solid US data and the revival of the Trump reflation trade. The only saving grace for the Rand has been the recently more upbeat SARB decision and last week’s month end quarter end selling of the Buck. But even still, the emerging market currency is under pressure. Throw in the prospect for a capitulation in an extended US equities market and the outlook continues to favour additional Rand weakness.