Next 24 hours: As Expected on US Columbus Day
Today’s report: Data Still Supportive of USD Recovery
The market will be wondering if the US Dollar can continue with its run over the past several weeks and it will be interesting to see how things play out this week, with the Fed Minutes and US CPI due. The US holiday should make for a lighter Monday.
Wake-up call
Chart talk: Major markets technical overview video
- Industrial production
- PM May
- Latest polls
- SNB strategy
- China PMI
- Canada jobs
- Post election
- Hourly earnings
- Macro players
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Volatility Trap Inflating Market Bubbles, A. Gallo, Bloomberg (October 5, 2017)
- There are No Bears Left, K. Muir, The Macro Tourist (October 5, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The uptrend in 2017 has stalled out for now after the market triggered a head and shoulders topping formation and broke back below the 50-Day SMA for the first time since the Euro broke out earlier this year. The measured move extension off the head shoulders top projects a drop to 1.1555, just under the 100-Day SMA. Next support comes in at 1.1663 and only a daily close back above 1.1900 will negate the current bearish outlook.
EURUSD – fundamental overview
Holidays in Japan and the US will make for lighter violumes on Monday and the Euro will mostly be focused on German industrial production, Eurozone confidence readings and ECB speak. Overall, the Euro has been under pressure over the past several days on the back of a combination of factors including dovish Draghi comments, political risk relating to Germany and Spain (Catalan referendum), stronger US data, a more hawkish Fed trajectory and a revival of the Trump reflation trade.
GBPUSD – technical overview
The market has entered a period of correction since topping out at a fresh 2017 high in September. From here, there’s room for additional declines into the 1.3000 area. However, sustained setbacks below the psychological barrier should be limited, with the greater risk for the formation of that next meaningful higher low ahead of a continuation of the newly formed uptrend in 2017.
GBPUSD – fundamental overview
There has been increased pressure on PM May to step down in recent days, with many not feeling too good about the direction Brexit is taking and many looking for a leader with a harder Brexit approach. This has certainly weighed on the Pound, while less hawkish Carney comments and the combination of solid US data, a Fed that will be looking to move on rates some more and the revival of the Trump reflation trade all add to the downside pressure in the UK currency. Trading volumes on Monday will be lighter on account of the Japan and US holidays and there will be no first tier data on the UK docket.
USDJPY – technical overview
The market has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips well supported below 108.00. The recent run up is therefore expected to stall out yet again into the resistance zone ahead of renewed downside pressure and bearish decline back towards the range low. Only a clear break above 115.00 or back below 107.00 would negate the outlook.
USDJPY – fundamental overview
Renewed North Korea tension hasn’t had any real impact on price action on Monday thus far and holidays in Japan and the US should make for a lighter quieter day of trade. We’ve also seen the latest election poll results in Japan tilt back in Abe’s favour, but again, no real reaction in USDJPY, with this market already pricing an Abe victory and focused on the broader macro drivers of US Dollar yield differentials and risk sentiment. Friday’s US employment report has ultimately weighed on the major pair as the risk off implication from higher rates in the US on the back of solid components within the data is having a bigger impact than the USD supportive yield impact at the moment.
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 last 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 2017 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. Interestingly, the latest surge in stocks has failed to bolster the exchange rate.
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 opening the door for the next downside extension towards 0.7500. Look for rallies to now be well capped ahead of 0.8000, with only a close back above the psychological barrier to put the pressure back on the topside.
AUDUSD – fundamental overview
The Australian Dollar is still getting sold into any rallies, with the currency feeling the pressure of an RBA that hasn’t welcomed the higher exchange rate, softer economic data, most recently in the form of last week’s retail sales and this latest discouraging China services PMI print. Meanwhile, things have been looking up for the US Dollar as economic data is improving, the Fed is in a position to be thinking about a more aggressive rate hike timeline and Trump reflation bets pick up. Looking ahead, volumes should be thin for the remainder of the day, with the calendar light and the US out for holiday.
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 more significant bullish reversal as oscillators turn up again. From here, there’s room for a push to retest key resistance in the form of the August peak at 1.2780, while any setbacks should be well supported ahead of 1.2300.
USDCAD – fundamental overview
Friday’s Canada jobs report came in above forecast and helped to open a minor rally in the Canadian Dollar. But overall, 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. While Canada employment data was solid, it’s been overshadowed by discouraging trade data, GDP, manufacturing, retail sales and subdued inflation. And it’s been no surprise to see Bank of Canada Governor Poloz singing a much different tune in recent days. 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. Remember, Friday’s US jobs report had impressive components that easily held up to the Canada report despite the NFP print which was a one off given the hurricane. Looking ahead, it’s going to be a quiet one with the Canada calendar empty and the US on holiday.
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. Any rallies should now be very well capped ahead of 0.7300.
NZDUSD – fundamental overview
The final results of the election have opened some more uncertainty as the race to form a coalition kicks off after it was revealed that both parties have claimed a mandate to govern. Overall, 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. This week, Kiwi took another hit after last week’s GDT auction results produced a disappointing negative print. 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, including a revival of the Trump reflation trade, solid US data and a more hawkish leaning Fed. Looking ahead, volumes should be thin for the remainder of the day, with the calendar light and the US out for holiday.
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 run to that next major barrier at 2600. 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. But at the same time, there’s 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, balance sheet reduction coming into play and another rate hike still on the cards this year. Friday’s jump in hourly earnings only adds pressure on the Fed to raise rates more aggressively, something that should make equity market valuations less attractive. But for now, it’s more of the same. It will take a breakdown in this market back below 2500 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
USDZAR is trying to poke back above a multi-week range that has capped gains in 2017. A clear break above 13.71 will open the door for additional upside towards the 2017 high from early January just shy of 14.00. At the same time, inability to establish a clear break through 13.71 will suggest the range trade is still intact, setting up the possibility for a renewed downside extension towards the range low in the 12.55 area.
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. Last week’s SARB monetary policy report flagging scope for additional rate cuts on the basis of near zero growth and a negative output gap aren’t doing anything to help the Rand either. The only supportive theme at the moment is arguably the record run in US equities which is a positive for risk correlated markets. However even here the Rand should be sitting uneasy as the prospect for a capitulation is looking increasingly realistic with stocks going parabolic.