Next 24 hours: Weekend Yellen Comments Slow USD Declines
Today’s report: Political Headwinds and Geopolitical Tension
We're off to a slow start this week. The economic calendar on Monday is thin and the market will probably spend more time thinking about all of the political headwinds and geopolitical risks at the moment.
Wake-up call
Chart talk: Major markets technical overview video
- Merkel’s position
- PM May
- political risk
- US stocks
- Yellen speak
- Loonie struggling
- coalition talks
- weekend words
- Global uncertainty
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Spotting a Financial Markets Crisis, D. McWilliams, Financial Times (October 5, 2017)
- Danger! Synchronized Swimming, E. Swarts, Market Anthropology (October 12, 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 dropped 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 decline to 1.1555, just under the 100-Day SMA. What’s even more interesting now is that if this latest minor rebound stalls out and the market holds below 1.1910 on a daily close basis, we could see the formation of an even bigger head and shoulders top that would trigger on a break below 1.1663 and open a downside extension into the 1.1200s.
EURUSD – fundamental overview
The Euro has held up rather well in recent days when one considers the Catalan ultimatum, German political uncertainty after Merkel’s CDU suffered a shocking defeat in the Lower Saxony state election, and some ECB caution with respect to tapering. At the same time, the Fed Chair was on the wires over the weekend echoing her view that she expects inflation to accelerate and a gradual tightening path remains appropriate. Looking ahead, we get Eurozone trade and US empire manufacturing as the key standouts on the day.
GBPUSD – technical overview
The market has eased off quite a bit since topping out at a fresh 2017 high in September, with the price dropping back into the 1.3000 area thus far. However, setbacks should be limited to the psychological barrier from here, with the greater risk for the formation of that next meaningful higher low ahead of a continuation of the newly formed uptrend in 2017. Look for a daily close back above 1.3300 to confirm the constructive outlook and accelerate gains. Until then, there is risk for some more short-term choppy consolidation.
GBPUSD – fundamental overview
Last Friday’s softer round of US economic data and comment from Bank of England Governor Carney that a rate could be possible in the coming months, have helped to fuel an additional recovery in the Pound after the UK currency retreated from recent 2017 highs. However, Brexit negotiation tension has been creeping back in and with more to come from this front over the coming days, the UK currency could be at risk for some selling into the latest bounce. As far as today’s docket goes, there’s no first tier data out of the UK, with the focus on the UK PM’s visit to Brussels for Brexit talks with EU Juncker and EU negotiator Barnier. Then in the US, we get US empire manufacturing.
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 has been showing signs of stalling out yet again into the resistance zone, with the market rolling back over. This sets up a drop back to the range lows, with a break below 111.00 to strengthen the bearish prospect. Only back above 113.44 would delay the outlook and expose the range highs in the 114.00s.
USDJPY – fundamental overview
The Yen has found some renewed demand in recent days (USDJPY lower), with the move largely attributed to broad based US Dollar selling after the Buck had enjoyed a small recovery rally. Right now, the big focus for the Japanese currency is global sentiment and any fallout from risks around the globe that include North Korea, Iran, Catalonia, Germany, the UK and New Zealand. Of course, next week’s Japan election is also worth mention, though with the LDP expected to win out convincingly, there shouldn’t be too many waves here. Looking at today’s docket, US empire manufacturing is the only notable standout.
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 has been attempting to recover this week, getting some help from renewed technical selling of the US Dollar and fundamental drivers that include concerns over US tax reform, a more dovish leaning FOMC Minutes and this latest round of softer US data in the form of CPI and retail sales. Still, there continues to be healthy offers into rallies from medium-term accounts and Fed Chair Yellen’s weekend comments where she expected inflation to shoot up and confirmed the need for rates to move higher, have been contributing to sell early Monday selling. Looking ahead, US empire manufacturing is the only notable standout on the calendar.
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
The Canadian Dollar has been attempting to get back to its trend in recent months, though the gains have been difficult for the Loonie despite some renewed broad based US Dollar selling in the previous week. 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 early this month, it’s been overshadowed by discouraging trade data, GDP, manufacturing, retail sales, subdued inflation and scaled back BoC Poloz comments. Looking ahead, there’s no data of note out of Canada and the key focus will be on US empire manufacturing. We have seen some bids back in the Buck after the Fed Chair echoed her more hawkish leaning stance over the weekend after the Buck had come off Friday from softer US CPI and retail sales.
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
A bout of broad based profit taking on US Dollar longs in the previous week has helped to support on ailing Kiwi rate off of recent lows, with renewed concerns over US tax reform, a slightly more dovish FOMC Minutes and Friday’s softer round of US CPI and retail sales data as the primary drivers. However, offers continue to emerge into rallies as the currency contends with a deteriorating outlook and ongoing political uncertainty post New Zealand elections. Latest reports on the post election front have NZ First’s coalition talks with National still going despite the Kingmaker party’s joint board and caucus meeting. Looking ahead, US empire manufacturing is the only notable standout on the calendar for the remainder of the day.
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. But for now, it’s more of the same. Although Friday’s softer US CPI was supportive of the market, this has been somewhat offset by the weekend Yellen comments with the Fed chief sticking to her more hawkish leaning tone. Nevertheless, tt will take a breakdown in this market back below 2500 to turn heads. The market will now digest the latest FOMC Minutes.
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 this most recent dip to round out that next higher low around 1260 in favour of a 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 has been confined to some range trade for much of this year, with rallies well capped ahead of 14.00 and dips supported into the 12.30 area. The most recent run up has once again stalled out into the range resistance suggesting we could see another drop to the range lows. A break and close back below 13.16 will strengthen this bearish outlook.
Feature – fundamental overview
A nice recovery in the Rand over the past week, with the emerging market currency getting help from the USD side on broad based selling of the Buck from tax reform concerns, a dovish Fed Minutes and soft Friday US data. Still, Yellen has kept with her hawkish leaning tone over the weekend and this should keep the market from selling the Buck too aggressively against the emerging market currencies. Meanwhile, the Rand remains exposed to ongoing tension on the political front. This month’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 going to help the Rand either. The only supportive theme at the moment is arguably the record run in US equities. However even here the Rand should be sitting uneasy as the prospect for a capitulation is looking increasingly realistic on overbought technicals and an unstable political backdrop around the globe.