Next 24 hours: FX Market Sits Back to Take in US Equity Craze
Today’s report: Draghi, UK Jobs, Fed Beige Book
The US Dollar has been doing a good job fighting its way back. The Fed outlook continues to point to higher rates and US economic data has been impressive. On the other side, the Euro and Pound have been contending with political uncertainty. Draghi, UK jobs ahead.
Wake-up call
Chart talk: Major markets technical overview video
- ECB speak
- 3% inflation
- John Taylor
- Franc offered
- iron ore
- NAFTA negotiations
- GDT auction
- Red flags
- Macro risk
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Are Yellen and the FOMC Clueless About Inflation, Macro Man (October 16, 2017)
- Five Reasons to Hate the Gilt Market, M. Gilbert, Bloomberg (October 16, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The uptrend in 2017 has stalled out for 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. What’s even more interesting right now is if the market breaks down below 1.1660, we could see the formation of an even bigger head and shoulders top projecting a measured move downside extension into the 1.1200s. There is however a lot of support in the 1.1600s including the mentioned neckline, 100-Day SMA and Ichimoku cloud bottom. Inability to establish below 1.1660 will keep the 2017 uptrend intact.
EURUSD – fundamental overview
The Euro is under pressure this week, feeling the heat from a less hawkish ECB outlook and ongoing Catalan saga ahead of tomorrow’s deadline. Meanwhile, the US Dollar has been bid up on its own merits, with the Fed staying the course on the policy normalisation timeline and US economic data looking solid. As far as today goes, the focus will be on a wave of central bank speak, with ECB’s Draghi, Praet and Coeure making appearances in Frankfurt. The central bank speak will be important to monitor with that next ECB meeting due next week. Eurozone construction data is also due and then later in the day, we get Fed’s Dudley and Kaplan, US housing starts and the Fed Beige Book.
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
Tuesday’s annual rise in UK inflation to 3% was a big deal and yet, the reading wasn’t able to keep the Pound bid up, with the currency coming under pressure for the remainder of the day. The market has been distracted by renewed Brexit uncertainty and BOE Governor Carney's contingency for a hard exit with no transition period served as a reminder of the unsettled nature of things at the moment. Of course, market expectations the Fed will keep to its timeline and more positive US data have also contributed to Cable’s latest slide. Looking ahead, we get UK jobs data, Fed’s Dudley and Kaplan, US housing starts and the Fed Beige Book.
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
Thin trade in Japan on Wednesday as the market turns its attention to China and the high profile National Party Congress. Upcoming Japan elections haven’t been a factor here, with the market already pricing a strong LDP victory. But the Yen has come under some pressure on US demand from favourable USD yield differentials. The news of the hawkish leaning John Taylor as a leading candidate to replace Janet Yellen has been helping to prop up the Buck, while US data has also been solid. The Yen has also been weaker on account of an ongoing bid in US equity markets, though with the record run looking exhausted, a reversal there could inspire Yen demand on the traditional correlation. Looking ahead, we get Fed’s Dudley and Kaplan, US housing starts and the Fed Beige Book.
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 come back under pressure this week on the back of a slide in iron ore futures, dovish leaning RBA Minutes and broad based demand for the US Dollar. The market has upped its expectation for another Fed hike in 2017 to a near certainty, while US data has been solid and the hawkish leaning Fed Taylor is gaining support as the next Fed Chair. Looking ahead, we get Fed’s Dudley and Kaplan, US housing starts and the Fed Beige Book.
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 got some good news on Tuesday with NAFTA negotiations to keep going. But overall, the Loonie has been having a harder time of late as the market prices a scaled back outlook at the Bank of Canada in the aftermath of a wave of data that has called recent rate hikes into question. At the same time, things have been looking up for the US Dollar, with the Buck getting help from a Fed keeping to its policy normalisation timeline, solid US economic data and the prospect of John Taylor as a replacement to Janet Yellen. Looking ahead, we get Canada manufacturing data, Fed’s Dudley and Kaplan, US housing starts and the Fed Beige Book.
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
Not a lot of love for the New Zealand Dollar right now. The currency tried its best to rally early Tuesday on the hotter than expected Kiwi CPI data early, but has since been sold into offers. The market doesn’t believe the inflation data will do anything to alter the central bank’s rate hike timeline and doesn’t see anything happening on that front until at least November 2018. Tuesday’s GDT auction result hasn’t helped Kiwi’s cause with the data producing another negative print. Meanwhile, Kiwi traders are trying to figure out what will be with post election uncertainty and who NZ First will back for a coalition government. On the US side, the near certainty of another rate hike this year, solid economic data and the prospect of John Taylor for next Fed Chair have been adding to downside pressure on the Kiwi rate. Looking ahead, we get Fed’s Dudley and Kaplan, US housing starts and the Fed Beige Book.
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. At this point, 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 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
The Rand has come back under pressure this week on the back of a fresh wave of USD positive developments out of the US. The market has upped its expectation for another Fed hike this year to a near certainty, US economic data has been solid and the hawkish leaning John Taylor has been gaining support as a candidate to replace Janet Yellen. 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. Looking ahead, the big focus for the week will be today’s South Africa CPI readings forecast to tick higher year over year.