Next 24 hours: Quiet Start to Busy Week Ahead
Today’s report: Plenty of Distraction to Offset Light Calendar
The economic calendar is quite thin at the start of the week, though the market will have other distractions in the interim. Things have been heating up in Spain, with the PM looking to invoke Article 55, while in the US, the President could soon announce the next Fed Chair.
Wake-up call
Chart talk: Major markets technical overview video
- Article 155
- Brexit negotiations
- fresh mandate
- weakness slows
- US drivers
- disappointing round
- Labour Day
- Fed Chair
- Buy side
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- The Economics Behind China’s Crackdown On Civil Society, T. Hamlin, NPR (October 20, 2017)
- Black Monday Remembered, B. McMillan, Independent Market Observer (October 18, 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. But 1.1660 is a strong level of support, with the neckline coinciding with the 100-Day SMA. Inability to establish below 1.1660 on a daily close basis will keep the 2017 uptrend intact.
EURUSD – fundamental overview
The Euro has been trading within a consolidation over the past several days and this has kept the FX market less committed to making any big decisions. As as has been the case with so much risk like this, the market has seemingly grown immune to the political risk, with the Euro holding up into the new week despite an escalation in Spain over the weekend. PM Rajoy has taken steps to invoke Article 155 at an emergency cabinet meeting over the weekend and the Senate will now look to approve the use of 155 at the end of the month. The Euro will have Thursday’s anticipated ECB meeting to think about this week and in the interim, it could also be thinking about a possible announcement of the next Fed Chair. Looking at today’s calendar, we get some second tier data in the form of Eurozone consumer confidence readings and the Chicago Fed national activity index.
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, while there is risk for another drop, setbacks should be limited below the psychological barrier, 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 1.3338 to confirm the constructive outlook and accelerate gains. Ultimately, only back below 1.2775 would delay the outlook.
GBPUSD – fundamental overview
There’s been a lot of choppy trade in the Pound, with the UK currency’s movement primarily dictated by developments on the Brexit negotiation front. In the initial part of last week, the market wasn’t feeling too great about the prospects, though into the end of the week, the Pound got a nice boost from Merkel’s call for both sides to move towards a deal by year end and from PM May’s apparent willingness to compromise on the divorce bill. But all of this is going to drag on and the market will now look to see what reaction we get from the Tory Euroskeptics. Of course, the BOE rate hike timeline is another influencer here and this latest pushback on the central bank’s tightening expectations, as reflected through BOE Cunliffe comments, should not be overlooked. As far as today’s data goes, it’s going to be a light one with only US CBI readings and the Chicago Fed national activity index due.
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 market has been in rally mode over the past several days, with the greater risk from here for a continuation of gains to test the range highs. At that point, look for the market to adhere to the range and stall out yet again for the start to a drop back towards the range low.
USDJPY – fundamental overview
The Japanese election went off as widely expected, with PM Abe's fresh mandate having been fully anticipated. And so, no reaction in the Yen to this news, with the currency instead moving lower on the back of traditional correlations with global sentiment and this ongoing run up in US equities. Dealers do however report USDJPY offers in size in the 114.00s. Looking ahead, the economic calendar for Monday is exceptionally thin, with only the Chicago Fed national activity index due.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high. 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 1.1400, while only back below 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
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. Interestingly, the latest surge in stocks has failed to have much impact on the exchange rate, which could already be a concern for the SNB.
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. Back below 0.7734 will strengthen the outlook.
AUDUSD – fundamental overview
Most of the recent moves in the Australian Dollar have been US driven, with Aussie weighed down on the Fed policy timeline and US tax reform optimism. Bullish Aussie bets have further declined as per the latest CFTC positioning data. Looking ahead, the economic calendar is exceptionally thin to start the week and Aussie will take its cues from broader macro themes and risk sentiment flow. Today, we get the Chicago Fed national activity index. Later this week, Aussie will be watching to see how the latest round of Aussie CPI comes in.
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 1.2400.
USDCAD – fundamental overview
Yet another demonstration the Bank of Canada was too aggressive with its consecutive rate hikes this year after Friday’s Canada CPI and retail sales were a big disappointment. We’re now into a week that has the Bank of Canada out with its latest policy decision and the central bank is expected to make some formal adjustments to its language with respect to the outlook for the economy and rate hike timeline. Looking ahead, the calendar is light on Monday, with only Canada wholesale sales and the Chicago Fed national activity index due.
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 0.700 warns of the possibility for a more meaningful reversal to retest the 2017 low at 0.6818. Any rallies should now be very well capped ahead of 0.7200.
NZDUSD – fundamental overview
New Zealand is on its Labour Day holiday today which is making for thinner trade in an already light calendar day. Overall, the Kiwi rate has been hit hard, with the latest surprise election result fueling additional declines. The New Zealand Dollar has been the clear underperformer over the past week, with the market unsure about what the Labour-NZ First coalition government will look like. Meanwhile, the US Dollar has been getting a boost of its own on the back of US tax reform optimism and a more hawkish Fed timeline. The only data of note out today is second tier in nature, with the Chicago Fed national activity index due.
US SPX 500 – technical overview
The market continues to shrug off overextended technical readings, once again pushing up to fresh record highs. Interestingly, the market broke out in August after a 75 point consolidation, which projected a measured move to 2565. This could warn of some form of a reversal to come, though we would need to see a daily close back below 2544 at a minimum to take the immediate pressure off the topside. Until then, the record run continues into unchartered territory, with the focus on the next major barrier at 2600.
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 tax policy 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. Tax reform updates and who President Trump appoints as the next Fed Chair will be the main focus this week.
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 range trade for much of this year, with rallies well capped ahead of 14.00 and dips supported into the 12.30 area. A the moment, the market has been well supported and is looking to once again push up to challenge the top of the range. Only back below 13.25 would negate the outlook.
Feature – fundamental overview
Expectations for a November rate cut in South Africa have been cut down after last week’s SA CPI readings rose by more than forecast. This isn’t a positive development for the South African economy with the greater need for flexibility on rates on the basis of a near zero growth and a negative output gap. Meanwhile, the Rand remains exposed to ongoing tension on the political front which will persist into year-end on account of the upcoming ANC leadership election and risk of credit rating downgrades. The latest speculation of President Zuma getting ready to sack Deputy President Ramaphosa has only added to the political saga, while locals are also thinking about what is likely to be an unrealistic Budget Statement from the FinMin this week. The only supportive Rand driver at the moment seems to be coming from the record run in US equities, which is a positive for risk correlated emerging market currencies. 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.