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German Coalition Talks, US Producer Prices

Next 24 hours: No Love for the US Dollar

Today’s report: German Coalition Talks, US Producer Prices

The Dollar has been trying to make a comeback in early 2018, though the move hasn't been all that impressive and the Buck is still up against the ropes. As far as today goes, German coalition talks and US producer prices are the main standouts.

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Wake-up call

Chart talk: Major markets technical overview video

Chart talk: Technical & fundamental highlights

EURUSD – technical overview

Despite a prolonged period of sideways trade, the outlook for the major pair remains highly constructive. The door is now open for a more immediate resumption of a well defined uptrend that has taken form in 2017. Look for any setbacks to be well supported ahead of 1.1700, for the next major upside extension beyond the current yearly high of 1.2094 and towards the 1.2600-1.2700 area further up, which happens to coincide with falling trend line resistance off the record high from 2008. Ultimately, only a daily close back below 1.1550 will delay this outlook.

  • R2 1.2093 – 8Sep/2017 high– Strong
  • R1 1.2019 – 10Jan high – Medium
  • S1 1.1916 – 9Jan low – Medium
  • S2 1.1818 – 22Dec low – Strong

EURUSD – fundamental overview

A lot of the focus has been on price action here, with the major pair stalling a hair shy of the 2017 high in the previous week, before breaking down and now settling in after getting a jolt from medium term players buying dips and on news China could reduce or even halt purchases of US treasuries. A lot of today’s focus will be on German coalition talks, which are scheduled to end. Inability for Merkel to broker a coalition deal, would suggest another round of elections, which would not be supportive of the Euro. The political backdrop remains a storyline that the market needs to follow, as uncertainty extends beyond Germany, into Spain and Italy and the UK, as it related to Brexit negotiations. As far as the calendar goes, we get Eurozone industrial production, the ECB Minutes, US producer prices and US initial jobless claims.

GBPUSD – technical overview

The market has been consolidating but ultimately looks poised for a continuation of the 2017 uptrend, with a higher low waiting to be confirmed at 1.3027 on a break of the 2017 high at 1.3658. This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018. Any setbacks should now be well supported into previous range resistance now turned support in the 1.3300 area.

  • R2 1.3660– 20Sep/2017 high – Very Strong
  • R1 1.3563 – 10Jan high – Medium
  • S1 1.3450 – Mid-Figure – Medium
  • S2 1.3426 – 29Dec low – Strong

GBPUSD – fundamental overview

Although Wednesday’s UK industrial production came in on the better side of expectation, this was offset by some discouraging trade data. At the same time, we’ve been seeing attempts by the US Dollar to make a comeback in early 2018, which has been adding to downside pressure in the UK currency. There is room for weakness to extend in the form of a minor correction down towards 1.3300, where dealers talk renewed demand in size. As far as today goes, absence of first tier economic data out of the UK,will leave the focus on US producer prices, initial jobless claims and bigger picture stories.

USDJPY – technical overview

The major pair 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 latest topside failure off the range high strengthens this outlook, though the market will ideally need to break back down below 110.85 to strengthen this prospect.

  • R2 112.79 – 10Jan high – Strong
  • R1 112.37 – 9Jan low – Medium
  • S1 111.28 – 10Jan low – Medium
  • S2 110.85– 27Nov low – Strong

USDJPY – fundamental overview

The Yen has been a mover this week, finding a wave of demand after the BOJ slashed its JGB purchases of maturities with durations longer than 10 years by 10 billion yen in a “shadow tapering” move. We’ve also seen Yen demand on a fresh batch of dovish Fed speak. Overall, into 2018, the Yen is trying to figure out whether it needs to be selling off on the ongoing bid in global risk assets, or if it needs to be rallying on the back of broad based US Dollar weakness and the possibility that an extended risk market could finally begin to capitulate. These are the big drivers that will dictate direction going forward. As far as today’s economic calendar goes, US producer prices and US initial jobless claims are the major standouts.

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.

  • R2 1.1800 – Figure – Strong
  • R1 1.1778 – 27Dec/2017 high – Medium
  • S1 1.1586 – 22Nov low – Medium
  • S2 1.1543 – 7Nov low – Strong

EURCHF – fundamental overview

The SNB will need to be careful right now as its strategy to weaken the Franc could face headwinds from the US equity market in 2018. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to US equities. But any signs of capitulation on that front into this new year, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc.  And so, we speculate the SNB continues to be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead.

AUDUSD – technical overview

Technical studies have turned back up over the past several days, with the market in the process of recovering after trading down to a fresh multi-day low around the 0.7500 barrier in December. Overall however, the pressure remains on the downside and additional upside could be difficult into solid internal resistance ahead of 0.8000.

  • R2 0.7898 – 13Oct high – Strong
  • R1 0.7887 – 11Jan high – Medium
  • S1 0.7794 – 2Jan low – Medium
  • S2 0.7724 – 27Dec low – Strong

AUDUSD – fundamental overview

While most currencies are under pressure against the US Dollar on Thursday, the Australian Dollar is outperforming on the back of a well received Aussie retail sales showing. Overall, the Australian Dollar has been better bid in recent weeks, with the currency extending its recovery into 2018. The combination of surging commodities prices, record US stocks, a broad based wave of US Dollar outflow, have all been behind this run of gains. We are however starting to hear of offers from medium-term accounts looking to build into existing short positions at current levels, which could come into play if this latest run in commodities falters or if global equities start to roll over. As far as today’s calendar goes, US producer prices and US initial jobless claims are the major standouts.

USDCAD – technical overview

Despite the latest round of setbacks, there are signs of basing in this pair, after the recovery from plus two year lows back in September extended through an important resistance point in the form of the August peak. This sets the stage for additional upside, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported ahead of 1.2300.

  • R2 1.2662– 28Dec high – Strong
  • R1 1.2584 – 10Jan high – Medium
  • S1 1.2479 – 9Jan high – Medium
  • S2 1.2428 – 10Jan low – Strong

USDCAD – fundamental overview

Overall, despite a recent run of solid Canada data and surge in the price of OIL, we would caution against getting bullish the Loonie at current levels. We believe there is plenty of downside risk to the Loonie, with the fate of NAFTA coming back into the spotlight. Any talk of a breakup will put a lot of pressure on the Canadian Dollar. As far as today’s calendar goes, US producer prices and US initial jobless claims are the major standouts.

NZDUSD – technical overview

The market has done a good job recovering off the 2017 low from November, though additional upside could now be limited after trading into a measured move objective in the 0.7200 area off an inverse head and shoulders formation. Overall, there is still medium term risk tilted to the downside and it will take a clear establishment back above 0.7400 to delay the bearish outlook and risk for another bearish reversal.

  • R2 0.7245 – 29Sep high – Strong
  • R1 0.7231 – 10Jan high – Medium
  • S1 0.7141 – 10Jan low – Medium
  • S2 0.7100 – Figure – Strong

NZDUSD – fundamental overview

The New Zealand Dollar has broken up to multi-week highs, with the currency extending its recovery off the 2017 low from November. The combination of surging commodities prices, record high US equities and a broad based wave of US Dollar outflow have been behind this accelerated run of gains. Last week’s uptick in the GDT auction and some solid Kiwi manufacturing data have also helped the cause, though technical traders cite solid resistance into 0.7200, while dealers report heavy sell orders around the barrier as well, which could limit gains from here, especially if a run in commodities and overextended equities market start to roll over. Looking ahead, US producer prices and US initial jobless claims are the major standouts.

US SPX 500 – technical overview

The market continues to shrug off overextended technical readings, with any setbacks quickly supported for fresh record highs. Still, technical readings are tracking well overbought and are in desperate need for a period of healthy corrective action. Ultimately however, it will take a break back below 2650 at a minimum to alleviate immediate topside pressure.

  • R2 2800.00 – Extension Target – Strong
  • R1 2762.00 – 9Jan/Record high – Medium
  • S1 2725.00 – 5Jan low – Medium
  • S2 2700.00 – Psychological – Strong

US SPX 500 – fundamental overview

The US equity market continues to push further into record high territory. It seems, on a macro level, the combination of blind momentum, expectation US tax reform will ultimately work out well in 2018, excitement around infrastructure plans and a belief the Fed will remain super accommodative under Jerome Powell are all factoring into the relentless bid. Last Friday’s subdued hourly earnings have only made investors that much more confident in the slow Fed path, fueling the latest run. Nevertheless, investor immunity to downside risk is not looking as strong these days and there’s a clear 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 the Fed finally following through with forward guidance in 2017. But for now, it’s more of the same, with the market shrugging off any red flags. 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. Look for this most recent dip to round out that next meaningful base 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.

  • R2 1357.75 – 8Sep/2017 high – Strong
  • R1 1326.30 – 4Jan high – Medium
  • S1 1281.50 – 27Dec low – Medium
  • S2 1236.70 – 12Dec low  – Strong

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 1200.

Feature – technical overview

USDTRY is in the process of correcting off the record highs in November to allow for extended studies to unwind. However, the uptrend remains firmly intact and a fresh higher low is now sought out ahead of the next big push through the massive psychological barrier in the form of the 4 handle. Ultimately, any setbacks should be well supported ahead of 3.6500, with only a break back below this level to delay the outlook.

  • R2 3.9820 – 22Nov/Record – Strong
  • R1 3.8980 – 14Dec high – Medium
  • S1 3.7330 – 5Jan low low – Medium
  • S2 3.7000 – Psychological – Strong

Feature – fundamental overview

The CBRT did a fabulous job disappointing investor expectation for what the market thought would be a much bigger adjustment to rates than what the CBRT delivered in December. The Turkish central bank opted to only raise by a modest 50bps in the LLW. This is viewed as a knock on CBRT credibility, with the central bank clearly influenced by the ongoing pressure from the Erdogan government to keep policy as loose as possible. The Lira could be poised for a fresh record low in the days ahead, with USDTRY considering a break of the massive psychological barrier at 4.00. The emergence of new stress in the global economy could add to the Lira strain if we see a global reduction in risk appetite that ultimately drags the entire emerging market space.

Peformance chart: Five day performance v. US dollar

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