Special report: Reflections and Insights
Today’s report: Important Takeaways and Key Markets to Watch
We're into Friday and as things stand, the US Dollar has enjoyed a nice week, flat against the Euro, but up against the other developed currencies. Two of the bigger stories this week were the fallouts in the Pound and Canadian Dollars on the back of a weak round of data and less hawkish central bank meeting respectively.
Wake-up call
- current account
- softer inflation
- traditional correlations
- SNB policy
- discouraging jobs
- BoC caution
- CPI print
- Policy normalisation
- Metal demand
- Crypto headwinds
- Ethereum exposed
Suggested reading
- Dollar’s ‘Exorbitant Privilege’ a Terrible Thing to Waste, S. Englander, Bloomberg (April 19, 2018)
- Six Precepts Every Investor Should Remember, Buttonwood, The Economist (April 18, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The major pair has been mostly sideways in 2018, resulting in a contracted range that has taken the form of a triangle. At this point, with the price consolidating past 2/3 of the way to the apex, there is risk for that next breakout. Key levels to watch over the coming sessions will be 1.2477 and 1.2215. Above 1.2477 will open a move to a fresh 2018 and +3 year high, exposing massive falling trend-line resistance off the record high from 2008 which comes in around 1.2600. Back below 1.2215 will open the door for a deeper correction targeting a retest of the December 2017 low at 1.1720.
EURUSD – fundamental overview
The Euro continues to struggle with direction and the market is unsure which way the single currency wants to break. It seems monetary policy and yield differentials have been more Euro bearish, while US protectionism and the threat of trade wars have been more supportive. Into Friday, the Euro is flat on the week against the Buck. Setbacks from softer Eurozone inflation data were offset by other factors including Dollar weakness on US protectionism, cross related Euro demand against other suffering currencies and news of Iran moving foreign transactions to Euro. Desks have been talking about an expected break in the major pair given the contracted volatility, which will make for more exciting times ahead. As far as today’s goes, German producer prices have come in softer, to weigh a little more on the Euro, while looking ahead, we get some Eurozone consumer confidence data.
EURUSD – Technical charts in detail
GBPUSD – technical overview
The market hasn’t been able to establish above the January high, with extended studies opening the door for a much needed corrective decline. There is risk for a deeper setback in the days ahead, with the market potentially gravitating to rising channel support off the 2017 uptrend which comes in around the 1.3700-1.3900 area. Still, overall, the structure remains highly constructive on a medium to longer term basis and a higher low is sought out ahead of a bullish continuation.
GBPUSD – fundamental overview
BOE Governor Carney put the nail in the coffin as far as this week’s Pound performance went, with the UK currency already struggling from a batch of softer data, including wage growth, inflation and retail sales, all forcing a reconsideration of those bets for a May rate hike. Carney’s reservations had the market scrambling and repricing those May odds, with the Pound setbacks intensifying as a result. Looking ahead, the economic calendar is quiet and the market will defer to bigger picture themes.
GBPUSD – Technical charts in detail
USDJPY – technical overview
The major pair has been attempting to bottom out after trading down to a 2018 low in the 104s. Still, a break and daily close back above 107.91 will be required to suggest the downside pressure has come off. Until then, risk remains for another topside failure and reversal back down towards the 2018 low.
USDJPY – fundamental overview
The Yen has come under some mild pressure this week on the back of the Nikkei rally, while a lack of protectionist headlines is also getting sourced for Yen weakness (USD demand). The main focus here continues to be on bigger picture themes on the macro front, with risk sentiment front and center. Looking ahead, the economic calendar is quiet and the market will defer to bigger picture themes.
USDJPY – Technical charts in detail
EURCHF – technical overview
The market continues to trend higher, recently extending gains to a fresh multi-month high back through the massive 1.2000 level. This is the first time the market has traded 1.2000 since January 2015. However, studies are now extended across all major time frames and there is risk building for a sizable corrective decline before considering a bullish continuation.
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 a more intensified liquidation on that front into Q2 2018, 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. SNB Jordan was on the wires this week, once again reaffirming policy strategy, even with the rate pushing back through 1.2000.
AUDUSD – technical overview
The market has been in the process of rolling over after failing to sustain a break above 0.8100 earlier this year. This has set up a sequence of lower tops and lower lows on the daily chart, with deeper setbacks seen towards the 0.7500 barrier over the coming sessions. A break back above 0.7917 would be required to negate the structure and force a shift in the outlook.
AUDUSD – fundamental overview
The Australian Dollar has come under renewed pressure into Friday as global equities turn back down and weigh on the risk correlated commodity currency. This week’s Aussie employment data was also discouraging and could be another weighing factor. However, setbacks have been less intense as it seems cross related Aussie demand against its Kiwi cousin is helping to slow the pace of the drop. Overall, Aussie will continue to monitor developments on the global front, with any escalation in tension to add to the downside pressure. Looking ahead, the economic calendar is quiet and the market will defer to bigger picture themes.
USDCAD – technical overview
Despite the latest round of weakness, overall, there are signs of basing after months of downside pressure. Look for any setbacks to now be well supported ahead of 1.2500, with a higher low sought out in favour of the next major upside extension through 1.3125 and towards 1.3500 further up. A daily close above 1.2700 will strengthen the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar has found renewed offers this week after bulls were disappointed with the central bank's policy decision. While there were no surprises with respect to the rate hold, bets that the Bank of Canada would lean to the hawkish side on the back of robust data, upbeat BoC survey, higher oil and positive Nafta developments were let down after the central bank sounded quite a bit more cautious than had been anticipated. The line that monetary policy accommodation was still needed seemed to be the dagger for Canadian Dollar longs and we continue to believe the Loonie had gotten ahead of itself with NAFTA risk a big deal and still well capable of giving the Bank of Canada a big headache if it gets too aggressive with policy normalization. Looking ahead, there are some important first tier releases to take in, with Canada retail sales and CPI due.
NZDUSD – technical overview
The market looks to be in the process of topping out, with the daily chart slowly rolling over in 2018. Rallies are now expected to be very well capped ahead of 0.7500, with only a break back above the psychological barrier to negate. Look for a renewed weakness in the sessions ahead, with the latest break back below 0.7300 strengthening the bearish outlook and prospect for a drop back down towards 0.7000.
NZDUSD – fundamental overview
This week’s Kiwi inflation data was discouraging, with the dip in tradable goods prices and drop to the lowest year on year print since Q3 2016 putting the RBNZ in a position to consider a less hawkish path going forward. This has resulted in a period of relative Kiwi underperformance. Overall, the combination of escalating trade tension, fallout from an end to a near decade long post crisis global monetary policy accommodation and less than stellar economic data out of New Zealand in recent weeks is all starting to weigh on the Kiwi rate after the market had pushed into some medium term resistance towards 0.7500. Looking ahead, the economic calendar is quiet and the market will defer to bigger picture themes.
US SPX 500 – technical overview
A severely overbought market is finally showing signs of rolling over off the January record high, allowing for stretched monthly readings to unwind. Any rallies should now be very well capped ahead of 2800 in favour of continued weakness towards the 2015 high at 2138.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX starts to rise from unnervingly depressed levels. The combination of Fed policy normalisation, ramped up US protectionism, and geopolitical tension have been capping the market into rallies, with any renewed setbacks at risk of intensifying on the prospect for the reemergence of inflationary pressure. Overall, we expect the bigger picture theme of policy normalisation to continue to weigh on investor sentiment into rallies.
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 some more chop followed by an eventual push above massive resistance in the form of the 2016 high at 1375. This will then open the door for a much larger recovery in the months ahead. In the interim, setbacks are expected to be well supported around 1300.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players persists, 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 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. The 2016 high at 1375 is a massive level that if broken and closed above, could be something that triggers a widespread panic and rush to accumulate more of the hard asset.
BTCUSD – technical overview
A break back above short term resistance at 7500 has taken the immediate pressure off the downside, with scope for a correction further up towards 9200. Still, the overall pressure still leaves the market in a downtrend and it is going to take a recovery back above 12000 to suggest otherwise.
BTCUSD – fundamental overview
The crypto asset has come under pressure in 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market is also coming back to earth after a euphoric 2017 run that had bubble written all over. Bitcoin has struggled on the transaction side as well, with transactions per second a major drawback, along with a mining community that has been less willing to process transactions due to the lower fees. The Lightning network has been a welcome development and is helping to ramp up transaction speed, which has been behind some of the recovery off the 2018 low, though it seems the combination of a massive bubble, more regulatory oversight, a market that is still trying to convince of its proof of concept, and the threat of a reduction in global risk appetite, could all result in even deeper setbacks ahead.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
Signs of recovery, with the market rallying out from the 2018 low and pushing back above some consolidation resistance. This opens the door to more significant resistance at 590, though a clear break back above the 590 level will be required to officially take the immediate pressure off the downside. Until then, the pressure remains on the downside and the market could be looking for a lower top ahead of a bearish resumption.
ETHUSD – fundamental overview
Setbacks in the price of ETH have been more intense than those of Bitcoin in 2018. Though both markets are going through a period of shakeup following bubble activity in 2017, there has been a bigger exodus from ETH with this cryptocurrency more heavily correlated to risk in global markets. The reduction in global risk appetite has put a strain on the investment in projects on the blockchain and with most of the blockchain projects built on the Ethereum protocol, it makes sense to see this market more negatively impacted than bitcoin, which is considered to be the store of value digital currency.