Dollar rally is over and a re-pricing has begun


  • The dollar rally has ended with a bang and markets are now in the process of re-pricing the dollar once again. This is impacting across financial markets with huge moves in Treasuries, forex majors, commodities and equities. The Non-farm Payrolls disappointment has changed market perceptions again and Fed chair Janet Yellen’s speech yesterday may have looked to calm some volatility but has done little to dampen the corrective outlook. The signs are now that this is a near term pause in what seems to be likely further dollar weakness.

dollar down

  • Janet Yellen’s speech appears to have put the final nail in the coffin for a June rate hike. Yellen remains positive on the US economy and that a rate hike in the coming months is likely. However she noted about the negative impact that a Brexit would have on financial markets, this rules out June. Also Fed Funds Futures are pricing a 25% probability of July so again unlikely (not only that it is not a month for members forecasts either. This leaves September, which then becomes incredibly close to the November Presidential election. US data will need to show consistent and sustained improvement (with no Brexit) for the Fed to have no other option than to hike in September.
  • Central Banks are in focus with some huge announcements in the next couple of weeks. With the RBA having announced today we now look ahead to the RBNZ on Wednesday night, and then the key FOMC decision next week along with the BoJ, SNB and BoE. The RBNZ is in the balance as to whether a rate cut will be seen or not tomorrow. The strengthening Kiwi is a problem and low inflation is an issue. However the strength of the housing market is also an argument against a rate cut. Consensus now seems to be pointing towards a 25 basis point cut, having last week been suggesting no move, suggesting that the Kiwi strength in the wake of the renewed dollar weakness could be a swing factor.
  • Brexit volatility continues to ramp up ahead of the crucial EU referendum on 23rd June and seems to be trumping all other factors in driving Cable. We are now getting swings on an almost daily basis as the market leaps on contrasting opinion polls that are either saying a Leave victory (sell sterling), or Remain victory (buy sterling). With one month sterling/dollar options spiking to levels not seen since 2008, expect this volatility to continue in Cable. This is going to probably increase as we approach the polling date and the tension mounts with focus ever more on the opinion polls in the run up. This will make trading Cable very difficult on a trending basis and quick dips in and out may be the best strategy. Ultimately the betting markets still view a Remain victory as most likely and should end up driving Cable higher in the wake of the result (if this is true). However in the meantime expect more volatility.

1 month GBPUSD vol

  • In commodities, gold and silver have been underperforming since the beginning of May (as measured against the forex majors). Whilst the dollar may now be on a corrective path for the coming weeks, if risk appetite also sustains an improvement then this underperformance of silver and gold may well continue.
  • Oil has been straining to breakout again to end a period of consolidation. WTI may be struggling to breach $50.20, but Brent Crude has already broken above its equivalent resistance and is looking to push back higher and continue the trend higher. The OPEC meeting may have ended in stalemate again, but the EIA oil inventories are beginning to show consistent drawdown of and this is supportive. The weaker dollar would also add to the support for oil.
  • Equities are bucking a recent corrective move and look to be improving again. Can this be sustained though with the S&P 500 looking to breakout above 2111 resistance and close in on the summer 2015 highs which consistently failed between 2130/2134. The Fed putting off a rate hike is conceivably positive for risk sentiment, but valuation remains steep on Wall Street around 20x (or around 26x on a cyclically adjusted price earnings basis) and comes as the Fed puts off a rate hike due to economic data disappointment.
  • On a relatively quiet week for economic data the focus will turn to China to drive sentiment. In the space of a few days we have the China Trade Balance (imports and exports), inflation, industrial production and retail sales. This sequence of data will give us a good insight into how the economic re-balancing is progressing as it will be clear of China New Year and also give good month on month comparatives. This will drive risk sentiment so look for moves on the Aussie and Kiwi, whilst commodities will also move and impact on equity markets with weightings
  • Watch for: China trade balance and inflation, Michigan Sentiment



EUR/USD – Looking to buy into weakness

  • A re-pricing for Fed rate hike expectations that are being pushed back will dive a weaker dollar in the coming weeks and should provide for further upside in EUR/USD. This may be a more of a quiet week in front of the Fed but no hike is expected and weakness on the pair is a chance to buy.
  • Breaking through key near term resistance means that there is a series of new support between $1.1215/$1.1290 to use as the basis for the next leg up towards the long term resistance around $1.1465 again.
  • Watch for: Michigan Sentiment

GBP/USD – Brexit continues to drive volatility

  • Changing prospects of a Brexit is overriding everything else with regards to Sterling and Cable. The surprise would be a Leave camp victory (which is not priced in currently) and this means that the fear of this is driving volatility. This will continue right up until the polling date on 23rd
  • Technicals are extremely choppy and indecisive now with support at $1.4330, whilst the resistance between $1.4725/$1.4770 is capping the upside. This is extremely difficult to trade with any extended horizon of over a couple of days.
  • Watch for: Brexit polls, Michigan Sentiment

USD/JPY – Consolidation but rallies still seem a chance to sell 

  • As the market settles the remainder of the week could be relatively quiet, however risk driving events such as the China economic data could mean volatility. Also watch for any surprises on Japanese GDP. The big moves could be next week with both the Fed and the BoJ.
  • The breakdown of key supports has changed the outlook and momentum indicators suggest that rallies are a chance to sell. Initial resistance is 108.20 up towards 109.50.
  • Watch for: Japanese GDP, Michigan Sentiment

Gold – Performance remains strong

  • Relative underperformance (versus the major currencies) continues and this is a concern for the gold bulls. I seem gold as a range play now but there could be an unwinding move following the recent gains. The Fed putting off a rate hike is supportive for gold. However any perceived improvement in risk appetite is a struggle for gold.
  • The technical improvement could see further gains up towards the resistance around $1260, but the prospect of a near term correction into the support band $1220/$1233 is growing.
  • Watch for: China trade balance and inflation, Michigan Sentiment

Oil – Near term corrections remain a chance to buy

  • The EIA oil inventories drawdown continues to be supportive for oil.
  • Technically the outlook remains strong both WTI and Brent Crude are shaping for a retest of their key October highs at $50.92 and $54.05 respectively. Corrections continue to be bought into at successively higher levels.
  • Watch for: China trade balance and inflation, EIA oil inventories to drive volatility

Indices – Wall Street needs to breakout otherwise the equity markets rally could struggle   

  • S&P 500 – Wall Street has managed to prevent a correction from dragging, but the overhead resistance at 2111 and then 2116 is sizeable, before the key all-time highs between 2130/2134. Could this barrier mean that other markets begin to struggle?
  • DAX Xetra – The DAX continues to outperform on days of improved risk appetite but the outlook continues to remain constrained by overhead resistance. It will needs Wall Street breaking out to prevent another bout of profit taking.
  • FTSE 100 – FTSE 100 has pushed to 5 week highs as the oil price and improved risk appetite has helped to drive gains. However, Wall Street is a leader and is up against key resistance, so FTSE 100 may require a breakout on Wall Street to prevent another mean reversion move within the three month range. The RSI around 60 has historically been constrictive to gains too.

Economc Calendar


Wednesday 8th June

  • Japan – GDP (final)
  • China – Trade Balance (Imports/Exports)
  • UK – Industrial Production
  • US – JOLTS job openings
  • US – Crude Oil Inventories
  • New Zealand – RBNZ monetary policy

Thursday 9th June

  • China – Inflation (CPI & PPI)
  • US – Weekly Jobless Claims

Friday 10th June

  • US – Michigan Sentiment (prelim)



Sunday 12th June

  • China – Industrial Production / Retail Sales / Fixed Asset Investment

Tuesday 14th June

  • UK – CPI
  • US – Retail Sales

Wednesday 15th June

  • UK – Unemployment and Average Weekly Earnings
  • US – PPI
  • US – Industrial Production & Capacity Utilization
  • US – Crude Oil Inventories
  • US – FOMC monetary policy

Thursday 16th June

  • Australia – Unemployment
  • Japan – BoJ monetary policy
  • Switzerland – SNB monetary policy
  • UK – Retail Sales
  • UK – BoE monetary policy
  • US – CPI
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims
  • US – NAHB Housing Market Index

Friday 17th June

  • Canada – Inflation
  • US – Building Permits & Housing Starts


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