Markets look to retrace dollar losses but will it last?

Market Overview

Markets are still coming to terms with Friday’s strong Non-farm Payrolls report and what it could mean for the prospects of a rate hike from the Federal Reserve in the December meeting. There have been some sizeable moves on dollar related markets, with dollar strength across forex markets and  also US Treasury yields sharply higher. As we begin the new week there is a slight reaction as markets have looked to retrace some of their losses against the US dollar, but the question is whether this will last or whether it is a dead cat bounce.

There have been and continue to be some diverging moves across equity markets as the implications of a Fed hike can have varied impact. The S&P initial reaction lower was clawed back later into the session (which is helping European markets higher today). The DAX has been strong on the back of a weaker euro (that negative correlation trade seems to be back on the table once more), whilst FTSE is mixed (no surprise there). However there is also a disappointing set of China trade numbers to consider from over the weekend. This has seen markets such as the Australian stocks suffer (close ties of commodities with China trade).

In forex markets the major currencies are trying to claw back some of Friday’s sharp losses against the dollar. It will be interesting to see if this is anything more than a dead cat bounce. Often in the wake of a significant move there will be an element of retracement amid profit –taking. It is interesting to see the Aussie underperforming in the wake of the China data. The safe haven yen is also underperforming.

There is little by way of economic data for traders to be worked up by today, so the day will continue to be reaction to the payrolls report.

Chart of the Day – USD/CAD

Dollar/Loonie has broken higher again on the back of the Non-farm Payrolls report (and that is not the only time I will be saying that in today’s Morning Report). The move above the late October resistance at 1.3280 is a five week high and once more opens the resistance at 1.3455. The bulls will be buoyed by the fact that the momentum indicators are strong but also show further upside potential, with the RSI around 50 and Stochastics pulling higher too. This would suggest that little near term intraday dips in the price should be seen as a chance to buy now. The hourly chart shows that the price is just consolidating a touch and could see that dip back today as some of the overbought momentum unwinds. There is good support that starts to come in around the breakout at 1.3280 with further support back at 1.3240 and more strongly at 1.3190. Once the bulls settle down, I would expect the move higher to resume with a retest of Friday’s high at 1.3315 before further gains are seen.

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In the wake of the strong Non-farm Payrolls report the market has clearly taken a view that the Fed will be raising interest rates in December. The euro has been sold off and has now broken below the $1.0810 key floor of support. This has taken the euro to its lowest level since April and now opens the critical lows from the original sell-off following the ECB’s introduction of QE. The near term technical outlook is negative with a series of lower highs the bear candles which suggest that intraday rallies are seen as a chance to sell. Momentum indicators are also bearishly configured and seeing as the euro is breaking key supports and is trending lower the RSI and stochastics could remain bearish for a while. The hourly chart shows initial resistance is in at $1.0830 (although $1.0810 will be the old support turned new resistance too). There could be a dead cat bounce today but look to use that as an opportunity to sell for a retest of Friday’s low at $1.0706 and then $1.0660. Main resistance near term is at $1.0895.

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After two strongly bearish candles, is this the downside break of the range finally being seen? It certainly looks to be a decisive move. With a close below $1.5105 on Friday the sellers certainly look in control. There has been an initial bounce off Friday’s Payrolls induced low at $1.5023 and it will be very interesting to see the reaction today. If the bulls cannot quickly re-establish themselves then the move ill simply be seen as a dead cat bounce and get sold into. The old breakdown support at $1.5105 now becomes the new resistance initially, with further resistance up to $1.5150 which was is the overhead support left from just prior to the Payrolls report. The hourly momentum indicators are already unwinding with this minor drift higher in the Asian session but unless the momentum builds quickly, I would see this as a chance to sell today. Below $1.5023 opens $1.4850.

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Across the forex major we see the market positioning for a December rate hike and Dollar/Yen is a classic example of this. The break out above 121.70 has been decisive and could now result in a new trend formation. An upside projection of what could be deemed to be a flag/wedge breakout gives an initial target of 123.85, but perhaps on a bull case scenario a target of 125.20 which is again towards a retest of the big 2015 highs at 125.85. The hourly chart shows an consolidation during the Asian session which may lead to a drift lower amid some minor profit-taking, however this should be seen as a chance to buy. The initial support comes in at 121.90/122.00 now and is a great near to medium term buy area now.

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The gold bugs have had a terrible time of it recently and this has not been helped by the Payrolls report on Friday. With 8 big bear candles in a row the downside pressure on the price has been significant. Intraday rallies continue to be seen as a chance to sell and there is little reason to think that this will end today. The traditional (well at least in the past 8 sessions) minor bounce during the Asian session has happened once more and it is again likely to be sold into. Momentum indicators are strongly bearish and a retest of Friday’s low at $1084.90 is likely to be seen. The gold price is now within touching distance of a new multi-year low dating back to February 2010. The hourly intraday chart shows how negative momentum is with the hourly RSI consistently failing around 40/50 and MACD lines consistently negative. Therefore this rally toward the old support which is now resistance in the band $1098/1104 should be seen as a chance to sell. Further resistance is in at $1111.

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Three bearish candles in a row has put the pressure back on to the downside once more. Momentum indicators such as the RSI and Stochastics have turned lower again reflecting the shift and this could now once more mean a retest of the big support of the range lows in the support band $42.60/$43.20.  There has been a tick higher in price as shown on the hourly chart and it will be interesting to see if the trend of lower highs that is forming continues now. The latest reaction high on Friday prior to Payrolls was $45.65 which is building to the strength of the near term resistance around $45.50. As the oversold momentum unwinds on the hourly chart the sellers could return once more with Friday’s low at $43.85 the initial support.

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