Volatility yet to settle with dollar strength ebbing slightly

Market Overview

The remarkable victory for Donald Trump in the US Presidential election resulted in an incredibly wild ride on financial markets that saw sharp swings first one way then the other. Initial pressure on risk appetite and the dollar turned around into the close, with an incredible rally in sentiment. The driver seems to have been the bond markets which took Trump’s acceptance speech as being a driver of both growth and inflation. This pulled a huge swing higher on the US 10 year Treasury yield and a significant steepening of the yield curve. Just 24 hours after Trump was announced as the President-elect, volatility is still yet to settle down. Will this initial assessment of reaction continue? Today there still seems to be an appetite for safe haven plays as the yen and gold have recovered some of the losses into the close. Furthermore, some of the dollar strength is just ebbing away again this morning and it will be interesting to see where the greenback ends up as the volatility subsides.

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Huge intraday rallies on equities (similar to what we saw on Brexit) resulted in Wall Street closing over a percent higher and now Asian markets playing catch up with a 6.7% gain on the Nikkei. These gains look to be consolidating today with the European markets mildly higher. In forex markets, there has been an unwinding on the positive dollar moves, with the euro, sterling and Aussie dollar all stronger. The one main exception is the Kiwi which is the main underperformer today after the Reserve Bank of New Zealand cut rates yesterday by 25bps. Gold and silver have started the day on the front foot with some decent early gains as the dollar has corrected, whilst oil also continues to claw back a recovery.

Traders have got little to concern them on the economic calendar but will be on the lookout for Weekly Jobless Claims at 1330GMT which are expected to stay around flat at 267,000. The FOMC’s James Bullard has the dubious honour of being the first Fed member to comment on monetary policy post the Trump victory. Bullard speaks at 1415GMT has fluctuated on stance but is expected to be erring hawkish.

 

Chart of the Day – AUD/USD

The Aussie came under pressure yesterday as risk appetite was hit on the Trump victory whilst as the dollar strength gathered pace into the afternoon the pressure ramped up again. However, all is not lost for the bulls and it was very interesting to see that the spike low found support just above the primary uptrend that has been in place since January. This intraday low at $0.7575 seems to be playing out as yet another higher low. On Brexit day in June (as risk appetite again was initially impacted) the spike low marked a key low that to this day remains intact and since then a series of higher lows has been posted along the uptrend. Momentum indicators retain a positive configuration with the RSI consistently finding a low in the mid-40s prior to the next push higher. The volatility is still to settle down on the hourly chart, however the bulls will be aware that this drop could be another chance to buy. If this positive outlook is to continue then a move above $0.7700 initial resistance would then re-open the key high at $0.7777. The bulls are already building from a higher low on the hourly chart at $0.7615. The outlook would be under pressure if yesterday’s spike low at $0.7575 were to be breached, whilst a break below $0.7555 is negative.

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EUR/USD

Traders will be looking at the wild swings on EUR/USD yesterday and still be wondering what to make of it all. With almost 400 pips of daily range I think very few people would have thought that the pair would have closed sharply down by over a 100 pips on a Trump victory. It is very difficult to take much from the candle other than the closing direction which was clearly negative for EUR/USD as the dollar strengthened into the close. Despite this though I do not think that the volatility is done yet, with an early rebound today. Ultimately, the market is decisively back below the $1.1050/$1.1100 longer term pivot range and is trading under all the moving averages. The Stochastics are in correction mode and the MACD lines are rolling over again under neutral. This all suggests that there is still a bearish bias and if these conditions continue as the volatility subsides then the strategy will be to sell into strength again. The hourly chart shows a resistance band $1.0950/$1.0985 will be watched today which is overhead supply. Support is initially around $1.0900 with $1.0850 still key.

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GBP/USD

Cable was just about the only major pair yesterday not to have a huge directional swing on the day. A relatively calm market which has held up well above the support of the old breakout at $1.2330. The candle posted may have lost over 100 pips from the high but closed higher on the day and the support has continued to hold overnight. The bulls will now look to build from this band of support $1.2330/$1.2350 as the general market volatility begins to settle, and with the momentum indicators remaining in recovery mode the confidence will continue to grow. The hourly chart shows sharp intraday moves are now being contained in a band of just over 200 pips between $1.2350/$1.2557 and the hourly indicators are increasingly neutral. A breach of $1.2350 would complete a small top pattern (confirmed below $1.2330) but we await to see if the dollar strength that is impacting across other pairs will be the driving force that pulls Cable lower. For now, we retain a wait and see stance.

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USD/JPY

On Brexit day there was a larger intraday range (770 pips versus 440 pips from yesterday) but the intraday resurgence that we saw yesterday was something incredible. Is there any profound signal to be taken from this huge candle that is in effect a “Hanging Man” candle (which is arguably actually a negative candle)? Probably the only thing of any note, is that the market still seems to be dollar positive. However, this is not a candle to get carried away with, the wild swing just shows that there is a lack of certainty and that could still play out with further volatility. The early move today is lower again. However the market did manage to push through the resistance at 105.50 and as the market settles down, this could be an important development. There is a sense that the dollar will come out stronger and that will mean watching the old support levels on the hurly chart for potential key lows. The hourly chart shows an old support range 104.30/104.65 to watch, whilst the overnight low has been 104.95. A move back above resistance at 105.89 re-opens the way towards 107.47.

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Gold

The candle on gold is almost the mirror opposite to that of Dollar/Yen with almost an entire retracement of the initial run higher. Arguably this is an “inverted hammer” candle which is actually a positive candle at the end of a mini correction. Today’s early gains on gold also suggest that the bulls may not be done with this one quite yet. It will be interesting to see the reaction once more if the bulls can drag the price back higher towards the resistance band $1300/$1310 again. This is an area of overhead supply which will be key to the outlook for the bulls. The volatility is still yet to settle down, however on a technical perspective it is interesting that the market has held on to its uptrend that has been building over the past five weeks. This will be a key market to watch as it is impacted by both dollar strength and risk appetite, which at the moment are both uncertain in the recovery late yesterday. Gold could become a barometer once again for the market’s views on Trump. Yesterday’s low at $1269.20 is now key. The hourly chart shows there is a minor pivot around $1279.

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WTI Oil

Traders will still be trying to get their heads around the implications of a Trump victory, and the EIA oil inventories report will not have helped the uncertainty, with a mix of mildly higher than expected crude oil stocks build, however drawdowns on distillates and gasoline temper the impact of the report. The broad range of 5% from low to high on the day closed with a small bullish candle body which actually means a third consecutive higher close on oil as the bulls look to rebuild shattered confidence. Although the volatility of yesterday has still yet to fully settle, the market is looking more positive again. The resistance at $45.90 was tested yesterday and will be seen as a key level in the recovery and signal a turnaround of sentiment. Hourly momentum has taken on a far more of a neutral outlook compared to the bearish configuration of the late October into early November sell-off. As long as the market can hold up above the old pivot at $44.30 the bulls can continue to grow in confidence again. The support of the September low at $42.55 is key. Above $45.90 opens $46.50.

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