The dollar bulls have taken another leap forward as Friday’s moves higher on Treasury yields have been sustained into the new trading week. Tax reform/fiscal expansion in the US would likely prove to be a game changer on the outlook for inflation and the dollar. The prospects of this happening took a step forward on Friday as the Senate passed the budget. This by no means guarantees that the Republicans will be able to get through their flagship piece of legislation, but the prospects are better than they were. The market impact was for Treasury yields to jump (on the increased inflation expectations) with the US 2 year showing further nine year highs and the 10 year back towards a test of 2.40% again, which is a medium term barrier. The US dollar has been boosted by strong yields, whilst Wall Street was also gives a further shot in the arm for moves into ever new high ground. The question is whether this move can be sustained into the new week? Against the Japanese Yen, certainly it seems to be the case, following the Japanese elections at the weekend. Shinzo Abe has won a snap election to continue his five year term as Prime Minister and gives him a mandate to extend Abenomics. This means a continuation of yen weakening policies and the reaction was for the yen to come under pressure this morning. However, does Abe’s disappointing approval rating in opinion polls cloud this strategy going forward? The initial sharp weakness on the yen has already been pared to an extent.
Wall Street closed sharply higher on Friday with the S&P 500 +0.5% at 2575, whilst Asian markets have taken this with Abe’s victory to push markets stronger today (Nikkei +1.1%). However, European markets are only mixed to slightly positive in early moves as the Catalonian independence bid seemingly rumbles on. In forex, the dollar is stronger against the euro and yen, whilst sterling remains positive after the relatively positive noises over Brexit coming from the EU summit on Friday. In commodities, the higher Treasury yields are pulling gold lower again, with oil opening slightly higher.
It is a quiet day for economic data today, with Eurozone Consumer Confidence at 1500BST. The market is expecting -1.1 which would be the slightest improvement from -1.2 last month.
Chart of the Day – USD/CAD
Having spent the past two weeks consolidating the September rally, the dollar bulls have taken another step forward. Friday’s strong bull candle broke out to close above 1.2600. This is not only a seven week high, but also breaks a downtrend dating back to May and takes the market above the 89 day moving average for the first time since June. If the bulls can confirm this breakout above 1.2600 then the upside for a continued recovery will be open. This could be done on a couple of ways, with a second close (preferably with an entire trading session) above 1.2600 and/or a close above the resistance at 1.2660. This would then open the key August high at 1.2780. The hourly chart shows strong configuration on momentum and corrections will now be seen as a chance to buy. The reaction to today’s early unwind will be interesting. Support below 1.2600 comes in between 1.2520/1.2590. A failure below support at 1.2445 would re-open the bear control once more.
For almost four weeks the market has been trading in a relatively tight range of around 210 pips, searching for the next decisive direction. However, there is still an expectation from the momentum indicators that this is building towards a test of the key support at $1.1660. The RSI continues to struggle whenever it gets towards 50, whilst the MACD lines are settled below neutral. This reflects a negative bias to medium term momentum with rallies likely to be seen as a chance to sell. Friday’s strong bear candle has cancelled out the previous positive candle and once more puts the euro bulls under pressure today. However there is still an uncertainty, and the initial support at $1.1735 from last week’s low remains in place. The hourly chart shows near term momentum simply oscillating and the market looks to be once more trying to use the support for a bounce again. There is overhead resistance at $1.1790 and the neckline at $1.1820 remains a basis of resistance for another chance to sell.
Despite a strengthening dollar that was seen across the majors on Friday, sterling found a basis of support and the Cable bulls are fighting hard. With the rebound, a low has been left at $1.3085 above the key October low at $1.3025, whilst also forming a near term bull hammer candlestick pattern. This has helped to embolden the bulls today and the rebound is holding form. A move back above Thursday’s high of $1.3228 would re-open the $1.3335 rally high. The momentum indicators have ticked higher to reflect Friday’s rebound, but there is an uncertain look to them now. The hourly chart shows the situation more clearly, with the hourly RSI consistently failing around 60 in recent days, meaning that today’s move is at a near term crossroads. If the hourly RSI can sustain a push into the mid to high-60s then the outlook will be more positive again. The resistance at $1.3228 is key near term. Support at $1.3160 initially.
The outlook has taken a dramatic improvement in the past few sessions as intraday volatility has spiked higher and the pair has broken out above the resistance at 113.43 resistance. This has been driven by not only a stronger dollar but also a weaker yen. Friday’s solid strong bull candle closed above 113.43 and the early gap higher today (on the yen weakening outcome from the Japanese election) has continued the move higher. However, there is a gap open at 113.55 and it is interesting to see the initial gains already being pared back from 114.10. The gap is supportive at 113.55 and the upside break really has opened the key medium term resistance at 114.50. The momentum indicators are strongly configured for further gains, with the MACD lines crossing higher above neutral and the RSI pushing into the mid-60s. The hourly chart reflects the breakout and strong momentum outlook that suggests corrections will be seen as a chance to buy. There is a band of support 113.10/113.43 for any unwind to build again.
The market has continued to track lower this morning as Friday’s corrective candle keeps the sellers in control. There has been a marked deterioration since the failure to break through the long term pivot band $1300/$1310 and the early breach of near term support at $1276 this morning once more re-opens a test of the October low at $1260. Turning back from $1290 on Friday adds to the resistance of a growing near term pivot at $1290 and also makes a lower high now below $1306. There is also a minor intraday resistance around $1285. Momentum indicators are again now gradually tracking lower with a bear bias as intraday rallies will continue to be seen as a chance to sell.
The outlook is looking rather uncertain again as an opening gap higher today has turned around what looked to be a threatening corrective move and puts pressure back on the $52.35 resistance once more. However, can the bulls hang on this time as previous moves towards these levels in the past week have all floundered? The early push higher has left a gap at $51.75 which remains unfilled so far and will be an issue if near term exhaustive signals build up once more. The bulls fought into the close on Friday to prevent a closing breach of the pivot at $51.20 which would have opened $49.10 once move. There is a mild positive bias in the market with the medium term outlook on indicators in positive configuration, however, there is a slight plateauing on the Stochastics and especially MACD lines which could suggest that there is still an uncertainty in the market. Despite this though there still seems to be an appetite to buy in the market. Watch for the gap being filled (bullish) and a higher low above $51.20. Friday’s low at $50.70 is now key.
Dow Jones Industrial Average
The run into new high ground simply shows no sign of slowing down. Yet another strong bull candle with an opening upside gap. The momentum in the run higher remains incredibly strong with the RSI pushing into the high 80s, the MACD lines accelerating higher and the Stochastics also very strong. With a run like this it is almost meaningless putting upper limits on, however the 2.0 SD Bollinger Bands remain an interesting gauge as the market hugs the upper band at 23,331, rising at around 90 ticks per day, whilst the Average True Range is 89 ticks. There is minor support at 23,173 from Wednesday’s high.