Risk sentiment has gone into reverse as potential for a US government shutdown looms overhead and the impetus from tax reform is waning. Since tax reform was passed in the Senate, aside from a brief kick to the upside, the US dollar has largely been in consolidation mode. Tax reform is not done yet, with House and Senate Republicans still needing to reconcile different tax reform proposals. It is almost as though the dollar bulls remain shackled and are in wait and see mode. This comes as there seems to be a slip into risk-off mode on global markets. Profit-taking seems to have taken over in equities, perhaps with a sense of “buy on rumour, sell on fact” as the S&P 500 slips for a third consecutive session. This retrenchment in risk appetite is reflected in longer dated US Treasuries being bought, which is pulling the 10 year yield decisively under 2.40% once more and the US yield curve to flatten further. The 2s/10s spread has tightened even further to 53 basis points now. The dollar and risk appetite will continue to struggle whilst the yield curve continues to flatten. The threat of a US Government shutdown is also weighing on sentiment, although an agreement is still likely before shutdown would occur on Friday.
Wall Street closed lower yesterday as the momentum from tax reform seems to have dissipated (S&P 500 -0.4% at 2630). Asian markets were negative across the board with the Nikkei -2.0%, whilst European markets are opening strongly lower today. In forex, there is a real sense of reduced risk appetite as the Japanese yen and Swiss franc outperform. Sterling remains under pressure as political pressure on UK Prime Minister May continues, whilst the Aussie is the big underperformer though as Australian GDP grew by +0.6% in Q3 however came in slightly weaker than estimates (+0.7% exp). In commodities, the reduced risk appetite has helped gold claw back some losses, whilst oil is also being pressured.
Traders will be watching out for the ADP Employment change at 1315GMT (191,000 exp) as some take it as an indication of perhaps how Friday’s payrolls will go. The Bank of Canada monetary policy is at 1500GMT and is expected to show the bank holding rates at 1.00% again, for a third consecutive month after September’s 25 basis point hike. The EIA oil inventories are at 1530GMT and are expected to show crude stocks in drawdown by -3.5m barrels, (-3.4m last week), whilst distillates inventories are expected to build again by +1.5m barrels (+2.8m last week) and gasoline stocks building by +0.8m barrels (+3.6m last week).
Chart of the Day – USD/CHF
Dollar Swiss has been corrective over the past few weeks, however a dollar rally has broken the downtrend channel early this week and the outlook is threatening to turn positive once more. The latest key lower reaction high within the recent downtrend comes in at 0.9980, however yesterday’s positive candle was the highest close in two weeks and the recovery is gaining traction. The daily momentum indicators are improving with the Stochastics advancing in their recovery and the RSI rising back above 50. A move back above the 23.6% Fibonacci retracement of the 0.9419/1.0037 rally at 0.9892 would be a signal that the bulls are back in control for at least a run to test 0.9950 resistance. The early move today has been slightly lower and it will be interesting to see if the bulls see this as another chance to buy. The hourly chart shows positive momentum set up with the hourly RSI holding above 50 and the MACD lines turning up above neutral. The support to watch is yesterday’s low at 0.9835 initially but any higher low above 0.9820 would be a positive now and would mean that near term corrections should be seen as a chance to buy.
The dollar has made some ground against the euro in recent days, in a move that has now broken the four week uptrend. The move has breached the intraday support at $1.1807 but the next stage of this is to confirm the break on a closing basis. With $1.1800 being the low yesterday the sellers would be looking to close below $1.1800. Even though we have seen an intraday bounce early today, this is something that could be building now with the momentum indicators beginning to show signs of deterioration. The Stochastics are at a three week low, whilst the MACD lines are threatening to ross lower and if the RSI falls below 50 this would also be a negative near term signal. For now though the market broadly remains in its consolidation and trades above its rather benign set of moving averages. The hourly chart shows a slight negative bias on RSI and MACD momentum and another failure under initial resistance at $1.1880 being a continuation of recent lower highs under first $1.1940 and then $1.1960 key resistance.
The near term bias is now certainly corrective with a run of negative candles and lower highs building. Momentum indicators are increasingly looking to unwind, with the RSI dropping back below 60 (having been above 70) and the Stochastics crossing back lower. A retreat to the medium term key breakout support at $1.3335 looks possible near term. This view is backed on the hourly chart with rallies failing at lower levels now and previously positive moving averages turning lower, whilst momentum indicators on RSI and MACD are taking on corrective configuration. Yesterday’s rebound high at $1.3460 is initial resistance to watch as a lower high under $1.3540 builds. The caveat is that this is a politically driven correction near term and any positive news surrounding Brexit and the Northern Ireland border is likely to drive sterling higher. In the meantime though the market looks corrective back towards $1.3335.
The degree of support that was building yesterday has been broken overnight as a decreasing risk appetite has pulled the yen stronger again. This move has seen Dollar/Yen pull below the initial support at 112.35 and once more question the ability of the bulls to break through the resistance of the pivot around 113.00. The momentum indicators are showing increasingly concerning signs of bull failure too, with the RSI losing impetus around 50 and the MACD lines with a questionable cross higher. The hourly chart shows the market bouncing at 112.05 but the configuration on the hourly momentum is now corrective and suggests that rallies are a chance to sell near term. A failure of a recovery around 112.40 would heap the pressure back on the downside once more. The initial key resistance is at 111.40 from Friday’s spike low, with a move above 112.85 needed to really suggest the bulls are regaining the ascendancy.
Can the support hold? A strong bear candle posted yesterday continued the move lower to test the key October low at $1260. The first test has held, but the market is beginning to look increasingly corrective now. The MACD lines have crossed lower back below neutral and the Stochastics are into negative territory. The market may have bounced a few bucks from $1260 but the weight overhead is growing now. Old support within the previous drift uptrend will become new resistance and $1270/$1275 is becoming a near term selling range now. This is reflected on the hourly chat with the momentum indicators negatively configured to suggest rallies are a chance to sell. A breach of $1260 is a key break and opens $1251 initially. Above the spike high at $1289.50 to sustainably improve the outlook.
The bulls fought back into the close yesterday but the uptrend of the past six weeks is certainly under pressure now having breached on an intraday basis, whilst the pressure continues today. The concern for the continuation of the near term bullish outlook is growing as daily momentum indicators are also testing their multi-month uptrends. The bulls will point to the rising 21 day moving average which has held as support once more (currently c. $57.15), leaving price support at $57.10 above the key $56.75 late November low, however the 21 day ma is also now losing its impetus. The hourly chart shows a near term rebound, but a batch of overhead supply near term around $58.00/$58.20 needs to be overcome for the momentum to be regained to the upside once more.
Dow Jones Industrial Average
Is the Dow shaping up for a correction? The candlesticks in the early part of the week that has followed the successful passing of tax reform through the Senate has been a disappointment for the bulls. An initial upside gap higher on Monday that was subsequently closed with the price closing at the low of the day on Monday was a bearish near term candle. Now with yesterday’s candle bearish below the open and the momentum in this bull run seems to have lost impetus. Batting against the longer term bull trend has not proved to be especially easy but the prospects of a near term correction are growing. The Stochastics have crossed lower, although have not confirmed a sell signal quite yet. Furthermore the RSI is rolling over and the MACD lines are losing their momentum too. On the hourly chart the momentum is also showing signs of bearish divergence, with a failure swing on the hourly RSI and MACD lines, whilst the Stochastics are also deteriorating. A consistent move below the 21 hour moving average which has been supportive for two weeks now is also be suggestive that a retreat back towards a two week uptrend c.23,840 could easily be seen now. There is the 24,000 psychological support with 23,872 further support.