The factors that have helped to support the dollar are still playing out and after a brief blip of confidence from the US/Canada agreement, risk aversion is taking hold once more. Fears over the global trade situation (namely between the US and China) are still no closer to being resolved despite the US coming to an agreement with Canada over NAFTA renegotiation. US Treasury Secretary Mnuchin says that the US is in no hurry to settle the trade war. Furthermore, concerns over how the Italian budget deficit will impact on Italian debt and credit ratings continue to drag on risk appetite in Europe. Subsequently, we see a risk averse move across financial markets. The 10 year Italian BTP has now risen by 50 basis points in the past three sessions. Subsequently, yield spreads between German and Italian 10 years at 5 year highs and the euro is under further pressure. This is playing into the renewed dollar strength (the dollar continues to play as a safe haven), whilst the yen is an outperformer. Gold is also being supported and there is a drag on European equities today. Sterling remains in focus with the UK Conservative Party conference and Brexit still a potential to tear through the factions of the governing party.
Wall Street closed decisively higher yesterday with the S&P 500 +0.4% at 2925, but the futures are unwinding much of this today and a retracement of some degree looks likely. Asian markets have been mixed overnight (Nikkei -0.1%) with European markets opening lower. In forex we see risk aversion with the yen and US dollar the chief performers, whilst the euro, and the Aussie are underperforming. In commodities, the risk aversion is helping to support gold despite the dollar strength whilst oil is also remaining strong.
It is fairly quiet on the economic calendar today with the UK Construction PMI at 0930BST which is forecast to slip a touch to 52.8 (52.9 last). There are a couple of Fed speakers to get interested in too, with Fed chair Jerome Powell speaking at 1745BST on unemployment and inflation. Permanent FOMC voter Randy Quarles (leans hawkish) is also speaking at 1500BST.
Chart of the Day – USD/CAD
A huge couple of bear candles have come as the Canadian dollar has driven significant strength from better GDP growth and subsequently the NAFTA renegotiations. The second big negative candle has also now broken the 1.2885 key support and taken USD/CAD to four month lows. It will be interesting to see how the market now deals with the decisive breakdown. For the past few months the US dollar has been losing ground against the Loonie, but posting lower highs and lower lows comes with a deterioration in the medium term momentum configuration as the RSI is at a five month low and both MACD and Stochastics post renewed bearish signals. The near term position is stretched on the hourly chart which could see a degree of the move now unwind. However rallies are now seen as a chance to sell and the overhead supply at 1.2885 is now a key area of resistance. Yesterday’s low is initially supportive at 1.2780 but there is a form of a downtrend channel support which comes in around 1.2750 which could be limiting to the near term move lower, whilst the May lows are supportive at 1.2725.
The market continued to fall away yesterday as another negative candle completed to cut over 30 pips off the price and move ever closer to a test of the key support just above $1.1500. This move lower is now therefore approaching a crucial moment as a closing break below $1.1500 would be a very negative development in the medium term outlook. There is a negative bias to the near term moves but whilst $1.1500 remains intact the fact that the medium term outlook is rather neutral still (moving averages mostly flat and a momentum indicators which are corrective but not bearish). However, this would all change on a decisive break below $1.1500, which would open a retreat to the key August low at $1.1300. The hourly chart shows the disappointment of intraday rallies in the past two sessions that have failed at $1.1620/30 under the $1.1650 pivot. The early move lower today seems to be continuing this run of bearish drift.
The sterling bulls could not hang on to the recovery gains yesterday that would have put a far more positive spin on the near term outlook. Instead, they lost their way into the close and the market is again back under the pivot around $1.3045/$1.3055. This gives the outlook a negative bias, but this would turn corrective again if there were to be a $1.29 handle on the price. The momentum indicators have taken on a more negative positioning, with the MACD lines crossing lower and Stochastics swinging lower towards 20. Yesterday’s failure at $1.3110 seems set to also continue a run of lower highs, under $1.3215 and the key $1.3297. The Cable bulls will need to fight hard to prevent a move back towards $1.2800 at this rate.
Another solid bull candle continues the run higher on Dollar/Yen. It seems at the moment that resistance is of little consequence as the market has pushed through the December high of 113.75 to open the key November high at 114.70. Momentum indicators are strongly positive with the RSI climbing into the low 70s whilst MACD and Stochastics remain rock solid strong. The one main caveat is that the RSI tends to struggle around 74 during the bull runs of May and July and this could begin to limit the move. However, the renewed uptrend comes in at 112.95 today as support, whilst the recent breakouts provide underlying demand at 113.15. The first higher reaction low is not until Thursday’s low around 112.50. The hourly chart shows a brief pause for thought today with a minor band of support 113.30/113.65 from Friday’s session. Intraday corrections remain a chance to buy for now, but the posting of a negative daily candle could begin to tempt the profit-takers, so caution with blindly chasing longs at these levels.
The dollar has been making ground again in recent sessions, whilst yesterday’s session was also packed with positive risk sentiment. These are factors that should drive the price of gold lower, but we come into this session still trading above last week’s low of $1180 and the bulls are hanging in there. It is interesting to see that the old higher low at $1183 from late August has still been acting as a basis of support and the failure to form a decisive break shows a lack of conviction in the sell-off. The momentum indicators are part of this too, with the RSI now ticking back higher and well above 40 (seemingly a level where the buyers are tempted still), whilst there has been no traction in the MACD cross and the Stochastics have actually pulled back higher again. The hourly chart shows a marginal improvement looking to build too, on momentum indicators with the hourly RSI especially keen to improve. There is a near term band of resistance now $1193/$1195 to watch today, a close above would further improve the position. Above $1200 would be an important milestone in the recovery and then a push above $1204 is needed to confirm a turnaround in sentiment. A move below $1184 would scupper the prospects of improvement.
An acceleration higher with an impressively strong bull candle has pulled the market through resistance at $75.25 to bring the market to its highest level since November 2014. This is an increasingly impressive run higher that shows little sign of stopping, with momentum indicators extremely strong. This suggests that intraday weakness remains a chance to buy. This is a strong trending move that should be backed, but for how much longer? How the bulls respond to the break above $75.25 will be interesting. On Brent Crude, its equivalent breakout has been a basis of support. Initial reaction today also seems set to have the bulls still in control. After the big spike higher yesterday, should the market close decisively back below $75.25 there is little real support until $71.65/$72.75 and profit-taking would be a risk. However, the breakout has opened $80 as a next key area, with the next resistance from almost four years ago comes in around $77.
Dow Jones Industrial Average
Once again, Wall Street smashes higher on positive risk appetite sessions. The Dow gapped higher at the open yesterday and held the move into the close. The traded low at 26,596 is initially supportive and although there is a gap open still at 26,515 the bulls are again on a run and should be set to test the all-time high of 26,769 in the coming sessions. It will though be interesting to see how the market treats this gap now, as there was a retest of yesterday’s open, which held. An initial look lower on the futures could set to test the gap and if the gap can be bullishly filled then the market will look back towards the highs once more. The strength of the outlook still suggests that corrections continue to be seen as a chance to buy though. A six week uptrend support comes in at 26,380 today. The strength of the uptrend channel is matched by the strength in momentum indicators, with the renewed strength in the Stochastics (crossing higher), and RSI (picking up again at 60). A closing breakout above 26,769 would also mean that 26,350 is also another higher low.
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