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Risk appetite moves into reverse as Aussie dollar slides


Market Overview

Donald Trump’s State of the Union address to Congress has seemingly done little to either inspire or spook markets. Aside from another meeting with Kim Jong Un of North Korea at the end of February, much of the focus came on the prospect of government spending on infrastructure (i.e. his border wall). However, given the split party lines across a highly partisan Congress, it will be difficult for Trump to get anything substantial passed that could be a game changer. On financial markets and largely away from politics, there has been a rebound on the US dollar in recent sessions, something that continues today. However, given the lack of traction on Treasury yields, it does seem as though the US economy and the dollar is the best of a bad bunch at the moment. This has been highlighted by the weakness on the Australian dollar which has been the big mover of the early part of today’s session. Although the Reserve Bank of Australia seeming helped to support the Aussie during yesterday’s session, by not being as cautious as the market had feared, RBA Governor Lowe has clarified that the option of a rate cut is very much on the table. This was a shift from Lowe’s previous communication which had threatened the next move to be higher. It took markets by surprise and subsequently the Aussie has been hit by over -1% against the US dollar. The Kiwi has also been dragged back by this too. It seems that risk appetite coming into this session is slipping a shade lower as the yen has found some support and equities are looking cautious.

US Congress US flag

Wall Street closed higher once more with the S&P 500 closing +0.5% higher at 2737, whilst US futures are a couple of ticks lower in early moves. Many of the Asian markets are shut throughout this week for Lunar New Year but the Nikkei is supported by +0.1% today. In Europe, there is a cautious look to equities, with the FTSE futures and DAX futures both a few ticks lower. In forex, there is a big move lower on the commodity currencies, especially on the Aussie being -1.4% whilst the Kiwi and Canadian dollar are also around half a percent lower. The euro has been slipping back consistently in recent sessions and is again ticking lower, whilst the yen is benefitting from a negative slant to the “glass half empty” look to the early session moves. In commodities, the dollar strength is a mild drag on gold, whilst silver is being hit on the reduced risk appetite. Oil is a touch lower too.

There is a limited economic calendar once more with the US data with the US Retail Sales pencilled in for 1330GMT on Reuters (although this has meant very little in recent days) with an expectation that US Retail Sales ex-autos are expected to grow by +0.1% in the month of December (+0.2% in November). The US Trade Balance for November does appear to have greater certainty of being announced, at 1330GMT and is expected to improve slightly to a deficit of -$54.0bn (from a deficit of -$55.5bn in October). The EIA Oil Inventories are at 1530GMT and are expected to show crude inventories building by +1.5m barrels (+0.9m last week), with the distillates in drawdown by -2.3m barrels (-1.1m barrels last week) and gasoline stocks growing by +1.7m (-2.2m last week). Late into the evening it is also worth keeping an eye out for FOMC’s Randall Quarles (permanent voter, leans hawkish) who is speaking at 2300GMT, whilst Fed chair Jerome Powell speaks at 0000GMT.

 

Chart of the Day – EUR/CAD

We focused on the euro yesterday making ground against the safe haven yen, but it is a different story crossed with the Canadian dollar. There has been a decisive negative sentiment through EUR/CAD in the past month that continues to suggest that rallies are a chance to sell. The RSI has continually failed on rebounds between 45/50 in this bear phase, whilst Stochastics remain strongly negatively configured and the MACD lines are falling below neutral. What we have seen in the past few days is a breach of support at 1.5040 taking the market to a nine week low but also implies a downside projection of 1.4860. Interestingly the market has paid good attention to the Fibonacci retracements of 1.4760/1.5645, with the 76.4% Fib at 1.4970 acting as a basis of support. The negative outlook on momentum indicators reflects this outlook, and means that there is a band of resistance to act as a “sell zone” on a technical rally between 1.5040/1.5100 (the latter being the 61.8% Fib level). A move that continues to close below the 76.4% Fib at 1.4970 would imply a full retracement to 1.4760 is likely.

 

EUR/USD

Having once more topped out just above $1.1500 last week the market has embarked upon a run of candles posting a run of lower highs and lower lows as EUR/USD again moves into reverse mode. This has also been characterise by a series of closes towards the lows of the session as the sellers seem to be consistently winning the daily battle. A move below $1.1420 which has been a near term pivot of the past month now adds to the pressure and is already this morning acting as a basis of resistance again As the momentum indicators roll over and post near term corrective signals, there is downside potential now for a retreat back towards $1.1300 again. This is the basis of support over the past few months and a close below initial support at $1.1390 would make this move increasingly likely.

 

GBP/USD

A near term correction within the broad multi-month trading range has kicked in. Losing initial support at $1.3050 this week (which has now become a basis of resistance) has brought Cable back into a band of mid-range support broadly between $1.2800/$1.3000. There are a number of old pivots and breakouts which are present to represent underlying demand to support a correction. The main pivots come in at $1.2920 (which has caught yesterday’s low) and an old breakout at $1.2815. Near term momentum is corrective with the run of bear candles, the Stochastics accelerating lower and MACD bear cross. However, the move will only turn decisively negative within the range on a break of $1.2815. Early today there is a degree of consolidation. Initial resistance is now between $1.3000/$1.3050.

 

USD/JPY

The market is really uncertain at the moment. The resistance of the old support at 110.00 has held the rally back over the past few sessions. Yesterday’s daily range was just 26 pips, less than half of the increasingly small 57 pip Average True Range. To put this in perspective, the market has tightened to the same ATR as in the consolidation days of November (trending moves tend to come with conviction). The consolidation under the 110.00 resistance continues today and this is clearly a level which is troubling the bulls. The momentum indicators looked to be ready to lead a breakout, but even they are ticking uncertainly sideways again now. There is a mild bull bias that is still suggesting an upside break is favoured, and perhaps all that is needed is a close above 110.00. However, for now we wait. Initial support is between 109.40/109.60.

 

Gold

The important test of the support band of the long term pivot between $1300/$1310 is holding. It certainly adds credence to the suggestion that near term corrections remain a buying opportunity for a push above $1326 towards $1366 in the coming weeks. Momentum indicators retain a positive medium to longer term configuration with the RSI consistently above 40/50 whilst MACD lines are above neutral. The near term slip has already looked to form support, even though there is room for further correction back towards the 12 week uptrend (currently at $1290.50). However, there is still a slight corrective near term move that is present on the hourly chart. The hourly RSI is stuck under 60, whilst hourly MACD lines are consistently below neutral. Bulls will be looking for a consistent move above $1316 (a near term pivot which is currently resistance) and a push above $1320 for a test of $1326. Given the importance of the long term pivot band $1300/$1310 which is now supportive, holding support at $130850 is now a positive signal. The bulls just need confirmation to go back in.

 

WTI Oil

An uptrend has continued to act as support over the past six weeks, but there are warning signs on momentum that suggest the bulls are not entirely in control. The past two sessions have held negative candles back towards the trend, and today the market is seriously threatening the trend support (which comes in at $54.00). The concern is that the daily momentum indicators are increasingly now threatening lower, especially the Stochastics which have been drifting lower in the past four week and are now looking for downside traction. The MACD lines have also come together and flattened to threaten a “bear cross”. The hourly chart shows how the past few sessions have traded back repeatedly test the support at $53.30, whilst momentum indicators have become increasingly indicative of a range play. A move below $53.30 would be a one week low and form a small top, something that is threatening, given the deterioration in the hourly momentum too.

 

Dow Jones Industrial Average

Another positive session for Wall Street as the Dow climbed another +0.7% into the close. Solid gains with a solid bull candle as the market now seemingly travels calmly towards the 76.4% Fibonacci retracement at 25,715. It seems as though there is little to prevent the market running higher for now, with the RSI gradually pushing into the high 60s, MACD lines rising above neutral and the Stochastics positive. The next price resistance of any note is the December high at 25,980. Corrections remain a chance to buy with the support between the 61.8% Fib at 24,950 and an old pivot around 25,000 being the first line of support. The hourly chart shows any unwinding move into 40/55 on hourly RSI is a chance to unwind and recharge the batteries for the next move higher.


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.