The recent recovery in risk appetite which saw equity markets pulling higher, Treasury yields bouncing and safer havens correcting seems to be starting to show signs of stalling. The driver seems to be a stronger dollar in the last few days, with the Dollar Index breaking out to its highest level since early March. This was boosted yesterday with a strong read on the US housing data with Housing Starts at their highest level since October 2015. This means that the euro has started to come under pressure again after a period of consolidation whilst sterling has also fallen away. The rally on equity markets which was driven in part by the assumption that the Fed would be pushing back its rate hiking cycle, has now started to find a touch of resistance, with the S&P 500 mildly lower by -0.1%, Asian markets again struggling overnight and European markets similarly cautious around the open today.
In forex markets, once more today there is a theme of mild dollar strength moving into the European session, albeit minimal currently. Gold and silver are consolidating today, whilst there are also marginal gains for oil.
Traders will be watching for the UK unemployment data at 0930BST with the headline rate expected to stay at 5.0% but as ever the UK weekly earnings growth will be the driver of reaction, expected to stay at +2.3% for the year on year ex-bonus data. There is little real US data in the afternoon but the EIA oil inventories at 1530BST will be key for oil volatility today. The API data showed a mild inventory drawdown yesterday and similar is expected with the EIA reading today with -2.0m barrels (after -2.6m barrels last week).
Chart of the Day – NZD/USD
Both Aussie and Kiwi have been under pressure in recent days but the selling pressure on the Kiwi looks to be coming back for a test of a key medium term support. With five consecutive bearish candles the momentum behind the selling pressure has increased again (as the market is now looking to price in a 25 basis points rate cut by the RBNZ). The price retreat is now back in range of a test of the support at $0.6960 which previously held in the wake of the Brexit volatility. However this time the momentum indicators are far more considered in their bearish move with the RSI already having broken to a 7 week low, the MACD lines recently having given a near term sell signal and the Stochastics also falling in bearish configuration. A close below $0.6960 would complete a double top pattern which would then imply another 140 pips of downside meaning $0.6820 would be possible. The Kiwi has consistently used old key breakouts and supports as pivot levels in the past few months meaning that a breach of $0.6960 would initially open the old pivot around $0.6820. The overnight price action has started to bounce from $0.7020 but the hourly chart shows initial resistance at $0.7067 but with a resistance band now strong between $0.7080/$0.7125 with rallies likely to be sold into.
After a brief rally on Monday which had questioned the developing bearish control, the sellers looked to regain the initiative yesterday. Another negative candle with a closing price below the long term pivot at $1.1050 also included intraday pressure on the support at $1.1000 too. This support at $1.1000 is the last real positive argument the bulls can hang on to and this is an argument that is on the brink of being decisively broken. A consistent intraday move below $1.1000 (preferably with a close below) would confirm the bear control and re-open the post Brexit spike low at $1.0909. The momentum indicators continue to confirm the negative medium term configuration which is a drag the euro for a test of $1.0909 and possibly back towards $1.0800 again. With the rallies being sold into, the hourly chart shows a resistance band is now in place between $1.1020/$1.1080.
As with the euro, we are now starting to see some traction to the downside on Cable once more as the dollar is strengthening again. Yesterday’s bearish candle of over 140 pips of downside means that having posted a high at $1.3480 early on Friday morning, Cable has now dropped over 370 pips in just three sessions. The momentum indicators are rolling over once more and the Stochastics have crossed lower, whilst the RSI has dropped back below 40 and even the MACD lines are on the brink of a downside cross. The closing price at $1.3110 was a five day low and also contained the breach of the key near term support at $1.3130 which confirmed the end of the near term recovery. Hourly momentum is now negatively configured (especially on the hourly MACD lines and it all suggests that any intraday rallies today should be seen as a chance to sell. There is now a band of resistance between $1.3100/$1.3200 and more targeted resistance at $1.3130 and $1.3170. The hourly RSI unwound to 55 on the failed rally from Monday. A rally above $1.3310 is now needed to reclaim bull control.
The rally on Dollar/Yen hit an intraday high at 106.52 yesterday meaning the rebound has been as much as 650 pips from the recent low, but I am still concerned that this will be an area where the profit-takers will begin to get a bit twitchy. The resistance from the huge bear candle on the day of Brexit was 106.80 and this has always been my resistance eyed as the top of the perfect sell-zone for a rally. This level is now precariously close for me but I still believe that this is a counter trend rally that will ultimately be sold into (especially after a rally of 650 pips on little more than mere expectation). Yesterday’s candle was the smallest daily range since the range began (at just 90 pips) and was also a doji so this was a pretty uncertain candle. The daily RSI is again close to 60 where previous rallies have fallen over and MACD lines have unwound back to neutral. The hourly chart still has a range of negative divergences on the hourly RSI and MACD lines which suggest upside impetus is waning too. Initial supports are 105.62 and 105.26 whilst the key support for a breakdown is 104.62.
The market remains in consolidation mode above the support around $1320 and is still broadly stuck below the old pivot at $1335. The question is whether this is a serious support forming or whether it is a pause for breath in the near term correction that will drag gold back into the band of support below $1306 which will prove to be a medium to longer term buying opportunity. The momentum indicators continue to drift in an unwinding fashion rather than a decisive bear move, with the RSI drifting serenely back towards 50 and the MACD lines unwinding back towards neutral. The correction is still live whilst the Stochastics continue to fall but if they start to bottom or even cross higher then this will be a signal for the bulls. The hourly chart shows the more neutral configuration of the momentum with the range of around $15. Neutral for now whilst we await the next signal. Decisive above $1335 opens $1346.70, whilst below $1320 opens $1306 near term.
The downside pressure is gradually telling now on WTI with a second consecutive candle with a lower high and a lower low (and also a close towards the low of the day yesterday). This follows a sequence of higher lows throughout last week and with a clear day of trading below the old $45.83 neckline, the outlook is deteriorating again and this is all suggesting that the key supports will be tested. The momentum indicators are under consistent negative configuration now with the Stochastics barely picking up from the lows of earlier in July before now rolling over again, whilst the MACD lines continue to decline. The one positive for the bulls to hang on to is that the RSI is still above 40, which suggests that there is not full confirmation of a corrective outlook for the near to medium term. However, the key support at $44.42 is being tested and a breach would open the May low at $43.03. Rallies are being sold into at lower levels with $46.33 resistance bolstered by today’s price action, whilst $46.93 is further resistance.