Last updated: May 3rd, 2017 at 09:58 pm
Traders have come back after the weekend to find that Brexit selling fears continue to dominate strategies, with safe haven plays remaining in favour. With volatility so high still the dust is yet to settle on the markets after the UK so dramatically voted to leave the EU last week. The dollar and more specifically the yen remain the currencies to hold in the forex majors, whilst bond yields have spiked lower and commodities also remain split by risk appetite the safe haven gold again higher. The wild swings on equity markets on Friday look set to continue again with European markets again opening sharply lower. With so much political and economic uncertainty it is difficult to know how long it will take for markets to settle down, but for now the bears are in control.
Asian markets may have managed to claw back some losses, however they did not get the mid-session bounce on Friday that the European markets saw, so they are playing catch up. However with the FTSE 100 again sharply lower today the pressure is back on again. In forex, risk appetite remain rock bottom with the dollar strength across the board except for the yen which remains the big outperformer (as always when risk appetite floods away). Gold is higher by around a percent and it will be interesting to see if this move can last amidst the dollar strength. Interestingly, oil has had a small rebound, but is probably one to keep an eye on.
Traders have not got a great deal to go on from a data front with US goods trade balance at 1330BST (-$59.5bn exp), whilst Mario Draghi is also expected to speak at 1830BST and will be watched for any comments on Brexit.
Chart of the Day – AUD/USD
A big bearish engulfing candle has heaped the pressure on the Aussie for a correction. The huge volatility with a 346 pip high to low trading day on Friday also contained a bounce of over 150 pips from the low means it is unlikely that this will be the end of the swings. This means that today’s trading will be seen as a key indicator after a weekend of consideration of the next move. The early weakness is therefore something of a concern. The old key level at $0.7385 could again be seen as a key level to watch today as a close back below would suggest the bears are certainly building momentum again. Technically, the cross lower on the Stochastics shows the bearish control, but the RSI and MACD lines are yet to fully confirm the deterioration and the dust is yet to settle so we must wait for further indication today. The hourly chart shows initial resistance is the rebound high from Friday at $0.7510. The key low will now be Friday’s low at $0.7302 and this could become a key medium term barometer now.
The flight into safe haven plays following the Brexit decision has driven sharp dollar strength. Friday’s enormous bearish engulfing candle will dominate the chart now for weeks and perhaps months with the 523 pip range. Technically the uptrend in place since the December low has been broken and momentum indicators have taken a turn for the worse. I have spoken at great length of the long term pivot band $1.1050/$1.1100 and the renewed weakness again today has taken the market back below the pivot following on from Friday’s initial breach. Concentration will now be on the spike low from Friday at $1.0910 which will be a key reference point now. For now the volatility remains high and the market moves are still somewhat violent, as shown by the magnitude of the hourly candles. There is initial resistance from overnight at $1.1075 whilst the rebound high at $1.1188 on Friday could now become key. I favour using rallies as a chance to sell for now with the market still in shock, meaning pressure on initial support $1.0980 and then the $1.0910 low.
After Friday’s huge sell-off which rebounded a remarkable 464 pips from the low of $1.3224, the selling pressure has resumed in Asia overnight. Sterling seems to be heading lower again with Cable another 2% lower from Friday’s close. Technically the momentum is clearly negative with the RSI back below 30 (it got to 15 in February) and the Stochastics having given a sell signal. The market is yet to settle down and remains extremely volatile given the magnitude of the candles on the hourly chart. Playing Cable in the coming days I likely to be somewhat tricky as the market looks to try and settle down, but the uncertainty over what Brexit will mean will continue to hang overhead. The resistance initially is $1.3485, today’s traded high at $1.3563 and a gap down from Friday’s close at $1.3678. If the European traders get their teeth into it then a retest of $1.3224 should not be ruled out, with further weakness likely.
The market is still looking to settle after Friday’s huge move. The bears are still clearly in control and there is little reason to believe that if pressure remains on sterling then the yen will continue to be the safe haven currency of choice and this will be a drag on Dollar/Yen. Further weakness in the Asian trading has pulled the pair back below 102.00 again. There is plenty of resistance building up overhead now with today’s high at 102.45 and old lows from mid-June around 103.60. The daily momentum indicators retain a negative configuration and rallies remain a chance to sell for now. The main caveats are not technical, with potential jawboning from the BoJ likely this could induce a rebound, whether traders believe it or not is another matter though. With reduced volatility and less violent swings in traing, the psychological support at 100 comes back into play, whilst 99.08 is clearly now a key low.
With gold higher again this morning, the safe haven trades are still being favoured. It is interesting though that given the context and the magnitude of some of the other moves on major markets, perhaps the move on gold has not been as impressive as might have been. Despite the spike higher unwinding significantly, the market did find support to close above the old breakout resistance at $1306 on Friday at $1315.50. However a rather timid candle is forming today so far and the bulls will need to back the breakout otherwise gold could become an early sign of a turnaround in sentiment. The resistance to watch comes in between $1335/$1340 which is now protecting the spike high from Friday at $1358. The support at $1306 could now become a key level to watch for whether the breakout is rejected. For now though the bulls remain in control.
Risk appetite has taken a significant blow in the wake of Brexit, and the oil price which has links to global growth has seen some selling pressure. The large outside day candle, which although is not strictly speaking a bearish engulfing as it did not come at the end of a trend, it does reflect the change in sentiment. This now means that the bears are in control and a retest of the June low at $45.83 is now increasingly likely. The momentum indicators have quickly deteriorated and the bear cross lower on the Stochastics whilst the RSI back below 50 is a concern for the bulls. The hourly chart shows that $46.70 is the immediate support from last week’s low but a breach would quickly put pressure back on $45.83 again. The resistance initially is at $48.45.
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