President Trump is on the brink of his first major legislative victory as the Senate passed the Republican tax reform bill in the early hours of this morning. One final vote in the House of Representatives today should be a mere formality given the solid Republican majority, before winging its way to the President to sign before Christmas. However, it is interesting to see that the dollar is still struggling for upside traction despite the progress of tax reform. Treasury yields jumped on Tuesday with the 10 year yield through the key 2.40% level that has been such a barrier in recent weeks. However the move was also in response to longer dated German yields also climbing sharply, so the dollar has failed to make much of an impact. EUR/USD has moved higher whilst even Cable was up on the day and elsewhere we saw gold also still supported. Equity markets should be underpinned by the passing of tax reform as essentially the move is a tax cut for the rich and corporations who can use the cut in corporate tax from 35% to 21% as a channel to increase share buybacks. However the question is of how much has already been priced in.
Wall Street closed marginally weaker last night with the S&P 500 -0.3% at 2681 whilst Asian markets were flat to lower (Nikkei +0.1%). European markets have got a slight amount of support today but nothing too significant yet in terms of direction. In forex, there is a lack of intent across the major pairs, with little real move to speak of. The Bank of Japan monetary policy meeting could have an impact on the yen and traders will be looking for signs of a hawkish tilt as the BoJ lags other central banks in tightening. In commodities, gold continues to consolidate above $1260 whilst oil is edging marginally higher again.
Traders will be keeping an eye on the Eurozone current account surplus which is announced at 0900GMT and is expected to shrink to €33.4bn (from €37.8bn). The US Existing Home Sales are at 1500GMT and are expected to improve by +0.9% to 5.53m (up from 5.48m last month). Then the EIA oil inventories are at 1530GMT which are expected to show crude stocks again in drawdown by -3.5m barrels (-5.1m barrels last week), whilst distillates are expected to drawdown by -1.0m (-1.4m barrels last week), with gasoline stocks set to build by +2.4m barrels (+5.7m barrels).
Chart of the Day – USD/CAD
The market has been ranging sideways in a very well-defined consolidation rectangle now for the past seven weeks. The support coming in 1.2620/1.2660 before consistently pulling towards 1.2900/1.2920 and failing. Tax reform was meant to give the dollar a boost (and could still do today) but as yet the market waits. If the breakout does not come on tax reform passing then the range is likely to at least continue for the Christmas period. Technical momentum indicators are showing a bullish bias with the RSI between 45/65, MACD lines hovering above neutral. However, there is a lack of intent from the bulls with the RSI latterly struggling to move above 60 and this questions a potential breakout. Another rally towards the range highs yesterday had a look at 1.2900/1.2920 and pulled back again. This could be the bulls testing the water for a breakout, with a close above 1.2920 completing a range breakout and implying around 250 pips of upside. The hourly chart now shows support around 1.2640 initially and a breach would see the bulls lose momentum again within the range.
A slight positive bias has formed within the consolidation as a second consecutive positive candle was posted yesterday. The move that added around 55 pips on the day has now taken the market above all the flat moving averages and is starting to pull a slight amount of positive traction on momentum indicators. This comes as the MACD lines threaten to tick higher, the Stochastics begin to increase and the RSI moves to a two week high. The resistance of last weeks high at $1.1860 is now being eyed by the bulls and a breakout would open the recent range resistance and November high at $1.1960. However this chart shows a tendency for the bulls to struggle to maintain momentum in the last couple of weeks and could again begin to struggle. Watch the hourly momentum indicators for signs of tiredness, with a slight negative divergence forming on the hourly RSI and the MACD lines threatening to roll over. Initial resistance of yesterday’s high at $1.1850 is in place with a band of support $1.1800/$1.1820.
Cable is another ranging market as the consolidation above support at $1.3300 and below the shallow two week downtrend continues. Many of the recent daily candles have been contradictory to previous moves, but yesterday’s doji reflects a settling down of the market. This comes as the momentum indicators which have been in a negative near term drift, begin to also settle. The RSI is flattening around 50, whilst the MACD lines have stabilised their retreat. The doji candle implies uncertainty and this is again being seen early today as the lack of intent continues. This is also shown on the hourly chart which sees resistance building around $1.3400/$1.3420 and ranging hourly momentum configuration. Yesterday’s low at $1.3330 helps to build the support at $1.3300.
Perhaps there are signs of intent of a risk positive move, as the market has posted a solid bullish candle that is now putting pressure on the resistance of the old pivot around 113.00. This comes as the market has started to form a new, shallower uptrend over the past three weeks as a un of higher daily lows has built in recent days. Momentum is neutrally configured on the daily chart, but there is a slight hint of a pick up as the RSI edges higher and the MACD lines tick higher. There is a band of resistance of lows and highs over recent months between 112.95/113.25 whilst the hourly chart shows 113.08 has been pivotal over several occasions now. A closing break above 113.10 would re-open a move towards 113.75. There is initial support of a recent pivot at 112.85 adding to support at 112.30 and 112.00.
The daily chart outlook suggests that rallies are a chance to sell. The recovery in the past week has brought the market back into the resistance band $1260/$1270 and this is likely to be around where the bulls begin to struggle again. A mini uptrend has formed and is supportive for the recovery but the overhead supply that is now being encountered could begin to weigh on the market. The daily momentum indicators are ticking higher as the rebound has developed, with a bull cross on the MAD lines and the Stochastics rising. However the bulls need to make a decisive breakout above the $1270 resistance to really suggest there is some substance to the move. The hourly chart is positively configured but the uptrend is being tested. Initial resistance overnight at $1265 is holding, but at least the support at $1259 is also in place. This has the feel of building to a key time for the near term outlook. The longer this recovery fails to breach $1270 the more the near term bull control will be questioned.
The consolidation continues to build in a symmetrical triangle pattern as a three week downtrend and six week uptrend converge. Within this the market is now finding last week’s extremes as the key near term levels to watch, with support at $56.10 and resistance at $58.55. This consolidation pattern is beginning to neutralise the momentum indicators again with the MACD and Stochastics corrections shallowing and the RSI hovering around 50. The small daily candlestick bodies also add to the neutral outlook on oil now. The hourly chart shows an increasingly ranging configuration with near term support now $56.80 and resistance at $57.80. A close outside this $1 range would add pressure for a breakout of the converging trends. There is a very slight positive bias to the chart forming today with pressure on $57.80, however as yet there is no breakout. Perhaps the EIA inventories will provide direction again.
Dow Jones Industrial Average
An early move to the upside yesterday could not be sustained, however the positive outlook on the Dow continues. This is reflected in the uptrend of the past three weeks which continues to play a supportive role. Today this uptrend comes in at 24,743 which is now above the latest breakout at 24,689. Momentum indicators remain strongly positive in configuration with the MACD lines rising and RSI in the high 70s. There is little to suggest that intraday corrections will not continue to be seen as a chance to buy for continued moves to all time high ground. Yesterday’s candle was marginally negative with a loss of 37 ticks, but in the larger scheme of the bull run this is a mere blip. However, there is still a gap open at 24,689 which ideally needs to be filled and it could still be that the reaction of the market to filling this gap could provide some near term direction. The key three month uptrend comes in now around 24,000.
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