Market Overview
With the recent strength of the dollar, as sure as night becomes day, Donald Trump starts talking about currency manipulation. It was just a matter of time. In an interview with Reuters on Monday, Donald Trump accused China and the Eurozone of manipulating their currencies. He has also said that he is “not thrilled” with the Federal Reserve raising rates and that he “should be given some help by the Fed”.
Trump made a similar move in July, resulting in EUR/USD adding just over 100 pips in the proceeding day. However this remains a highly controversial strategy by Trump as it could be deemed to question the independence of the central bank. Despite this though, Trump has said that he will continue to criticise the Fed if it continues to raise rates. Treasury yields fell across the curve, yesterday with the 10 year yield down 5 basis points, whilst the dollar also continues to correct. However, the move in July quickly petered out and it is likely that this dollar weakening will again be short-lived.
The big caveat to that though is this enormous record short positioning on Treasuries, which could induce some short covering. Is this the beginning of a big turnaround on Treasuries and the dollar? I am not convinced but watch this space. Watching yields over recent weeks has been more akin to watching paint dry, however, perhaps it has just become a little more interesting again.
Wall Street closed with mild gains once more, with the S&P 500 +0.2% at 2857, whilst futures are all but flat this morning. This has allowed Asian indices to tick marginally higher (Nikkei +0.3%) but European markets are looking lighter in early moves.
On forex majors the dollar is broadly weaker and all those currencies that had previously been under pressure are bouncing back, with the euro and the Kiwi doing well. However, it is notable that the yen has been unable to take any real gains off the dollar today.
In commodities, the rebound on gold continues amidst the dollar correction, with gold around $5 higher, and oil is also ticking higher again.:
On another relatively quiet day for the economic calendar, the UK public borrowing stats for the month of July are released at 09:30 BST. The expectation is for -£2.3bn (i.e. net cash in for the month and is along with January the other month where the government traditionally brings money in). This would be better than July last year (which was -£1.3bn) and similar to July 2016 as a comparative.
Chart of the Day – USD/CAD
The performance of the Canadian dollar has been curious over the past six weeks as it has actually been making marginal gains against the US dollar, hence the mini downtrend channel that has formed. This is interesting, as the US dollar performance has been very strong across most of the majors (yen aside) in that time. The tick higher on USD/CAD seen over the past couple of weeks has seemingly failed to break out of this downtrend channel phase and the pair is falling over again and looks ready to track lower once more. Since the end of May there has been a pivot around 1.3050/1.3060 which has frequently acted as a gauge for the near term outlook. Yesterday’s decisive close below support of the pivot suggests that Canadian dollar bulls are finding their voice again. Momentum indicators also confirm this, with the MACD lines playing a major role. With the rally of the past couple of weeks failing to get the MACD lines back above neutral, the lines are rolling over again. Furthermore the Stochastics have crossed lower with another near term bear signal. A close below 1.3050 suggests loss of near term momentum of rally and the market beginning to track lower again towards the bottom of the channel (currently around 1.2890). At least it would suggest a retest of the 1.2960 August low again. Resistance is 1.3175, with the hourly chart showing pivot resistance at 1.3110.
EUR/USD
In the wake of Trumps comments on currency manipulation, the dollar has suffered and the euro has gained. This has pulled EUR/USD higher for a third consecutive positive candle and the move looks set to continue today. This has unwound the market to a position above the old key support at $1.1505, meaning it is now into the band of overhead supply. How far can this rally go before the medium to longer term selling pressure kicks back in again? The resistance band between $1.1505/$1.1630 will be key to this. With momentum indicators improving now, this band of resistance could be the difference between a near term rally against the bear trend and something more sustainable. The RSI is already towards 50/55 which is where it struggled throughout July. Stochastics have crossed higher and MACD lines are also on the brink. A close above $1.1630 (which has been a pivot during late July/early August) would though be a real statement of intent from the bulls. The hourly chart shows initial support at $1.1445.
The dollar has weakened on Trump’s currency manipulation comments. However, although Cable is in rally mode, it is the tentative nature of this rally that nature of rally that is a concern for the longevity of the move. For now the bulls are pulling the market higher, but there is very little that has been achieved yet in the recovery, aside from pushing above last week’s high of $1.2825. The $1.2955 resistance of the old key support needs to be overcome, before the psychological $1.3000 is negotiated. For now, this still looks to be a near term rally within the medium to longer term bear trend, the trend of which comes in at $1.2900 today. The RSI is improving but consistently failed around 50 during July. A failure of this rally within the downtrend would be an ideal chance to sell again. There is a near term band of support $1.2760/$1.2825 now. Below $1.2725 re-opens the downside.
The negative bias that we have been discussing over the past couple of weeks is turning into something more substantial now as Dollar/Yen has now completed two consecutive bear candles with closed at multi-week lows with an intraday breach of 110.00 this morning. A close below 110.00 would continue this move today, whilst the 109.35 is the next support in view. The deterioration in the momentum indicators is continuing, with the RSI decisively falling below 40, MACD lines deteriorating below neutral and the Stochastics in bear territory. If this continues, then the key medium term higher reaction low at 108.10 could be tested. The hourly chart reflects this bearish configuration where rallies are now being sold into, and there is a band of resistance 110.30/110.70 to contain an intraday rally today.
Gold
The rebound on gold is now coming into a key phase. Is this a bear market rally which will give another chance to sell within the downtrend channel, or is this a recovery that is more substantial? A second positive candle yesterday has continued with gains today and the rebound is now into the overhead resistance $1194/$1204. The trend channel resistance falls at $1202 today. Momentum signals could though be a lead indicator to watch today. The RSI and Stochastics are putting pressure on their equivalent downtrends, whilst the RSI moving above 40 would be a two month high. It would also need at least a decisive move above the falling 21 day moving average (currently around $1207) which has been a basis of resistance for two months. The hourly chart shows a mini-pivot at $1185 which is supportive initially.
WTI Oil
Near term recovery mode is helping to pull the market back towards the pivot resistance around $67 once more. However the momentum indicators and the resistance of a five week downtrend suggest that the bulls have their work cut out to prevent this move being used as another chance to sell. The MACD lines are still negatively configured and although the RSI has picked up back above 40, the run of lower highs and lower lows questions the longevity of a rebound. The five week downtrend falls at $67.35 today whilst the pivot around $67.00 is a prime sell zone now. It would need a move above $68.35 to really shift the needle on this corrective outlook which is to use rallies as a chance to sell for a retest of $64.45 and likely back towards $63.60.
The market looked to confirm the upside breakout yesterday to multi month highs, but the immediate test of the February high of 25,800 has been rebuffed. Despite this intraday failure at 25,790, the strength of momentum indicators suggests that the bulls are in control enough to use corrective moves as a chance to buy now. The RSI above 60, MACD and Stochastics lines both rising all point towards further gains and upside potential in this run higher. This means that a move to the 76.4% Fib retracement at 25,845 is still likely. The hourly chart shows support 25,520/25,690 initially.
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