Market Overview
Since the G20 there has been a shift in sentiment on the dollar. There is a degree of uncertainty over exactly what has been agreed between the US and China, but the mood for conciliation has seemingly improved. Although it may take a while still, the groundwork is there for a move towards an agreement. This is helping to restrict a key driver of continued dollar outperformance and the market will now begin to look towards Fed monetary policy, which has also taken a dovish tilt in recent days.
It is interesting to see therefore that the 10-Year US Treasury yield has fallen away below 3% again, but with the shorter dated yields holding up, talk will increase above curve inversion again. The 2s/10s spread is just 14 basis points today.
This is all putting the dollar under increasing pressure and is showing through gold pushing through $1236 which is a long term pivot, EUR/USD pulling higher towards $1.1400 and Dollar/Yen also lower.
Key focus will also remain on the continued underperformance of sterling in which Prime Minister Theresa May seems to have to jump from frying pan to frying pan via every fire in the kitchen. The UK Parliament begins a week long debate on her Withdrawal Agreement today, but now she also has to face off a contempt of Parliament challenge over the legal advice that the government have received.
Wall Street closed strongly higher again last night with the S&P 500 +1.1% at 2790, whilst the futures look to be giving back much of this today -0.6%. This has left Asian markets mixed today with the Nikkei -2.4% and Shanghai Composite +0.4%. European markets are slipping back too, with the FTSE 100 futures -0.3% in early moves.
In forex, the main theme is dollar weakness across the majors with yen strength but interestingly also the Aussie and Kiwi still strong.
In commodities the dollar weakness is a boost for gold which is testing above $1236 key resistance whilst oil continues to climb in its recovery by another percent.
This the day quiet day of the week for the economic calendar, with the UK Construction PMI at 09:30 GMT being the only real key release. Consensus is expecting a slip back to 52.5 in November (from 53.2 in October). Beyond that there will also be focus on Bank of England Governor Carney who is testifying to committee over the Bank’s Brexit scenarios. There are other speakers today with the FOMC’s John Williams (NYSE:WMB) (permanent voter, leans hawkish) at 15:00 GMT and the Bank of England’s Gertjan Vlieghe (centrist) at 1800GMT.
Chart of the Day – USD/CAD
After eight weeks of trending higher, two fundamental factors (the dollar corrective move from the Trump/Xi meeting and the oil rebound on positive Russia/Saudi co-operation) have combined to drag the pair lower. A decisive bear candle yesterday has now broken the uptrend. The key will now be how the market responds to this trend break, and initial moves this morning suggest that the market is accepting the correction. There is an old pivot band around 1.3170 and support of a higher reaction low at 1.3125. If this support at 1.3125 were to be broken (confirmation on a closing basis) then this would signal a key shift in trend. The momentum indicators are already beginning to deteriorate with a negative divergence on the Stochastics and the RSI having fallen below 50 to a new seven week low. It was interesting to see that a downside gap was bearishly filled this morning at 1.3270 and if the resistance of another old pivot at 1.3225 cannot be quickly broken back above, the outlook will deteriorate further. This would mean that rallies would then be seen as a chance to sell.
EUR/USD
The dollar weakening is taking the pair higher for another test of the key resistance band overhead. Within the downtrend channel there has been a number of resistance levels left at lower levels, whilst the downtrend falls at $1.1390 today. Price resistance comes at $1.1400 (last week’s high), $1.1430 (an old pivot) and $1.1470 (the mid-November high). There is a relatively benign medium term configuration forming (at least on the RSI and Stochastics) whilst the MACD lines are looking to continue to recover. This suggests upside pressure is mounting and how the market reacts to this resistance will be key. There is support growing at $1.1265 and Friday’s low around $1.1300 which was am old key support will increase the bull confidence. The hourly chart reflects the improving outlook, and that this could be the time the bulls make their move now. A close above $1.1500 would be a decisive bull move.
The negative bias on sterling continues to act as a drag on Cable. Considering the corrective move on the dollar across the majors since the G20, the fact that Cable has fallen is a rather damning indictment on sterling. The trend lower is now approaching four weeks and falling below $1.2720 yesterday the market has tested the $1.2695 key October low. This marks the beginning of the key medium term floor of lows between $1.2660/$1.2695. Momentum has been reasonably benign within the last couple of weeks but is now beginning to edge lower again in confirmation of the bear drift of lower highs and lower lows. Initial resistance now with yesterday’s failure at $1.2825 under $1.2850 and then the reaction high at $1.2925. The hourly chart is not excessively negative on momentum but selling into strength remains the strategy.
After a run of disappointing candlesticks, the trend higher of the over the past two weeks has been broken. The early morning selling pressure which has taken the pair to a one week low now begins to question whether the market will remain in its positive configuration. A breach of 113.20 on a closing basis today would increase the corrective near term momentum which seems to be developing now. This comes with the RSI falling below 50, and Stochastics which are now tracking lower. The MACD lines are still positive on a medium term basis, but threatening to turn lower from a position where the momentum is rather limp is a concern. A close below 112.60 would increase corrective momentum, whilst losing 112.30 would now begin to really question the bullish medium term outlook. Resistance is growing at 113.85 under 114.00.
Gold
After weeks of positive drift but a lack of decisive intent from the bulls, is there about to be a key breakout? The strong bull candle yesterday has continued early today and as the European traders take over the market is above $1236. This has been a key long term pivot and has not seen a close above since July. October’s rally tested on several occasions intraday above it (hitting a high at $1243) but failed to close above and eventually turned lower. However there is more of a positive position beginning to develop on momentum, with RSI above 60 and Stochastics above 80. The MACD lines have been slow to pick up but are also beginning to also tick higher. A close above $1236 would be a strong signal, confirmed above $1243 and would then open the next leg higher within the uptrend channel. The resistance at $1266 would then be open. Already a higher low is in at $1210 above what is a key support at $1195.
WTI Oil
The bulls are finally seeing some light at the end of the tunnel. With yesterday’s jump higher which could also include a breakaway gap, the market has broken a four week downtrend and is now shaping for a test of the bigger eight week downtrend which comes in today at $54.60. The encouraging feature of this move is the improvement in momentum, with the RSI above 30, and crossover buy signals now on the MACD and Stochastics. Closing above $52.75 (an old pivot) means that this is now supportive and the bulls will be eyeing a test of $54.75 as the next pivot. Initial resistance is at yesterday’s high of $53.85. The caveat will continue to be newsflow around OPEC this week, but at least the technicals are now improving.
Another jump higher on the Dow and the market is through the next pivot at 25,800. This now means that the November high at 26,278 comes back into play. Momentum is running positively with this move, with Stochastics and RSI rising above their neutral points. However, it is important to note that the MACD lines are still below neutral and this suggests the bulls should not to get too carried away yet. There is a gap that is now open at 25,550 and yesterday’s candlestick was not 100% positive (very small real body, with long upper shadow). A basis of support around 25,500 would come back into play on a slip.
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