Market Overview
The dollar bulls have just had some of their energy sapped in the last couple of sessions as the Chinese yuan has engaged something of a near term recovery. It is notable that moves on major bond yields have been subdued and lacked direction in the past week, and the market has taken direction from movement in the yuan. As the People’s Bank of China has moved to stabilise losses on the yuan by raising the reserve requirement ratio for FX forwards, the weakening of the yuan has moved into reverse, at least for the time being. This has restricted the dollar strength and induced a touch of profit taking on the greenback. Subsequently we see markets such as EUR/USD bouncing, Dollar/Yen breaking an uptrend and even gold threatening a downtrend. For now, this is little more than a consolidation and there are considerable barriers restricting potential trend change, but for now the dollar bulls have lost their impetus on forex markets. Will it last? Well, the trade story is a key driver of markets now. The US has now confirmed a that a 25% tariff on $16bn of Chinese imports will being on23rd August. China consistent response has been for reciprocal reaction and how the official channels convey this could mean the situation is exacerbated, something that has previously been dollar supportive. For now, equity markets remain supported by strength on Wall Street especially when earnings season is the focus. Overnight, the China Trade Balance was cut to +$28.1bn (+$38.8bn exp, $41.5bn last) as imports grew much stronger than expected at 27.3% (+17.0% exp, +14.1% last)whilst exports were +12.2% (+10.0% exp, +11.2% last).
Wall Street close decisively higher again with the S&P 500 (0.3% at 2858) edging closer towards its all-time highs again. Asian markets were mixed to slightly higher (Nikkei +0.04%), with European markets cautious and mildly lower in early moves. In forex, the move against the US dollar continues early today, with the euro and yen around +0.2% stronger whilst the Kiwi is performing well in front of the RBNZ tonight, whilst the underperformance of sterling continues. In commodities, the slip on the dollar is helping the mild rebound on gold which is around $2 higher, whilst the oil price is consolidating.
It is a fairly quiet day of announcements with the EIA oil inventories first up with crude stocks expected to drawdown by -1.8m barrels (+3.8m barrels last week). The Reserve Bank of New Zealand are announcing monetary policy at 2200BST with an expectation to hold rates at +1.75% once more.
Chart of the Day – EUR/AUD
For several weeks the market has been trending sideways in a tight range between 1.5655/1.5890, however in the past few sessions there has been some direction taken that has signalled a breakdown. A close below 1.5655 on Friday completed the move and now that the RBA is out of the way, the market seems to be generating downside momentum for a correction to the implied range breakdown target of around 230 pips and a test of the mid-June low at 1.5425. Momentum indicators have been waning in recent weeks with the RSI drifting ever lower and the MACD lines weakening, especially now that they are moving below neutral. A run of closes has been seen below the old support which is now acting as a basis of resistance following the breakdown and there is a near term sell zone 1.5655/1.5700. Yesterday’s candle was mildly negative but a rebound off 1.5575 could provide an opportunity for a move back into the 1.5655/1.5700 overhead supply and a chance to sell on a renewed bear signal.
EUR/USD
The scope for a near term recovery on the euro is gathering momentum now as a solidly positive candle yesterday added 45 pips and the move has continued into the early hours of today. This pick up has left support at $1.1527 which is above the key medium term range low at $1.1505. Having posted five consecutive negative candles throughout the last week, the bulls are pulling a retracement move. The market closed decisively above the initial resistance of $1.1570 yesterday and is now into $1.1620 overhead supply which is the next test. The encouraging sign is that the RSI has picked up from 40, whilst the Stochastics have also crossed higher to give an arguable buy signal (similar to those seen during the previous forays to the range lows in June). What gives rise to a further positive signal near term is that the hourly chart also shows a move above $1.1610 which has completed a small head and shoulders base pattern that implies a rebound target of around $1.1700. A move above $1.1650 resistance would certainly open this move. Initial support is now $1.1570/$1.1580.
Cable had a very quiet session of consolidation yesterday in a move that has just maintained the current negative outlook without exacerbating it. A small decline on the day posted a close below $1.2955 support and leaves open the likelihood of a retreat to $1.2850 and the $1.2770 August 2017 low. Although the consolidation has continued early today, the bottom of the two month downtrend channel sits around $1.2850 and is a realistic target zone now. Rallies remain a chance to sell with momentum negatively configured. The hourly cart shows the market biding time sideways but confirms the negative configuration of momentum. Initial resistance around $1.2975 but $1.3000 is the psychological barrier now with $1.3040 and $1.3070 further barriers.
For over a week now, it has been a struggle to justify saying that Dollar/Yen remains in its four month uptrend. Consistent intraday breaches have somehow managed to claw back a recovery into the close, but yesterday, surely now the consolidation in the market has now closed below the trend and the market is now officially in sideways consolidation. The dollar bulls are no longer in control. The old pivot around 111.15/111.40 which has seemingly been like a magnet to the price in recent weeks continues to play a role in the consolidation. There is now a support at 110.60 which on a breach would give the bears direction, and resistance at 112.15, similar for the bulls. However, for now the consolidation continues and this is reflected on the momentum indicators which are subdued to say the least. The hourly chart gives little more indication of near term direction either, as we wait for a catalyst.
Gold
Just in the past day or so there has been a slight indication that the selling pressure has been waning on gold. The market has been testing the resistance of the seven week downtrend now for the past couple of weeks but signs are now that it could be breaking. The support formed at $1204 (which is the key December low) has held for the past few sessions and with yesterday’s gain into the close along with a further pull higher today, the bear trend is under pressure. However, this is still just part of what could be a sideways consolidation rather than a sustainable recovery. There needs to be a push above $1220 initially but there is more considerable resistance up to $1236 which is a barrier. The long term momentum indicators are testing their own bear configurations too, but as yet these are still intact. The hourly chart shows the slight improvement in momentum configuration but the 144 hour moving average is still a basis of resistance around $1215 currently. Initial support $1208.
WTI Oil
Within the consolidation of the last few weeks, the market has been in a mild trend lower. The recovery once more from the $67 pivot has been testing this downtrend for the past couple of sessions, but for now this trend remains intact. Both these sessions have seen intraday tests but a failure at $69.90 which is under $70.45 reaction high. Momentum indicators have settled down in recent weeks and are increasingly neutrally configured (especially on RSI and MACD lines which have plateaued). The uptick in the Stochastics implies an improvement in the market but nothing yet that suggests an imminent upside break of this consolidation. The recent downtrend comes in at $69.70 today.
The Dow has followed the S&P 500 to break into multi-month highs once more. After the bull hammer helped to forge a higher low last week, the market has formed a run of bullish candles that have left another higher low at 25,120 in place. With an upside gap yesterday, the market has broken out above 25,587 to reach the highest level since the February highs. Leaving decisively behind the 61.8% Fibonacci retracement of 25,367 the market is open for a run higher to the 76.4% Fib at 26,845, whilst the February high at 25,,800 is now within reach. The breakout at 25,587 becomes a basis of support for near term retracements and there is a good band of support now 25,500/25,587 to act as a near term buy zone. Momentum indicators are edging towards decisively strong once more and the RSI in the high 60s still has upside potential in the current move.
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