Market Overview
There has been a much needed pause for breath across financial markets this morning as the selling pressure on the Turkish lira has just seemed to abate, allowing traders to take stock of what the outlook is. This could mean some room for a near term technical rebound on market sentiment. The Turkish central bank has promised to provide liquidity for the lira and this has just put the brakes on the embattled currency’s slide this morning, which has unwound from yesterday’s session high of 7.21 back around 6.70 this morning (although the currency remains very volatile and liquidity likely thin). However, this is not necessarily time to assume a sustained recovery is in the offing quite yet. The Chinese yuan remains weak, whilst question marks remain over other emerging markets with current account deficits and big dollar denominated debt can cope. The South African rand and Indonesian rupiah have come under pressure in recent days too. US yields have ticked back higher again and this is helping to pull Dollar/Yen higher on the yield differentials, but the stabilisation on broader major forex markets does not guarantee a recovery. Equities have steadied in Asia, but any renewed momentum on the lira weakness or Chinese yuan would drive renewed dollar strength again. However, there was a raft of Chinese data coving the month of July out overnight that reflects the growing impact of the trade tensions. China Fixed Asset Investment fell to 5.5% (+6.0% exp, +6.0% in June), China Industrial Production missed estimates at +6.0% (+6.3% exp, +6.0% in June), whilst China Retail Sales were also disappointing at +8.8% (+9.1% exp, +9.0% in June).
Wall Street closed weaker with the S&P 500 falling -0.4% at 2822, but with a sense of relief that the losses were relatively contained, futures are ticking higher a touch today. Asian markets showed signs of support with the Nikkei +2.2%, whilst European indices are set for a mild rebound in early moves today. In forex, there is a tick of improvement in risk appetite, with the yen losing ground, whilst major that has been losing ground against the dollar has bounced. In commodities, this is also helping gold $2 higher but in the context of yesterday’s weakness, this is a very tepid rebound. Oil is trying to build support again in early moves.
After a quiet start to the week, the data ramps up today, especially for the European session. UK Unemployment is at 0930BST and is expected to once more be steady around 4.2%, with the claimant count expected to be 3,800. However, the real interest from the UK employment data for June comes with the Average Weekly Earnings which are expected on an adjusted ex-bonus basis to stay at +2.7% (+2.7% in May). Eurozone Industrial Production is at 1000BST and is expected to improve year on year to +2.6% (from +2.4% in May). The German ZEW Economic Climate is at 1000BST and is expected to improve marginally to -20.7 (from -24.7 in July) having deteriorated consistently over the past six months.
Chart of the Day – AUD/USD
The outlook has taken another turn for the worse as risk appetite has taken a beating over the past few sessions, with the market falling to new 17 month lows. The Aussie was fairly steady as it ranged sideways between $0.7310/$0.7485 for 8 weeks but a couple of big bear candles have closed for a breach of the range and now implies a downside move of c. 175 pips towards $0.7135 in the coming weeks (it is interesting to see that the Kiwi has made a similar breakdown and already hit its downside target). Momentum indicators confirm the breakdown but also with downside potential, the with RSI below 40 and at six week lows, the MACD lines bear crossing lower just under neutral and the Stochastics with traction. The rebound off yesterday’s low at $0.7245 is just unwinding the oversold momentum of the move and is helping to renew downside potential. Rallies are now seen as a chance to sell, with the daily chart showing a band of overhead supply between $0.7310/$0.7350 being an ideal sell zone now. The next key support is the December 2016 low of $0.7142. Key resistance is at $0.7455.
After last week’s sell-off, the market has begun to take on a degree of stability. However, with recent moves having decisively shifted the outlook, this stability looks to be a pause for breath within a market that is now medium to longer term bearish with a medium term target of $1.1150. In this context, rallies will be seen as a chance to sell, it just depends upon how far any rebound gets before the selling pressure resumes. The old support of $1.1505 is now a key basis of overhead supply. Momentum is strongly negatively configured but there is also room for a rally, with the RSI at 30. The hourly chart is already unwinding and there is resistance at $1.1435 from yesterday’s high to watch as initial resistance as a move above would open a recovery to the $1.1500 area again. Support at $1.1365 protects $1.1310.
There are hints of a near term recovery on other major currencies against the dollar, but sterling is still struggling. Yesterday’s doji candle on Cable suggests uncertainty within the prevailing downtrend, however, is more likely a minor consolidation than a signal for an impending recovery. Since breaking down below $1.2955 the market has barely looked back and momentum is very strongly negative now. The $1.2600 support area from June 2017 is a realistic area for a test in the coming sessions, and any form of the technical rally will be seen as a chance to sell. The RSI is hovering in the mid-20s but shows little sign that the bulls are eyeing a rebound of any note from Friday’s low of $1.2720. The hourly chart shows another consolidation sideways which is helping to unwind momentum indicators but no appetite to push the price higher. Initial resistance at $1.2790 and then around $1.2850.
It had looked at one stage yesterday that there was a significant shift in outlook underway as the yen strengthened to pull Dollar/Yen well below the support of 110.60. However, the market rebounded 60 pips into the close and finished the session well off the lows back above the 110.60 level once more. Despite this rebound though, there is a sense still that the market remains under corrective pressure. The 110.60 support has been breached now, as has the 55 day moving average (today at 110.80) and this proves that unless the bulls can continue with traction today, the support will come under renewed pressure. The three week downtrend falls at 111.10 today, whilst momentum indicators are calling for the breakdown (RSI closed below 45 yesterday, MACD lines continue to fall). So today’s session is important as the bulls need to break higher to prevent another intraday rebound from simply being used as a chance to sell again. Resistance builds at 111.15 and then up at 111.50. A close below 110.60 opens 110.00 (psychological) support again, and then 109.35.
Gold
For the last week and a half, gold has been hanging on to the key support at $1204, however, has never been able to build the traction in a recovery. The bulls paid for this reluctance yesterday as a decisive bear candle took hold and the market sold sharply through $1204 support. A decisive bear candle has also marginally breached the next support at $1194.50. Coming on a day where the market moved towards safety but the dollar did not actually perform especially well, this downside break does not bode well for gold. The market may have breached a recent downtrend in the past week, but the trend of lower highs, lower lows continues. There is now a new band of overhead supply at $1204/$1220 to use should there be any unwinding technical rally now. Momentum indicators remain negatively configured and have again turned down at key bearish levels. The hourly chart shows a potential unwind could play out in the coming hours as near term stretched momentum unwinds to renew downside potential. There is initial support at $1191.50 from yesterday’s low but $1180 is the next real level to watch.
WTI Oil
The bulls have clung on to prevent a negative outlook from taking hold, by the skin of their teeth. The medium term pivot of $67 has been breached on an intraday basis in each of the past four sessions but never really broken and remains in play as a basis of support. However, the follow up to Friday’s bullish engulfing candle was far from convincing, containing a downside spike and rebound from $65.70, and with the deterioration in the indicators over the past five weeks continuing. There is a sense that there is a struggle that continues for the bulls to hold on to any traction. Rallies continue to be sold into, with the run of lower highs of the past four weeks that forms a downtrend coming in around $69.25 today. The momentum indicators retain their negative bias with the RSI still struggling in the low 40s, whilst the MACD lines drift below neutral. Yesterday’s high at $67.95 is initial resistance, with the hourly chart showing a near term pivot at $68 taking shape. A decisive close below $67 would open $63.60.
With four consecutive negative sessions, the fear is that a deeper correction is threatening. Yesterday’s decisively negative candle shows that but also that the 61.8% Fibonacci retracement at 25,367 is also now a potential barrier to the recovery. There is still a gap wide open at 25,493 and the concern is that the longer this remains open, the increased potential this is for a “breakaway gap” which can be seen at the start of a trend. The MACD and Stochastics sell signals are adding to the concern now. With Friday’s low at 25,223 having been breached the reaction low at 25,120 is key as this would confirm the bulls have lost control. Having now broken the uptrend channel, the fear is that this starts to become a basis of resistance in a recovery (today at 25,415).
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