Market Overview
Trade negotiations are still a factor for market moves as uncertainty remains over how Canada will respond to the apparent agreement between the US and Mexico.
A failure for Canada to agree over the new terms that have been struck in a bilateral deal between the US and Mexico could mean tariffs going up on exports such as automobiles. Suggestions are that Canada could be ready to make concessions to be part of a new deal. Time is a factor though, with the Congress mid-terms in November and a 90 day period for Congress to be consulted on any decision to disband NAFTA.
Global markets are subsequently in wait-and-see mode, as how this plays out could have consequences for other trade deals, especially China.
The dollar continued its slip yesterday, with the market seeming to be cautiously optimistic, however this move is unwinding some of the losses early today. Any risk positive outcome should be positive for equities and dollar negative, however, exactly how the market views the intricacies of any deal could be a factor in the ultimate dollar move.
It was interesting to see Treasury yields pulling higher yesterday, skewed towards the longer end of the curve too (although some of this could be attributed to the multi-year highs on US Consumer Confidence). Although yields are back lower again this morning, expect this pull higher to continue if Canada comes into the agreement. A second look a US Q2 growth numbers today could provide a distraction but largely the focus remains on US trade relations.
Wall Street closed a shade higher last night (S&P 500 +1 tick at 2897) and with futures ticking higher overnight there has been a supportive bias to Asian trading (Nikkei +0.2%) and European markets are also supported in early moves today.
In forex, there is a very mild USD bounce (but this was also the case in yesterday’s early moves too), and it interesting to see AUD underperforming as the Chinese yuan has also turned weaker initially today. Also of interest is CAD which is the outperformer in early moves on suggestions that Canada may be about to make concessions on the trade negotiations.
In commodities, gold is hovering around $1 higher, with oil consolidating.
It is a quiet European morning for traders looking at the economic calendar, however interest is cranked up a notch with the prelim reading of US Q2 GDP growth at 13:30 BST. The strong Advance GDP print of +4.1% is expected to see a mild downward revision to +4.0% but anything that holds a 4 handle will still be considered a strong reading. US Pending Home Sales are at 15:00 BST and are expected to be +0.6% (down from +0.9% last month).
The EIA oil inventories are at 15:30 BST and are expected to show crude stocks to show a slight drawdown of -0.4m barrels (after a big drawdown of -5.8m barrels last week); distillates are expected to build by +1.2m (+1.9m last week); with gasoline stocks +0.3m (+1.2m last week).
Chart of the Day – USD/CHF
Despite the dollar strengthening across majors over recent months, the Swiss franc has largely held firm. However, with the dollar now hinting at a corrective move, this solid performance of the Swissy has now translated to a decisive breakdown on USD/CHF. A decisive close below the June low at 0.9785 has taken the Swiss franc to its strongest level against the US dollar since April. The move has completed a range breakdown, effectively seeing the market top out to complete a 280 pip reversal pattern that implies a retreat back towards 0.9500 in the coming months. The breakdown has also been confirmed with the RSI moving below 30 and a six month low, whilst the MACD lines are now accelerating below neutral and the Stochastics are strongly bearishly configured. The first test is the 38.2% Fibonacci retracement of 0.9185/1.0068 around 0.9730, but there is little real support until 0.9650. The RSI very rarely gets to position below 30 and this could see the market stretched, but how the market reacts to a technical rally would be key. There is a resistance now between 0.9785/0.9860 the latter of which is the 23.6% Fib retracement. A renewed bear signal in this band of resistance would confirm the top and be a chance to sell.
The technical recovery on EUR/USD continued yesterday with another gain on the day, but the bulls will have been a touch disappointed as to the one day candlestick pattern. A rather limp end to the session ended around 15 pips higher and way off the day high. However, the early move today is also looking rather circumspect and this is putting the element of doubt into the outlook suddenly. It may be early, but the Stochastics have just begun to look a touch tired and are beginning to roll over. The rebound is though still in an uptrend which is supportive today at $1.1610 so there is room for a mini dip to be contained still and maintain what is now a two week recovery trend. Yesterday’s high at $1.1735 is initial resistance, interestingly coming around the initial July highs beginning at $1.1745. The hourly chart shows strong momentum configuration and corrections being bought into. There is also an initial pivot at $1.1650.
Sterling bulls continue to struggle as the attempted recovery remains stuck in the mud of the resistance overhead. Last week’s high of $12935 again put paid to an attempt at a move higher as the session ended with a negative candle after a promising early move higher (note how sterling continues to underperform other major currencies). The momentum indicators are still reflecting this struggle, with the RSI stuck in the mid-40s and Stochastics just edging higher. The recent bounce may have managed to break a four month downtrend but the prospects of a sustained recovery are still low. Within this, support at $1.2800 as a higher low is now key as the market has ranged for the past week in a 135 pip band. A near term breakout could determine the immediate direction, but the bulls are unable to get a grip on the market. The hourly chart shows an increasing ranging market.
With last week’s bounce now having lost its impetus, the market is posting a series of indeterminate, neutral candles that are devoid of any significant direction. Subsequently, the market has spent the past three sessions stuck in a 60 pip range. This is reflected in the RSI flat-lining around 50, whilst the MACD and Stochastics have tailed off again. This is a ranging consolidation of a market over the past five to six weeks and there is little to suggest this is set to change. The hourly chart shows neutral momentum with initial support at 110.90 protecting the support around 110.00 whilst 111.40/111.50 is a basis of resistance now.
Gold
In the past two weeks gold has recovered well from a low of $1160, building a mini-uptrend channel and pulling through key overhead resistance at $1204. The momentum indicators have recovered well within this move which hints that a key low may also now be in place. However, the road to recovery is a bumpy one and this is reflected in yesterday’s session. A bearish outside day really does complicate the near term outlook now. With the market leaving a new high at $1214, a close below the previous session low is a negative signal that needs to quickly be snuffed out today. A second negative candle today would really question how much control the bulls have in this rebound. The mini-uptrend channel comes in at $1195 today and a breach would then open the $1183 key higher low. For now, the hourly chart shows this move to be contained within the recovery and momentum indicators are still holding their positive configuration. However, initial support at $1199 needs to be watched this morning as a gauge for sentiment.
WTI Oil
Although the rebound has taken a pause for breath, a mild negative candle should not necessarily be the end of what continues to look to be a developing recovery. Momentum indicators are still in a state of improvement, with the RSI still above 50 (recently hitting six week highs), whilst the last time the Stochastics were in this strong configuration was during the June bull run. Resistance of Friday’s high at $69.30 is the initial barrier and a renewed breakout would re-open the $70.45/$71.10 resistance band once more. The hourly chart shows positive momentum configuration with a support band $67.30/$68.20 that will now be seen as a base for the next leg higher with corrections still seen as a chance to buy. A break below $67.30 would though change the emphasis of the rally.
After the exuberance of the pull to multi-month highs in recent days, the bulls have just taken a brief paus for breath. Yesterday’s mild gains formed a very slight negative candle (after the opening gap higher to the session), however any sense of a correction should still be seen as a chance to buy. Momentum indicators remain strongly configured, with the RSI in the high 60s and still with upside potential. However any weakness back towards the 76.4% Fibonacci retracement at 25,845 and the previous breakout at 25,888 is now a chance to buy. As long as the key higher low at 25,608 remains intact, the market is still well positioned for a move back towards a test of the all-time high at 26,616.
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