Market Overview
The market has taken a view on the dollar, and it does not look pretty for the greenback. It seems that every shift in newsflow is being interpreted as dollar weakening right now. The impact of the tit-for-tat deterioration in US and China diplomatic relations along with increasingly worrying reintroduction of containment measures across several key US states. However, it is the perception of the US economic recovery lagging in the second half of the year which seems to be the major factor in driving the dollar lower. This was hinted in the flash PMI data from Friday, and economic data for July could paint a worrying picture for the US. If so, this could usher the Fed towards further easing measures such as yield curve control, whilst there is also a difficult political backdrop of disagreement in Congress over additional fiscal stimulus. However, it could be that if Congress can come together with a support package of measures, then this could change the course of the dollar this week (at least near term anyway). Treasury yields are edging lower as the dollar weakens. The dollar has lost its safe haven appeal. For now, we see EUR/USD ever higher, Cable breaking out, Dollar/Yen breaking down, but the most eye opening moves are coming in the commodities complex. Gold has finally hit an all-time high in a move above $1920 this morning, whilst in just one week, silver has rallied a whopping +25%. The contrarians will clearly be looking for their opportunities, but for now, the dollar weakness is continuing.
Wall Street closed lower for a second consecutive session on Friday, with the S&P 500 -0.6% at 3215. However, futures are looking a little more stable today, with the E-mini S&Ps +0.4%. This has enabled a relatively settled Asian session, with the Nikkei -0.2% and Shanghai Composite -0.2%. European markets are mildly higher in early moves, with FTSE futures +0.1% and DAX futures +0.2%. In forex, the mass USD underperformance continues, with JPY and EUR the main gainers, but also NZD and AUD suggesting it is not necessarily a risk move, more of a dollar selling move. In commodities, silver of +6% higher, whilst gold has jumped over +$30 to an all time high (+1.8%) this morning. Interestingly, though, oil remains stuck, trading just under -0.5% lower.
On the economic calendar this morning we have the German Ifo Business Climate for July is at 0900BST. Consensus is forecasting an improvement to 89.3 (from 86.2 in June), driven by a pick up in both current conditions and expectations components. Into the US session, Core Durable Goods Orders at 1330BST are expected to show an ex-Transport growth of +3.5% in June (following growth of +3.7% in May).
Chart of the Day – AUD/JPY
Is this a pullback for the risk trade, or something of a bigger correction? The chart of Aussie/Yen tends to give a good indication on broad risk appetite. The slide back in the past two sessions has unwound AUD/JPY to the confluence of two trend supports. Support of a near four month uptrend at 74.85 is also the support of a shorter uptrend of the past five weeks too. There is also a band of support 74.65/75.15 of the breakout of the past few weeks. With the daily RSI unwinding back to the low to mid 50s (where previous rallies of the past couple of months have found buying momentum resuming), it feels like this is a market at an important crossroads again. A third corrective candlestick would seriously pressure all these trends, whilst a breach of support at 74.65 support would suggest the bulls had lost control, at least near term. The bigger support comes in at 74.00 which if broken would be the first higher low breached since the recovery really kicked in back in March. Already we see MACD lines struggling to sustain a positive configuration as they cross lower, whilst Stochastics are also pulling lower. Holding the confluence of trendlines and breakout support, with renewed positive candles would suggest that corrections remain a chance to buy. This is a key moment for the outlook of the recovery.
Dollar weakness has been a huge factor in driving EUR/USD higher, but a re-evaluation of a stronger euro has also had a key part to play too. Despite near term exhaustion signals showing last week (primarily negative divergences on hourly momentum), once more on Monday morning we see EUR/USD decisively higher. Although we continue to back the bull run, we are also equally cautious of how quickly this move could begin to turn and profit taking set in. For this reason we need to stay close to the near term technical signals for any potential signs of corrective move. Support of higher lows continues, with Friday’s low initially back at $1.1580, whilst the early morning low today of $1.1635 will become more important as the session develops. On the hourly chart, the renewed buying this morning, has aborted the corrective potential of any negative divergences last week. Only below 40 on hourly RSI would be a realistic corrective signal now. A near term support band is $1.1625/$1.1660. We still see little real technical resistance until the $1.1800 area which was key resistance from September 2018.
Cable has been the latest major currency pair to breakout to multi-month highs amidst a progressively weaker dollar environment. The advance had been stuttering slightly through the middle of last week, but Friday’s solid positive candle and early gains today have cleared $1.2810 resistance. This move has opened the next resistance of the March high at $1.3200. However, we are always cautious in backing sterling longs (given the uncertain political backdrop of Brexit trade negotiations and negative interest rates chat). Although the dollar weakening continues to be a key driving force behind this move, we see the need to be careful with backing this breakout and we are cautious bulls now. Given that the 14 day RSI is now over 70, something not see since the December high, this can either be a reflection of trend strength, or overbought conditions. We are worried that Cable is late to the dollar weakness party, and this could mean that there is little left in this move. There is a whole load of overhead supply from the old November to February range to restrict the run higher. The psychological $1.3000 barrier could be key also. So we have to be on alert for profit-taking signals. The hourly chart shows a support band $1.2765/$1.2800 which if broken would begin to pull a corrective move. Initial resistance at $1.2855 from early this morning.
After weeks of doing very little aside from a mild downside bias within the multi-month trading range 106/109.85, we now see Dollar/Yen breaking sharply lower. The dollar weakness drove an intraday breach of 106.00 support on Friday. Although this move could not be held into the close, we see another decisive move lower early today. If we see a closing breach of this 106.00 support, it would be a really significant move to open old support around 105.00, but the next real support could not be until 101.20, the spike March low. Momentum indicators are going with this move, with a notable breakdown on daily RSI to the low 30s which is still not excessive (the March low saw 19 on RSI). This move means that all the old support between 106.00/106.60 (and towards 107.00 area) now becomes a source of old stale bulls and overhead supply. Near term rallies have to be therefore seen as a chance to sell now.
This incredible bull run on gold has now hit an all-time high on a move above $1920 (the previous all-time high from September 2011). It is a remarkable run (although pales in comparison to the move on silver) which shows little sign of stopping either. Strong bull candle after strong bull candle as intraday weakness continues to be bought into. The next level of note is the $2000 round number and psychological resistance. There are increasing questions of how far this run can last? Technical indicators are very stretched, and there is a clear risk that the elastic could snap. Gold has added c. $140 in just over six sessions. The daily RSI is now at 85 (the January rally got to 86 before near term profit taking hit). Despite this, the developing negative divergences that were on the hourly chart have been broken by this morning’s move. We will often see with these gold rallies that there is a final intraday blowout before a corrective move set in later in the session. The rising 21 hour moving average (currently $1910) has been a very good gauge throughout this rally of the past week. Initial support is at $1898/$1906.
It is interesting to see that although the dollar has been under huge pressure (which is a source of strength for commodities), there is a curious lack of upside drive through Brent Crude. With oil being so closely tied to economic recovery and subsequently risk appetite, as market sentiment has suffered, so oil has been dragged back. It is more a sense that oil is unable to push on with these conflicting forces at work. Despite this though, there is a positive bias to Brent Crude, with the rising 21 day moving average (today around $43.00) still a basis of support, as it has been for the past six weeks. The gentle drift back of last week is again looking to find support at the 21 day ma and the run of higher lows remains intact. These near term corrections are seen to be renewed opportunities to buy. There is still a bias towards higher highs too, and last week’s multi-month high of $44.90 will be eyed by the bulls. However, the key resistance remains the big March gap down from $545.20, which if can be “closed” would be a significant barrier broken and really open the recovery potential once more. Initial support of note if the first higher low at $42.35, with $41.30 below.
The Dow fell for a second successive session on Friday to now sit challenging the key support of the near four month uptrend recovery. We have focused previously on the importance of the 26,300/26,610 band of support which was previously resistance through June and early July. The bulls will be intent on defending this area as the uptrend also means it is a confluence of support around 26,300. It means that this could be an important turning point for the Dow. Momentum indicators are beginning to reflect this too, with Stochastics threatening to cross lower, along with MACD lines. Closing under 26,300 would not be a technical breakdown though, just a significant warning that the bulls are losing their way. The first real higher low at 25,525 would be the support to watch for a significant technical breakdown. The bulls will be looking for a response though today, with a close back above 26,610 being encouraging. There needs to be a move back above 27,070 for the bulls to be back on track.
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