Market Overview
The pause button has just been hit on the developing dollar correction as focus has turned back on the impact of economic slowdown in China. As the Caixin China Manufacturing PMI (the unofficial data) came in much worse than expected at 48.3 (49.5 expected) and deeper into contraction territory, this just shows how important the US/China trade negotiations could be for the world’s second largest economy.
Whilst the comments are positive coming out of the trade negotiations, there is still the need for something concrete to back it all up, so for now traders are not budging on mere rhetoric.
The Chinese yuan has weakened overnight and there has been a mild shift back into the dollar across forex majors as a result. Risk sentiment looks mixed at best today, with Treasury yields still under pressure. The Australian dollar which is seen as a proxy for Chinese growth amongst major currencies, is slipping back.
Despite this though there is plenty of other data points for traders to be worried about today, not least US Non-farm Payrolls. This could be an odd payrolls report today as the government shutdown of recent weeks could significantly compromise the accuracy of the data. Traders may therefore view any surprises with scepticism.
Wall Street closed mixed last night with a slight drop on the Dow whilst the S&P 500 climbed by +0.8%, with futures are settled to slightly higher today. Asian markets have been mixed to higher (Nikkei +0.1%, Shanghai Composite +1.3%), whilst European markets appear to be following the US, with the FTSE Futures and DAX futures a shade higher.
In forex there is a steady look coming ahead of a stream of key data points (including payrolls), although the Aussie is under pressure following the Chinese data disappointment.
In commodities there is a slip back as profit taking hits gold and silver, whilst oil is steady.
There is a lot to keep traders interested on the economic calendar throughout the day. First up are the PMIs for January in Europe, with the Eurozone final Manufacturing PMI at 0900GMT which is expected to be confirmed at 50.5 (50.5 prelim, 51.4 final December). UK Manufacturing PMI is at 0930GMT and is expected to slip a shade back to 53.5 (54.2 in December). The flash Eurozone inflation is at 10:00 GMT and is expected to see headline inflation falling to +1.4% (from +1.6% in December) but there is a downside risk in the wake of the lower than expected German reading. Core Eurozone inflation is expected to remain at +1.0% (+1.0% in December).
The US Employment Situation is at 13:30 GMT and always of key interest, with the headline Nonfarm Payrolls expected to be +165,000 (down from 312,000 last month), but uncertainty is sizeable given the recent government shutdown. Average Hourly Earnings are expected to have grown by +0.3% in January to keep the year on year earnings growth at +3.2% (3.2% in December). The US Unemployment is expected to remain at 3.9% (after an increase to 3.9% in December following a jump in labor force participation rate saw a lot more workers into the jobs market). The US ISM Manufacturing is at 1500GMT which is expected to tick a touch lower to 54.2 (after a huge drop to 54.3 in December). The revised Michigan Sentiment is at 1500GMT and is expected to remain at 90.7 (90.7 prelim, 98.3 final December).
Chart of the Day – USD/CAD
The US dollar has been coming under increasing pressure at the same time that the oil price has been pulling higher, both of which add up to downward pressure on USD/CAD. The move has also driven a key technical break of support at 1.3160. This has been the support over the past couple of months and effectively now completes a top pattern (arguably a “head and shoulders top”). This move has been confirmed on a two day closing breach, with the market trading below all moving averages and looking increasingly corrective on momentum. Look at the RSI turning negatively configured, with “bear kiss” on the MACD lines and Stochastics in decline. This all now points to selling into strength. Today’s rebound could be that opportunity. There is now a band of overhead supply 1.3160/1.3200 as a “sell zone” whilst it is interesting to see that the 21 day moving average (currently 1.3275) having been a basis of support during the October/December rally is now a basis of resistance in the correction. A retracement of the October/December rally is now on, with support levels at 1.3045 and 1.2910. The hourly chart shows an increasingly negative configuration and rallies being sold into. The old resistance at 1.3290 has again become a basis of resistance this week and as long as this remains intact on a closing basis, the outlook for USD/CAD is turning increasingly corrective.
The bulls have failed to grasp control once more as the barrier of $1.1500 has kicked in again. This is a range play. Every time corrections reach $1.1300 there is a basis of support that kicks in, however, every time a rally hits $1.1500 the bulls lose faith. This has happened repeatedly for a few months now. The market has tested $1.1500 for the past two sessions, but failed yesterday and closed the session with a negative candle which reaffirms the range. The market has subsequently drifted back to the near to medium term pivot within the range at $1.1420. Momentum indicators are increasingly reflecting the range with the RSI dropping back towards 50 and MACD lines increasingly benign. This settled momentum is reflected on the hourly chart. There is a positive bias on EUR/USD whilst trading above the $1.1420 pivot. A breach of the support at $1.1390 turns the outlook negative within the range once more.
There has been an uncertain feel to sterling in the wake of Tuesday’s strong negative candle. Although support has formed at $1.3050, yesterday’s candle shows that the bulls are not in control. Testing higher but closing around the low of the session is not positive and the pressure is growing on the four week uptrend. What is likely now is that this uptrend will be breached as sterling settles into some form of consolidation. The momentum indicators retain a positive bias, but have lost some of their bullish impetus that has driven the rally. Support above $1.3000 is positive, but $1.3160 now risks being a lower high under $1.3215. Payrolls today will add some spice to this chart but the steep uptrend is looking precarious now.
The dollar bulls are under pressure, however, yesterday’s session shows they are willing to fight to prevent a retreat on Dollar/Yen. There is a corrective outlook on momentum indicators, with the Stochastics in decline, but a rebound from 108.50 yesterday has prevented a test of 107.75/108.00 and has helped to settle immediate nerves. There may now form a range between 107.75/110.00 and there is therefore a pivot at 109.10 which is currently resistance. The hourly chart momentum configuration shows a negative bias meaning that unwinding moves towards the 109.10 pivot could now struggle. So selling into strength within this range seems to be the strategy for now.
Gold
Is this the first sign of exhaustion in the gold rally? Yesterday’s candle was only mildly higher and the early move today has seen a slip which has broken below yesterday’s low (the first time this has been seen in the past week). This is interesting as it comes as the market hit resistance at $1326 yesterday (the May 2018 high), whilst momentum indicators are quickly beginning to slip. A bout of profit-taking after such a strong run higher is possible, but there is a strong basis of support now between $130/$1310 to look for the next buying opportunity. This means that the bulls are in decisive medium term control for a move towards the 2018 highs at $1366, however, a near term corrective slip could be seen first. The initial resistance around $1326 (the May 2018 high) just held the market back yesterday, but once this is broken on a closing basis then the way is open for a move towards $1366. There is minor resistance at $1355 to contend with. An 11 week uptrend is supportive today at $1286.
WTI Oil
Oil is straining to breakout, but just cannot make the move quite yet. Intraday moves above resistance at $54.75 are a move above the first really decisive lower key high within the October to December sell-off. However this needs to be seen on a closing basis to make it a really key technical development. The market closing at its highest since mid-November would be positive, but furthermore, it would also arguably be a completion of the first real base pattern in this recovery. For now though the bulls have to wait. Yesterday’s slip into the close sows they are now quite ready. With the reaction low at $51.35 from earlier this week, a new uptrend can be drawn and is supportive at $52.75 today. Momentum is questionably strong and the Stochastics need to be watched. The RSI needs to break into the 60s to confirm, and MACD lines need to get going again. Weakness is a chance to buy on oil and a higher low above $51.35 would be positive.
A dovish Fed should be positive for Wall Street and that was certainly the reaction in the wake of the FOMC. Now, can the bulls sustain the move higher? In the last couple of weeks this rally has become increasingly tentative, and put aside the knee jerk reaction on Wednesday post-FOMC, there is still a sense of caution. Yesterday’s candlestick reflects that as the Dow slipped 15 ticks (a tiny move for the Dow) and an almost doji candle was formed. The 25,000 is where we see this near term consolidation. Momentum is positive though with the RSI above 60 and MACD lines tracking broadly higher above neutral. So there is a positive bias still to the market. However, it is the caution with the run higher which is a concern and the Stochastics should be watched. If the market is higher and the Stochastics drop below 80 this is a signal that something may be brewing. Resistance above Wednesday’s high of 25,110 is 25,980. There is a gap still open at 24,675 whilst the 50% Fibonacci retracement at 24,333 is increasingly important now.
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