Bearishness in EURUSD continues, in this weekly chart price bounced off the 1.1490-1510 area and has now moved toward the uptrend line marked on the chart.
If the trendline breaks we may move lower toward the 1.10 level.
The trendline level could be used as support.
The downtrend which started at the beginning of 2018 is still intact.
1.13 has looked sticky in the past and looked like a base formation but if it breaks the lower low, lower high sequence continues.
1.1186 is the 61.8 Fib retracement level.
EURUSD seems to be oversold and the repricing of the rate hiking cycle by the Fed did point to USD weakness. The Gov. shutdown does not seem to have affected the USD as much as expected but Europe has its own issues with Italian and French budgetary concerns as well as Macron policy discontent in France. Stock markets have moved back to being risk on and the US-China trade deal could unwind some of the USD strength. Having said that its still a pretty bearish looking chart, keep an eye on the trendline and the consolidation low of 1.1216 for clues.
* US Sen Grassley says president Trump is inclined to impose car tariffs.
* Grassley also says that govt shutdown may also delay trade talks.
* Chinese FDI (foreign direct investment) in the US falls significantly.
* Philly Fed manufacturing index due out this afternoon.
* PM May statement last night urged parliament to come together and find a way forward and a deal which appeals to all.
* Party leaders met with PM May last night, with the exception of Labour leader Corbyn who insists she rules out no deal first.
* At least 130 UK business leaders have urged parliament to seek a second referendum.
* UK Dec RICS House Price Balance falls to its lowest level since Aug 2012; -19.%.
* EU CPI out this morning – second reading expected to confirm a headline rate of 1.6% while the core rate sticks at 1.0%.
* German govt looking for ways to exclude Huawei from 5G auction.
* ECB’s Lautenschlager speaking later today – yesterday said not surprised by the dip in inflation, still sees economy within ECB forecasts.
AUD & NZD
* Risk sentiment will dictate price action in the related currencies – NZD the underperformer, now a cent off the recent highs.
* AUD also down as Chinese growth concerns will continue to put a cap on the commodity linked currency.
* Australian home loans for Nov fell 0.9%, though a drop of 1.5% expected.
* Also feeling the turn in risk sentiment, USD/CAD pushes back above 1.3300 this morning.
* Canadian ForMin Morneau says Brexit will not affect Canada but will impact on global economy.
* Oil prices holding their ground, though off the recent highs.
By now, it should have become painfully obvious that USD demand is now predominantly a function of the weaknesses elsewhere, rather than expressing a positive view on the US economy. Naturally, it is hard to argue against a more favourable position stateside, but the US is not without its risks, which will be exacerbated every time the Fed decides to hike. The normalisation process was long overdue, and I argued that the Fed was perhaps a little too hesitant in tightening as Fed chair Yellen, at the time, wanted to wait for clear signals. Well they came through, and while the market focused on the twin deficits, the USD index was pounded into the ground and few could see a reason for the turnaround. And now here we are.
The market cannot get enough USDs, and at a time when the balance sheet is slowing contracting, the backdrop of year-end shortage maintains a relative bid in the greenback despite the prospects of a dovish hike tomorrow night. It would not surprise me if the Fed decided to stick on this one, and as per Jerome Powell’s rhetoric, watch the data. There is, however, one distinct drawback in taking this course of action, that being the perception of yielding to political pressure. President Trump makes no secret of his disappointment in the current Fed path, though come 7.00pm tomorrow evening, we will know through the dot plot whether there has been any moderation in how policymakers now believe the normalisation process should continue – if at all.
Anyone choosing to stick to the script need only look at the housing market, where yesterday’s NAHB House Price Index took another dip from 60 to 56, having fallen from 68 in the previous month to this. Domestically, neutral rates may be closer than the Fed thinks, and their recent commentary is certainly moving this way. Any suggestion of a pause tomorrow night will confirm Fed concerns, so in this respect, perhaps some of the outliers for an unchanged stance are a stretch at this point. The level of market dependency for direction from central banks has been raised significantly in recent years. so policy communication has to be dealt with kid gloves these days. In this regard, we do expect the Fed to direct market participants towards the data and coerce the mindset towards what is actually happening in the economy. It is long overdue.
That said, it is hard to steer the market away from the USD at the present time. The EUR is riddled with political instability in the region, exacerbated by the Brexit fallout, and the domestic data has taken a hammering from export-led weakness. The Pound, as undervalued as it is, faces a crisis of a magnitude not seen since the ERM debacle in the early 1990s and global trade worries continue to weigh on the majors closely tied to Asia. Australia, along with Canada also faces serious housing concerns as well as private debt thereon, and with Oil prices dropping like a stone, we cannot count on the traditional followthrough in the Canadian economy which has been a staple default scenario as a tailwind of US growth.
We still see room for a modest correction in the USD should the dot plot fall in line with market expectations. Whether this can effectively mark a more significant turnaround at this stage is in the balance. It will take some significant improvement in some of the USD’s major counterparts for this to develop, and this is clearly not going to happen overnight. The JPY and CHF look the obvious choice in the current climate, though both the BoJ and more so the SNB will have something to say on this, so the playing field is a bumpy one, to say the least. EUR/USD is making all the running this morning alongside a reluctant push lower in USD/JPY. 116.00 and 111.35-30 are levels we are watching for in either case.
(EUR/USD Technical Analysis)
Midweek, the FOMC meets to deliver their latest monetary policy announcement, where the odds continue to favour a 25bp hike – the fourth move this year. This would take Fed Funds to 2.5%, a level which touches on the lower end of the neutral range which has and continues to be under question. Consequently, the release of the latest rate projections through the dot plot will be of greater interest to the market, having tempered expectations for 2019. The odds for just one move currently stands at a little over 50%, reined in from the forecasts that the Fed will hike at least twice through next year.
Fed chair Powell has clearly stated in recent addresses that policy is data dependent, and while we would expect markets to adopt this perception at all times, recent years have seen a heavier reliance on forward guidance, so we may also see some changes in the statement which may be designed to steer the market towards data inputs rather than measuring sentiment around the general theme of ‘further gradual rate hikes’.
(DXY Daily Chart)
Starting off the week, we have seen the USD coming under a little pressure, and this may be little more than some modest catch up with the rates markets. The latter have been pre-emptive in accommodating for the recent change in rhetoric from policymakers, so there are risks to a surprise on the hawkish side if the dot plot sees little change to reflect market sentiment. In this instance, equities are likely to come under further fire, with the major Wall St indices already teetering on the edge at the levels we are at present.
The USD is still de facto a default currency, gaining on the weakness of others, so the impact of the outcome is pretty binary on how the Fed communicates any endorsement (or not) to how the rates markets are pricing the future rate path from 2019 onwards.
(DXY Weekly Chart)
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What can we expect from AUD/USD?
- Could be at the start of a new Elliott Wave pattern to the upside but a break of .7400 is needed to confirm
- .7160 is an important support level if it breaks this could suggest trend continuation
- RSI has broken lower watch out for a hold above 50
On the market profile chart, the area between .7157 and .7018 looks very congested. We have since auctioned higher and ranged between .7157 and .7393. If we saw a bearish NFP result we could revert to the mean value area of .7254 or possibly higher. If the market is net bearish this could be the area where a lower high is formed. In a bullish view, only a break of .7293 would confirm a wave break higher.
Across the currency spectrum, and not just against the USD, we have seen a weakness in the AUD in the past week or so, with domestic matters weighing on the currency, in particular, this week. The RBA meeting threw up few surprises in keep rates unchanged and maintained the balance of economic pros and cons within its statement. In essence, the RBA still sees the next rate move as up, though as has been the case for some time now, it is a matter of timing and widening differentials with US rates have largely dictated losses in the spot rate. In the past month or so, however, AUD – along with the NZD – has recouped some ground against the greenback, though this has been more a function of its oversold status and in the time it has been achieved.
Hitting highs close to 0.7400, AUD/USD resistance has been largely based on the global factors surrounding the threats to global trade. As US actions against China have threatened demand for Australian raw materials, so the longer term negative bias is set to contain the upside. There was been some periodic mismatch in the sensitivity to data – for example, the relief from the near term truce between the major economic powerhouses over the G20 weekend, though as above, domestic matters are now weighing on the AUD, with this week’s Q3 growth coming in lower than expected at 0.3%. Trade data was also lower than forecasts, though both cases argue for continued expansion – perhaps not as much as expected, though enough to battle through tough times in the current climate. We have also seen commodity prices picking up and finding some resilience despite a stronger USD, so this should suggest a level of underlying demand as the world ‘ticks over’.
Australia may be some way off raising rates from current levels, but at this stage, some of the alarmist calls for a rate cut seem out of place in our view.
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