The dollar has taken a turn for the worse in the past 18 hours. There had been a creep of renewed downside pressure forming as Treasury yields had begun to fall over again. However, this creep turned into something more considerable in the wake of the much worse than expected New York Fed manufacturing data for August. This survey data deteriorating is a concern that the elevated COVID infections are about to hit the economic data. This is the first in a series of regional Fed surveys that could paint renewed worries over the state of economic recovery in the US. Previously, markets have been reacting to better than expected US data, but could this all be about to change again? It should be remembered that this is just one data point, but it has shaken the dollar and longer-dated Treasury yields have jagged lower (bear flattening the yield curve). Another key market this is impacting is pulling renewed buying pressure through the gold price, which is back above $2000 again this morning.
Wall Street closed mixed last night, with renewed strength in the tech sector not overly filtering down to older economy stocks. The S&P 500 closed +0.3% higher but till unable to make all-time highs, ending the day 3382. Futures are also cautious this morning, with the E-mini S&Ps -0.1%. Asian markets have been mixed overnight, with Nikkei -0.2 and Shanghai Composite +0.1%. European markets are taking a cautious stance, with FTSE futures -0.7% and DAX futures -0.5%. In forex, the USD weakness is still the main story, with JPY outperformance being the key winner. It is interesting to see NZD still underperforming. In commodities the dollar weakness is helping to drive gold back higher by +0.8% and silver +2%. Oil is again struggling for traction, falling by half a percent.
It is another quiet day on the economic calendar, aside from a bit of housing data state-side. The US Building Permits are at 1330BST and are expected to improve to 1.32m in July (from 1.26m in June). Housing Starts are expected to also improve to 1.24m (from 1.19m in June).
Chart of the Day – USD/CHF
The prospect of a dollar rally has been threatening in the past couple of weeks, but it seems that there was a decisive shift away from this line of thinking yesterday. The Swiss franc is not normally seen as a lead indicator, but this morning we have seen Dollar/Swiss now at its lowest since early 2015 (when the SNB removed the currency ceiling). This bodes well for potential dollar negative range breaks for other major currency pairs too (such as EUR/USD). Yesterday’s decisive move lower on USD/CHF was a fourth consecutive negative candlestick and tested key support at 0.9050. This support is breaching this morning and a close below 0.9050 would complete a three week consolidation rectangle breakdown to imply -150 pips of downside projection. Momentum indicators are set up for the move, with RSI falling over again around 40 recently to now hit 30, whilst Stochastics also look to cross lower with downside potential. The move is leaving 0.9200/0.9240 as key resistance now. Intraday rallies are now seen as a chance to sell. The hourly chart shows resistance 0.9080/0.9100 is now a sell zone, with any intraday unwind on hourly RSI towards 50 as an opportunity.
There seems to have been a subtle shift in market sentiment in the last couple of sessions. After a couple of weeks of consolidation where the dollar selling pressure had eased, we are now seeing a renewal of the intent to sell the greenback. This is driving EUR/USD higher in a move now threatening to breakout. There have now been four solid positive candles in a row which have taken the market towards a test of the resistance at 1.1915 once more. Momentum indicators are set up for the test as daily RSI and Stochastics swing higher towards strong configuration again, whilst MACD are also looking to bottom. The market is looking primed for a breakout. A close above 1.1915 would complete a 220 pip continuation rectangle breakout and imply a move towards 1.2235 in the coming weeks. The hourly chart shows a run of higher lows now forming, with a band of initial support 1.1825/1.1865 to use as support for any intraday weakness.
The ranges that EUR/USD and Cable have formed in recent weeks are very similar. Both are also now beginning to reflect a renewed selling pressure on the dollar too. A run of positive candlesticks is forming for Cable, something that is continuing today and is setting up the market now for a test of the range high 1.3185. More importantly though, the market is positioning for a look at the key resistance at 1.3200. How Cable reacts to these two levels in the coming days could be key for the medium term outlook. A decisive closing breakout above 1.3200 would be a really strong signal. Momentum indicators are strengthening once more. The daily RSI is back above 70, whilst Stochastics are crossing higher and the market looks primed for continued gains now. The hourly chart has developed a positive configuration of higher lows and positive momentum set up. The hourly RSI consistently bottoming around 50, whilst MACD lines are above neutral, reflects weakness quickly being supported. With the market breaking to a one week high today, unwinding moves towards 1.3100 are now a chance to buy. For this move to continue, holding above 1.3070 reaction low from yesterday is needed.