As a deadline looms for the assessment of potential tariffs on another $200bn of imports from China, the continued sell-off on emerging market assets is impacting negatively on sentiment. Will Donald Trump formalise the latest ramp up in the trade dispute? This question is weighing on sentiment with traders pulling out of risk and into safe haven areas of the market. However, there is an increasing dichotomy of performance forming for the dollar. Strong performance against emerging market currencies, but uncertainty on the G4 pairs (dollar against euro, sterling and yen). The key driver certainly remains the politics of trade hitting emerging market currencies that means the likes of the Indonesian Rupiah, Indian Rupee and Turkish Lira are being hit. The G4 pairs are though increasingly choppy and ranging. Dollar/Yen never seems to manage traction in one direction for long, uncertainties surrounding the Italian budget seem to also be restricting a decisive play on EUR/USD, whilst Brexit is still a massive factor on Cable. However, there could now be a floor forming on sterling as reports broke yesterday of negotiations between the UK and EU taking a turn for the positive. Apparently Germany is ready to allow less detail for an agreement to be reached, whilst the UK is ready to give up on some of its own demands. This allows a smoother path to a deal, and is sterling supportive. A similar jump was seen a couple of weeks ago, only to fade as domestic UK political uncertainties weigh. Although this is a likely scenario again, there seems to be a floor increasingly building on the pound and with a huge short position on sterling futures ripe to be covered, this could be sustainable, albeit in a choppy basing process.
Wall Street closed mixed last night, with the dragging the S&P 500 down -0.3% to 2888, whilst futures are again ticking marginally lower today. Asian markets were lower again overnight (Nikkei -0.4%) whilst European indices are mixed to slightly lower in early moves today. In forex, there is a slight degree of risk aversion to trading, with the yen performing better, whilst the commodity currencies (AUD, NZD, CAD) remain under pressure from the EM sell-off. In commodities, with little real direction on the dollar we see gold is around the flat line, whilst oil has continued to slip lower as the demand impact of the trade war pressure on EM is factored in.
Traders will be looking towards the US services sector for a steer this afternoon but first a look at the ADP employment change at 1315BST could give a seer for Friday’s payrolls. Consensus expects 190,000 which would be down from the 219,000 last month). The ISM Non-manufacturing at 1500BST will be key after the manufacturing data was so strong a couple of days ago. Consensus expects the data to tick marginally higher to 56.8 (from 55.7 last month) which was a 12 month low. The EIA oil inventories are a day delayed this week due to Labor Day, and are released at 1600BST today with crude stocks expected to drawdown by -2.5m barrels (-2.6m last week), with distillates building by +0.6m (-0.8m last week), and gasoline expected to drawdown by -1.5m (-1.6m last week).
Chart of the Day – EUR/CAD
The relative weakness of the Canadian dollar has taken a step up in the past few sessions as EUR/CAD has broken some key levels. As the euro has made ground, the past few sessions have formed decisive and solid bull candles. The move to close above 1.5190 has also completed a key near term breakout. Moving to a new five week high the move has formed a head and shoulders base pattern as the market has also broken a near six month downtrend. The momentum indicators are signalling positively with the move as the RSI moves into the mid-60s and a ten week high, whilst MACD and Stochastics also move positively. Yesterday’s session has also confirmed the decisive improvement on a closing break above the old pivot at 1.5300. This opens for weakness to be bought into amidst continued recovery to test initially, however, the key June high at 1.5585 will become a realistic test again. The neckline breakout at 1.5190 is now a basis of support leaving 1.5190/1.5300 a buy zone.
Since the selling pressure eased in August and a recovery of sorts managed to kick in, the outlook of the euro has become somewhat less certain. This is reflected in the moves of the past couple of weeks and shows that this is a pair that is likely to be increasingly choppy with a lack of decisive trend. The slip lower earlier this week found support above the old key breakdown of $1.1505 and nearer term support at $1.1530. This is now building a renewed floor. Yesterday’s positive candle has negated the negative aspects of Tuesday’s move lower and the market is now fairly stable within a band of around 200 pips up to $1.1735. This is shown on momentum indicators, with the MACD lines flattening around neutral, the RSI oscillating just above 50 and an increasingly benign Stochastics. For direction the market needs a close above $1.1735 or below $1.1505.
An intraday spike higher on improved prospects for Brexit has left a bullish outside day candle which has given a better outlook to Cable. Aside from how tricky Cable is becoming now on political factors, the market has now looked to form support. With a floor building around $1.2800 in recent weeks (even though yesterday’s brief drop to $1.2783) means that a higher low is taking shape now above the key August low at $1.2660. With yesterday’s gain, momentum indicators have improved too, as the RSI holds above 40 and the Stochastics are also bottoming around neutral. This is an increasingly choppy market near term under the $1.3045 rebound high of late August but at least the bulls now have something to defend. Yesterday’s spike high at $1.2980 is initial resistance.
Is positive traction once more about to be lost. A shallow uptrend has formed in the past two weeks which has pulled the market back above 111.40, but a rather drab bull candle yesterday and an early slip today means that this move is looking a touch tired again. The failure to test resistance at 111.80 is a concern and how the bulls react today could be key. Momentum indicators still hold a mild positive bias and it is interesting to see on the hourly chart the market holding on to near term pivot support around 111.15. However, there needs to be a positive reaction into the close today, otherwise positive momentum will begin to slide in this recovery. The support 110.70/110.90 holds the bulls up now. Above 111.80 tests 112.15 but can the bulls manage it?
The slip back in the past week has seriously questioned the prospects of a recovery on gold. However the bulls are not ready to give up quite yet and a positive reaction yesterday is now putting pressure on a mini downtrend once more. The support at $1189 will now be key and the momentum indicators will be worth watching now. The RSI is holding up above 40 where previously this had been a basis where the rallies were failing. The MACD lines are also shallowing in their recovery. If these two momentum signals fall over then the bulls will be in trouble once more. Holding on to the higher low at $1183 is vital on a near term basis. A move to close back above $1200 would be a real statement of intent for renewed recovery, however, as the hourly chart shows, a bear channel is still intact and this needs to be breached in order for the bulls to find traction. Building support above $1190 would help but a failure below $1189 would be a disappointment.
The corrective momentum behind the slip in the oil price seems to be gathering momentum now. The support of the two week uptrend has been broken as a bear candle was formed yesterday. This comes with a negative crossover sell signal on the Stochastics, which is seemingly set to confirm today, but hints at a growing corrective momentum now. The key test neat term is the first higher reaction low within the former uptrend which is supportive at $68.20. If this is breached on a closing basis then it would suggest that not only is the recovery reversing but also the sellers are gaining key technical ground. The resistance between $70.45/$71.40 continues to grow and it is interesting to see the hourly chart showing resistance initially around $69.50 which is increasingly a near term pivot.
Dow Jones Industrial Average
Despite the selling pressure engulfing markets in Europe, the corrective momentum on the Dow of the past few sessions has failed to follow through. It is interesting that the market has maintained the previous session low at 25,806 with the basis of support forming as the market is again consolidating around a Fibonacci retracement level. The 76.4% Fib provided the basis of resistance in mid-August and is now forming as a basis of support. The momentum indicators are taking this support well and are maintaining their positive configuration. The hourly chart shows a move above 26,028 would help to re-engage the bulls and re-open a test of the August high again at 26,168. The support at 25,608 remains key to continuing the bullish outlook.