Renewed positive risk appetite is hitting the dollar early this week. Positive newsflow of COVID vaccinations from AstraZeneca and Pfizer have helped to boost sentiment. The dollar is still perceived as a safe haven and as such is coming under pressure once more. This mood has been bolstered overnight, with the announcement of key Chinese data, with retail sales coming in ahead of expectation and back positive for the first time since the pandemic struck. The sharp appreciation of the Chinese yuan is certainly a signal of renewing risk and pressure on the dollar. Although Treasury yields are broadly steady in front of the two-day FOMC meeting, there is a perception that the Fed will confirm the lower for longer mantra for interest rates. This would lay further groundwork for a path of broad dollar weakening in the coming months. A dollar weakening is impacting across major forex pairs today, whilst gold and silver are also feeling the benefit. UK unemployment data for July broadly comes in ahead of expectations even though unemployment has ticked up to 4.1%, although this will worsen in the coming months as the furlough scheme is wound down. Sterling has been supported by this data.
Wall Street found support to climb higher last night, with the S&P 500 +1.3% at 3383. US futures are also gaining ground again today, with the E-mini S&Ps +0.3% today. This has generated a mixed session in Asia, with the Nikkei -0.5% but Shanghai Composite +0.2%. European markets look mildly higher with FTSE futures +0.1% and DAX futures +0.5%. In forex, we see a weaker USD across the major pairs, with the outperformance of AUD and NZD along with a relatively less strong JPY reflecting the improving appetite for risk. In commodities, a weaker dollar is supportive for gold (+$7 or +0.3%), with silver +0.7%. Oil has been starting to show signs of consolidation this week, with a key meeting of OPEC+ on Thursday.
There are several major announcements to be aware of on the economic calendar today. The German ZEW Economic Sentiment at 1000BST is expected to slip slightly to +69.8 in September (down from the record high of 71.5 in August). However, it is also worth watching out for the current conditions component which is expected to improve to -72.0 (from -81.3 last month). The New York Fed Manufacturing index is expected to improve to +6.0 in September (after dropping back to +3.7 in August). The US Industrial Production is expected to improve by +1.0% in the month of August (after growing by +3.0% in July) whilst Capacity Utilization is expected to improve to 71.4% (from 70.6% in July).
Chart of the Day – NZD/USD
The Kiwi looks increasingly as though a key shift in sentiment and relative performance has been seen. A couple of weeks ago we discussed the bullish breakout and the move to buying into weakness in the 0.6600/0.6715 support band. A correction went deeper into the band of support than we had been looking for, but the support around 0.6600 held firm, along with a six month uptrend and the bulls now look ready to take off again. Yesterday’s decisive positive candle has broken eight day downtrend, whilst improving momentum indicators come with upside potential. Early signs are positive again today with an initial move above 0.6715. A close back above 0.6715 would put the bulls back in the driving seat for another test of the key long term resistance at 0.6790. Above 0.6790 would then open 0.6940/0.6970. There is good near term support now around 0.6640 (building from lows of the past three sessions), also around the basis of support of the six month uptrend. Support at 0.6600 is increasingly key now as the next key higher low.
A series of positive closes has re-established the bulls as the driving force in the market. Bouncing off the support of a four month uptrend, but more importantly maintaining the support at 1.1750 was a key medium term technical signal. A near term correction is being used as another chance to buy around the medium term uptrend. The spike high resistance at 1.1915 that was posted in the wake of the ECB meeting last week is set to be tested. If the bulls can overcome this initial barrier it would open 1.2010 once more. It would be at that stage where the market would likely need to consider how the ECB would react (cue jawboning of the euro lower in an attempt to counteract its strength). Technical indicators are now decisively improving, with daily RSI rising above 60, Stochastics also rising and MACD lines bottoming. It suggests near term positions buying into weakness. The hourly chart shows support in the band 1.1855/1.1885. Below 1.1830 would question the near term strength.
Support has started to form on Cable as the dollar has seen renewed selling pressure in the early part of this week. This comes with the outlook for Cable very much in an uncertain stage. Last week’s big sell-off has seriously damaged the bullish outlook and we turned neutral on a medium term basis. The support has since begun to form around 1.2760/1.2770, but for now, is still only tentative. If this rally now fails under the resistance of overhead supply between 1.2980/1.3050 then the selling pressure could quickly resume. A two week downtrend comes in at 1.2980 today. Initial resistance now from yesterday’s high at 1.2920.