The dollar has come under considerable pressure over the past week or so, leading to some strong moves across major markets. As ever, it has been shifting positioning over the US/China trade dispute. Positive noises towards finally signing of “phase one” have been growing. On New Year’s Eve, President Trump tweeted that a meeting on 15th January to sign an agreement has been pencilled into the diary. Flow out of the safer haven assets (USD, JPY, government bonds) and towards the higher yielding plays (AUD, NZD, CAD) have all been seen. Even EUR and GBP have benefitted, whilst the USD weakness has played into a gold rally. China has also added to this, with an injection of liquidity as the PBOC has cut the reserve requirement ratio by -50bps. The improvement in risk appetite leaves USD under pressure. However, a portion of this move will be borne out of the low volume/low liquidity trading of the Christmas holiday period. So, there is a risk of a degree of retracement on these moves which could set in. There is a hint of this in early moves today. A slight miss on the China Caixin Manufacturing PMI leaves a cautious mood into the European session. Quite how far this goes could depend on how the PMI data plays out in the coming days. We get a look at European data this morning.
Wall Street closed the year on a positive note on 31st December, with the S&P 500 +0.3% at 3230, whilst US futures are +0.3% higher again today. This has helped Asian markets positive this morning with the Shanghai Composite +1.1% (Nikkei closed for public holiday). European futures are taking more of a mixed outlook early today though, with the DAX futures mildly lower by -0.1% whilst FTSE futures are +0.2%. In forex, after days of losses there is a USD recovery hinting today, with gains across the board (aside from CAD which is holding up well). GBP and AUD are the main underperformers. In commodities there is still a bid for gold and silver, whilst oil is also holding up well.
The first proper trading day of the month is a day for manufacturing PMIs on the economic calendar. The Eurozone final Manufacturing PMI for December is at 0900GMT and is expected to be unrevised from the flash at 45.9 (which would be down from the 46.9 in November). The UK final Manufacturing PMI is at 0930GMT and is expected to see a very slight upward revision from the flash to 47.6 (flash December 47.4, final November 48.9). The US Weekly Jobless Claims is at 1330GMT and is expected to tick slightly higher to 225,000 (from 222,000 last week).
Chart of the Day – USD/CAD
In the run up to Christmas we had been talking about the strengthening of the Canadian dollar (helped by a rising oil price). However, coming at the same time as a weaker US dollar, meant that USD/CAD completed our downside target of testing the key supports of 1.3015/1.3035 but also broke sharply below 1.3000. This move has opened 1.2780 which is the next key support. We have seen USD/CAD previously break below key support in June only to then retrace on stretched momentum. The latest move brings the RSI under 30 again (the point around where rallies kicked in back in June and October. It leaves a big caveat in chasing the downside break. With the low liquidity of the Christmas trading period, there is a risk of an initial US dollar retracement rally which would pull USD/CAD higher again. It would give a better opportunity to sell (with more downside potential). There is effectively a resistance band of overhead supply 1.3015/1