The dollar weakness that has been such a feature of trading over the past week or so has begun to just slow down slightly this morning. As Treasury yields tick slightly lower, this could be a function of a near term waning of the positive risk appetite that has driven equity markets to breakout of the medium term ranges. It comes as a tinge of caution is beginning to leak into sentiment. Although the US did not come down too hard on China over the security bill for Hong Kong, there are hints of something bubbling under the surface. According to media reports, China is ordering state authorities to scale back purchases of US soy beans. This would potentially restrict the ability of China to meet its obligations under the Phase One trade agreement and could induce a response from President Trump. Is the tariff war about to re-emerge as a risk that needs to be priced in again? It comes also as major cities in the US continue to see riots and protests which are hampering the ability for a re-emergence from the period of lockdown. Equity markets have thus far seemed to be fairly resistant to these factors (stoked by massive monetary and fiscal support and newsflow of economies re-opening around the world). However, if riots continue and a belligerent President Trump fails to diffuse the situation, it could begin to feed negatively into sentiment. There are hints of this coming this morning. Away from the US, the UK/EU trade negotiations resume today and sterling is benefitting from reports of potential compromise. The talks are into a critical month ahead of a deadline to extend the transition period. The Reserve Bank of Australia came as little surprise as it held rates on hold at +0.25% and maintained its 3 year bond yield target at +0.25%.
Wall Street performed well into the close last night although gains were slight, with the S&P 500 +0.4% at 3055. US futures are giving some of this back today, with the E-mini S&Ps -0.2%. Asian markets were broadly positive, with the Nikkei +1.2% and Shanghai Composite +0.2%. In Europe, there is a mild positive bias, with FTSE futures +0.2% and DAX futures +0.4%. In forex, the strong runner comes with GBP outperformance ahead of the latest round of trade talks, whilst elsewhere there is a mild bounce on USD. In commodities, the upside has been curbed slightly on gold and silver, whilst oil remains supported.
The economic calendar is showing no key economic releases today.
Chart of the Day – NZD/USD
Risk appetite continues to improve and this is reflected in the recoveries of the commodity currencies. Yesterday saw AUD and NZD storming higher. For the Kiwi, the recovery has subsequently taken a key step forward after another decisive positive candlestick on NZD/USD. The market is now leaving behind a consolidation rectangle between $0.5910/$0.6175 in a move that implies c. +265 pips from the $0.6175 breakout to a target of $0.6440. It also means that the key March high at $0.6450 is a realistic upside target for the recovery over the coming weeks. The price action over recent sessions has been all about confirming the breakout and it has been interesting to see the market continually finding a basis of support around the old resistance before using this as a springboard. Momentum confirms the strength of the breakout too, with RSI in the mid-60s and at 5 month highs, whilst MACD and Stochastics lines are similarly bullish. It suggests that buying into weakness is the strategy now. A two week uptrend supports around $0.6210 today as the initial gauge. The hourly chart also shows initial support at $0.6220/$0.6260, with the breakout support around $0.6175 remaining strong. The bullish outlook would defer below $0.6080.
There is a strength to the recovery run on the euro which has pulled EUR/USD towards an ongoing test of resistance at $1.1145. However, two consecutive candlesticks have failed in a breakout and the bulls are just beginning to lose some of the impetus in the recovery that has got them this far. This could simply be part of the process of testing the resistance, but there is a risk that a near term pullback begins to set in. The technicals remain strong, but care must be taken in that momentum is becoming stretched. We discussed yesterday that the RSI was close to around 70 which historically has been restrictive on EUR/USD (although not during the huge volatility of March), and could lend to a near term, corrective unwind. Despite this, we would continue to look for weakness to be a chance to buy. The breakout support around $1.1015 houses good support now, whilst the two week uptrend is supportive at $1.0960 today. Moving into the European session, the pair is all but flat and again consolidating under the resistance area (now $1.1145/$1.1153). The hourly chart shows momentum unwinding in this consolidation, but if hourly RSI begins to slip below 40 and hourly MACD begins to slip below neutral it could be a signal that a corrective move is building. If initial support at $1.1080/$1.1100 breaks then a correction back towards $1.1015 would be likely, although this would then be the source of the next opportunity to buy.
We have recently been concerned by the lack of real traction on Cable, given the underperformance of the dollar across the major pairs. However, Cable took a big leap forward in recovery yesterday as it posted a strong bull candlestick to close above resistance a t$1.2465. The momentum of this recovery within what is a trading range between $1.2075/$1.2645 is now such that the bulls will be eyeing the range highs once more. Impressively, momentum is with the traction of the move, as RSI is now this morning above 60 and is its highest since early March. It suggests that pressure towards $1.2645 is building. However, we would still view this run with caution and given the price moves on Cable since late March, this is a move that could be close to maturity. All of these swings higher and lower over the past nine weeks have been one to two weeks in duration, before a retracement has set in. This move is currently two weeks old. The mid-range breakouts $1.2360/$1.2465 are now a gauge for support.
Another session completed, with a small candlestick body and little direction to speak of. Dollar/Yen has now effectively traded almost entirely flat for two weeks. Furthermore, that is not accounting for the seven week consolidation range between 106.00/108.10. Aside from the spike lower on Friday (and subsequent rebound), there is still very little real indication for the next move on Dollar/Yen. So often over the past two weeks, as the pair has slipped intraday towards 107.30 there has been a lack of intent to breach lower. However, equally, the resistance at 107.90 is mounting by the day too. Dollar yen can often go through these phases of lacking intent and it would be unwise to be taking too significant a view, in light of this being a market devoid of conviction in technical signals. Momentum indicators have tailed off slightly, as the Stochastics now begin to drift lower again but there is little to go on here, as it is more of a moderation than anything to go by. A close below 107.30 or above 108.10 may begin to see some traction forming, but this is still a market is dire need of a catalyst.
A third positive session in a row has improved the outlook on gold once more. However, the daily candlestick bodies are shrinking which suggests that the market is perhaps lacking the momentum to really drive the price higher for a decisive breakout to multi-year highs again. Today’s early slip lower plays into this too. We remain positive on gold over a medium to longer term basis and holding the support at $1693 helps to bolster this view. However, it is becoming clear that the bulls are lacking the impetus that was so prevalent during the late March to April rally. The RSI seems to be rolling over at lower levels at each peak now. Although still holding consistently above 50 (a good basis of a trend higher), this is becoming more of a slow and steady bull run now. We still look towards using near term weakness on gold as a chance to buy. Since May, the area between what is now an eight week uptrend (coming in today at $1700) and the rising 21 day moving average (today at $1721) has been where the bulls are supporting the market. Initial resistance is at yesterday’s high of $1744, under$1753 and the multi-year high of $1764. The importance of the $1693 reaction low is ever increasing.
Brent Crude Oil
A strong response on Brent Crude to the contract rollover formed a decisively positive one day candlestick in a move which has continued higher today. This has continued to pull what technically is now a market completing a big base pattern above the $36.40. This breakout is now leaving what is a strong area of support at $33.55/$36.40 which the bulls will now look to use as a support area to buy into weakness. There is a strong technical outlook now, with momentum indicators increasingly strong. The RSI is in the high 60s, whilst MACD lines rise above neutral and Stochastics higher above 80. We look to buy into intraday/near term weakness now. The next resistance is at $39.70 which was a minor intraday high from mid-March, but the real opportunity lies in the market having little real resistance until filling to gap at $45.20. Once more moving higher from a period of consolidation is a positive signal for the development of continued recovery in oil. The OPEC meeting later this week will increase volatility and is a caveat but we still see the technical pointing to further gains on oil.
Dow Jones Industrial Average
The Dow recovery was back on track with a session of mild gains yesterday. A small yet positive candle on the daily chart may not have been outlook defining, but is still important in adding to the foundation of the breakout above 24,765. It has helped to form initial support at 25,030 which is consolidating the bull position. There is a basis of a new uptrend forming of the past two weeks, although it is still tentative at this stage. Momentum indicators remain in their positive medium term configuration, but there is a slight slowing of the move higher and this sees Stochastics and RSI tailing off. Despite this we continue to view the breakout above 24,765 as being key and the outlook will be strong whilst supported above it. We look to use weakness into support as a chance to buy although would turn more cautious if support at 24,060/24,295 were breached. Initial resistance is at 25,760 whilst the key March high remains the latest recovery target around 27,100.