The market has taken a view on the dollar, and it does not look pretty for the greenback. It seems that every shift in newsflow is being interpreted as dollar weakening right now. The impact of the tit-for-tat deterioration in US and China diplomatic relations along with increasingly worrying reintroduction of containment measures across several key US states. However, it is the perception of the US economic recovery lagging in the second half of the year which seems to be the major factor in driving the dollar lower. This was hinted in the flash PMI data from Friday, and economic data for July could paint a worrying picture for the US. If so, this could usher the Fed towards further easing measures such as yield curve control, whilst there is also a difficult political backdrop of disagreement in Congress over additional fiscal stimulus. However, it could be that if Congress can come together with a support package of measures, then this could change the course of the dollar this week (at least near term anyway). Treasury yields are edging lower as the dollar weakens. The dollar has lost its safe haven appeal. For now, we see EUR/USD ever higher, Cable breaking out, Dollar/Yen breaking down, but the most eye opening moves are coming in the commodities complex. Gold has finally hit an all-time high in a move above $1920 this morning, whilst in just one week, silver has rallied a whopping +25%. The contrarians will clearly be looking for their opportunities, but for now, the dollar weakness is continuing.
Wall Street closed lower for a second consecutive session on Friday, with the S&P 500 -0.6% at 3215. However, futures are looking a little more stable today, with the E-mini S&Ps +0.4%. This has enabled a relatively settled Asian session, with the Nikkei -0.2% and Shanghai Composite -0.2%. European markets are mildly higher in early moves, with FTSE futures +0.1% and DAX futures +0.2%. In forex, the mass USD underperformance continues, with JPY and EUR the main gainers, but also NZD and AUD suggesting it is not necessarily a risk move, more of a dollar selling move. In commodities, silver of +6% higher, whilst gold has jumped over +$30 to an all time high (+1.8%) this morning. Interestingly, though, oil remains stuck, trading just under -0.5% lower.
On the economic calendar this morning we have the German Ifo Business Climate for July is at 0900BST. Consensus is forecasting an improvement to 89.3 (from 86.2 in June), driven by a pick up in both current conditions and expectations components. Into the US session, Core Durable Goods Orders at 1330BST are expected to show an ex-Transport growth of +3.5% in June (following growth of +3.7% in May).
Chart of the Day – AUD/JPY
Is this a pullback for the risk trade, or something of a bigger correction? The chart of Aussie/Yen tends to give a good indication on broad risk appetite. The slide back in the past two sessions has unwound AUD/JPY to the confluence of two trend supports. Support of a near four month uptrend at 74.85 is also the support of a shorter uptrend of the past five weeks too. There is also a band of support 74.65/75.15 of the breakout of the past few weeks. With the daily RSI unwinding back to the low to mid 50s (where previous rallies of the past couple of months have found buying momentum resuming), it feels like this is a market at an important crossroads again. A third corrective candlestick would seriously pressure all these trends, whilst a breach of support at 74.65 support would suggest the bulls had lost control, at least near term. The bigger support comes in at 74.00 which if broken would be the first higher low breached since the recovery really kicked in back in March. Already we see MACD lines struggling to sustain a positive configuration as they cross lower, whilst Stochastics are also pulling lower. Holding the confluence of trendlines and breakout support, with renewed positive candles would suggest that corrections remain a chance to buy. This is a key moment for the outlook of the recovery.
Dollar weakness has been a huge factor in driving EUR/USD higher, but a re-evaluation of a stronger euro has also had a key part to play too. Despite near term exhaustion signals showing last week (primarily negative divergences on hourly momentum), once more on Monday morning we see EUR/USD decisively higher. Although we continue to back the bull run, we are also equally cautious of how quickly this move could begin to turn and profit taking set in. For this reason we need to stay close to the near term technical signals for any potential signs of corrective move. Support of higher lows continues, with Friday’s low initially back at $1.1580, whilst the early morning low today of $1.1635 will become more important as the session develops. On the hourly chart, the renewed buying this morning, has aborted the corrective potential of any negative divergences last week. Only below 40 on hourly RSI would be a realistic corrective signal now. A near term support band is $1.1625/$1.1660. We still see little real technical resistance until the $1.1800 area which was key resistance from September 2018.
Cable has been the latest major currency pair to breakout to multi-month highs amidst a progressively weaker dollar environment. The advance had b