Risk appetite got a welcome boost yesterday and this has filtered into today’s session. The stronger than expected US ISM Manufacturing data for July helped to improve sentiment across the risk spectrum yesterday, buoyed by the better than expected new orders component. This allowed a better breadth of rally on Wall Street, pulling a rally on the oil price and pulling trades away from safe havens such as the yen and the dollar. The move has also enabled a mild “bear steepening” of the US yield curve (longer dated yields rising faster than shorter dated yields, something which tends to be linked with more positive risk environment). The question is whether this momentum can be built upon now. Progress is being made in the talks in Congress over how to replace the emergency employment support in the US. However, there is nothing concrete yet. Also, amidst the positivity in the ISM data, the employment component deteriorated and will add caution for the Non-farm Payrolls data later in the week. Taking a step back, it seems that these moves are generating a consolidation. The huge dollar selling pressure of recent weeks may have abated, but it is not reversing. It is still likely that agreement in Congress would be a key driver of the next decisive move. Overnight the Reserve Bank of Australia did little to change monetary policy.
Wall Street closed with a breakout to multi-month highs on the S&P 500 which was up +0.7% at 3294. Futures also show a continuation of this move, with the E-mini S&Ps +0.2%. Asian markets also continued to move higher, with the Nikkei +1.7% and Shanghai Composite +0.1%. In Europe, this is translating to gains on DAX futures (by +0.5%) and FTSE futures (by +0.1%). In forex, there is a risk positive lean although moves are quite slight, with AUD and NZD mildly outperforming, and JPY weaker. In commodities , gold is a shade lower, silver a shade higher, whilst oil is just giving back some of its gains from yesterday.
It is a relatively quiet day for the economic calendar today. Into the US session there are US Factory Orders at 1500BST which are expected to grow by +5.0% in June. (after growing by +8.0% in May).
Chart of the Day – NZD/USD
As the US dollar has threatened to mount a technical recovery in recent days, the pair has pulled back from $0.6715 towards a key crossroads. Two decisive negative candles in a row mans that support of a five week uptrend has been broken. The pullback is now testing the first of two key support levels. Support from the breakout of the old key resistance band between $0.6585/$0.6600 is coming under pressure now. How the bulls react in the coming days could be a key indication of the near to medium term outlook. Momentum is now tailing off, with the MACD and especially Stochastics lines beginning to deteriorate. The RSI is though once more back around the low 50s where rallies have taken from in the past two months. A decisive close under $0.6585 would confirm a near term top (that would imply $0.6515) but also suggest that the higher low support at $0.6500 would be about to come under pressure. The Kiwi tends to react to moves on the Aussie and the initial moves from the RBA meeting seem to be fairly muted. However, near term negative pressure has not abated yet. Hourly indicators are turning lower with a more negative configuration holding. A move back above $0.6640 would improve the outlook.
With a second consecutive negative close, the bull run on the euro has hit the buffers. The question is whether the move will now begin to go into reverse, of whether it is a near term bump in the road. Technical indicators have naturally rolled over, but as yet, nothing that would be considered as an outright sell signal. For that we must look at the support around $1.1700 which seems to be developing into a potential neckline of a top pattern (potential head and shoulders top). Given the euro bounced over +60 pips off its session lows yesterday, there is a still an uncertain feel to this market now. Today’s early consolidation is not helping this either. However, momentum indicators are for now holding up, with only really a deterioration on Stochastics as the negative signal. There is an uptrend of the past three weeks that rises at $1.1650 today and the bulls are seemingly not quite ready to given up their gains. The hourly chart shows that this could be an important session for how this phase develops. As hourly RSI has unwound, a failure between 50/60 would suggest corrective momentum is building, also if hourly MACD lines fail around neutral and Stochastics bear cross. For almost two weeks of the rally, the 55 hour moving average was an excellent gauge and could now become a basis of resistance as it falls (this morning around $1.1790). A move above $1.1800 would help to improve the outlook again.
The dollar bulls have threatened to pull Cable back in the past couple of sessions, but as yet they cannot find a stable foot hold for traction in this market. Posting two successive negative closes is a warning, as is the apparent bull failure on Friday (arguable shooting star). However, initial testing lower could not be sustained yesterday and the support of a sharp two week uptrend of the recovery has held. Daily momentum signals are drifting back slightly and for now this is more of a consolidation than a building correction. However, the hourly chart signals are beginning to look slightly more corrective. Hourly RSI falling over under 60, hourly MACD also faltering around neutral, and an hourly Stochastics bear cross this morning. Under the $1.3170 rally high there is resistance at $1.3110 and if this is not broken then a phase of lower highs could be building. The key support to watch is at $1.3000, as a breach would generate a new negative trending outlook and a deeper correction would develop.