The ECB meeting caused the volatility for the euro yesterday, but the continued constructive rhetoric on the trade dispute maintains a positive bias to risk appetite. In recent days there have been concessions from both sides, and now a suggestion that President Trump would be willing to accept an interim agreement with China ahead of a much more comprehensive deal in due course. The cycle of this trade dispute still has a few weeks until an early October meeting between the two sets of trade negotiators. There is a sense that positive rhetoric could sustain the improvement on market sentiment during that time. This is resulting in the usual flow away from safety and towards higher risk. That means Treasury yields continue higher whilst the Japanese yen continues to be sold into strength in favour of the Australian dollar and equities. However, this morning we are seeing a mild dollar negative position also being taken as traders take the dovish actions of the ECB, the usual petulant response from Donald Trump and the implications this could have for the Federal Reserve monetary policy next week. Interestingly, gold is finding support. This is a function of a dovish ECB and prospective dovish response from the BoJ and expectation of the Fed next week. However, the enduring outlook is more uncertain as positive risk and central bank monetary easing pull against each other.
Wall Street closed higher again, albeit off the day highs, as the S&P 500 closed +0.3% higher at 3009, whilst US futures point towards further gains of +0.2% in early moves today. Asian markets continue to pull decisively higher with the Nikkei +1.0%. In Europe there is a continued positive bias to early moves with FTSE futures +0.2% and DAX futures +0.1%. In forex majors, there is a USD negative theme developing, as EUR and GBP regain a degree of upside momentum again, whilst CAD is beginning to suffer as the recent drop in oil price weighs. In commodities, the drop back on the dollar is supportive gold, whilst oil is maintaining its slide back lower.
The focus is on the US consumer for the economic calendar today, but initially it is the size of the Eurozone trade surplus to look at. The Eurozone Trade Balance is at 1000BST which is expected to improve to +€17.5bn in July. The US Retail Sales are expected to continue to show monthly ex-autos (core) sales growth of +0.1% for August (+1.0% in July). Another consumer indicator to take note of is the prelim Michigan Sentiment for September at 1500BST which is expected to show an improvement to 90.9 (from the final reading of 89.8 in August). This improvement is expected to come from both Michigan Current Conditions improving to 107 (from 105.3 last month) and Michigan Expectations which is expected to improve to 82.0 (from 79.9 last month).
Chart of the Day – AUD/USD
The better risk environment (trade dispute and broad monetary easing from central banks) is helping the performance of the riskier assets and meaning the Aussie is benefitting. This has played out over the past couple of weeks in a decisive rally on AUD/USD which has rallied decisively through the resistance at $0.6830. Finding support above this pivot the market is now looking to push on again with a decisive positive candle yesterday and a continuation of the recovery. Whilst this is still just a bear market rally within what is now a nine month downtrend (which comes in today around $0.7000), a completed base pattern above $0.6820 implies $0.6965 of recovery. It suggests that a return to the downtrend should not be ruled out on this move. Momentum is certainly backing the run higher, with Stochastics strongly configured, MACD lines accelerating higher and RSI into the low 60s. A few slightly indecisive positive candles have come around the 50% Fibonacci retracement of the $0.7080/$0.6675 sell-off (at $0.6875) is a consolidation. A closing breakout implies a push to 61.8% Fib is on at $0.6925. Initial resistance is at $0.6905 which is the old early July low. Near term corrections are a chance to buy for this recovery back to the downtrend.
The ECB monetary policy announcement and press conference has left an incredible bullish engulfing candlestick as a legacy. It is difficult to trust the immediate reaction to such a volatile previous session, and so today needs to be a day of contemplation. If the immediate reaction of mild gains this morning can be held through the European session, then it will cap a remarkable turnaround from the initial spike lower. Hitting support at $1.0925 to the pip before a sharp rebound has put a far more positive spin to the market. Momentum signals are now looking higher with a bull cross on MACD and potential bull kiss on Stochastics. Is this a pre-cursor to a sustainable bullish move? Given the market is still trying to get a grip on the post-ECB reaction, it is far too early to say for sure. Watch for the RSI moving above 55 to really suggest bull traction is pulling through the market. A mini four week downtrend has been broken and a test of the key channel resistance at $1.1110 is now on. A close above $1.1085 would be another positive step. We remain cautious of this rally, feeling that the buyers need to prove their bullish credentials before shifting outlook on a market that has so consistently sold into strength.
Cable has really settled down in recent sessions. Amidst all the volatility on EUR/USD yesterday, Cable has been relatively zen-like in configuration. The market continues to trade broadly above $1.2300 (a little intraday bounce from $1.2280 ensured that yesterday). Momentum is positive although with lost impetus. As long as the support at $1.2230 remains intact, the bulls will still be fairly happy. However, to really re-engage there will need to be a closing break above $1.2380 which would breathe life back into the market and open the key resistance at $1.2580 once more. This morning we see sterling bid and the $1.2380 resistance under pressure. For now, this is still a market in consolidation, but the bulls are well positioned (above the $1.3205 base neckline) for the continuation of a move higher in due course.
The rally on Dollar/Yen took a bit of an intraday wobble yesterday but another decisive move higher into the close has formed yet another strong bull candle and the continuation of the rally. It just goes to show that near term corrections remain a chance to buy on USD/JPY. The uptrend of almost three weeks comes in at 107.05 today and is supportive. Furthermore all the old breakout levels between 107.50 and down towards 106.75 are pivot supports