Is the medium term dollar rally about to break down?

Is the medium term dollar rally about to break down?

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  Weekly Outlook Monday 17thSeptember 2018 by Richard Perry, Market Analyst Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report. Key Economic Events WHEN: Wednesday 19th September, 0930BST LAST: Headline +2.5%, Core +1.9% FORECAST: Headline +2.4%, Core +1.9% Impact: With UK wage growth picking up last week and the Bank of England still concerned over the path of inflation (which pushed it to hike rates in August), focus is on CPI this week. Headline CPI is expected to tick back by -0.1% with core dipping to +1.8%. However there is another aspect, with the PPI Input prices needing to be watched. There is a strong negative correlation between the strength of sterling and input prices which plays into the margins of UK companies. Falling input prices would help to ease cost inflationary pressures. Sterling and Gilts will be reactive. Date Time Country Indicator Consensus Last Wed 19th Sep BST Japan Bank of Japan monetary policy No change -0.10% No change -0.10% Wed 19th Sep 0930BST UK CPI (headline / core) +2.4% / +1.8% +2.5% / +1.9% Wed 19th Sep 1330BST US Building Permits / Housing Starts 1.31m / 1.23m 1.31m / 1.17m Wed 19th Sep 1330BST US Current Account -$103.5bn -$124.1bn Thu 20th Sep 0830BST Switzerland Swiss National Bank monetary policy No change -0.75% No change -0.75% Thu 20th Sep 0930BST UK Retail Sales (ex-fuel) +2.4% +3.7% Thu 20th Sep 1500BST Eurozone Consumer Confidence -2.0 -1.9 Fri 21st Sep 0030BST Japan CPI (core) +0.9% +0.8% Fri 21st Sep 0900BST Eurozone Flash PMIs (Manufacturing / Services / Comp) 54.4 / 54.4 / 54.4 54.6 / 54.4 / 54.4 Fri 21st Sep 1445BST US Flash PMIs (Manufacturing / Services) 55.0 / 55.0 54.5 / 55.2 T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 1 N.B. Please note all times are British Summer Time (BST) i.e. GMT +1. Data: Reuters Macro Commentary The condition of the medium term bull run on the US dollar is becoming increasingly questionable. The fact that the dollar sold off for much of last week even after US earnings growth hit multi-year highs and Treasury yields were pushing higher, is a cause for concern if you are a dollar bull. The market is all but pricing a 100% probability of a Fed rate hike at the September meeting next week. The market is also 80% sure of a December rate hike now and there could be a further one, maybe two hikes in 2019 towards 3%. However that is likely to be where the Fed stops and it seems that the market is ready for it. So, there seems little to be gained for the dollar bulls on the monetary policy front. The latter stages of a tightening cycle is when a currency begins to lose performance. Much of the run higher of recent months has been born of the trade dispute, capital flooding out of emerging markets and into US assets. However, is Trump threatening to go all in going to be seen as the beginning of the end? If so, global investors will begin to understand where they need to be positioned. Will it be at that stage that the market sees the need to take account of the expanding US twin deficit? According to CFTC net dollar futures, there is a significant net long dollar position that has now started to unwind for the past two weeks. This is seen as a “smart money” indicator coming from hedge funds. This is the first time there has been a reverse in this positioning since April. If this continues to unwind then there is likely to be a significant dollar correction coming. Must Watch for: UK CPI Chart of the Week – Gold/Silver Ratio The Gold/Silver Ratio hit 85 on Friday. Moves above 80 tend to be stretched on a long term basis. This suggests a reversion is likely and means silver should outperform in the coming months.
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  Weekly Outlook Monday 17thSeptember 2018 by Richard Perry, Market Analyst Foreign Exchange There seems to be a shift in the dollar outlook underway just as sterling and the euro are recovering. Whilst domestic UK politics and Brexit no deal planning provide daily volatility, the mood music out of the EU seems to have shifted, especially from the Michel Barnier. This is helping to underpin sterling and ensure that weakness is a chance to buy. The caveat is party conference season in a couple of weeks and a potential Tory leadership challenge. Whilst unlikely, this would also likely fail and provide an opportunity to buy. Huge short contracts on sterling are unwinding and this should help a Cable rally towards the $1.3400/$1.3500 in the coming weeks (assuming no deal will not happen). The dollar is also suffering against the euro too. Draghi and the ECB were notably not dovish and any concerns over a downward revision to growth overweighed by increased confidence on inflation including “uncertainty surrounding the inflation outlook is receding” and “domestic cost pressures are strengthening”. As long as Italy toes the line on its budget, this should help to underpin euro gains now. The dollar is though edging higher against the yen and the Bank of Japan is not expected to shift this at its monetary policy meeting this week. Positive impetus of a strong revision to Q2 GDP has been negated by two natural disasters (an earthquake and a typhoon) adds up to a lower for longer policy from the BoJ and normalisation expectations remain low. The positive correlation of UST/JGB yield differentials and USD/JPY continue. WATCH FOR: Politics of trade remain key, Brexit developments and the BoJ for the yen T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 2 FX Outlook GBP/USD Watch for: Cable continues to build for a recovery with a test of the first key lower high Outlook: A broken 5 month downtrend means that a sterling recovery continues to build. A series of higher lows and higher highs if now in place over the past month and a test of resistance at $1.3215 would be a significant moment. If the bulls can decisively breach this resistance it would be the first lower high within the April to August sell-off that would have been broken. This would then mean a decisive new trend formation will be underway. In the least it would confirm that a bottom was in place. Momentum indicators certainly point to this with the MACD and RSI lines the most positively configured for five months. Support in the range $1.2900/$1.3000 will play a key role in this recovery. EUR/USD Watch for: The support above $1.1500 should give another opportunity to buy into weakness. Outlook: The bulls may have slipped up on Friday but they will still be eyeing key resistance at $1.1745 this week. An improvement in momentum indicators as the week progressed leaves the market well set up and with support bolstered above $1.1500 there will be an opportunity to buy into weakness. There seems to have been an appetite now to support EUR/USD which should be aided by the encouraging position of the ECB. This is a chart increasingly looking like a large base formation. Above $1.1850 would complete it.
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  Weekly Outlook Monday 17thSeptember 2018 by Richard Perry, Market Analyst Equity Markets As media outlets have paid a lot of attention to the 10 year anniversary of the collapse of Lehman Brothers and whether the lessons have been learned, the Wall Street bull train continues to chug along, once more buying into weakness and eyeing all time highs again. Since the bull run resumed in April, the S&P 500 has time and again found uptrend support to push higher highs. Subsequently, 2918 is in range this week, whilst a tech-heavy NASDAQ is eyeing its all-time high of 8133. With a boost from Apple’s latest product launch, a 1.5% gain is within reach. However there is still a significant divide between performance of US and European equities. This has been a theme for several months but shows little sign of changing. However, with market sentiment picking up there has a notable improvement in the prospects of European equities in the past week. This comes after the latest leg lower on European markets that took the German DAX, FTSE 100 and French CAC 40 to multi month lows. Stretched negative momentum positions are now unwinding and technical analysis will note that the DAX is close to a MACD buy signal, which would be just the sixth one of 2018 and each have come on a decisive recovery. There is a similar position on the French CAC, however FTSE 100 is finding the going a lot more tough. This underperformance in the recovery is coming as we find a strengthening of sterling again. Whilst the improved prospects of a positive Brexit deal is helping a rebound on sterling, this is acting as a drag on FTSE 100. Overseas earnings equate to around 70% of total FTSE earnings and these translate less well on a stronger sterling. FTSE 250 (mid caps) with around 50% foreign earnings are likely to outperform the large caps. WATCH FOR: Trade tariffs news for Wall Street and DAX, Brexit developments on FTSE 100 T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 3 DAX Xetra Watch for: Can the bulls continue to build for a decisive move above 12,120 resistance? Outlook: The technical rally is looking to build. Even though the candles on the daily chart have shown questionable control from the bulls, there seems to be a decisive move to recover the RSI from 30 once again. This seems to be the area where the bulls continue to return and subsequently push the RSI into 50/60 on every occasion since the March low. There is subsequently further upside momentum to be seen in this bull leg. The resistance at 12,100/12,130 could play a key role in this as if/once this is broken it would then become a basis of support for an unwind to 12,300/12,400. FTSE 100 Watch for: Can the bulls build from support around 7200/7220 and form a recovery? Outlook: Has there ever been a time where the FTSE 100 has not been frustrating for the bulls? Another moment where other major markets appear to be in recovery mode but FTSE 100 is lagging behind. Momentum had become stretched around 30 on the RSI, but MACD and Stochastics lines are yet to show any real signs of life in a recovery as the market struggles around 7300. If this resistance area can be sustainably overcome there is a realistic opportunity for a recovery into 7428/7500. However, as ever, this is a FTSE bull run that seems to have the handbrake on. Support at 7200/7220 is increasingly key for a recovery. Index Outlook
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  Weekly Outlook Monday 17thSeptember 2018 by Richard Perry, Market Analyst Other Assets: Commodities & Bonds There has been a shift in sentiment for gold in recent weeks, as dollar performance has started to struggle. If this is the beginning of a dollar correction again, the support should be found in the gold price. A move above $1217 resistance would be a key technical development to signal a change in trend. Another key development over recent sessions has been the move on the Gold/Silver ratio to record levels. Normally it would be a case where above 80 is considered stretched on a long term basis. The ratio is currently around 85 and is the highest since 1995. This would suggest that gold is likely to underperform silver in the weeks/months ahead. Oil is latterly being impacted by the potential for Hurricane Florence to cause sizeable damage but also drive up demand. It may take some days still for the volatility to settle down in the price, however then focus will be on emerging markets demand pressures. If Trump continues to pursue his tariffs, then the likelihood is that the spread between Brent Crude and WTI will remain high. The trade would be for this spread to tighten on more positive developments over the trade issue. Global bond yields are rising again with inflationary pressures seemingly building. However, can the US 10 year yield break above 3% again? The 2s/10s Treasury spread is tracking lower again and this suggests that the US yield curve continues to flatten. This should begin to play into any corrective dollar momentum. WATCH FOR: Trade dispute developments, US current account and the BoJ T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 4 Gold Watch for: Selling pressure has stalled but the recovery is struggling for momentum. Outlook: The sell-off has stalled (just as the dollar rally has lost traction) and gold has picked up from $11760. However, the prospects of a continued recovery are still uncertain as the market has spent the past few weeks consolidating between $1183/$1214. There are mixed momentum indicators within this consolidation, with the Stochastics (being the most sensitive to near term moves) slipping back again. Closing breakouts of these range levels will provide a key indication of sentiment and a move that would then likely continue. Markets Outlook Brent Crude oil Watch for: The pivot at $75.25 remains supportive in the middle of the range. Outlook: For the past four months we have seen Brent Crude trading in a range. The May highs of $80.50 has not been broken despite a couple of attempts so far, whilst the floor at $70.30 is growing as support. Traders will be looking at this run higher towards the range resistance once more and see momentum indicators becoming an increasing concern. The Stochastics have already given a negative signal, whilst the MACD lines are threatening to deteriorate. Although there needs to be confirmation of more corrective signals, there is a growing risk that another retreat to the $75.25 pivot could easily be seen.
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  Weekly Outlook Monday 17thSeptember 2018 by Richard Perry, Market Analyst T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 5 Risk Warning for Financial Promotions This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability. Trust Through Transparency Hantec House, 12-14 Wilfred Street, London SW1E 6PL T: +44 (0) 20 7036 0850 F: +44 (0) 20 7036 0899 E: [email protected] W: hantecfx.com