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Monday, October 23, 2017

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Global FX Insightsby LMAX Exchange Research & Analytics

Comprehensive daily market research and analytics, with insightful commentary and charts

Plenty of Distraction to Offset Light Calendar Wake-up Call

The economic calendar is quite thin at the start of the week, though the market will have other distractions in theinterim. Things have been heating up in Spain, with the PM looking to invoke Article 55, while in the US, the Presidentcould soon announce the next Fed Chair.

Technical highlights Daily Video

EURUSD Big support below•GBPUSD Setbacks corrective•USDJPY Pushing to range high•EURCHF Thinking about 1.2000•AUDUSD Deeper setbacks ahead•USDCAD Sights on August high•NZDUSD Gravitating to yearly low•US SPX 500 Price goes parabolic•GOLD (spot) Choppy but bullish•Feature – USDZAR Rally mode•

Fundamental highlightsEURUSD Rajoy initiates Article 155 process•GBPUSD Brexit negotiations take positive turn•USDJPY Abe secures fresh mandate as expected•EURCHF Franc weakness slows despite stocks•AUDUSD Aussie weighed down on US drivers•USDCAD Another disappointing round of data•NZDUSD Kiwi gets relief in Labour Day holiday•US SPX 500 Investors wait on next Fed Chair•GOLD (spot) Buy side happy to build longs•Feature – USDZAR More political drama•

Five day performance v. US dollar

Suggested readingThe Economics Behind China’s Crackdown On Civil Society, T. Hamlin, NPR (October 20, 2017)•Black Monday Remembered, B. McMillan, Independent Market Observer (October 18, 2017)•

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

EURUSD – technical overview

The uptrend in 2017 has stalled out for after the market triggered a head and shoulders topping formation and droppedback below the 50-Day SMA for the first time since the Euro broke out earlier this year. The measured move extension offthe head shoulders top projects a decline to 1.1555. What’s even more interesting right now is if the market breaks downbelow 1.1660, we could see the formation of an even bigger head and shoulders top projecting a measured movedownside extension into the 1.1200s. But 1.1660 is a strong level of support, with the neckline coinciding with the 100-DaySMA. Inability to establish below 1.1660 on a daily close basis will keep the 2017 uptrend intact.

R2 1.1880 – 12Oct high – Strong•R1 1.1859– 19Oct high – Medium•S1 1.1737 – 17Oct low – Medium•S2 1.1663 – 17Aug low – Strong•

EURUSD – fundamental overview

The Euro has been trading within a consolidation over the past several days and this has kept the FX market lesscommitted to making any big decisions. As as has been the case with so much risk like this, the market has seeminglygrown immune to the political risk, with the Euro holding up into the new week despite an escalation in Spain over theweekend. PM Rajoy has taken steps to invoke Article 155 at an emergency cabinet meeting over the weekend and theSenate will now look to approve the use of 155 at the end of the month. The Euro will have Thursday’s anticipated ECBmeeting to think about this week and in the interim, it could also be thinking about a possible announcement of the nextFed Chair. Looking at today’s calendar, we get some second tier data in the form of Eurozone consumer confidencereadings and the Chicago Fed national activity index.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

GBPUSD – technical overview

The market has eased off quite a bit since topping out at a fresh 2017 high in September, with the price dropping backinto the 1.3000 area thus far. However, while there is risk for another drop, setbacks should be limited below thepsychological barrier, with the greater risk for the formation of that next meaningful higher low ahead of a continuation ofthe newly formed uptrend in 2017. Look for a daily close back above 1.3338 to confirm the constructive outlook andaccelerate gains. Ultimately, only back below 1.2775 would delay the outlook.

R2 1.3288– 17Oct high – Medium•R1 1.3229 – 19Oct high – Medium•S1 1.3088 – 20Oct low – Medium•S2 1.3027 – 6Oct low – Strong•

GBPUSD – fundamental overview

There’s been a lot of choppy trade in the Pound, with the UK currency’s movement primarily dictated by developmentson the Brexit negotiation front. In the initial part of last week, the market wasn’t feeling too great about the prospects,though into the end of the week, the Pound got a nice boost from Merkel’s call for both sides to move towards a deal byyear end and from PM May’s apparent willingness to compromise on the divorce bill. But all of this is going to drag on andthe market will now look to see what reaction we get from the Tory Euroskeptics. Of course, the BOE rate hike timeline isanother influencer here and this latest pushback on the central bank’s tightening expectations, as reflected through BOECunliffe comments, should not be overlooked. As far as today’s data goes, it’s going to be a light one with only US CBIreadings and the Chicago Fed national activity index due.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

USDJPY – technical overview

The market has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips wellsupported below 108.00. The market has been in rally mode over the past several days, with the greater risk from here for acontinuation of gains to test the range highs. At that point, look for the market to adhere to the range and stall out yetagain for the start to a drop back towards the range low.

R2 114.50 – 11Jul high – Strong•R1 114.00 – Figure – Medium•S1 113.00 – Figure – Medium•S2 112.30 – 19Oct low – Strong•

USDJPY – fundamental overview

The Japanese election went off as widely expected, with PM Abe's fresh mandate having been fully anticipated. And so,no reaction in the Yen to this news, with the currency instead moving lower on the back of traditional correlations withglobal sentiment and this ongoing run up in US equities. Dealers do however report USDJPY offers in size in the 114.00s.Looking ahead, the economic calendar for Monday is exceptionally thin, with only the Chicago Fed national activity indexdue.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

EURCHF – technical overview

A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high. The bullish breakcould now get the uptrend thinking about a test of that major barrier at 1.2000 further up. In the interim, look for anysetbacks to be very well supported ahead of 1.1400, while only back below 1.1260 would delay the overall constructivetone.

R2 1.1630 – 20Oct/2017 high – Strong•R1 1.1600 – Figure – Medium•S1 1.1485 – 17Oct low – Medium•S2 1.1390 – 2Oct low – Strong•

EURCHF – fundamental overview

Overall, the sell-off in the Franc in 2017 has been a welcome development for the SNB. Still, the central bank will need tobe careful as the record run in the US stock market has been a big boost to the SNB’s strategy. Any signs of capitulation onthat front, will likely invite a very large wave of demand for the Franc, which could put the SNB in a more challengingposition to weaken the Franc. Interestingly, the latest surge in stocks has failed to have much impact on the exchange rate,which could already be a concern for the SNB.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

AUDUSD – technical overview

Despite rallying to a fresh +2 year high in September, the market has been unable to hold onto gains, quickly reversingcourse and trading back below 0.8000. There is now risk for the formation of a more meaningful top opening the door forthe next downside extension towards 0.7500. Look for rallies to now be well capped ahead of 0.8000, with only a close backabove the psychological barrier to put the pressure back on the topside. Back below 0.7734 will strengthen the outlook.

R2 0.7987 – 22Sep high – Strong•R1 0.7898 – 13Oct high – Medium•S1 0.7786– 12Oct low – Medium•S2 0.7734 – 6Oct low – Strong•

AUDUSD – fundamental overview

Most of the recent moves in the Australian Dollar have been US driven, with Aussie weighed down on the Fed policytimeline and US tax reform optimism. Bullish Aussie bets have further declined as per the latest CFTC positioning data.Looking ahead, the economic calendar is exceptionally thin to start the week and Aussie will take its cues from broadermacro themes and risk sentiment flow. Today, we get the Chicago Fed national activity index. Later this week, Aussie willbe watching to see how the latest round of Aussie CPI comes in.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

USDCAD – technical overview

Despite the September breakdown to a fresh 2017 and +2 year low, stretched medium-term technical studies continue towarn of the possibility for a more significant bullish reversal as oscillators turn up again. From here, there’s room for a pushto retest key resistance in the form of the August peak at 1.2780, while any setbacks should be well supported ahead of1.2400.

R2 1.2700 – Figure – Medium•R1 1.2663 – 31Aug high– Strong•S1 1.2534– 18Oct high – Medium•S2 1.2451 – 19Oct low – Strong•

USDCAD – fundamental overview

Yet another demonstration the Bank of Canada was too aggressive with its consecutive rate hikes this year after Friday’sCanada CPI and retail sales were a big disappointment. We’re now into a week that has the Bank of Canada out with itslatest policy decision and the central bank is expected to make some formal adjustments to its language with respect tothe outlook for the economy and rate hike timeline. Looking ahead, the calendar is light on Monday, with only Canadawholesale sales and the Chicago Fed national activity index due.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

NZDUSD – technical overview

Medium term studies have turned down after the market pushed up to a plus two year high through 0.7500 in late July. Arecent break below 0.700 warns of the possibility for a more meaningful reversal to retest the 2017 low at 0.6818. Any ralliesshould now be very well capped ahead of 0.7200.

R2 0.7100 – Figure – Medium•R1 0.7036 – 20Oct high – Medium•S1 0.6954 – 20Oct low – Medium•S2 0.6914 – 22May low – Strong•

NZDUSD – fundamental overview

New Zealand is on its Labour Day holiday today which is making for thinner trade in an already light calendar day.Overall, the Kiwi rate has been hit hard, with the latest surprise election result fueling additional declines. The NewZealand Dollar has been the clear underperformer over the past week, with the market unsure about what the Labour-NZFirst coalition government will look like. Meanwhile, the US Dollar has been getting a boost of its own on the back of US taxreform optimism and a more hawkish Fed timeline. The only data of note out today is second tier in nature, with theChicago Fed national activity index due.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

US SPX 500 – technical overview

The market continues to shrug off overextended technical readings, once again pushing up to fresh record highs.Interestingly, the market broke out in August after a 75 point consolidation, which projected a measured move to 2565.This could warn of some form of a reversal to come, though we would need to see a daily close back below 2544 at aminimum to take the immediate pressure off the topside. Until then, the record run continues into unchartered territory,with the focus on the next major barrier at 2600.

R2 2600.00 – Psychological – Strong•R1 2577.00 – 20Oct/Record high – Medium•S1 2544.00 – 19Oct low – Medium•S2 2487.00 – 25Sep low – Strong•

US SPX 500 – fundamental overview

The US equity market continues to be well supported on dips, pushing further into record high territory. It seems thecombination of blind momentum and expectation of favourable US tax policy are helping to keep the move going. But atthe same time, there’s a nervous tension out there as the VIX sits at unnervingly depressed levels. The fact that Fed policy isnormalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reductioncoming into play and another rate hike still on the cards this year. But for now, it’s more of the same. At this point, it willtake a breakdown in this market back below 2500 to turn heads. Tax reform updates and who President Trump appointsas the next Fed Chair will be the main focus this week.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

GOLD (SPOT) – technical overview

Setbacks have been well supported over the past several months, with the market continuing to put in higher lows andhigher highs, opening a recent push to a fresh 2017 high up around 1357. And so, look for this most recent dip to round outthat next higher low around 1260 in favour of a bullish continuation towards a retest of the 2016 peak at 1375 further up.Ultimately, only a drop back below 1200 would negate the outlook.

R2 1334.35 – 15Sep high – Strong•R1 1316.10 – 20Sep high – Medium•S1 1260.70 – 6Oct low – Medium•S2 1251.45 – 8Aug low – Strong•

GOLD (SPOT) – fundamental overview

Solid demand from medium and longer-term players continues to emerge on dips, with these players more concernedabout exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. Allof this should continue to keep the commodity well supported, with many market participants also fleeing to the hardasset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the USDollar under pressure in 2017 has added to the metal’s bid tone as well, but there is a growing sense that even in ascenario where the US Dollar is bid for an extended period, GOLD will hold up on risk off macro implications. Dealers arenow reporting demand in size ahead of 1260.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

Feature – technical overview

USDZAR has been confined to range trade for much of this year, with rallies well capped ahead of 14.00 and dipssupported into the 12.30 area. A the moment, the market has been well supported and is looking to once again push up tochallenge the top of the range. Only back below 13.25 would negate the outlook.

R2 13.87 – 9Oct high – Strong•R1 13.75 – 20Oct high – Medium•S1 13.25 – 16Oct low – Strong•S2 13.16 – 22Sep low – Strong•

Feature – fundamental overview

Expectations for a November rate cut in South Africa have been cut down after last week’s SA CPI readings rose by morethan forecast. This isn’t a positive development for the South African economy with the greater need for flexibility on rateson the basis of a near zero growth and a negative output gap. Meanwhile, the Rand remains exposed to ongoing tensionon the political front which will persist into year-end on account of the upcoming ANC leadership election and risk of creditrating downgrades. The latest speculation of President Zuma getting ready to sack Deputy President Ramaphosa has onlyadded to the political saga, while locals are also thinking about what is likely to be an unrealistic Budget Statement fromthe FinMin this week. The only supportive Rand driver at the moment seems to be coming from the record run in USequities, which is a positive for risk correlated emerging market currencies. However even here the Rand should be sittinguneasy as the prospect for a capitulation is looking increasingly realistic on overbought technicals and an unstablepolitical backdrop around the globe.

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Monday, October 23, 2017 LMAX Exchange Global FX Insights

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