Dollar strengthens on higher yields despite Moody’s China downgrade

Market Overview

The dollar bulls are beginning to find some support once more as Treasury yields have started to pick up again. Comments from FOMC member Jim Harker last night have helped to boost prospects for a June hike, noting that it was a “distinct possibility”. This comes ahead of tonight’s release of the FOMC minutes for the May meeting. This is helping the dollar to make key gains against the yen, pulling the euro lower and also seeing gold coming off its recent highs. However, there is an added factor to today’s trading in that the ratings agency Moody’s has downgraded China’s credit rating from A1 to Aa3 amid concerns over debt levels that were expected to increase over the coming years, which will erode its financial strength. This is impacting sentiment on equity markets early today.

Wall Street closed lower with the S&P 500 +0.2% at 2398, whilst Asian markets were mixed overnight in the wake of the China downgrade, although the Nikkei was +0.6% helped by yen weakness. European markets are mixed in early moves today. In forex markets the dollar is broadly strong with the yen and euro weaker, whilst it is interesting to see sterling regaining some strength as markets have settled following the terrorist attack. Gold is slightly lower again on the dollar strength, whilst the oil price is looking stable one day before the crucial OPEC meeting.

There is very little to trouble traders during the morning of the European session, however there is a speech from ECB President Mario Draghi at 1345BST which will be of interest. He is though speaking at a conference on financial stability so there may not be too many implications for ECB monetary policy. The Bank of Canada’s monetary policy will be in focus at 1500BST with rates expected to stay at +0.5% but the interest will come in the assessment of inflation. US Existing Home Sales at 1500BST take on added importance after yesterday’s dreadful new homes data, with an expectation of 5.65m (down from 5.71m last month). The EIA oil inventories at 1530BST always have a volatility impact on oil prices, with an expectation of another crude oil drawdown of -2.5m barrels. Distillates are expected to be -1.0m barrels whilst gasoline is expected to be -0.8m barrels. However the FOMC minutes for the May meeting are at 1900BST and will be the key factor for traders today. The Fed held fire and gave little away with only mild upgrades to language in the FOMC statement. Interest will come in any mention of balance sheet reduction and hints towards further rate hikes in 2017.

 

Chart of the Day – NZD/USD

In the face of dollar weakness, the Kiwi has made a remarkable recovery against the greenback in the last week or so. On Monday this rally moved above resistance at $0.6970 to complete a small base breakout implying around 150 pips of upside. The break has been confirmed and the move implies pressure on the key resistance between $0.7050/$0.7090 which has been a barrier to upside for the past two months. The momentum indicators have been improving for over a week now and with two positive sessions the momentum is increasingly positive. However, the market seems to be at something of an inflection point once more. Today’s move is mildly lower and is pulling back to an old pivot at $0.6990. If this support between the neckline at $0.6970 and pivot at $0.6990 now starts to build then the near term recovery can continue towards the near term breakout target. However, the momentum indicators are though at a crossroads now with the RSI into the mid-high 50s, whilst the Stochastics are now around 80 and MACD lines expanding but back to neutral. Can the bulls sustain the recent recovery and build higher? The falling 89 day moving average (c. $0.7050) has been resistance for the past few rallies and again capped the gains yesterday. There are question marks over the recovery, with yesterday’s high at $0.7046 before drifting lower into the close. This is an interesting inflection point for the Kiwi.

 

EUR/USD

There are increasing questions over whether the impetus is beginning to be lost from the rally. The negative candle from yesterday closed almost at the day low and has been followed by an early drift lower today. There is nothing yet to suggest a significant correction is coming, but if a second negative candle is posted today then the worries will increase. The momentum indicators are beginning to roll over and could begin to post corrective signals is the bears can gain control today. This comes with the support at $1.1100 and the previous breakout at $1.1020. The pivot is a long term basis of support now and would be an area the bulls will be watching. The hourly chart shows the initial support at $1.1160 remains intact even though the hourly momentum indicators have deteriorated. Corrections remain a chance to buy and anything towards $1.1100 is likely to be pounced upon by the bulls now.

 

GBP/USD

A drift off the recent highs has not yet changed the near term outlook but the bulls will need to work hard to prevent a more neutral outlook from taking hold. The momentum indicators beginning to track lower reflects a less positive configuration to the market is forming and this could begin to impact on the price too. The Stochastics are looking to roll over now under 80, whilst the MACD lines are slipping lower and the RSI is close to a 5 week low. However whilst the support at $1.2890 remains intact the bulls will be confident still. A breach though would open $1.2840 which is the support that protects $1.2775. It does though look a struggle for the bulls around $1.3050 which was a pivot from Q3 2016. The hourly chart shows a fairly benign range outlook, however there is a drift lower that could begin to pressure the more important supports that needs to be watched.

 

USD/JPY

The bulls are regaining control once move with yesterday’s late push back above 111.60. The pivot resistance had been a barrier in recent days but the market closed above the pivot to help re-engage the bulls once more. The next barrier is the 112.20 upper part of the pivot and if the bulls can breach that today there is an increasingly positive look to the recovery once more. The momentum indicators are beginning to respond to the improvement with the Stochastics picking up, the RSI back to 50 and the MACD lines bottoming. The early move today is mildly positive so the bulls will now be growing in confidence. The hourly chart shows the near term break above 111.60 and this will now be seen as a basis of support today as the outlook gradually improves again. The hourly RSI holding above 60 would reflect this improvement. A move above 112.20 opens 113.05 again. There is now a higher low as support at 110.85 that is increasingly important.

 

Gold

With the dollar beginning to strengthen against the majors, the gold bears are beginning to make ground once more. The negative session yesterday formed a bearish engulfing candle with a close below the previous session low and with further declines early today the market is beginning to add to the downside pressure. The resistance around the old $1261 pivot is growing now and for now the neutral near term outlook is intact. However the sellers will increasingly be watching the key downside support that could turn this market negative once more. Momentum indicators are beginning to roll over again, with the RSI around 50 and the MACD lines around neutral. Supports to watch are at $1245.40 initially and then the old pivot at $1240. A move below $1240 would turn a more negative outlook and re-open the May low at $1213.80. The hourly hart shows the near term importance of $1245.40 as a breach would complete a top pattern and imply $20 of additional downside. Today’s high at $1253.80 is initial resistance.

 

WTI Oil

The bulls have been resilient once more with a move to support an initial intraday decline which then pushed back above the resistance at $51.22. The bull run in front of the crucial OPEC meeting on Thursday remains intact. This is helped by the daily RSI pushing strongly above 60 and the MACD lines accelerating higher. There is no need to be too worried about the Stochastics losing impetus quite yet as this was seen during early April and the market continued to move higher for almost two weeks. A cross lower though on the Stochastics would begin to be a concern. For now the bulls remain in control and at least for today intraday corrections are a chance to buy. Support at $50.45 will be near term key as a loss would form a small top pattern. There is though strong support now in the range between $48.00/$49.65. Closing above $51.22 opens upside towards $53.75. The big caveat though is the OPEC meeting tomorrow and the market could begin to consolidate in front of it as the day progresses.

 

Dow Jones Industrial Average

The bulls have now closed the potential “breakaway” gap that was posted last week and this has helped to continue to improve the outlook again following the sharp sell off from last week. The consistent bull move has helped to improve the outlook once more with the momentum indicators such as the Stochastics and RSI picking up again whilst the MACD lines are also bottoming. This close above 20,932 now means that the bulls can then look towards a test of the recent range resistance again above 21,000, with the highs between 20,034 and 20,070 subsequently the test. The hourly chart shows the market pushing through the previous overhead supply at 20,887, whilst the hourly momentum is also positively configured to use corrections now as a chance to buy. The band between 20,780/20,887 now becomes a near term “buy zone”.