Treasury yields tick higher to support the dollar again

Market Overview

After the volatility and elevated market fears seen throughout last week, there is a sense that sentiment is starting to settle down. However, if that means Treasury yields start to track higher again, then this will impact through a stronger dollar and mean that risk aversion will sustain across markets and prevent a sustainable recovery on equities. Despite yesterday’s US Retail Sales coming in below estimates (hurricane related?), US treasury yields closed the session towards the day high and continue to pull higher today. This is currently only small moves, especially within the context of what has been seen in the past couple of weeks, but if this move begins to trend then it will have an impact. The dollar is gaining small ground today. However as we approach the middle of the week, attention turns back to Brexit, with a crucial UK Cabinet meeting today coming ahead of the EU Summit tomorrow where we are approaching make or break time. Squaring the circle of the Northern Ireland border issue remains the critical stumbling block still and unless the negotiations can conjure up a way to solve the problem in a way that somehow placates all sides, then an extreme outcome (a hard landing no deal, or perhaps even stay in) could even result. Today’s Cabinet meeting could also contain some resignations which would again further undermine the already knife-edge position that Mrs May finds herself teetering on.

Wall Street closed lower last night, led lower by tech stocks with the S&P 500 -0.6% at 2751 but futures are +0.3% higher today. This is helping a mixed session in Asia where the Nikkei was +1.3%, however China’s Shanghai Composite was weaker -0.7%. An indication that the trade tensions with the US are having an impact, producer inflation continues to drop back in China. However the inflation data was broadly in line with expectations with China CPI rising a shade to +2.5% as expected (+2.5% exp, +2.3% last) whilst the China PPI came in a touch above expectations in its dip to +3.6% (+3.5% exp, +4.1% last). In European markets there is a mixed start to the session. In forex, there is a shade of dollar strength through the majors, with the yen being the main underperformer as yield differentials play a role here, with sterling just edging a shade higher ahead of a key couple of days for UK politics. In commodities, the recoveries on gold and silver remain on track whilst the oil price is marginally lower but broadly stable.

It is a wide and varied economic calendar for trader to keep an eye on today. First up will be the start of  run of key UK data point throughout this week. The UK unemployment is at 0930BST and is expected to stay flat at 4.0%. However, more importantly will be the UK Average Weekly Earnings growth which is expected to stay at +2.6% on a total compensation basis (salary and bonus). Then at 1000BST there is German ZEW Economic Sentiment which is expected to drop back to slip back to -12..0 (from =10.6) which would be a disappointment after two months of improvement. The US Industrial Production is at 1415BST and is expected to show monthly growth of +0.2% (+-.4% last month) whilst Capacity Utilization is expected to tick higher to 78.2% (from 78.1%) and back to August’s three year high. The US JOLTS jobs openings at 1500BST are expected to slip back a shade to 6.90m (from 6.94m).

 

Chart of the Day – USD/CAD

For almost two weeks the Canadian dollar was under pressure and a sharp rebound on USD/CAD was seen amidst a fall on oil and increased market fear. However, the Bank of Canada is expected to hike interest rates next week and with oil showing signs of stabilising, it will be interesting to see whether the Canadian dollar can start to perform better again. There is a strong medium term technical outlook for the Canadian dollar that is dragging a downtrend channel over the past three and a half months. The recent loonie weakness translated to a rally within the downtrend channel, however the medium term negatively configured momentum indicators are now back around the selling pressure tends to resume on USD/CAD. The RSI failing around 60 and MACD lines unwinding to neutral and also Stochastics beginning to cross back lower again, all suggests that sell signals are on alert. This has also come as the resistance of the lower high at 1.3080 has kicked in to limit the rally last week, with the past three candles all under the resistance. The psychological 1.3000 has been broken on a closing basis  and has now opened the near term key higher low at 1.2920. If this support were to be breached then it would signal increased momentum on a correction back towards the recent low at 1.2780. The caveat would be that there is still room to run in a rebound within the downtrend channel and still be negatively configured on a medium term basis. Initial support is at 1.2950.

 

EUR/USD

There is a certain extent of consolidation that has settled across the euro in the past couple of sessions. Having made a near term break above $1.1550 the market is consolidating without managing to push decisively forward with the break. This move comes as the market settles under a clutch of mildly negative moving averages and momentum indicators stabilise once more. The momentum could hold the key here as the market does still have the legacy of the early October break below $1.1500 in the outlook and there is still a mild negative configuration to the MACD and Stochastics which suggests that if the price started to drop back below $1.1500/$1.1550 support once more it would be a development of concern for the bulls. The hourly chart shows a couple of highs around $1.1610 meaning this is a barrier that needs to be overcome now to regain momentum for a recovery and a failure to do so would increase the potential for the bulls to tire with this move. A close above $1.1610 or below $1.1500 will determine the next direction and end this current three session consolidation.

 

GBP/USD

Sterling is so intrinsically linked to the progress of Brexit that you could get a very good idea of how the negotiations are going simply from looking at the charts. Euro/Sterling would be a classic but given both currencies should benefit from a “good deal” then we also look at Cable as a good barometer. Hence why there should be an increasing amount of volatility this week to watch out for here. Friday’s bearish engulfing candle has set back the recovery again but a degree of stabilisation has set in with a neutral  candle yesterday. Technicals may take a backseat in the rollercoaster to be ridden, but the support of an eight week uptrend that comes in at $1.2990 today is key. A failure of the September EU summit did not break the recovery, so this week’s October EU summit will be keenly watched. Resistance comes at $1.3260 but an agreement will see this surpassed (as likely will $1.3297). Initial support is yesterday’s low at $1.3075 as the market consolidates early today.

 

USD/JPY

Another negative candlestick has continued the corrective move of the past week and a half and has now tested the support of the near seven month uptrend dating back to March. There is a basis of old breakout support between 111.60/111.85 which is also now being tested and if this were to be breached then it would suggest that a further retreat is likely to be seen back towards the September low around 110.40. The early rebound this morning does though give the bulls some hope as an eight session downtrend has been broken (it would have been difficult to continue the steepness of this trend). How the market reacts to this rebound will be interesting as there is resistance now between 112.15/112.55. If the market can close above this resistance band then there is an improvement in progress. The momentum indicators are corrective now with the MACD lines accelerating lower and the Stochastics also negatively configured. However, the RSI is also at a crucial level where corrections have all found support above 40 in recent months. The reaction shows this is an important crossroads to be given due consideration, whether to turn from being simply an unwinding move within the uptrend, into something more malign for the bulls. The sessions in the coming days could prove key to this.

 

Gold

The positive outlook is certainly now looking to build. It was important that once the huge bull candlestick from Thursday was left, that the move did not simply get unwound. However, the market has used the old breakout at $1217 as a basis of support and is now looking to develop a new push higher. Yesterday’s candle was not decisively strong but did contain a decent gain on the day and the bulls are already eyeing a test of the resistance at $1236. Wat is most encouraging is the improvement in the momentum indicators, with the RSI above 60 and at over six month highs, whilst the MACD lines are finding traction to push above neutral for the first time since April. The support band at $1217 and then the old highs within the rang e$1208/$1214 are now growing in importance as near term weakness is seen as a chance to buy. A breach of $1236 would now open $1266.

 

WTI Oil

Is the support beginning to form again? After the sharp selling pressure through the middle of last week, the selling pressure has dried up a touch. Friday’s mild positive candle included a retest of the $70.50 previous low which remained intact and the market has ticked higher again this week. A decisive breach of the eight week uptrend has been averted, at least for now. This is helping to calm the recent corrective momentum on indicators such as the RSI and MACD lines. However, the bulls still have work to do to prevent a renewed corrective move, the RSI back below 45 would suggest continued downside is likely. Yesterday’s positive close was tempered by the mild negative candlestick on the session (a close below the open). Despite this though, the support at $70.00/$70.50 is building over the past three sessions. This is important as a breach would then open a retreat to $67.00. For confidence the bulls need to start trading back above the resistance band $72.50/$73.00 which is growing as a barrier to gains.

 

Dow Jones Industrial Average

Precipitous selling pressure that has seen the Dow lose over 1300 ticks in two sessions seems to have abated. However, it is though still far too early to determine whether this is sustainable support or simply respite. With Friday’s rebound candle, there was actually a RSI crossover buy signal seen which is a very basic positive momentum signal, however, with the formation of a negative candlestick for Monday’s session and a close near to the day low, the element of stabilisation is being questioned. Despite this though there is now further improvement with the Stochastics turning up and also close to a bull cross. The support comes in at 24,900 and then 25,000. There will also be a concern that the rebound has not continued yesterday with resistance at 24,482.