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S&P 500 Climb Slows as Trade Wars Headlines Questioned, Dollar Avoids Break for Now

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Trade War Talking Points:

  • There was still a notable risk-favorable drift this past session but pace was notably flagging without clear motivation
  • Numerous themes are stirring such as trade wars (with key meetings ahead), the government shutdown and downgraded growth forecasts
  • The Dollar’s clear support held this past session with few obvious prompts ahead; fundamentals are stirring for EUR, GBP and CAD

What are the DailyFX analysts’ top trading ideas for 2019 and key lessons to take away from 2018? Sign up for both on theDailyFX Trading Guides page.

A Range of Unresolved Yet Overwhelming Fundamental Themes

We have seen a host of systemic-important fundamental themes wax and wane for influence over the global markets, but there has always been a catalyst to take up the reins when others offered respite. At the moment, it seems more than a few of these drivers are collectively gaining influence, threatening to overload speculative complacency and potentially set markets to volatility once again. Much of the headlines through the past session remained with the US government shutdown thanks to the focus on President Trump’s planned press conference on the border wall, illegal immigration and the government’s partial closure. We have seen similar Presidential updates in the past move markets and the slow bleeding of GDP as the shutdown drags on makes this an important event. It is interesting that as much attention as the shutdown has earned, an update on global growth by the World Bank seemed to go by with little-to-no response from markets. The group further downgraded its 2020 forecast for advanced economies, the US forecast for next year was lowered 0.3 percentage points to 1.7 percent (though 2019 was remarkably unchanged despite recent data headwinds and the shutdown), while the EU’s and Chinese projections were also downgraded. Between active development and sheer potential market impact, the trade wars remain my tope concern. It was reported that US and Chinese mid-level negotiators were making progress with compromise from China to buy more US goods and allow American interests more access to the economy. Yet, there was no sign that something significant was ready for signing and more controversial issues weren’t broached. The market is showing less enthusiasm for jawboning as too many suggested points of progress have failed to materialize into action. Perhaps a little more reliable for market impact is the upcoming meetings scheduled between the US and European trade ministers and another meeting which will add Japan’s representative. If the US were to take the step to direct its trade war at the EU or Japan, the probability of a stalled global economy would rise dramatically.

Chart of USDCNH (Daily)

S&P 500 Climb Slows as Trade Wars Headlines Questioned, Dollar Avoids Break for Now

Risk Trends are Slowing but Don’t Put Too Much Emphasis on Levels

As systemic as the fundamental themes that are currently under watch may be, risk trends are still coasting. The rebound from the S&P 500’s tumble into official bear market territory as of December 24th continues, but the pace has notably decelerated. The benchmark US index put in for a third consecutive advance as it closed in on 2,580. This figure hosts the combination of the midpoint to bear leg from November’s high to December low as well as the 38.2 percent Fibonacci retracement of the stretch between the record high set in late September and the same December trough. That is moderate technical weight in my estimation, but it is appropriate given the density of supposed resistance levels overheard and the market’s growing requirement for more tangible fundamental stepping stones to return the markets to a more reliably bullish trend. What is more remarkable to me in the S&P 500’s case than the levels we are marking is something like the size of the opening gaps. The past three are positive but the size of the jumps from previous day closes (whether bullish or bearish) are averaging much larger gaps. That is indicative of volatility which can quickly destabilize markets. We see the same picture from the index’s 20-day average true range (ATR) – a price-based measured of volatility. In other risk assets outside of US indices, we find varying tempo efforts to stoke recovery, but they are generally more restrained and starting from much lower levels. To reasonable expect a return to record highs for the likes of the S&P 500 and Dow, a concerted (correlated) move supporting risk appetite is essential. Without it, the recovery will always be at risk.

Chart of S&P 500 and Opening Gaps (Daily)

S&P 500 Climb Slows as Trade Wars Headlines Questioned, Dollar Avoids Break for Now

Dollar is Fundamental Sensitive but Lacking Catalyst, Euro in Abundance but Resistant

I took a poll yesterday asking whether traders believed the Dollar was going to break proximate support and start more earnestly to reverse its gains over the past 10 months. The majority of respondents believed we would hold, but it wasn’t an overwhelming expectation. The Dollar has a number of fundamental winds vying for its attention but it is unclear which will take the yoke to establish a productive move whether it be bullish or bearish. That it itself poses a problem for clearing the distinct support on the DXY – which translates into explicit resistance at 1.1500 for EURUSD. It is also worth noting technically that the Greenback has few other clear patterns staging for a critical move across other major peers. Trade wars, government shutdown, downgraded US growth forecasts and a rebound in Fed rate forecasts since Friday all offer a mixed picture for the currency which will breakout trading difficult. In contrast, the Euro is garnering a clearer view on its fundamental course, but the currency is proving more resilient to the reality. This past session, German industrial production reported a sharp decline on the month and the deepest year-over-year slide since the financial crisis. The fear of a recession for the economy has grown and that is a threat to the Eurozone at large as this is its largest member. Sentiment data for the Eurozone in the meantime would also slide this past session. Ahead, the German trade figures and Eurozone employment update will draw closer focus. Yet, will it generate significant currency response?

S&P 500 Climb Slows as Trade Wars Headlines Questioned, Dollar Avoids Break for Now

Top Event Risk Wednesday Goes to the BOC Decision, Commodities Earn Technical Attention

Looking out over the next 24 hour period, there are a number of noteworthy discrete economic updates. However, the most binary and potentially market-moving event will be the Bank of Canada (BOC) rate decision. The central bank is not likely to change its policy following the recent downgrade issued in forward guidance, but the Loonie’s charge this past week has lowered the bar for market impact. A five-day rally for the currency and drop from USDCAD is both impressive consistency and heavy momentum for progress. While expectations are already bearish, the currency’s bounce can still register disappointment. Outside of the currency market, commodities are staging possible larger moves. From gold, the past week has established congestion that has placed a pin in the under-the-radar climb the metal has made. The clarity on the range whether priced traditionally in the Dollar alone or an index pricing via the major currencies. From oil, progress continues to track forward. The benchmark energy product is up six consecutive trading days for the longest advance since May. That said, it is still early in a reversal, which will draw in considerable technical interest. That said, the fundamental needs for this move are not small. Be wary. We discuss all of this and more in today’s Trading Video.

Graph of USDCAD and Retail Trader Positioning (Daily)

S&P 500 Climb Slows as Trade Wars Headlines Questioned, Dollar Avoids Break for Now

If you want to download my Manic-Crisis calendar, you can find the updated file here.



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Forex

AUD/USD May Fall With Asia Stocks After Wall Street Volatility

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Asia Pacific Market Open Talking Points

  • British Pound and New Zealand Dollars climbed. Former enjoyed Brexit news, latter rallied on CPI
  • S&P 500 recovered after risk-aversion dominated US markets on shutdown news. USD depreciated
  • AUD/USD may fall as market mood sours in Asia, jobs data misses expectations. Eyes chart support

See our study on the history of trade wars to learn how it might influence financial markets!

The British Pound and New Zealand Dollar were some of the best performing majors on Wednesday. Sterling continued rallying amid ebbing ‘No-Deal’ Brexit bets despite UK Prime Minister Theresa May leaving the door open to one. Meanwhile, the Kiwi Dollar enjoyed fading expectations of an RBNZ rate cut this year after a better-than-expected local inflation report.

For pro-risk currencies such as the Australian Dollar, the US trading session offered little fuel to extend their gains. White House Economic Adviser Kevin Hassett spoke and warned the continuation of the government shutdown could result in near-zero growth. After gapping higher, the S&P 500 traded lower as domestic government bonds rallied. After a slight rally later, the index closed +0.22%.

This signaled a flight-to-safety as risk capital flowed into haven assets. The US Dollar, which tends to benefit in this scenario, failed to capitalize on gains and ended the day cautiously lower. Falling yields alongside a fading Fed rate hike bets may have been a more prominent influence. Meanwhile the anti-risk Japanese Yen still ended the day lower, perhaps due to the Bank of Japan lowering inflation expectations.

Earlier in the day, US President Donald Trump warned China that tariffs could increase should a trade deal not be reached. As the markets then transitioned into Thursday’s session, the White House requested data on if the shutdown prolongs into March. This showed that it may continue for the time being. As such, these developments may adversely impact Asia Pacific benchmark stock indexes as markets turn risk-averse.

This could boost the Japanese Yen at the expense of the sentiment-linked Australian and New Zealand Dollars. Australia’s December jobs report will also cross the wires. Data out of the country has been tending to underperform relative to economists’ expectations as of late. Such an outcome could increase expectations of an RBA rate cut as AUD/USD falls. Overnight index swaps are pricing in a 34% chance of a cut later this year.

AUD/USD Technical Analysis

The continuation pattern outlined in my weekly Australian Dollar forecast appears to have been broken on the AUD/USD chart below. Typically, a “Pennant” is a continuation pattern. The descent under it may open the door to losses instead. Near-term support is at 0.70211 with resistance around 0.71645.

Each week I conduct a poll to see which Aussie crosses to cover in the technical forecast. You can participate in the poll by following me on twitter @ddubrovskyFX as well as to see timely updates on the Aussie Dollar.

AUD/USD Daily Chart

Chart of AUD/USD

Chart created in TradingView

US Trading Session

Chart of US Trading Session

Asia Pacific Trading Session

Chart of Asia Pacific Trading Session

** All times listed in GMT. See the full economic calendar here

FX Trading Resources

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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Traders Net-Long Increases from Last Week

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EURUSD

65.7% OF TRADERS ARE NET-LONG

EURUSD: Retail trader data shows 65.7% of traders are net-long with the ratio of traders long to short at 1.91 to 1. In fact, traders have remained net-long since Jan 10 when EURUSD traded near 1.1554; price has moved 1.6% lower since then. The percentage of traders net-long is now its highest since Dec 31 when EURUSD traded near 1.1464. The number of traders net-long is 2.0% higher than yesterday and 27.2% higher from last week, while the number of traders net-short is 8.2% lower than yesterday and 4.3% higher from last week.

To gain more insight to how we use sentiment to power our trading, join us for our weekly Trading Sentiment webinar.

EURUSD SENTIMENT CONTINUES TO SUGGEST A BEARISH BIAS

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bearish contrarian trading bias.

Having trouble developing your strategy? Here’s the #1 mistake that traders make.

— Written by Nancy Pakbaz, CFA, DailyFX Research



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Oil Risks Larger Recovery as Inverse Head-and-Shoulders Takes Shape

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Oil Talking Points

Oil prices remain bid even as the International Monetary Fund (IMF) reduces its global growth forecast for 2019 and 2020, and the ongoing efforts by the Organization of the Petroleum Exporting Countries (OPEC) to stabilize the energy market may spur a larger recovery in crude as an inverse head-and-shoulders formation takes shape.

Image of daily change for major financial markets

Oil Risks Larger Recovery as Inverse Head-and-Shoulders Takes Shape

Image of daily change for crude oil prices

Fresh comments from OPEC Secretary-General Mohammad Barkindo suggest the group will continue to cut production over the coming months as the official insists that the ‘the market has started to respond positively’ at the World Economic Forum in Davos, Switzerland, and the current environment raises the risk for higher crude prices as Mr. Barkindo goes onto say that ‘we are beginning to see very sharp reductions in supply.’

Image of EIA U.S. field production of crude oil

In fact, OPEC and its allies may curb production throughout 2019 as updates from the U.S. Energy Information Administration (EIA) show field production climbing to 11,900K in the week ending January 11 after holding steady at 11,700K for three consecutive weeks, and the group may continue to combat the stickiness in Non-OPEC supply especially as Russia Minister of Energy, Alexander Novak¸ endorses a price range of $55-65bbl.

With that said, the advance from the December-low ($42.36) may gather pace as oil prices break out of the downward trend carried over from late-2018, with developments in the Relative Strength Index (RSI) fostering a constructive outlook for crude as the oscillator bounces back from oversold territory and carves a bullish formation. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Oil Daily Chart

Image of crude oil daily chart

  • Crude stages a near-term rebound following the failed attempts to test the June 2017-low ($42.05), and oil prices may continue to track higher as an inverse head-and-shoulders formation takes shape.
  • In turn, a break/close above the $55.10 (61.8% expansion) to $55.60 (61.8% retracement) region raises the risk for a larger reversal, with the next area of interest coming in around $57.40 (61.8% retracement) followed by the Fibonacci overlap around $59.00 (61.8% retracement) to $59.70 (50% retracement).

For more in-depth analysis, check out the 1Q 2019 Forecast for Oil

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other markets the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019.

— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



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