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
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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)
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)
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?
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)
If you want to download my Manic-Crisis calendar, you can find the updated file here.
Slowing New Zealand GDP to Rattle Post-Fed NZD/USD Rally
Trading the News: New Zealand Gross Domestic Product (GDP)
Updates to New Zealand’s Gross Domestic Product (GDP) report may rattle the NZD/USD rally following the Federal Reserve meeting as the growth rate is expected to narrow to 2.5% from 2.6% per annum in the third-quarter of 2018.
Another downtick in the GDP print may produce headwinds for the New Zealand dollar as it warns of a slowing economy, and a dismal development may push the Reserve Bank of New Zealand (RBNZ) to alter the forward-guidance as the central bank warns ‘trading-partner growth is expected to further moderate in 2019.’
Even though the official cash rate (OCR) sits at the record-low of 1.75%, the weakening outlook for economic activity may encourage the RBNZ to further insulate the economy as the central bank asserts that ‘the direction of our next OCR move could be up or down.’ In turn, a GDP print of 2.5% or lower may spark a bearish reaction in NZD/USD, but a positive development may fuel the advance following the Federal Reserve meeting as it curbs bets for an RBNZ rate-cut. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.
Impact that the New Zealand GDP report has had on NZD/USD during the previous release
(1 Hour post event )
(End of Day post event)
12/19/2018 21:45:00 GMT
3Q 2018New Zealand Gross Domestic Product (GDP)
NZD/USD 15-Minute Chart
New Zealand’s Gross Domestic Product (GDP) report showed the growth rate increasing 2.6% after expanding a revised 3.2% in the second-quarter of 2018. A deeper look at the report showed Mining as the biggest contributor to growth as the sector grew 12.4% in the third-quarter, with Wholesale Trade climbing 1.1.% during the same period, while Utilities suffered a 2.3% decline after rising 4.1% during the three-months through June.
The New Zealand dollar struggled to hold its ground following the below-forecast print, with NZD/USD pulling back from the 0.6800 handle to close the day at 0.6774. Learn more with the DailyFX Advanced Guide for Trading the News.
NZD/USD Daily Chart
- Broader outlook for NZD/USD remains fairly constructive as both price and the Relative Strength Index (RSI) continue to track the upward trends from earlier this year, but the exchange rate may face range-bound conditions over the near-term as it appears to be stuck in a long-term wedge/triangle formation.
- With that said, the Fibonacci overlap around 0.6930 (23.6% expansion) to 0.6960 (38.2% retracement) sits on the radar as it lines up with the 2019-high (0.6942), with a break/close above the stated region raising the risk for a run at the December-high (0.6969).
- Next region of interest comes in around 0.6990 (50% expansion) following by the 0.7040 (50% retracement) zone, but failure to hold above the 0.6820 (23.6% retracement) to 0.6870 (78.6% expansion) area may trigger a move back towards 0.6780 (100% expansion) to 0.6790 (50% expansion).
Additional Trading Resources
New to the currency market? Want a better understanding of the different approaches for trading? Start by downloading and reviewing the DailyFX Beginners Guide.
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.
— Written by David Song, Currency Analyst
Follow me on Twitter at @DavidJSong.
Crude Rally Testing Critical Resistance Zone
In this series we scale-back and look at the broader technical picture to gain a bit more perspective on where we are in trend. Crude Oil prices have rallied nearly 10% from the yearly lows with the advance now testing a key technical resistance confluence around the 60-handle. These are the updated targets and invalidation levels that matter on the Crude Oil weekly price chart. Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.
New to Oil Trading? Get started with this Free How to Trade Crude Oil Beginners Guide
USD/CAD Weekly Price Chart
Notes: In last month’s Crude Oil Weekly Technical Outlook we noted that price was approaching 2018 pitchfork resistance with, “A topside breach of this formation / the high-day close at 57.14 targets more a more significant resistance confluence at 59.61-60.06 where the 50% retracement of the October decline and the 2018 open converge on the 2015/ 2016 pitchfork resistance- look for a larger reaction there IF reached.” Oil prices are testing this critical resistance confluence today on the back of a weak inventories report that showed a drop of more than 9.59mln barrels last week.
The focus is on a reaction off this threshold with the yearly advance at risk near-term while below. A weekly close above would be needed to suggest that a more meaningful low was registered in December with such a scenario targeting the 52-week moving average at ~62.82 and the 61.8% retracement of the 2018 decline at 63.68. Key support and bullish invalidation now rests back at 55.21/53– weakness beyond this threshold would risk substantial losses for crude prices.
For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy
Bottom line: We’re looking for a reaction on this stretch into confluence resistance at 59.61 – 60.06. Watch the weekly close- below would highlight the threat for a near-term correction / exhaustion in price. From a trading standpoint, a good place to reduce long-exposure and raise protective stops. We’ll be looking for possible price exhaustion heading into next week IF crude prices respect this threshold into the close. I’ll publish an updated Crude Oil Technical Outlook once we get further clarity in near-term price action
Even the most seasoned traders need a reminder every now and then- Avoid these Mistakes in your trading
Crude Oil Trader Sentiment
- A summary of IG Client Sentiment shows traders are net-short Crude Oil – the ratio stands at -1.04 (49.1% of traders are long) – neutral reading
- Long positions are 4.2% lower than yesterday and 5.7% lower from last week
- Short positions are 8.2% lower than yesterday and 1.5% higher from last week
- We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise. Yet traders are less net-short than yesterday but more net-short from last week and the combination of current positioning and recent changes gives us a further mixed Oil – US Crude trading bias from a sentiment standpoint.
See how shifts in Crude retail positioning are impacting trend- Learn more about sentiment!
Previous Weekly Technical Charts
— Written by Michael Boutros, Technical Currency Strategist with DailyFX
Follow Michael on Twitter @MBForex
US Market Open: Top 3 Market Drivers
Market Themes and Movers – Brexit, FOMC and US-China Trade.
GBP: Another day of confusion and conflicting Brexit deal/delay talks continue to leave Sterling rudderless. Despite the current impasse the British Pound remains bid, although it is becoming increasingly vulnerable to short, sharp moves as news flows continue. The latest round of media reports suggest that PM May is looking for a three-month Brexit delay from EU negotiators although putting a revised meaningful vote to Parliament cannot be ruled out. UK inflation data released this morning showed little change and was put aside as traders focus on Brexit updates.
USD: The latest FOMC monetary policy decisionswill be released later in the UK session with monetary settings expected to be left unchanged. Traders will look for clues from Fed Chair Jerome Powell on the future path of interest rates, via the dot plot, and his latest thoughts on balance sheet normalization.
Gold/Oil: Both gold and oil are struggling to make further headway with one eye on the FOMC meeting and the other on the latest US-China trade negotiations with US President Donald Trump tweeting yesterday that talks were going ‘very well’. As with Brexit, the situation remains fluid with news flows again the dominant driver for trade war risk sentiment. With global growth falling, any positive trade news should underpin oil at its present level and may well give it a further leg-up in the short- to medium-term.
Chart of the Day – US Dollar Basket – Over to You Fed
DailyFX Economic Calendar: For updated and timely economic releases.
Retail sentiment is an important tool for any trader to help gauge market sentiment and positioning. We provide updated daily and weekly positional changes on a wide range of currencies and asset classes to help decision making.
Market Movers with Updated News and Analysis:
- Sterling (GBP) Price Slips on Renewed Brexit Confusion, UK Inflation Stable.
- Preview for March FOMC Meeting and US Dollar Price Forecast.
- Trading Outlook for Gold Price, Crude Oil, Dow Jones and More.
- FTSE Technical Analysis – Support on Dip, New Levels of Resistance Targeted.
— Written by Nick Cawley, Market Analyst
To contact Nick, email him at Nicholas.Cawley@ig.com
Follow Nick on Twitter @nickcawley1
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