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Will the Fed Break the Dollar’s and S&P 500’s Calm?

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Talking Points:

  • Neither the promise of peace from the US-North Korea summit nor the provocations from the G-7 summit have unseated risk
  • Top event risk ahead is the FOMC rate decision whereby the market is certain of a hike but less sure of all 2018
  • Beware if you intend to trade the Euro or Pound, the ECB rate decision Thursday and Brexit votes are still ahead

Are you trading any Dollar based majors? Concerned about what the gradual policy shift from the Fed means for general risk trends? Join me for live coverage of the FOMC rate decision. Sign up on the DailyFX Webinar Calendar page.

Neither Threat of Trade Wars Nor Promise of North Korea Peace Charges the Markets

Risk trends are the foundation of all market trends in one form or another. Everything else is simply a catalyst that can charge the collective appetite of adding to risk exposure or wind it down. It is with that view on the market’s undercurrent that we should assess the implications of this week’s remarkable stoicism. We didn’t register the concern that naturally follows the weekend’s headlines relaying the United States’ efforts to further isolate it from trade partners with President Trump escalating the row with some of the country’s closest trade partners. Yet, disarming interpretations that this is evidence of a bullish bias that thwarts uncertainty, this past session showed little yield to optimism following President Trump’s meeting with North Korean leader Kim Jong-un in Singapore. This is a familiar picture of complacency at work. Until something forces speculators to make a choice, the market rank may leave the burden of picking a long-term view for the future. Or, perhaps, what we have seen in the opening 24 hours of the week is anticipation for a more action-packed event?

Will the Fed Break the Dollar's and S&P 500's Calm?

Before There Was Global Trade Wars, There Was Monetary Policy

The economic and political relations between the world’s largest economies is exceptionally important to the course of the financial markets moving forward, but it isn’t the only key theme that holds substantial sway over investors’ course long-term. It is easy to forget the importance that monetary policy plays to our current standing an path forward as the major central banks have proven remarkably effective at directing expectations through their forward guidance. That said, the past decade of general bullish reach was made possible by the extremely accommodative policies from the Fed, ECB and other major central banks around the world. Near-zero rates and unorthodox stimulus programs translates into easy access to funds and an implicit support for speculators that was famously referred to as ‘moral hazard’. These crisis-era policies extended well past the actual crisis conditions following the ‘Great Recession’ and arguably inflated speculative appetites beyond the constraints of a simple growth-supporting financial recovery. Yet, we have seen a slow tide shift towards normalizing from the extreme support rolled out by these groups. At what point is it recognized as a withdrawal of support? When does it become a burden to speculative excess? This week will prove a great litmus starting with the Fed decision Wednesday.

Will the Fed Break the Dollar's and S&P 500's Calm?

The Fed Will Hike Rates, But What More Will They Do?

There are two general paths of influence for Wednesday’s FOMC rate decision: the short-term implications of the contrast the Fed draw to its counterparts and the long-term recognition that the era of ‘easy money’ is slowly receding. For the Dollar, the market impact is still more readily registered through the latter. As it stands, the market is virtually certain that the US central bank will hike its benchmark rate for the second time this year by 25 basis points to a range of 1.75 to 2.00 percent. That furthers its technical advantage versus nearly every other major for yield; but as we saw in 2017’s slide from the Dollar, a considerable portion of this speculative appeal has been discounted. The real fundamental weight is behind speculation for the Fed’s course moving forward. Fed Funds futures are still split between three or four total hikes in 2018 (futures show a 46 percent chance of four), but that sets the bar even higher than what it already is relative to counterparts. If risk appetite is so robust that a slight increase in yield advantage is sufficient to revive the speculative reach, it is possible that the Fed holding its advantageous course can re-establish the Dollar’s medium-term upswing. A faster pace of hikes would do even better in that environment. That said, we don’t seem to have that backdrop. Instead, it is easier to disappoint and there is a larger premium to work off should they disappoint hawks. Pairs like the NZD/USD, AUD/USD and USD/CAD are better positioned to leverage the Dollar’s swing. EUR/USD is arguably the worst option.

Will the Fed Break the Dollar's and S&P 500's Calm?

Anticipation: The Trouble with EUR/USD

In the event that the Fed triggers a speculative run – bullish or bearish – for the Greenback, the most troubled counterpart to select for the currency would be the Euro. While the present bearings for the Fed and ECB couldn’t be any more different, speculators value the outlook. Where the US policy authority has gone through pains to set the market’s appreciation of its course, the outlook for the European Central Bank is in considerable flux. It is that background that will ramp up anticipation for this group’s policy meeting on Thursday and in turn curb speculative ambition before it is clear whether they intend to fully taper their QE program over the coming months and set put the bank on pace for its first hike by mid-2019. The EUR/USD is not the only pair that will have to deal with cross currents. Cable is another major that looks ripe for trade potential, but ongoing Brexit votes laden it with an uncertain path of volatility ahead. If you are looking to avoid systemic issues like risk trends, trade wars and critical monetary policy turns; consider the Canadian, Australian and New Zealand dollars. We discuss all of this and more in today’s Trading Video.

Will the Fed Break the Dollar's and S&P 500's Calm?

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



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Bitcoin Net-Longs Slide Into 1-Month Lows

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Bitcoin Client Positioning

Bitcoin Net-Shorts 5.2% Higher Since Last Week

Bitcoin: Retail trader data shows 76.8% of traders are net-long with the ratio of traders long to short at 3.3 to 1. The number of traders net-long is 1.1% lower than yesterday and 8.0% lower from last week, while the number of traders net-short is 0.5% lower than yesterday and 5.2% higher from last week.

Be sure to check out our Bitcoin Trading Guide if you’re new to cryptocurrencies!

Bitcoin Net-Long Dip Indicate Bullish Bias

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Bitcoin prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Bitcoin price trend may soon reverse higher despite the fact traders remain net-long.

— Written by Yayati Tanwar, DailyFX Research



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Canadian Dollar (CAD) Eyes Latest Inflation Report

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Canadian Dollar Price, News and Analysis

  • Inflation expected unchanged, but any uptick could seal another rate hike in October.
  • Canadian economy continues to grow strongly.

IG Client Sentimentshows retail are 46.3% net-long of USDCADa bullish contrarian sentiment indicator.

Canadian Dollar May Receive a Boost on Latest Inflation Report

The Canadian dollar is currently treading water ahead of the July CPI report with the market expecting a 0.1% month-on-month rise and a 2.5% annualized reading, both unchanged from last month’s strong report. Canadian CPI grew at its fastest rate in over six years in June, due to higher energy prices, and another strong reading today will increase pressure on the Bank of Canada to hike rates again, probably at the October meeting. The central bank has already hiked rates by 0.25% twice this year and by a total of four times in the last 12 months. Last week data showed Canadian unemployment falling to 5.8% from a prior 6% while employment grew by 54.1k against expectations of 17K and a prior month’s 31.8k.

USDCAD has remained in a 1.2950 – 1.3200 range over the last month, despite the strength of the US dollar and fears over the NAFTA negotiations. The pair currently trade at 1.3130, just above 23.6% Fibonacci support at 1.3118 and below the July 24 high at 1.3192. An inline or slightly stronger-than-expected reading would seal another 0.25% rate hike and see USDCAD break lower with the 38.2% Fibonacci retracement at 1.2952 the short-term target. A weaker-than-expected reading today would see the July 24 high under pressure.

We have recently released our Q3 Trading Forecasts for a wide range of Currencies and Commodities, including the Canadian Dollar.

USDCAD Daily Price Chart (January – August 17, 2018)

Canadian Dollar (CAD) Eyes Latest Inflation Report

DailyFX has a vast amount of updated resources to help traders make more informed decisions. These include a fully updated Economic Calendar, and a raft of Educational and Trading Guides

— Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1



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USD/CNH & Gold Price Action Point to Reversals Gaining Traction

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Gold, USD/CNH Technical Highlights

  • Gold price reversal and sentiment supportive of a low
  • Correlation between Gold & CNH extremely high
  • USD/CNH reversing hard from near Dec ’16 peak

For an in-depth intermediate-term technical and fundamental outlook, check out the Q3 Gold Forecast.

Gold price reversal and sentiment supportive of a low

On Wednesday, we were discussing the oversold, overly bearish backdrop in gold, but that first we needed to see some type of swift flush and reverse or something of that nature before looking for a low. We didn’t have to wait long, as the past few sessions qualified as flush-and-reverse price behavior, with silver, unsurprisingly and in silver-like fashion, displaying even more capitulation-like behavior, shedding 3 of its 4% in an hour on Wednesday.

As long as gold & silver can hold onto yesterday’s lows on a closing basis, we’re looking for at least a rebound back to the point of origination of the most recent leg lower (~1210 & 15.30). If another leg lower develops we’ll have to reassess.

Check out the IG Client Sentiment to see how other traders are positioned and why it can be used as a contrarian indicator.

Gold Daily Chart (Flush & Reverse)

Gold daily chart, flush and reverse

Correlation between Gold & CNH extremely high

If gold is reversing then so is CNH and vice versa. Gold and CNH have a 3-month correlation of 97%. They are effectively the same market at this juncture. How one plays it is up to the instrument of choice, but be mindful of total risk if trading both.

Gold/CNH Daily Chart (97% 3-mo Correlation)

Gold/CNH daily chart (97% 3-mo correlation)

USD/CNH reversing hard from near Dec ’16 peak

USD/CNH is in the process of carving out a weekly key-reversal bar just shy of the December 2016 high, assuming it doesn’t post a big rally from here. Trade a little higher today or lower and the reversal currently in place will stand as confirmed.

The candle development along with a break in the upward channel on the daily time-frame should usher in more selling, and perhaps in swift fashion. Looking lower, there are minor levels along the way that were carved out as the channel matured, but the broader target is the bottom of the upward grind since last month, right around the 6.60 mark.

USD/CNH Weekly Chart (Key-reversal nearly complete)

USD/CNH weekly chart, key-reversal as long as no sizable rally ensues today

USD/CNH Daily Chart (Channel break to send it lower)

USD/CNH daily chart, channel break to send price lower

Resources for Forex & CFD Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX



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