Dollar Talking Points:
- The US Dollar opened the week with its third, large bullish gap in a month, but the previous charges will prove difficult to replicate
- A run of growth-related data and mix of trade war headlines wouldn’t tear investors’ anticipation away from Thursday’s ECB rate decision
- Reversals from the Pound, EURCHF and Gold all tap systemic interests, but their progress will prove just as unreliable as the Dollar’s
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Growth Measures and Trade Headlines Fail to Engage Trader
We were not without notable fundamental event risk and headlines to start this new trading week. Yet, the mere presence of sparks does not mean a speculative fire will catch. Either the signal has to overwhelming as to override reticence or markets need to be positioned such that encouragement can start – or extend – a cascade of buying or selling interest. With that qualification considered, all three major themes that I’ve regularly followed for their ability to take control of the broader capital markets these past months were prodded through Monday trade. Growth measures were offered a particularly wide range of update. Japan’s final 2Q GDP reading was downgraded (1.3 percent annualized) while its Eco Watchers survey outlook tumbled. From Europe, Bloomberg surveys of economist forecasts downgraded Eurozone and German outlooks but the UK’s July GDP reading posted a better-than-expected 0.3 percent expansion. And, tempting traders appetite for short-term windfalls – or more explicitly their appetite to front run them – US Treasury Secretary Steve Mnuchin suggested the White House would consider another tax cut in 2020. None of this would urge a shift in market appetites.
Trade wars was another theme that was afforded the type of headlines that has generated a significant market response in previous periods, but would garner little-to-no traction so far this week. Amid a range of trade indicators, China’s August update was unmistakably the most loaded of the updates. Monday morning, the world’s second largest economy reported its surplus last month shrank to $34.8 billion against expectations of a $42.8 billion favorable gap and previous $44.6 billion measure. Exports – superficially the most important aspect of the figure – rose 2.6 percent, but that turned into a -1.0 percent contraction in Yuan terms and imports dropped another -5.6 percent. While the net figure may seem steady without context, a sharp drop in purchases of foreign goods bodes poorly for the country’s domestic health and points back to the detrimental impact of ongoing trade fight. Meanwhile, the general drift that followed last week’s otherwise-hollow remarks from US and Chinese officials that they are confident the return to the negotiation tables early October lingered. In short, don’t rely on this theme to carry forward significant trends without a far more significant update.
Chart of USDCNH and the Ratio of Dow to Shanghai Composite in Red (Daily)
Chart Created on Tradingview Platform
ECB Decision Later this Week Hangs Heavy Over the Market
The top fundamental theme this week is also the reason the market is likely to continue its struggle for a clear run. Monetary policy is generally leaning to the dovish outlook across the developed world as economic activity slows and political pressure mounts. That shifts responsibility for future growth and returns increasingly on the shoulders of a temporary foundation, one that is beyond stretched after a decade of indulgence. The next phase of such external support and the evaluation of its effectiveness will center on the ECB (European Central Bank) rate decision. The group is expected to move rates deeper into negative territory and revive only recently paused open-ended stimulus efforts. Living up to those expectations is one thing, whether or not it proves effective and market moving is something completely different. Expect difficulty gaining traction for EURUSD and most other Euro crosses between now and that key event, but keep perspective of the big picture it will direct moving forward.
Ultimately, what the ECB does this week will weigh heavily on what the other major central banks will consider for their respective meetings moving forward. As it happens, there are four major groups due to determine their own policies just next week – the Fed, Bank of Japan, Bank of England and Swiss National Bank. Yet, we aren’t completely sidelined as we await the European group to illuminate our global bearings. This past session, the downgrade is Japanese 2Q GDP held direct implications for a flighty BOJ, something the market picked up on. Meanwhile, the rate forecasts measured in Fed Fund futures through the end of 2020 have shown dovish expectations have leveled out. Yet, rather than obsess over next steps, investors would be wise to consider the ‘costs’ of extreme policy which SEC Chairman Jay Clayton warned over including the explosion of corporate debt which increased to $10 trillion or approximately 50 percent of US GDP under the support of the US bank.
An Impressive Technical Range from the Dollar: DXY, GBPUSD, USDJPY, AUDUSD
If you are following the systemic themes in the US Dollar, you likely find most of these global themes converging on the currency. That does more to prevent a reliable trend from the Greenback than it does to ensure one. Is the USD a safe haven, carry currency, economic outperformer or a shifting reserve? There are many roles to consider and no easy answer as to which traders hold in the highest regard over time. As you could imagine, that makes the Dollar particularly difficult to trade. The DXY opened this week with a large gap higher – the third large jump in a month – but even the short-lived upswing in the previous two iterations will prove difficult to fulfill with the ECB running disruption.
Oher Dollar pairs of note includes USDJPY which seems to have completed an inverse head-and-shoulders pattern reversal. That is a loaded pattern in the best of times, but the Greenback’s struggles compound with questionable risk trends. which are necessary to supporting such an advance. Another appealing technical picture is offered through AUDUSD. Up five consecutive trading days through Monday’s close, we are matching the best run since January 2008. The bullish break last week was the path of least resistance, but running all the way up to resistance in the long-term channel decline requires further leeway from trade wars.
Chart of AUDUSD and Consecutive Candle Count (Daily)
Chart Created on Tradingview Platform
GBPUSD is a matter all its own. Absolutely a Dollar-based major and a reversal that tempts even the most disciplined fundamental-leaning trader, it is important to recognize the influence that Brexit will continue to exert over Cable and Pound crosses at large. Parliament has been suspended by the Prime Minister, but not before they would put into law demand for Boris Johnson to seek an extension on Brexit negotiations if no deal is struck before the October 31st deadline. Keeping things interesting, the government’s spokespeople said Johnson will not ask for an extension, but he would also follow the law. This creates an interesting paradox.
Chart of GBPUSD (Daily)
Chart Created on Tradingview Platform
Unreliable Reversals from the Pound, EURCHF and Gold
Cable will be a particularly weighty pair to evaluate from the perspective of the Dollar’s health but it will also represent the Sterling very clearly – particularly for the contrast of reserve status and save haven. I will further pay close attention to pairs like EURGBP for greater sensitivity to the fallout anticipation from the divorce, GBPJPY given the risk specific element and then a pair such as GBPCAD which is not as much a fundamental conflict.
Chart of GBPCAD (Daily)
Chart Created on Tradingview Platform
Looking to another very prominent technical development this past session, I’m drawn to the reversal triggered by EURCHF. This pair has been consolidating for over a month, and Monday finally afforded a 1.0925 breakout of congestion and bearish trend channel. After five months of slide, this looks like the technical makings of a clean reversal. The problem is the same as we see across the global market: lack of follow through. The ECB decision is absolutely an issue for this pair given that the SNB’s efforts will be make substantially more difficult (possibly slightly easier) depending on what its benchmark counterpart does this Thursday. The best opportunities are not strong signals from just technical or fundamentals but rather the convergence of both techniques.
Chart of EURCHF and 50-day Moving Average (Daily)
Chart Created on Tradingview Platform
And, as we assess the health of the economic and financial outlook with growth, trade wars and monetary policy reaction fueling the mix of fear and speculation, traders would do well to follow those measures that they feel are strong reflection on the perspective of the system. I feel there is no better representative to the state of economic and financial health than gold. The precious metal has charged to multi-year highs – on the verge of records if we look at other, equally-weighted measures of the commodity – for a reason. Particularly, a short duration rate of change (three to five days) is perhaps one of the best short-term readings to market sentiment that I have seen in years.
Chart of Gold and 3-Day Rate of Change (Daily)
Chart Created on Tradingview Platform
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