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Wednesday, October 25, 2017

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Global FX Insightsby LMAX Exchange Research & Analytics

Comprehensive daily market research and analytics, with insightful commentary and charts

UK GDP, US Durable Goods, BoC Decision Wake-up Call

A slow start to the week should be met with volatility as the calendar heats up from today into Friday. Aussie hasalready come under pressure on softer CPI and the market will now look to German IFO readings, UK GDP estimates,US durable goods and the BoC decision.

Technical highlights Daily Video

EURUSD Waiting for big break•GBPUSD Dips to be supported•USDJPY Upside limited from here•EURCHF Thinking about 1.2000•AUDUSD Fresh downside ahead•USDCAD Room to run to 1.3000•NZDUSD Closing in on 2017 low•US SPX 500 Relentless record run•GOLD (spot) Higher low sought out•Feature – USDZAR Pushing up•

Fundamental highlightsEURUSD Euro stable ahead of Thursday’s ECB•GBPUSD Brexit negotiation uncertainty a weight•USDJPY Big picture macro themes drive Yen moves•EURCHF SNB activity could be worrying story•AUDUSD Aussie slides after CPI data comes in soft•USDCAD BoC decision should produce adjustments•NZDUSD Kiwi continues to struggle post election•US SPX 500 Senate shows strong support for Taylor•GOLD (spot) Macro fund demand props setbacks•Feature – USDZAR Watching today’s SA budget•

Five day performance v. US dollar

Suggested readingEx-HSBC FX Trader Convicted for Front-Running, L. Nguyen, Bloomberg (October 23, 2017)•Will This Battle For The Soul Of Bitcoin Destroy It?, L. Shin, Forbes (October 23, 2017)•

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

EURUSD – technical overview

The uptrend in 2017 has stalled out for after the market triggered a head and shoulders topping formation and droppedback below the 50-Day SMA for the first time since the Euro broke out earlier this year. The measured move extension offthe head shoulders top projects a decline to 1.1555. What’s even more interesting right now is if the market breaks downbelow 1.1660, we could see the formation of an even bigger head and shoulders top projecting a measured movedownside extension into the 1.1200s. But 1.1660 is a strong level of support, with the neckline coinciding with the 100-DaySMA. Inability to establish below 1.1660 on a daily close basis will keep the 2017 uptrend intact.

R2 1.1859 – 19Oct high – Strong•R1 1.1800– 19Oct high – Medium•S1 1.1725 – 23Oct low – Medium•S2 1.1663 – 17Aug low – Strong•

EURUSD – fundamental overview

The Euro has stabilised over the past several sessions and looks to be in positioning mode ahead of tomorrow’s highlyanticipated ECB meeting. The market will be thinking about Spain, US tax reform headlines and the Fed Chairappointment, but isn’t likely to get any certainty from these outcomes between now and the ECB decision, which couldultimately open the next big move. The Senate has expressed overwhelming support for Taylor as the next Fed Chair,which is US Dollar supportive, but ultimately, it’s all speculation right now. As far as today goes, the big standouts are USdurable goods and US new homes sales.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

GBPUSD – technical overview

The market has eased off quite a bit since topping out at a fresh 2017 high in September, with the price dropping backinto the 1.3000 area thus far. However, while there is risk for another drop, setbacks should be limited below thepsychological barrier, with the greater risk for the formation of that next meaningful higher low ahead of a continuation ofthe newly formed uptrend in 2017. Look for a daily close back above 1.3338 to confirm the constructive outlook andaccelerate gains. Ultimately, only back below 1.2775 would delay the outlook.

R2 1.3288– 17Oct high – Medium•R1 1.3229 – 19Oct high – Medium•S1 1.3088 – 20Oct low – Medium•S2 1.3027 – 6Oct low – Strong•

GBPUSD – fundamental overview

The Pound comes into Wednesday back under pressure after EU chief Brexit negotiator Barnier said was also preparingfor a ‘no deal’ with the UK. Brexit uncertainty has worked its way back into the picture in recent weeks as the negotiationscome back into the spotlight. A lot of back and forth is expected here and this should result in a choppy UK currency. As faras today goes, the market will take in the Q3 GDP estimate out of the UK, but overall, with Brexit uncertainty lingering andwith next week’s BOE rate hike already priced to a good extent, the short term risk points to the possibility for moredownside. Other data out today includes US durable goods and US new home sales.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

USDJPY – technical overview

The market has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips wellsupported below 108.00. The market has been in rally mode over the past several days, with the greater risk from here for acontinuation of gains to test the range highs. At that point, look for the market to adhere to the range and stall out yetagain for the start to a drop back towards the range low.

R2 114.50 – 11Jul high – Strong•R1 114.10 – 23Oct high – Medium•S1 113.00 – Figure – Medium•S2 112.30 – 19Oct low – Strong•

USDJPY – fundamental overview

The price action here continues to be driven off the broader macro themes, with risk sentiment at the top of the list. Theongoing record run in US equities has helped to drive the major pair back towards some important resistance in the114.00s. There has also been US Dollar supportive developments over the past 24 hours, with the US Senate expressing itsoverwhelming support of the more hawkish leaning Taylor for next Fed Chair. Looking ahead, the market will watch whatUS equities are doing and will also be looking in on US earnings, durable goods and new home sales.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

EURCHF – technical overview

A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high. The bullish breakcould now get the uptrend thinking about a test of that major barrier at 1.2000 further up. In the interim, look for anysetbacks to be very well supported ahead of 1.1400, while only back below 1.1260 would delay the overall constructivetone.

R2 1.1700 – Figure – Medium•R1 1.1663 – 25Oct/2017 high – Medium•S1 1.1485 – 17Oct low – Medium•S2 1.1390 – 2Oct low – Strong•

EURCHF – fundamental overview

Overall, the sell-off in the Franc in 2017 has been a welcome development for the SNB. Still, the central bank will need tobe careful as the record run in the US stock market has been a big boost to the SNB’s strategy. Any signs of capitulation onthat front, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging positionto weaken the Franc. The Franc has just dropped to another low against the Euro this year on what could be ramped upSNB activity. We speculate this activity could be an attempt to build some cushion ahead of what could be a period ofintense Franc demand in the event of a sell off in global equities.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

AUDUSD – technical overview

Despite rallying to a fresh +2 year high in September, the market has been unable to hold onto gains, quickly reversingcourse and trading back below 0.8000. There is now risk for the formation of a more meaningful top opening the door forthe next downside extension towards 0.7500. Look for rallies to now be well capped ahead of 0.7900, with only a close backabove the psychological barrier to put the pressure back on the topside. Today’s break back below 0.7734 strengthens theoutlook.

R2 0.7835 – 23Oct high – Strong•R1 0.7785 – 25Oct high – Medium•S1 0.7700– Figure – Medium•S2 0.7572 – 5Jul low – Strong•

AUDUSD – fundamental overview

No surprise to see the Aussie underperformance on Wednesday, with the market taking in a softer than expected CPIprint that will keep the RBA from making any rate hike moves any time soon. However, it’s worth noting the data wasn’t assoft beneath the surface, with most of the drop coming from a collapse in the fruits and vegetables prices, whereasutilities, audio, visual & computing equipment, and services & tobacco held up ok. The RBA has also done a good jobflagging this risk and hasn’t been inclined to be looking to feel the pressure of monetary policy normalisations going on inother countries. Nevertheless, stops were taken out below 0.7730 and this could open a more pronounced decline towards0.7500. Looking ahead, we get US durable goods and new home sales.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

USDCAD – technical overview

Despite the September breakdown to a fresh 2017 and +2 year low, stretched medium-term technical studies continue towarn of the possibility for a more significant bullish reversal as oscillators turn up again. From here, there’s room for a pushto retest key resistance in the form of the August peak at 1.2780, with a break above to invite the psychological barrier at1.3000. Any setbacks should now be well supported ahead of 1.2400.

R2 1.2780 – 15Aug high – Medium•R1 1.2693 – 24Oct high– Strong•S1 1.2600– Figure– Medium•S2 1.2534 – 18Oct high – Strong•

USDCAD – fundamental overview

The Canadian Dollar has come under additional pressure this week on the back of last Friday’s Canada CPI and retailsales disappointments, which already follow a string of disappointments since the Bank of Canada opted to hike rates fora consecutive time this year. This puts a lot of focus on today’s Bank of Canada decision where there is an expectation thecentral bank will make some formal adjustments to its language with respect to the outlook for the economy and rate hiketimeline. Other data of note on the docket includes US durable goods and new home sales.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

NZDUSD – technical overview

Medium term studies have turned down after the market pushed up to a plus two year high through 0.7500 in late July. Arecent break below 0.700 warns of the possibility for a more meaningful reversal to retest the 2017 low at 0.6818. Any ralliesshould now be very well capped ahead of 0.7200.

R2 0.7036 – 20Oct high – Strong•R1 0.7004 – 24Oct high – Medium•S1 0.6882 – 25Oct low – Medium•S2 0.6818 – 21May/2017 low – Strong•

NZDUSD – fundamental overview

The New Zealand Dollar continues to struggle in the aftermath of a surprise election result that saw the emergence ofLabour. Overall, the currency had already been under pressure in the lead up to the election, with economic data headingthe wrong way and the market pricing a less hawkish RBNZ path forward. The PM elect was on the wires this week shakingthings up some more after outlining the intention to ‘review and reform’ the Reserve Bank Act. Looking ahead, the marketwill continue to monitor post election headlines, while watching broader themes and taking in US durable goods and newhome sales.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

US SPX 500 – technical overview

The market continues to shrug off overextended technical readings, once again pushing up to fresh record highs.Interestingly, the market broke out in August after a 75 point consolidation, which projected a measured move to 2565.This could warn of some form of a reversal to come, though we would need to see a daily close back below 2544 at aminimum to take the immediate pressure off the topside. Until then, the record run continues into unchartered territory,with the focus on the next major barrier at 2600.

R2 2600.00 – Psychological – Strong•R1 2580.00 – 23Oct/Record high – Medium•S1 2544.00 – 19Oct low – Medium•S2 2487.00 – 25Sep low – Strong•

US SPX 500 – fundamental overview

The US equity market continues to be well supported on dips, pushing further into record high territory. It seems thecombination of blind momentum and expectation of favourable US tax policy are helping to keep the move going. But atthe same time, there’s a nervous tension out there as the VIX sits at unnervingly depressed levels. The fact that Fed policy isnormalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reductioncoming into play and another rate hike still on the cards this year. But for now, it’s more of the same. At this point, it willtake a breakdown in this market back below 2500 to turn heads. US earning season, tax reform updates and who PresidentTrump appoints as the next Fed Chair will be the main focus this week. News of the Senate’s overwhelming support ofTaylor hasn’t dont much to weigh on investor sentiment, despite the bearish implications from a hawkish leaning FedChair.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

GOLD (SPOT) – technical overview

Setbacks have been well supported over the past several months, with the market continuing to put in higher lows andhigher highs, opening a recent push to a fresh 2017 high up around 1357. And so, look for this most recent dip to round outthat next higher low around 1260 in favour of a bullish continuation towards a retest of the 2016 peak at 1375 further up.Ultimately, only a drop back below 1200 would negate the outlook.

R2 1334.35 – 15Sep high – Strong•R1 1316.10 – 20Sep high – Medium•S1 1260.70 – 6Oct low – Medium•S2 1251.45 – 8Aug low – Strong•

GOLD (SPOT) – fundamental overview

Solid demand from medium and longer-term players continues to emerge on dips, with these players more concernedabout exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. Allof this should continue to keep the commodity well supported, with many market participants also fleeing to the hardasset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the USDollar under pressure in 2017 has added to the metal’s bid tone as well, but there is a growing sense that even in ascenario where the US Dollar is bid for an extended period, GOLD will hold up on risk off macro implications. Dealers arenow reporting demand in size ahead of 1260.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

Feature – technical overview

USDZAR has been confined to range trade for much of this year, with rallies well capped ahead of 14.00 and dipssupported into the 12.30 area. A the moment, the market has been well supported and is looking to once again push up tochallenge the top of the range. Only back below 13.25 would negate the outlook.

R2 13.87 – 9Oct high – Strong•R1 13.77 – 23Oct high – Medium•S1 13.25 – 16Oct low – Strong•S2 13.16 – 22Sep low – Strong•

Feature – fundamental overview

Expectations for a November rate cut in South Africa have been cut down after last week’s SA CPI readings rose by morethan forecast. This isn’t a positive development for the South African economy with the greater need for flexibility on rateson the basis of a near zero growth and a negative output gap. Meanwhile, the Rand remains exposed to ongoing tensionon the political front which will persist into year-end on account of the upcoming ANC leadership election and risk of creditrating downgrades. Locals are also thinking about what is likely to be an unrealistic Budget Statement from the FinMintoday, given the weak growth, rising inflation and poor revenue collection. The only supportive Rand driver at the momentseems to be coming from the record run in US equities, which is a positive for risk correlated emerging market currencies.However even here the Rand should be sitting uneasy as the prospect for a capitulation is looking increasingly realistic onoverbought technicals and an unstable political backdrop around the globe.

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Wednesday, October 25, 2017 LMAX Exchange Global FX Insights

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