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Otmane El Rhazi - A quiet economic calendar in European trading hours is likely to see traders looking ahead to US news-flow. Retail Sales are expected to have added 0.6 percent in August, marking the largest increase in four months. Meanwhile, the University of Michigan Consumer Confidence gauge is forecast to show the strongest sentiment reading since April.
The trend in US economic data in the weeks leading up to Augusts’ disappointing jobs report was decidedly rosy. Chatter around the news-wires was dismissive of the soft payrolls outcome, chalking it up to a flukethat would be revised away in subsequent releases rather than a real turning point for US economic performance.
If that narrative finds support in upbeat results on today’s outcomes, that may fuel bets on a relatively sooner onset of policy tightening from the Federal Reserve. This has potential to undermine risk appetite considering the formative role of Fed stimulus in elevating sentiment in recent years. Such a scenario is likely to generate gains for the US Dollar while applying particularly strong selling pressure to commodity-bloc currencies.
The Australian Dollar underperformed in overnight trade, sliding as much as 0.5 percent on average against its leading counterparts. Risk aversion appeared to be the driving catalyst behind the move. The MSCI Asia Pacific regional benchmark stock index traded lower and S&P 500 futures faced selling pressure, eroding demand for the sentiment-sensitive Australian unit. We remain short AUDUSD.
Otmane El Rhazi - The EURUSD breakdown has respected one moving average in particular on the H4 timeframe, and now it’s time for the trend to continue or to reverse. The 34-EMA has served as resistance to price since August 17, with price having turned and failed there on each attempt.
Coinciding with price turning at the H4 34-EMA in EURUSD has been the Slow Stochastics turning around and reversing lower near the 50 median line. Such was the case on each rejection of the H4 34-EMA; so we are looking for this condition to be held in order to maintain EURUSD shorts. For now, the post-NFP swing high (a weak report for the US Dollar) should serve as resistance near $1.2990.
Elsewhere the technical breakdown in AUDUSD looks rather clean, considering that a wave of better than expected Australian labor market data propelled the pair back into the former March-September range support lows near $0.9205/20, yet price was unable to achieve a return to the range.
In the classic nature of support turned resistance, AUDUSD shorts are thus encouraged by the failure and the march to $0.8906 can continue, the target of the topping pattern that may have just begun.
Something to watch over the next few days: the direction of long-end US Treasury yields. The rolling 20-day correlation between the Dollar Index (DXY) and the 10-year US Treasury Note yield is at its highest level since early-February at +0.593. If US yields decide to play catch up, there may be a bonafide cushion inflating underneath the buck.
Otmane El Rhazi - The precious metals are marginally weaker in Asian trading (silver -0.16%, palladium -0.56%) as US Dollar strength permeates the broader market. A research note from the US Federal Reserve released on Monday suggested investors were underpricing a rate hike from the central bank, which has likely aided the greenback’s ascent.
A thin US economic docket lies ahead. This raises a question mark over whether the US Dollar bulls can continue their charge amid a void of supportive news flow. Nonetheless the tide has certainly turned in favor of the reserve currency over recent months as speculation over Fed tightening gathers pace. Alongside ebbing geopolitical concerns this leaves gold and silver in a precarious position near noteworthy technical levels of support.
Crude oil and copper have also likely suffered at the hands of their pricing currency. The DOE’s upcoming Monthly Short-Term Energy Outlook report may do little to inspire a recovery for the crude benchmarks. The set of global forecasts from the government agency for energy demand and consumption are often met with little fanfare by traders.
Coupled with fading Iraqi and Russian supply disruption fears WTI and Brent may be left lacking bullish fundamental cues. However, the potential for a “corrective bounce” should not be overlooked given the speed and magnitude of recent declines.
Talking Points by Otmane El Rhazi:
- USDJPY posting an inverted hammer against its yearly high.
- USDOLLAR Index support comes in at 10689, the 8-EMA.
- August NFPs: +230K exp vs +209K prior.
The USDOLLAR Index is attempting to break through its yearly highs set in January, but an overextended bull run and softening technicals leave the greenback vulnerable to a weak NFP report. That’s not to say a weak Nonfarm Payrolls report is expected - consensus estimates call for the seventh consecutive month of jobs growth >+200K, the best streak since 1997.
Instead, the fact that the US Dollar is both strong yet vulnerable is a testament to its recent seemingly non-stop rally. Ever since EURUSD lost $1.3335 in mid-August, buying pressure under the greenback has been rampant.
Considering that non-commercials/speculators were already their most short in two years coming into this week and then yesterday we saw the largest decline and volume day in EURUSD in over two years, it’s possible that the supply of sellers of the Euro/buyers of the US Dollar may be in low stock.
Positioning is important as it could transform a meagerly disappointing NFP print into something magnified; the straw that breaks the camel’s back and produces a wave of profit taking across the USD-spectrum. A strong NFP here, barring a print in excess of +300K, might find it hard to produce another string of fresh highs in the USD-pairs.
Otmane El Rhazi - Gold and silver face a make-or-break moment with US NFPs set to cross the wires over the session ahead. The precious metals were sent reeling in trading on Thursday as the US Dollar bulls continued their charge on the back of a beat to US service sector activity data. The greenback could find further fuel on the back of a beat to the upcoming jobs added figure or headline unemployment rate.
However, policy makers continue to note concerns over broader measures of labor market activity, including the pace of wage growth. Until the complete picture shows greater signs of improvement the Fed will likely remain hesitant to hike rates from record lows. This in turn raises some doubts over the potential for USD momentum to continue without a more hawkish shift in “Fed-speak”.
Meanwhile, crude oil has been left lacking bullish fundamental cues after a mixed US inventories report this week. Drawdowns in total stocks and supplies at Cushing were reported. Yet these positive signs were largely offset by a wind down in refinery utilization - signaling fading demand for the commodity after the height of the ‘driving season’. Further, US crude production remains elevated close to its peak for the year (the highest rate in close to three decades).
On the geopolitical front; ongoing conflict in Iraq and Eastern Europe remains a distant blip on traders’ radars at this point. Further, concerns over crude oil supply disruptions from either region are almost non-existent. This leaves bullish supply side drivers seemingly lacking, and suggests the potential for a sustained recovery for the crude benchmarks may be difficult.
Otmane El Rhazi - Crude oil rebounded in US trading on Wednesday (WTI +2.86 percent, Brent + 2.42 percent). A corrective bounce offers the most likely rationale behind the move, given the pair’s substantial declines earlier in the week. Positive investor sentiment on the back of ebbing Ukrainian concerns also may have contributed to the gains for the risk-sensitive commodities.
Interestingly, the cease-fire discussions in Eastern Europe reduce the likelihood of sanctions on Russian commodity exports. Which in turn may actually have negative implications for crude, as concerns over supply disruptions from the energy producer fade.
Upcoming US inventories data may generate further volatility for WTI. Total crude stocks are tipped to decline for the third consecutive week. Yet concerns over a lingering supply glut in the US remain. This follows the last DOE report which revealed a ramp up in US crude production to its highest rate since 1986. Until we see a more broadly constructive picture painted by incoming reports selling pressure for WTI may remain.
Also in the energy space; the weekly natural gas storage report is set to cross the wires during the session ahead. Another above-average storage injection figure would likely keep natural gas prices contained below the $4.00 handle.
Finally, the precious metals remain vulnerable as traders look past turmoil in Iraq and Ukraine. Fading concerns surrounding the regional conflicts threaten to sap safe-haven demand for the alternative assets. Meanwhile, on the US Dollar side of the equation ADP payrolls data and ISM Non-Manufacturing figures may offer the greenback some guidance. However, the potential for a strong response from the reserve currency to the releases is questionable. This is given that traders are likely to be treading cautiously ahead of the critical Non-Farm Payrolls report on Friday.
Otmane El Rhazi - US Dollar strength has weighed on gold in Asian trading today. The greenback bulls have returned despite a lack of major supportive news flow from the US overnight given the Labor Day holiday. The trading lull on Monday may have proven to be the calm before the storm as US traders return ahead of a busy week for economic events.
Over the session ahead US ISM Manufacturing figures headline the docket. Yet the leading indicator is on the periphery for Fed policy makers with their core focus remaining on the labor market. This suggests the impact on policy expectations and thus the US Dollar could prove limited. Nonetheless, the potential for further greenback strength should not be discounted given its strong performance today despite a lack of data flow from the region.
Tensions in Eastern Europe are also likely to remain on the radar for commodity traders. Yet the latest flare-up has proven insufficient to dramatically bolster safe-haven demand for gold and silver. At this stage it appears only a significant escalation and greater international response could generate significant gains for the alternative assets.
Mounting speculation over sanctions on Russian energy exports may offer the Brent benchmark some short-term support. Additionally, as the world’s largest producer of palladium the precious metal could be afforded some further gains. However, traders should be mindful that such fear-driven positioning may be quickly unwound if supply disruption concerns are not realized.
Otmane El Rhazi - Augusts’ preliminary Eurozone CPI reading headlines the economic calendar in European hours. The benchmark year-on-year inflation rate is expected to edge lower to 0.3 percent, marking the lowest level since October 2009.
In overall terms, price-growth data from the single currency area has cautiously improved relative to consensus forecasts since the beginning of the year, opening the door for an upside surprise. A better-than-expected reading may chip away at speculation about an expansion of ECB stimulus measures at next week’s monetary policy meeting, sending the Euro higher.
Leading survey data disagrees however, pointing to the largest drop in output prices in there months in August. With that said, the extent of recent selling and seemingly stretched speculative net-short speculative positioning suggests the risk of outsized volatility may be asymmetrically greater on the upside than otherwise. For what it’s worth, technical positioning hints a EURUSD bounce may be ahead.
The Australian and New Zealand Dollars underperformed in overnight trade as risk appetite unraveled, weighing on the sentiment-linked high yielders. The MSCI Asia Pacific regional benchmark stock index fell 0.2 percent and is on pace to register its first monthly drop since April.