Since Monday the CAD (-1.43%) and AUD (-1.13%) have been the weakest dollar counterparts. Both currencies have been pressured after the RBA decided to leave the QE practically untouched and there was no expectation that the BOC would do much either. This is indeed what happened. The bank kept the rates and monetary policy unchanged. Today we’ll see if the ECB follows their example and leaves the Fed to lead the world into ‘the great unknown’ of tapering so to speak. EURUSD has retraced to our key support area and attracted some short-covering ahead of the ECB monetary policy statement. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Since Monday the CAD (-1.43%) and AUD (-1.13%) have been the weakest while the USD (0.52%) has had a relatively strong performance. Both AUD and CAD have been pressured after the RBA decided to leave the QE practically untouched and there was no expectation that the BOC would do much either. Today we’ll see if the ECB follows their example and leaves the Fed to lead the world into ‘the great unknown’ of tapering so to speak. It’s always a risk to remove the monetary support, especially when the patient is so hooked to the drug that it has grown to take the constant stimulus for granted. However, it’s also a risk to keep kicking the proverbial can down the road. The benchmark US 10 yr. Treasuries yielded 1.35% at the end of the trading yesterday. Previous close: 1.38%.
This week hasn’t been kind to the bulls in precious metals. Rising yields and the expectation that the Fed will indeed taper sooner or later has been weighing on platinum (-4.85%), silver (-3.73%) and gold (-2.10%). USOIL has been a strong performer. Traders have been defying the dollar strength and have been buying WTI Crude near supports. This has resulted in an upward trend in oil.
The S&P 500 (-0.13%), the DJIA (-0.20%) and the Nasdaq (0.57%) all lost ground in yesterday’s trading even though VIX retraced a bit. However, VIX trading above 15 (yesterday’s close 17.97 means investors are nervous. The same sentiment is reflected in the sectors. The weakest sector was energy (-1.28%) while utilities (1.97%) gained strongly indicating an increase in risk aversion. The strongest stocks in our CFD selection were GIS, KHC, CTXS, DUK and SBUX while the five weakest stocks were FCX, NTES, SLB, BB and WDC.
The above chart shows the % performance of each stock. Stocks are presented here with the S&P 500 tracking ETF (SPY, red line) to illustrate the performance of each stock relative to the benchmark index. This allows our readers to see the potential for intraday trading opportunities in these stocks. Often the sudden increase in volatility continues on the second day. You should, therefore, keep monitoring these stocks to see if they will satisfy your criteria for a trade. All % performance charts in this report are courtesy of Tradingview.com.
The BOC Rate Statement is the biggest risk event today. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.
After the RBA decision and the bad ZEW numbers triggered a sell-off in EURUSD that was already losing momentum the pair reached a key support level at 1.1804. We defined this level well in advance (here) when EURUSD was still trading substantially higher. There are several technical factors coinciding right below this level. The SMA(20) is currently at 1.1785 and the SMA(50) is at 1.1801 while the bear channel high is at 1.1800.
As usual, we don’t know a) what the ECB Monetary Policy Statement and press conference will reveal about the central bank’s future policies and b) how the market will react. Therefore, there is no way of estimating the probabilities of the future price moves with any degree of certainty. This is why we refrain from making any predictions and will stay in cash until there is enough information (in terms of both macroeconomic and price action) to trade with an edge. This is where the key price levels are highly important as price action around those levels can help us to understand the supply and demand dynamics in EURUSD.
The key price zones and levels for EURUSD are 1.1663, 1.1785 – 1.1804, 1.1892 – 1.1908 (38.2% retracement level and a weekly resistance level) and 1.1965 – 1.1975 (the 50% retracement level and a daily swing point).
Another market that has been weak lately is AUDUSD. RBA decided to cut & extend their QE which resulted in traders buying USD and selling the Aussie dollar. The idea was that the Fed is more likely to move sooner than the RBA which just extended its QE until February whereas the Fed is expected to taper in this quarter. This manifested quickly in price action and we took a view (here) that the AUDUSD pair would move lower if the 0.7426 was violated. Now the pair is trading near to our key price level zone is at 73.05 – 73.20 where we have the SMA(20 and the 23.6% retracement level. This zone could attract short-covering but at the same time, we need to keep in mind that AUD has been the weakest currency (among the dollar major dollar counterparts) and there’s a fundamental reason for it: the market expectation that the Fed will start taper first. This is why there’s a risk that this support doesn’t hold. Our traders should plan their trades accordingly.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||Fed Chair Powell said on Friday (August 27th) in Jackson Hole Symposium that tapering could begin in 2021 but also voiced concerns about the spread of delta variant.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US lawmakers have agreed to a $1.2 trillion infrastructure spending plan. The Fed officials consider ending the asset purchases in the middle of 2022.|
|Yields||Apart from the recent pickup (that started in August 2021), the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||After two highly positive employment reports (+938K and +943K) the August number (+235K) was a big disappointment but in fact at a level that used to be the norm in the years before the pandemic. This number could delay the Fed taper but isn’t likely to reverse their decision to taper.|
|Inflation||The month on month Core CPI (excluding food and energy) for July came in at 0.3% (0.4% expected) which indicated a big drop in the rate of inflation from the month before (0.9%). The Fed has earlier taken a view that inflation is transitory and will be therefore likely to fade away. Even though one data point doesn’t make a trend it seems that the Fed has been correct in their inflation projections. The lumber futures for instance are once again trading at October 2020 levels and down over 70% from their May highs.|
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Market News & Facts
- BOC rates and QE left unchanged
- US JOLTS job openings 10.934M (10.03M expected)
- Fed’s Williams: appropriate to start taper in 2021
- No chance expected from BOC today
- Japan GDP for Q2 +0.5% (+0.3% prelim.)
- Federal Reserve Beige Book to be released today
- RBA kept rates at 0.10% and cut but extended QE
- Australian consumer confidence 100 (101.8 prior)
- German factory orders +3.4% (-1.0% expected)
- Saudi Arabia cuts oil prices for Asia
- New Zealand ANZ Commodity Price index -1.6% (-1.4% prior)
- Mercedes: chip shortage to stay in 2022
- China Services PMI 46.7 (52.6 expected)
- Gazprom to switch all settlements from USD to CNY
- US Factory Orders 0.4% (0.3% expected)
- WHO: Variant Mu could be resistant to coronavirus vaccines
- Australia July trade balance 12.1 bn AUD surplus (10.2bn expected)
- OPEC in agreement on increasing output gradually
- US ISM Manufacturing Index 59.9 (58.6 expected)
Quick Links to Recent Analysis
The Next Main Risk Events
- EUR – ECB Monetary Policy Statement
- EUR – ECB Main Refinancing Rate
- EUR – ECB Press Conference
- USD – Unemployment Claims
- USOIL – Crude Oil Inventories
- USD – 30-y Bond Auction
- CAD – BOC Gov Macklem’s Speech
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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