Weekly analysis

Interesting to note the CHF weakening here versus both the Euro and US dollar as yields march higher. USDCHF is one of the few USD pairs outside of USDJPY to post a new cycle high. Swiss yields have not tracked higher with Europe and the US and important EURCHF resistance is falling above 0.9800, just as USDCHF has traded above 1.0100 for the first time since 2019. The high since all the way back in 2010 is 1.0344. 

Trade accordingly with your risk.

EUR/GBP advanced significantly this week to trade back within the ascending channel. A series of extended lower wicks set the scene for the bullish move which appears to have encountered an immediate level of resistance at 0.8670  a level that has kept higher prices at bay many times before.

Price action also trades around the midline of the ascending channel which may serve as additional resistance in conjunction with the 0.8670. Should we see an advance above immediate resistance, the next significant level of resistance comes in at 0.8723  a stronger level that has proven to be rather effective in acting as a pivot point.

Support appears at 0.8670 and if we are to see a retracement of this weeks move, 0.8470 becomes the next level of support.

Trade accordingly with your risk

Commodity markets continue to attract a great deal of directional inspiration from the price action across financial markets with traders and investors trying to gauge the risk and potential depth of an economic slowdown by watching developments in stocks, bonds and forex. A focus which during the past two week sent precious metals on major rollercoaster ride.
Gold’s ability to act as a diversifier has increasingly been called into question in recent months with the metal falling despite seeing inflation at the highest level in four decades. Once again, however, it is important to note that gold as an integrated part of financial markets will continue to be impacted by movements and correlations to other markets, especially yields and the dollar. Gold trades down by 9% in a year.

Gold in a downtrend since March has settled into a wide $1617 to $1725 range, with support being of the 2018 to 2022 rally. While  maintain a bullish long-term outlook for gold, a break lower may raise concerns about a double top sending prices even lower. For a change towards a more bullish sentiment to occur the metal first needs to break the downtrend followed by a move above $1735.

If we have a look at the reaction in Fed expectations from Friday’s Fed Chair Powell speech at Jackson Hole, there was no major market takeaway. During the speech, there was a trivial marking down of expectations as Chair Powell emphasized the “totality” of data in setting the appropriate rate at the September meeting. (And 90 minutes before his speech, the July PCE inflation data was out a tad softer than expected, while the final University of Michigan sentiment survey for August saw longer inflation expectations 0.1% lower). But for that September 21 FOMC rate decision, the payrolls and earnings data this Friday and the Sep 13th CPI release will weigh more heavily.

Somewhat more importantly, Powell underlined the importance of ensuring that The Fed’s policy remains persistent enough to ensure that the inflationary cycle has abated. One of the key passages worth highlighting is “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” Powell then went on to invoke Paul Volcker and his fight with recurring bouts of high inflation in the 1970’s and early 1980’s. 

Watching USDJPY closely this week to see if US data takes US treasury yields higher still – especially at the longer end of the US yield curve, which could serve to renew the pressure on the Bank of Japan as it insists on maintaining the yield-curve-control policy. Arguably, as long as the longer end of the US yield curve is anchored below the June highs, the pair doesn’t have particularly cause to run higher unless there is a USD liquidity problem not connected to yield volatility. And if we get weak US data this week through Friday’s jobs and earnings report, we might be instead looking at a “double top” scenario. The 139-140.00 zone looks important this week. 

Trade accordingly with your risk

AUDUSD an interesting pair that looked heavy on the cycle lows  A strong US jobs report and earnings, together with higher US yields and a CPI release that doesn’t move the needle this week are likely needed to prompt a new slide, perhaps eyeing the 0.6000 area eventually. Clearly weak jobs growth, indifferent or worse average hourly earnings, and a weaker than expected US CPI next Thursday, together with a celebratory surge in risk sentiment as treasury yields presumably drop. Remember that the RBA pivoted dovish and concerns remain on demand from China, where new Covid cases remain a threat as the cold season approaches in norther regions ahead of the pageantry of appointing leader Xi to a third term. 

For the moment, the Fed tightening rhetoric appears to be unmovable, meaning supposedly that we’ll have to look through many months of softening employment data before we can expect the Fed to climb down from its hawkish freight train. In that light, today’s September jobs data may weigh little, barring huge surprises.

As for the Fed, speeches from no fewer than three FOMC voters suggest that all Fed members are on the same page in continuing to deliver a message of determination to see the inflation dragon slain before easing up.

Lower fuel costs lowered Canada’s July inflation. The BoC governor believes inflation is still too high. Investors will take a lot from Fed Chair Powell’s speech next week regarding monetary policy.

The weekly USD/CAD forecast is bullish as the pair might continue its rally next week with the dollar strengthening further. 

USD/CAD had an intense week with news releases from Canada and the United States. Official data released on Tuesday revealed that Canada’s inflation moderated marginally in July due to decreased gasoline costs, leading the central bank governor to comment that the annual rate may have peaked but will “remain too high for some time.”

Underlying price pressures indicated that another significant interest rate increase was possible. Bank of Canada Governor Tiff Macklem stated that inflation is still “far too high” in an opinion piece published on the National Post website following the release of the statistics.

Despite rising gasoline prices and increased sales at car dealerships, Statistics Canada data showed on Friday that Canadian retail sales rose 1.1% in June, surpassing estimates. However, sales were predicted to decline in July. Statscan, in a preliminary estimate, said it sees July retail sales falling 0.2%.

On the other hand, the US dollar soared last week after Fed officials emphasized the need for more significant interest rates to control inflation. This dollar rally saw USD/CAD closing the week higher.
In the coming week, investors will wait to hear what the Fed chair, Powell, will say in his speech regarding monetary policy. US GDP for Q2 is expected to grow from -1.6% to -0.8%.

Looking at the daily chart, we see the price trading above the 22-SMA with the RSI above 50, showing the trend is bullish. The price is heading for a strong resistance level that has stopped bulls several times. The 1.30258 level might cause a reversal to the downside.

The USD has pulled higher , setting new cycle lows for EURUSD, GBPUSD and in other USD pairs, though with the notable absence of the USDJPY on the list as the market respects the risk of Bank of Japan intervention, at least at the margin. Still, the directional sympathy in USDJPY to the USD direction elsewhere has been in evidence since the pair bottomed below 142.00 overnight, trading above 143.00 as of this writing. More importantly, the massive surge in US long treasury yields to new cycle- and 11-year highs are piling on the pressure for the Bank of Japan to change its policy. US treasuries are the dominant driver across markets. 

The USDJPY situation played out largely as one might have anticipated after the FOMC took US yields higher and the Bank of Japan continued to take a stand on its currency policy and then made good on its intervention threats shortly after USDJPY breached 145.00 to the upside, taking the pair all the way back below 141.00 at one point before the price action stabilized. Now, the upside pressure has ratcheted significantly higher for the pair as the key coincident indicator for USDJPY historically, a longer-dated US treasury yield like the 10-year benchmark, surged yesterday by nearly 20 basis points. Without the BoJ’s presence and threats, we would likely be well on our way to 150.00. How long can the market stand to sit back before challenging the BoJ once again? It doesn’t seem a war the latter can win as long as Kuroda and company insist on staying pat with the current policy of freezing yields out to 10 years as US treasury yields march ever higher… Plenty of danger for market participants wanting to make that challenge, however, as the BoJ/MoF have shown tremendous determination in the past, at least when intervening against JPY strength as in 2003.  

Trade accordingly with your risk

The pair closed the week slightly higher with a small-bodied weekly candle showing there were mixed reactions to the news releases over the week. The move up was mainly caused by the weakness in the US dollar after disappointing US data showed a slowdown in the economy.

The US dollar also lost ground after the FOMC meeting, where Powell came off as less hawkish than investors had feared. Markets seized on this as a possibility that the Federal Reserve would loosen its tight policy. All these developments helped support the EUR/USD. 

However, this move up was capped by the crushing eurozone economy. Several things have been ailing the region this past week, including political instability in Italy, the ever-growing gas crisis, and the red hot 8.9% inflation rate. All these things played a role in dragging the pair down.
The daily chart shows the price at a very important level. The bulls have been trying to break above 1.02503 since July 19. However, this level has held strong. The RSI trades below 50 and shows bears are still in charge. At the same time, the price is on the cusp of breaking above the 20-SMA, showing a looming shift in sentiment.

If 1.02503 holds as resistance, the price might retest parity, while a break above could hit the June 28 resistance at 1.05879. 

Trade accordingly with your risk

The commodity sector traded lower for a third week, with the main market focus being the risk of an economic slowdown caused by runaway inflation and central banks stepping up their efforts to bring it under control .
Gold, which has been on the defensive for the past five weeks in response to stubbornly high US inflation driving up the dollar and US government bond yields, slumped below support-turned-resistance at $1680 as the market was overwhelmed by momentum and technical-driven selling related to the risk of a 1% US rate hike next week. In addition, the market continued to raise expectations for how high Fed funds will rise over the coming months.

Crude oil traded lower in the week, partly driven by losses across fuel products such as gasoline and diesel, but remained within a recently lowered range, with demand concerns once again being the main focus more than offsetting potential supply challenges in the coming months. Growth and demand concerns, as well as the stronger dollar making the cost of fuel increasingly expensive around the world, remains the focus as the market prepares for another growth dampening rate hike from the US FOMC next week.

In addition, demand in China continues to linger after the IEA said the world's largest importer of oil was heading for its biggest annual drop in demand in more than three decades. Meanwhile, the US Department of Energy walked back on its SPR refill stance by saying that it didn’t include a strike price (that was said to be around $80/barrel) and it isn’t likely to occur until after fiscal 2023.

In Europe and increasingly also Asia, elevated prices for gas and power continue to attract substitution demand into fuel products like diesel and heating oil. In addition, the supply side will also be watching the impact of the EU embargo on Russian oil, which will begin impacting supply from December. The IEA in their latest monthly oil market report highlighted the embargo as their reason for lowering Russian supply in early 2023 by 1.9 million barrels per day – a development if not arrested by a peace deal or any other political development in Moscow could see the market turn increasingly tight again. In addition, the current lull in Chinese demand look set to reverse once lockdowns are lifted and, together with the risk of supply tightening, we see potential weakness in Q4 being replaced by renewed strength next year.

With Fed Chair Powell’s refusal at the FOMC meeting on Wednesday to provide forward guidance and indication that coming rate moves will depend on incoming data, the risk as we noted would be an increased sensitivity to data releases. And we saw that yesterday after the release of the weak first estimate of US Q2 GDP, which had annualized growth falling at -0.9% relative to the prior quarter (so an actual fall of less than 0.25%), led by shifts in inventories, weaker government spending and fixed investment, while personal consumption was +1.0%. Fair or not (and to be fair to observers like the Biden Administration, this does not look like a real recession at all yet) this drove the USD sharply lower, with the USD touching new local lows against the majority of G10 FX pairings and the JPY the highest beta currency to the situation on the sharp move lower in treasury yields. That reaction, rather like the kneejerk reaction to the FOMC meeting the day before, has in turn faded fairly quickly, if not fully, suggesting that the market realizes very well that the next data release could fail to support the trend toward lower and earlier peak Fed funds rates. Today we get the June PCE inflation data, but the busy data calendar through next Friday’s July US jobs report may offer a minefield for tactical USD traders, especially when the next CPI data points roll around on August 10 and September 13. Tactically, an important coincident indicator is the US 10-year Treasury yield benchmark, which finally punched below the 2.70% in the wake of the data release but has not followed through lower – if it reverses back sharply into the old range, that may be the end of this USD move lower for now – also in USDJPY terms (assuming no BoJ shift).

The Fed’s halt to QT and eventual move to cut rates and even resumption of QE was possible as there was no inflation to complicate the backdrop, and it while had softened a bit, there was no whiff of recession in the air. This time, the Fed is only likely to relent on further tightening and to begin ease because the labour market has come under severe pressure, which only happens in recessions. And recessions are historically where the Fed is busy chasing to get ahead of a worsening of financial conditions. And the latter only improve in a recession once the Fed has eased sufficiently to get ahead of the downturn. In short, the market is getting way ahead of itself here and we are likely well ahead of peak financial condition tightness – the point at which “something breaks” as we have phrased it before.
This week has seen a tactical capitulation of the USDJPY bulls after the FOMC meeting and negative US Q2 GDP estimate. Overnight, the Tokyo CPI was a bit hotter than expected as well, although it is unlikely the BoJ will carry out a policy shift unless it is under duress at a time of weaker JPY and higher commodity prices. The Ichimoku level of note in coming days is the bottom of the cloud near 131.50, conveniently near the old cycle high that was retested back in June.

Trade accordingly with your risk