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The Weekly Close Out

Luke Suddards
Research Strategist
Aug 20, 2021
Risk-off ensconced markets this week, with commodites getting drilled and Fed minutes providing some information before next week's Jackson Hole Symposium. Let's find out what you need to know.

Dollar Index (DXY):

The strength we’ve seen in the greenback is a classic case of risk-off flows. A study out this week showed reduced efficacy of vaccines post 3 months for the delta variant, which could have triggered a change in sentiment as global growth stalls. Equity markets falling, VIX spiking and the US 10-year strongly bid substantiates this. This shows the left side of the US dollar smile is alive and well. It really does seem like the dollar can’t lose at the moment – risk-off and the dollar gains; risk-on and strong economic metrics (labour) see the Fed get closer to policy normalization and the dollar gains. There was zero informational content from Jerome Powell’s town hall speech, but the FOMC minutes the next day did shed some light on thinking over at the Fed. Most participants judged it could be appropriate to begin tapering this year if economy evolved as anticipated, given it’s close to achieving substantial further progress on employment and already done so on price-stability. Key questions for traders are: the timing of tapering; the pace of tapering – this will have consequences for when rates are lifted. The pace of tapering will depend on how the Fed thinks the market will digest a 2022 rate hike. The strong July NFP number was published post this meeting – I’d imagine support for tapering this year has likely been given further support. Next week’s Jackson Hole Symposium will be watched closely for any further clues on the topic of tapering. To see a September taper announcement we’ll need to see a solid NFP print (above 900k). In terms of a potential timeline based on conditions currently, my view is for a start to actual tapering in December with a first rate hike in December 2022. Economic data wise - retail sales disappointed as the boost from stimulus checks fades. In contrast, US industrial production surged and is now back to pre-covid levels. Finishing off jobless claims were strong as initial claims came in at 348k down from last weeks 377k and below expectations of 364k. Continuing claims finally slipped below the 12 mln mark too.


King dollar has surpassed its 31 March highs and is now back to levels last seen in November 2020. Price is back in the ascending channel and the RSI breached its downtrend line and is now close to overbought territory. Both the 50-day SMA and 21-day EMA are pointing upwards and the 21-day EMA is providing dynamic support to price. On the upside, 94 seems like a good first target. On the downside, I’d look to 92.8 horizontal support and the 21-day EMA. Below that we have the 50-day SMA which would also be another good level.


EURUSD has moved through some key levels, however, there’s not much euro specific to mention. The 2nd estimate of Q2 GDP was in line on the QoQ figure, but very slightly missed on the YoY number. Inflation data threw markets no curveballs with data bang in line with consensus expectations. German PPI data out earlier today, was pretty punchy though, potentially giving some titbits for the hawks at the ECB to nibble on. The biggest news flow out of Europe this week was probably a poll indicating the race for the German Election is getting close! A poll from Forsa showed the centre-left SPD have now moved into second place ahead of the Greens. The numbers now stand at 23% for CDU/CSU, 21% for SPD and 19% for the Greens. SPD and the Greens lean left economically, meaning higher taxes and more government spending. Next week sees Flash PMIs, GfK consumer confidence from Germany and ECB minutes.


The big technical break of 1.17 would have triggered some stops and put further pressure on the single currency. Jackson Hole could be what pushes price closer to the 1.16 October November double bottom. For now rallies into the 21-day EMA could be looked at as potential shorting areas, with further moves higher running into resistance at the 50-day SMA and 1.185 horizontal resistance. RSI is making some minor negative divergence still and is close to oversold territory.


It’s been a busy data week for the pound which has put the BoE’s optimism to the test. Beginning with employment, there were 95k job gains vs 75k expected, this helped the unemployment rate come in at 4.7% (better than expectations). Inflation missed and fell back to the 2% target of the BoE. Clothing was particularly weak with summer sales offering customers discounts. The ONS stated the majority of the slowdown was due to base effects from last July. However, according to BoE forecasts this will be temporary and by the end of the year, inflation should hit 4% YoY. We know the Bank of England have said some modest tightening of monetary policy could be necessary to meet their inflation target. The peak of inflation is not what is key for the BoE to move with a rate hike, it’s how sticky inflation remains. Looking at OIS data, the market is pricing in a 15bps rate hike by May 2022. Economists polled by Reuters on the other hand do not expect a rate rise until 2023. Retail sales missed expectations quite substantially. I put this down to hospitality reopening up providing alternative options for consumers spending to go towards as well as some maybe remaining more cautious on the spread of delta variant and steering clear of shops. Next week is quite for UK data, but we will get some flash PMIs.


Another double bottom support taken out at 1.366. Price now is right on the upper trend line of its descending channel. A death cross is fast approaching unless price can put in a rebound. The 50-day SMA and 21-day EMA are both capping price moves upwards for now. The 200-day SMA will also act as resistance for any price rallies. The RSI has moved a lot lower and is approaching oversold territory. If price takes out the 1.357 20 July low then we could see 1.355 and 1.35 come into play. The 200-day SMA and 1.385 resistance would be targets on the upside.


The Antipodeans are getting smoked. The RBNZ was ready to pull the trigger and become the first major G10 central bank to raise rates, but then delta came along and caused them to hold (ironic given that not too long ago they were talking about -ve rates). I’ve been bullish on NZD, however, I’d also been flagging the risk of a delta flare up given the low vaccination rate, combined with a steep money market curve causing pain for the Kiwi. Leveraged funds (hot money) are long NZD by almost 1.5 STD DEVS above the average. A positioning unwind would heap further pressure on NZDUSD. Despite growth rates in Australia and China waning (NZ’s biggest two trading partners), progress on the economic front is solid – inflation above target and unemployment back to pre-covid levels. What helped stem excessive weakness was the hawkish RBNZ interest rate projections – 0.6% by end of 2021, 1.6% by end of 2022 (almost 100bps higher than May’s forecast) and roughly 70bps above where the market is pricing. The market’s pricing in circa 3 rate hikes by end of 2022 – 1 by end of 2021 and 2 over 2022. This provides a bit of cushion as the market is less hawkish than the RBNZ, however, a worrisome detail from Wednesday's NZ covid briefing flew onto my radar - one of the confirmed cases is in a nurse who worked four shifts without knowing she was infected. As of writing this, total current cases are at 69.

AUD is getting drilled and looks like it could target 0.7 against the dollar. Aussie jobs data out on Thursday actually showed a very slight payroll gain and the unemployment rate came in at 4.6%. This could be due to the effects of lockdowns not having filtered into the data yet or labour market is remaining robust. There are a couple factors working against the Aussie at the moment: 1) Deteriorating growth picture from China, its largest trading partner 2) Worsening COVID situation 3) Iron ore, Australia’s largest export is continuing its steep decline (back to December levels) as BHP predicts a rout based on lower Chinese steel output global growth risks accelerate. Partially been offset by positive price moves in their second largest export – coal. 4) Minutes out from the RBA showed that some members had considered delaying the taper of asset purchases due in September 5) Lastly, risk-off sentiment.


The cross had a brief rally into the 21-day EMA, however, now relatively the Aussie is under more pressure than the Kiwi and the pair has continued its move lower. I think to see us get to the Head and Shoulders target of 1.025 would need to see the covid situation resolve quickly in New Zealand and a rate hike, while Australia’s covid situation doesn’t improve. A first initial target would be the 1 December low around 1.04. Upside targets would be the 21-day EMA and the former range support at 1.06.


I haven’t analysed the South African rand in a while (my country of birth) and it’s making some interesting moves, so I thought I’d put it on your radar. The rand’s weakened due to 1) Global risk-off sentiment 2) Softer inflation data this week allowing the reserve bank more time before they begin a hiking cycle 3) SA is large commodity exporter and commodities are down across the board. 4) Techncial moves through the 200-day SMA triggering stops and systematic traders jumping on the move.


USDZAR has sliced right through the 200-day SMA and now looks like it’s heading towards 15.55 overhead resistance. Looks like a golden cross could be on the cards too. Price is being bought on dips into the 21-day EMA and 50-day SMA. The RSI, however, is in overbought territory. Upper price target would be 15.50/5 and on the downside – 15 and the 200-day SMA.


Gold has been rangebound this week with a slight bias to the downside. Dollar strength and safe-haven flows have been neutralizing price action for the yellow metal. Real yields have also been increasing since Monday which works against gold given its yieldless nature. Jackson Hole next week could have implications for gold through tapering expectations pushing real yields up and applying pressure on price.


Gold is right on its upper trend line of its descending channel and 21-day EMA. The 50-day SMA is also capping gains for upward price moves. The 50-day SMA is still below the 200-day SMA. The RSI is close to the 55 mark which has caused price to stall previously. Targets wise, $1750 support would be my first initial downside area of interest and on the upside $1800 and the 200-day SMA.


So what’s driving crude at the moment? At the beginning of the week Chinese data missed expectations and confirmed a loss of momentum in growth. APAC particularly is struggling with the spread of the delta variant, which has sparked worries about demand destruction. A stronger dollar and risk-off sentiment do nothing to help the black liquid either. Summer travel season is fading so consumption growth is peaking. Goldman cutting its GDP forecast. One other thing for oil traders to put on their radar is Hurricane season near the Gulf of Mexico is fast approaching (supply destruction). OPEC sent Biden’s call to raise production straight to voicemail. The cartel said it sees no need to raise production than already planned. OPEC+ is currently planning to raise output by 400k BPD a month beginning in August until all the of 5.8mln BPD cuts are brought back to the market. Inventory data from the US showed drawdowns were slightly better than expected, but only very marginally. Interestingly, my colleague Chris Weston ran an interesting backtest - crunching the numbers since 2000 there has been 91 occurrences of crude falling 6 days in a row. If you buy the next open and sell on the close of that day (a mean reversion trade) - you'd have 53 winners/38 losers, but the average loss is 3.17x the winner.


Oil is not looking good. The $68 support was smashed and the trend like broken. Further weakness could see us reach the 200-day SMA at $63.47 It would have to contend with the strong support at $65 first which for me is a key line in the sand to be held if price is to not go lower. The RSI is close to oversold too. Upside rallies towards $68 would be my first area of interest and above there $70.


Not any specific news flow has come out to drive crypto’s price this week, it’s merely been at the whims of risk-sentiment which has not been great. Price fell back to its 21-day EMA and bounced to just above the 200-day SMA. The $49.2k resistance (former range support) is still a necessary hurdle to be cleared. The RSI is close to overbought, but not as bad as it was a week ago. Targets - to the upside are $49.2k and the downside are the 21-day EMA and the former range resistance at $41k.


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