The Weekly Close Out

Dollar Index (DXY):

The greenback has essentially gone full circle this week, trading roughly where it started. The beginning of the week strength was most likely driven by softer risk sentiment as indicated by lower equity markets and a slight uptick in the VIX as well as stagflationary concerns. Then on Wednesday we saw around a 50bps move lower in the dollar index. For me there are various reasons which I believe could have catalysed this move – 1) Equity markets recovering their losses with solid major bank earnings 2) Some trimming of long dollar positions after last week’s significant build 3) Policy error by the Fed. On point 3, looking at the yield curve we’ve seen a bear flattening take shape as the market ramps up its interest rate bets (September 2022 hike now being priced) - causing the 2Y yield to increase, while the back end (10Y yield) declines on fears of lower growth from the Fed normalizing policy. The strong auctions for both the 10Y and 30Y this week confirmed the trend of lower yields for now. It could also be expectations of a reversal back to easy policy (seems unlikely after the minutes out on Wednesday which all but confirm a November taper). However, if it is a policy error that the market is worried about then surely that would cause risk-aversion and actually this dip we’re seeing should be used to reload longs? Headline inflation came in hotter than expected on the YoY measure at 5.4% (emerging market levels of inflation, quite extraordinary) and Core was slightly better than expectations on a MoM basis. Jobless claims data were solid, beating on both initial and continuing claims. Retails sales injected some life back into the economic data with a very strong print.

(Source: Pepperstone - Past performance is not indicative of future performance)

The dollar is hovering just below the 94 level, but comfortably above its former range resistance at 93.2. Price is trending nicely within its ascending channel, supported by the 21-day EMA as price dips lower. Both moving averages are pointing upwards supporting bullish momentum. The RSI has fallen back to the 55 level which tends to act as support/resistance depending on which direction its coming from. Targets wise - on the upside 94.5 would be my initial target, beyond there 95 would come into play. On the downside, zones I'd be paying particular attention to would be the 21-day EMA and the 93.2 former resistance (50-day SMA.)

EURUSD:

Didn’t have too much data out from the eurozone this week with a weaker than expected German ZEW index reading, in line inflation, but a better than expected industrial production print. Next week Friday will bring flash PMIs. We have had quite a few speakers out from the ECB this week with Villeroy stating the ECB should retain some of the PEPP’s flexibility in the toolbox. This was contrasted by hawk Mr Knot who seems concerned about complacency towards inflation – read through on this is obviously taking the foot a tad off the accelerator. With the historic under-performance of the ECB reaching its inflation goal and recently switching to a more symmetrical inflation target of 2% I still can’t see the punch bowl being removed anytime soon and continue to think EURUSD is a prime candidate to short. The euro hasn’t really had any catalysts of its own and has been taking direction from what happens across the Atlantic in the US.

(Source: Pepperstone - Past performance is not indicative of future performance)

The euro has been under pressure and is struggling to reclaim the 1.16 resistance level. Price tried to rally above the 1.16 level, but has again been pushed down lower. The moving averages all indicate bearish momentum for EURUSD. The RSI, however, is indicating negative divergence with price and is moving out of oversold territory. Shorting the rallies would be the right way to play EURUSD. Targets would be the 21-day EMA (been working well to cap rallies) just above 1.16 and then 1.17 just below the 50-day SMA. On the downside, 1.15 would be the zone I'm looking towards.

GBPUSD:

The UK economic calendar was relatively busy with this week kicking off with employment data which showed wage growth, the unemployment rate both coming in line with expectations but slightly less than expected expansion in employed. This unfortunately won’t have incorporate the effects of furlough ending quite yet. GDP data was a bit softer with the MoM coming in 10bps lower than expected as well as the previous months seeing a negative revision into contractionary territory. Industrial and manufacturing production were better than expected on a MoM basis though. We also had two BoE members, Catherine Mann and Silvana Tenreyro, out on the wires yesterday who dismissed the risk of non-transitory inflation and seem to prefer an easier policy setting instead of premature tightening. Money markets still see a 15bps hike by year end. Brexit chatter is back with the potential for a trade war to break out. The EU released their solutions to the current problems in NI. The UK’s Frost is headed to Brussels today for a meeting with Sefcovic (point man for the EU). He had this to say – “The EU have definitely made an effort in pushing beyond where they typically go in these areas and we're quite encouraged by that but obviously there is still quite a big gap.” The gap he refers to is most likely the governance of NI by the ECJ which is a red line for him. So far traders have shrugged this off and I’m not surprised with all the can kicking as well as Brexit fatigue. One to watch though I suppose as a trigger of Article 16 by the UK could make things interesting.

(Source: Pepperstone - Past performance is not indicative of future performance)

Cable looks like it's navigating the 50-day SMA (we'll have to see where we close over the weekend) as well as just above the 53 RSI level which has capped gains in the past. For the bulls both moving averages need to turn upwards and the 21-day EMA needs to cross above the 50-day SMA. Targets wise, on the upside the 50-day SMA will need to be cleared decisively first around 1.371 from there 1.38-5 around the 200-day SMA would be key. On the downside, 1.36 and the low of 1.34 would be prudent to keep an eye on.

USDJPY:

Honestly USDJPY seems unstoppable. The cross remained resilient despite very recent softness seen in US 10-year yields. Low volatility leads to more appetite for carry trades and the yen is a prime candidate as a funding currency. Additionally, they're a big energy importer which is not a great position to be in at the moment. However, today’s spurt in the US 10-year yield has seen another surge in dollar yen. Price is now well above its recent high/resistance of 112 and is in now in the mid-114 region. The move looks a tad stretched when looking at the RSI which is in deep oversold territory. Targets wise, for bulls 115 would be a good target. On the downside, 113-112 (21-day EMA) would be prudent to monitor.

(Source: Pepperstone - Past performance is not indicative of future performance)

Gold:

The yellow metal is getting thumped today as yields move higher and hit the non-interest bearing asset, forcing it to give up most of its Wednesday gains. The price move explaining gold this week can be distilled into 3 factors: yields, dollar and inflation release. The inflation release obviously got some investors jumpy and saw them flock into gold as a hedge. The weaker dollar would have also increased global demand and then the real yields declining added a further tailwind.

(Source: Pepperstone - Past performance is not indicative of future performance)

Gold is under pressure as it finds sellers at the 200-day SMA ($1800). The 21-day EMA and 50-day SMA are back in the picture as price fluctuates around them. The RSI is below the 55 level which capped previous price rallies and looks to be headed lower. Targets to have on your radar are $1775 and $1800 on the upside (both near the 50-day SMA and 200-day SMA). On the downside if price breaches the $1750 level then $1725 would be next up.

Oil:

The oil complex has been quiet in terms of news flow. OPEC did however revise down their oil demand forecast for 2021 to 5.8mln b/d from 5.96mln b/d. We also heard from Vlad Putin who thinks we could see triple digits at $100 a barrel. He’d love that as it’d come right into Russia’s coffers for their budget. The less stronger dollar will have also helped the black liquid remain lofty.

(Source: Pepperstone - Past performance is not indicative of future performance)

The chart shows almost a straight line move higher. Momentum has been very strong, but I can't help but think maybe price is due a cooling off and a minor correction before another leg higher. Price is stretched beyond its 50-day SMA and 200-day SMA as well as being in overbought territory on the RSI. When price is 11-15% above its 50-day SMA its historically stretched - now at 13.35%. Could we see some mean reversion here? Targets wise, for the bulls - $85 would be the target to get to and on the downside - $80 and below there at $78 (21-day EMA there too) would be where I'm watching.