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The Weekly Close Out

Luke Suddards
Research Strategist
Aug 6, 2021
Quite a big week for markets with the BoE Meeting and today's marquee event of the Non-Farm Payrolls. Let's take a look at where we're at before the weekend begins.

Dollar Index (DXY):

Before heading into this event the dollar had been on a firmer footing due to a variety of factors. 1) Strong economic data across all PMIs as well as the ISM non-manufacturing PMIs 2) Fed Governor Waller who in an interview on CNBC mentioned that if the next two months of jobs reports prints around 800k-1mln then in his books substantial progress would have been met - leading to a September announcement and actual tapering in October 3) More hawkish undertones surprisingly from Fed Vice Chair Clarida who stated conditions for rate hikes could be met by end of 2022 and that he can certainly see the Fed announcing tapering later this year. Clarida’s comments overshadowed the weaker than expected ADP numbers. Jobless claims were mixed going into today’s NFP report with initial claims almost in line and continuing beating quite handsomely. The NFP was a strong report across the board with 943k new jobs (above the 870k expectations and a revision higher of last month’s figure), unemployment rate at 5.4% vs exp of 5.7%, wages up and the participation rate up 0.1pp. The US 10-year yield has responded with around a 6bps pop higher as this report shows we’re heading in the right direction to meet the Fed’s goal of significant progress for tapering. The greenback followed suit too. Will be interesting to see if tonight’s CFTC positioning report shows another build on last week’s dollar net spec longs. Next week, we’ll get Job openings data and on Wednesday we’ll get the July inflation print.


The dollar index is now well above the mini range between 91.8 and 92.2, with the 21-day EMA also being sliced through. Bulls got a solid NFP print and this has propelled price through my previous target of 92.5. Despite the recent pullback with both price and the 50-day SMA above the 200-day SMA, the trend remains up. The RSI is just above the key 55 level. Targets to monitor, on the upside are 92.8 previous resistance and the previous channel high of just above 93. For moves lower, I’d keep a close eye on the horizontal support around 92 and the 50-day SMA lower.


The euro has had a mixed week on the economic data front. Starting off the week Germany produced better than expected retail sales data and eurozone manufacturing PMI impressed. The composite and services side of the indicator disappointed and eurozone retail sales beat on the YoY measure, but missed on the MoM reading. The euro is struggling heading into the weekend as the dollar strengthens on the back of the solid NFP report reminding traders about the different policy views of the ECB and Fed. Next week we’ll get ZEW economic sentiment data and the final reading for German July inflation data.


EURUSD has moved almost 50 pips lower post the NFP report as price was capped by the 21-day EMA and 1.185 horizontal resistance. The RSI peaked at key resistance around 52 and still has a decent amount of room before oversold becomes a problem. The death cross divergence is widening further. My first target lower would be 1.175 and then 1.17 (around the March 31 lows). On the upside monitor 1.185 (21-day EMA and horizontal resistance). Above that 1.19 would be my next level to keep an eye on.


Although, the pound’s direction like other key G10 FX pairs is being dictated by the latest NFP report, I think the latest BoE Meeting warrants a discussion due to the interesting facets which arose. Although, you wouldn’t think so looking at the price action, yesterday’s meeting actually had a slight hawkish tilt. Inflation expected in Q4 21 was given a chunky revision to 4% near term and we received guidance on interest rates which was quite stark compared to June’s rhetoric - “some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”. With money markets already pricing in a punchy rate lift-off of 15bps around June 2022 this wasn’t enough to move the needle (OIS curve hasn’t flinched in response). How quickly policy tightens will depend on the evolution of the labour market post furlough scheme expiry which according to the Bank’s forecasts, unemployment should peak at its current level of 4.8% - indicating a soft landing as furlough is removed. GDP growth projections were in line with market expectations of a slowdown in Q3 and rebound into Q4 allowing the economy to reach pre-pandemic levels at the end of this year. We also heard that negative rates could be implemented into the financial system and commercial banks are ready. Whether it will be used and can be used are two different kettle of fish. On the QT policy normalization sequencing, the market got what it was expecting a lower threshold for gilt sales at a 1% bank rate and the curtailing of reinvestment of maturing bonds at a bank rate at 0.5%. Looking at the OIS curve, markets don’t see a 0.5% rate until well into 2024 and the 1% goal for the sale of gilts looks even more laughable with short term forward contracts all the way out to 2027 not even coming close to 1%. The BoE’s benchmark rate hasn’t reached 1% since the Global Financial Crisis. JPM highlighted something which I found quite humorous too – “Assuming QT involves only ceasing reinvestments and not selling gilts then the stock of APF gilts held by the BoE would only very gradually fall to reach pre-pandemic levels in 2034.” So much for Bailey’s desire to create additional balance sheet room for the next crisis. Lastly, in my preview I mentioned the inflation projections at the end of the BoE’s forecast horizon (Q3 2024) and how that might affect money market pricing, well based on current market interest rates the Bank expects inflation to come in at 1.89% (slightly softer than May’s 1.93% expected for Q2 2024) and just below the target at 2%. This suggests the BoE is comfortable with where market interest rates are currently. Finishing off, economic data for the pound was on the positive side as manufacturing PMI came in line with expectations, on the composite and services side of things beat consensus, however, construction PMI disappointed. Next week Thursday we’ll get the UK’s Q2 GDP data.


Cable continues to struggle to make its mind up directionally as the Fed and BoE spar for who is more hawkish. Price is currently trapped between the 21-day EMA support and 1.385 horizontal support and on the upside the 50-day SMA resistance. The RSI is fluctuating very tightly around the 53 level. Targets on a breakout of this consolidation price behaviour would be – Upside: 1.40 and 1.41; on the downside: 1.385 and the 200-day SMA.


Not surprised at all buy the higher moves we’re seeing in the USDJPY given its close correlation to the US 10-year yield which has moved up quite a bit. USDJPY has breached the upper trend line of its descending channel and pushed above the key psychological level of 110 and is now touching the 50-day SMA. The RSI has rebounded above the 46 level supporting price momentum higher. For bulls I’d like to see the 21-day EMA back above the 50-day SMA. Targets wise, keep your interest piqued around 110.5 and 111. On the downside look to 109.5 and 109.2.



AUDNZD is the crowd favourite for central bank divergence trades. The market got a bit of a surprise when the RBA said they’d stick to their taper schedule due in September. Still rates aren’t expected to be lifted based on the RBA’s guidance until 2024. Victoria has also just been placed into a snap 7-day lockdown adding to the growth slowdown for Q3. The RBNZ made more hawkish moves by announcing its intention to tighten lending standards to try cool a red hot property market being driven by excessive mortgage borrowing. Add to this a stonking jobs report, with unemployment coming in at 4% far below 4.5% expectations. This has now all but assured a 25bps rate hike on August 18 with an outside chance for a 50bps hike, but in view of the tighter lending standards I’d go with 25bps. Some major banks are predicting 1% by end 2021 which would see a 75bps hike from where we are currently. Only concerns are low rate of vaccination (20% of population) making the Kiwi vulnerable to the RBNZ taking a step back.


A Head and Shoulders pattern looks to have formed within the range and if it plays out that projects to a target of 1.025. Also, there is the death cross – 50-day SMA crossed below the 200-day SMA. The 1 December low around 1.04 would need to be taken out first before we get close to 1.025. There is a tiny bit of negative divergence on the RSI keeping selling momentum in check. Still a good candidate for a short the rallies approach. Dec lows would be my first target.


Gold traders remained on tenterhooks before today’s NFP report with price remaining stuck in its range between $1800 and $1830. The problem for gold bulls is the movement towards policy normalisation which hurts the yellow metal in two ways 1) non-interest component of gold loses out to higher yielding assets as interest rates lift and 2) a stronger dollar as those interest rates rise.


Gold has been drilled today and sharply moved out of its range between $1800 and $1830. Price kept knocking on $1830, but is struggling to see a sustained move through there with the 50-day SMA providing a bit of a resistance headwind too. Bears may be licking their lips as the 50-day SMA is starting to point lower and incredibly close to making a death cross with the 200-day SMA if price continues to slide lower. A little double top pattern seems to have played out too. The RSI has dropped like a stone. Targets on the downside would be $1750 and $1725 with upside moves eyeing $1800 and the 50-day SMA/200-day SMA. I’m still of the view that gold is a solid candidate for a short the rallies approach.


Oil prices have been like a rollercoaster this week. The poor virus situation in the APAC region, more particularly China created demand concerns given China’s significant role as a consumer. The move through the closely watched 50-day SMA could have also led to some liquidations from CTAs and systematic traders. Softer inventory data out of the US probably didn’t help either with a build taking place against drawdown expectations. On the geopolitical side, things are heating up between Iran and Israel over a tanker attack. The stronger dollar today has taken some winds out of oil’s sails.


Price has been pushed lower today, now back below the $72 support level. The RSI is kind of in no man’s land around 42. The 21-day EMA has crossed below the 50-day SMA (bearish short term). For bulls price needs to maintain the $70 level. For rallies, monitor the $73.9/$74 area.


The digital currency is having another crack at the top of its range resistance, around 41k. Regulatory concerns from the SEC have been overshadowed by a positive risk environment as well as reports emerging that hedge fund, Point72, is about to take a big bet in the crypto space. Price came back down to test the 21-day EMA and horizontal support around $38.2k and rebounded higher from there into the $41k area. If price can break that range resistance then the 200-day SMA around $45k becomes the next target with enough room before the RSI can be considered overbought. For pullbacks keep your eyes peeled on $38.2k and the $35.7k level just above the 50-day SMA.


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