FX Markets: Clear and Present Danger
Price action across major currencies show wobbles ahead in the FX markets. While these are counter trend they are still worth watching as the weeks ahead could be painful.
- EURUSD has taken out decent supports and is at risk of testing 1.15 if not 1.13
- Similar indications of USD strength can be seen on the DXY Index
- EURJPY is heading to 1.21. Previously USDJPY led the way lower but that role is likely to be taken over by EURUSD
- Gold is trading poorly, and this is more than simply USD strength. The XAU-G4 Index (Gold equally weighted against USD, EUR, CNY, JPY) shows a technical gap suggesting a decline of 4%-5%
- The USD is looking stronger even in parts of Asia
- Silver is at risk of testing $19
Why would the above take place? It is difficult to pinpoint the exact cause. There seem to be no pressing problems coming from the fixed income and funding markets. Instead, the market appears to be squaring up positions, perhaps slightly earlier than expected ahead of the US election. Additionally, the Federal Reserve’s balance sheet is increasing at a snails’ pace lately, despite their commitments. Perhaps Chairman Powell himself is waiting for the election result before opening the taps further.
For those seeking hope in the stability of the Nasdaq over the past couple of sessions, beware that it is now one of the most concerning short-term charts out there, even if the picture may be different in the long term. The risk at this stage is that we retest the February peak of 9,736 before stabilising which would imply a decline of at least 12% from current levels – a noteworthy risk especially as we are 10% off the highs already. Until recently, the fall on the Nasdaq from early September was rather contained, however this week the picture seems more concerning as other equity indices around the world are also struggling. In Asia both the Kospi and TWSE, in South Korea and Taiwan respectively, failed at earlier highs and are falling. North Asia had recently been an outperforming region.
Overall, the risks highlighted here look likely to be corrective in nature even if deep. The underlying longer-term trends of a weaker USD and a higher Gold price will re-emerge over a broader horizon which will mean opportunities should present themselves in time. Be in no doubt that the Fed will remain dovish until the labour market is properly back on its feet, however clear or unclear their guidance may be.
More technical commentary and charts available below…
EURUSD
EURUSD closed below the head and shoulders neckline as well as the 55 day moving average. The initial target for the setup is 1.15 while an extended target would be just below 1.13
USD Index (DXY)
Daily chart: Rallied through the reverse head and shoulders neckline and breached the 55 day moving average with a large gap tot eh 200 day at 97.13
Weekly Chart: Held the 76.4% Fibonacci retracement of the whole rally from February 2018 at 91.73. A close this week above 93.59 would provide a bullish outside week
EURJPY & USDJPY
EURJPY also showed a topping pattern and a decent gap to the 200 day moving average which is currently at 120.88. As USDJPY failed to sustain below the July low, a move down on EURJPY is likely to now be led by a short term fall in EURUSD as per above.
Gold – XAU-G4 Index
This chart is Gold equally weighted against the USD, EUR, CNY and JPY. We have taken out the base of the recent range and the 55 day moving average implying a fall fall towards the channel base and 200 day some 5% below current levels.
Asia-USD Index (ADXY)
Bearish daily reversal at the highs and triple negative divergence on the momentum indicator shows weakness in the uptrend in the short term.
Nasdaq 100
Breached the 55-day moving average and has so far failed to move back above it. The 200 day is at 9,543 which is close to the previous February high of 9,742 – some 12%-14% below current levels.
SKA