Trade war threat recedes to help improve risk appetite again

Market Overview

The immediate negative threat of a trade war has receded, meaning that the safe haven flows are now beginning to unwind again. In the wake of last week’s announcements from Donald Trump with tariffs on aluminium and steel and the threats over the weekend on German cars, the fears have begun to calm down. This comes as Republican officials plea to President Trump to reconsider his moves. The yen has unwound some of its recent gains, the rally on gold has pulled back and Treasury yields are on the rise once more. Will this improvement in sentiment help the dollar again? There seem to be mixed moves on forex majors today, as the Dollar Index seems to be consolidating rather than recovering. Trump has been sounding off about again about how bad NAFTA has been for the US, which has put pressure on the Canadian dollar again. The Loonie has sold off sharply in recent sessions towards 1.3000 against the dollar, its worst level since July 2017, and now seems to be a significant underperformer as Trump continues to vent his ire over trade. The Reserve Bank of Australia as expected chose to stand pat on monetary policy (no change at +1.50% exp) whilst it was interesting to see the RBA cautious on growth, just as Aussie Retail Sales for January missed expectations at +0.1% (+0.4% exp) and the Australian current account worsened to –A$14.0bn (-A$12.6bn exp).

Markets generic blue

The main move has though been seen in equity markets where Wall Street, having been sharply lower in early moves, closed over a percent higher, with the S&P 500 +1.1% at 2721. Asian markets were equally positive with the Nikkei +1.8% (certainly helped by a weaker yen), whilst European markets are looking stronger too, with the volatility of the DAX which is so geared towards global trade, now driving its outperformance. In forex there is more of a muted reaction, with little real direction of note. In commodities, gold is finding a degree of support again with little direction on the dollar, whilst oil is again higher on reports that The International Energy Association see global demand improving.

There is little of any note on the economic calendar with regards to economic data today, however the US Factory Orders will garner some attention at 1500GMT. Consensus expects there to be a decline of -0.4% on the month (having improved by +1.7%). Aside from that there will also be attention given to the comments of the FOMC’s Bill Dudley (permanent voter, centrist) who is speaking at 1230GMT, whilst another FOMC member, Lael Brainard (permanent voter, dove) also speaks at 1030GMT.

Chart of the Day – EUR/NZD 

Euro/Kiwi has been trending gradually higher since August and in the past couple of weeks the market has used the support of the trend to once more accelerate higher. However, there has been a key pivot in place around 1.7100 since November which has become resistance in the past few months. As with the early February rally, we saw that market testing the resistance only to subsequently roll over to leave a negative one day candlestick pattern. Is this another failure at this resistance? This time we see the momentum indicators more positively configured, but still more is needed. The RSI failed around the low 60s in February and again this is where the market is beginning to lose impetus. However the daily MACD lines and Stochastics are also positive. The hourly chart shows momentum rolling over and the near term importance of the support at 1.7000. A move back below 1.7000 would open the next support at 1.6960 but also suggest lost impetus once more. However, corrections would remain a chance to buy with a band of support 1.6920/1.6960. A move below the support at 1.6810 would change the outlook to negative again.

EUR/USD

The euro seems to be riding out the uncertainty of the Italian election result fairly calmly. Posting a positive close last night on a session of around 100 pips daily range (just above the Average True Range of 90 pips) suggests that the bulls are solid in this market. The momentum indicators continue to tick marginally higher and suggest that the recent corrective move continues to be seen as a chance to buy. The barrier of $1.2360 which has been in place over the past couple of weeks still needs to be decisively breached (on a closing basis) in order for the market to open the upside towards the highs again at $1.2555. It was interesting to see the market failing around that resistance yesterday and it is also a factor early today, so clearly is a level the market is currently struggling with. The hourly chart shows yesterday’s low at $1.2265 is now key near term support that the bulls need to hang on to in order to maintain the recovery momentum.

GBP/USD

The Cable bulls had a positive day yesterday. Pushing solidly higher with a strong bull candle to form a third consecutive positive session. The move has helped to now stabilise the corrective momentum on the MACD and Stochastics lines, with the RSI also bouncing above 40. However there is still much more that needs to be done to suggest this five week run of lower highs and lower lows has finally played out. The overhead resistance at $1.3855 still seems to be a factor, with the market again this morning failing to decisively clear it before dropping away again. The hourly chart shows a more positive configuration has built up but this needs to be maintained now. Trading decisively above $1.3855 would certainly improve the outlook near term but then the old pivot area around $1.3930/40 needs to be tackled, whilst clearly the $1.4000 barrier remains an issue too. The early drop back today suggests there is still work to be done for the bulls, however there is minor support at $1.3755/65 now above the key low at $1.3710.

USD/JPY

As broad market risk appetite improved again yesterday the yen gradually weakened throughout the session. This ended with the formation of a solid bull candle and a decent reaction by the bulls to the breach of the February low at 105.50. So the market has failed on successive sessions to close below 105.50, however the market still looks to be one to sell into strength. The old support at 106.35 is now a basis of resistance, whilst the eight week downtrend comes in around 107.05 today with the falling 21 day moving average at 107.30 also a gauge of the selling pressure. This means there is a near term sell zone of around 100 pips. The key resistance levels come in with the lower highs at 107.65 and 107.90. The daily momentum indicators remain negatively configured and set up for rallies to be sold into. The hourly chart shows the market rallying back to the overhead supply of the low lows around 106.35, with hourly momentum now turning lower this morning. Initial support is at 105.75.

Gold

The market tested the resistance of the two week downtrend yesterday without decisively breaching it. A mild negative candle closing at $1320 poses more questions than provides answers about the recovery. There is a basis of resistance between $1320/$1325 and the market turned back from $1327.90 yesterday to maintain the recent downtrend. This is all coming with the daily momentum indicators plateauing after a phase of selling pressure, however if the market starts to trade back below $1320 again, then this will be a concern for the bulls. This is shown on the hourly chart with the momentum indicators just beginning to deteriorate again. Initial support is at $1315 which now protects the key lows between $1300/$1310. The bulls need to clear $1332 to get the recovery back on track.

WTI Oil

The bulls have responded by starting the week in a positive frame of mind. After four consecutive negative candles, the buying has picked up and looks to have helped to form support at $60.15. With the mixed configuration on the momentum indicators there is little real overall direction, but a second positive candle today would help to build belief that potentially a higher low is forming at $60.15 above $58.10, whilst the bulls will be looking towards testing overhead supply once more. The old pivot at $62.85 is the initial test. On the hourly chart there is a push above initial resistance at $61.85 and a five day downtrend has been broken. The hourly chart shows there is a band of near term resistance between $62.50/$62.85 above which opens $63.45 and then the key resistance at $64.25.

Dow Jones Industrial Average

The bulls have fought back well early this week, posting a strong positive candle on Monday. The encouraging news is that the overhead supply of the old reaction low at 24,793 has been decisively cleared as the rebound has gathered momentum. Support is now in place at 24,218 which is above the 23.6% Fibonacci retracement of the big sell off at 24,128. It is also interesting to see that once the 38.2% Fib level barrier at 24,605 was cleared, the market quickly rallied towards the 50% Fib level (at 24,988). This all but capped the day high as the market turned back from 24,961. The 24,793 level once more becomes a basis of support now for today’s session as the bulls will look to continue the recovery. Above the 50% Fib at 24,988 opens 61.8% Fib at 25,372. The momentum indicators on the daily chart are still throwing off a range of mixed signals, however the hourly chart is now looking to improve again, with the bull cross on the hourly MACD lines the first signal since 9th February (a signal that worked well). Also the hourly Stochastics are now strongly configured. Are the bulls ready to take off again?