USD rises as hawks retreat

In an article published earlier this week, we noted this week was the 10-year anniversary of the lowest level that the S&P500 traded to during the dark days of the Global Financial Crisis (GFC). As an Elliott Wave practitioner, a form of technical analysis which is based on cycles, or “waves,” I keep an eye out for other types of cycles in markets, one of which is “time”.

After the overnight sell off in U.S. equity markets, the NASDAQ is on track to close the week lower, after 10 straight weeks of gains. While there may be a temptation to read more into this coincidence, our base case remains that U.S. equities (and Australian equities for that matter) have commenced a Wave iv correction which should result in the S&P500 trading back towards the 2710/2690 support region, while the 6100-support level in the ASX200 beckons.

Interestingly, the fatigue in stock markets this week, has coincided with two more major central banks, throwing in the towel on their optimistic growth and rate forecasts and moving to a more dovish stance.

On Wednesday night, the Bank of Canada (BoC) kept rates on hold as expected, however there was little for the bulls to cheer about as the BoC downgraded the growth outlook. While they still have maintained a mild bias to raise interest rates, they noted “the outlook continues to warrant a policy interest rate that is below its neutral range” and that there is “increased uncertainty about the timing of future rate increases”. 

Then overnight, the European Central Bank (ECB) exceeded the markets dovish expectations by downgrading growth and inflation forecasts by far more than expected with the 2019 GDP estimate lowered to 1.1% from 1.7%, and inflation forecast lowered to 1.2% from 1.6%. The ECB now expects interest rates to remain unchanged “at least through the end of 2019”. Then to top it all off a new round of stimulus was announced known as TLTROs to maintain bank lending conditions and support the region’s sagging economy. Perhaps of most concern in all of this is that 10 years after the GFC, the ECB was unable to get anywhere near its “neutral” policy rate before turning dovish.

The reaction in FX has been as would be expected, with the CAD and the EUR immediately losing ground against the U.S. dollar. The U.S. dollar index, the DXY was able to break above trendline resistance at 97.30. However, a break and close above the December 2018 97.71 high is still required as further confirmation that a move towards 100 is underway.

This may come as soon as tonight’s U.S. non-farm payrolls data, particularly given the strong seasonal pattern for February non-farm payroll data to beat the consensus estimate by approximately 50,000 in recent years. Although with global growth concerns once again back on the markets radar, a weaker than expected 180,000 jobs may also give the U.S. dollar a boost, given the dollar is likely to be the main beneficiary if the current equity market pullback was to accelerate.

Should the U.S. dollar take the next leg higher, I am looking to add to USDSGD longs, which as can been seen on the chart below is trading just below the the neckline of an inverted head and shoulders pattern (like the pattern in USDCAD which was triggered earlier in the week). A break and close above the neckline 1.3616/25 should confirm that a medium term is in place at the January 1.3443 low and that the rally can extend towards 1.3800.

Source Tradingview. The figures stated are as of the 8^th of March 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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