To summarise market moves:
- US10Y fell to its lowest level since October 2017
- JPY and CHF dominated the FX space, as you’d expect
- CAD was the weakest major with falling oil prices
- EUR rebounded above key support at 1.1100 on weak US data (despite weak Euro data)
It was a lively session for Europe and US to say the least. Germany’s business sentiment deteriorated with IFO current assessment dropping to its lowest level since 2016 and business climate to its lowest since November 2014. European and German PMI also softened further. This promptly saw the DAX as the weakest index of a bad bunch and helped EUR/USD push to a new low.
Not wanting to miss out, weak US PMI data saw a sharp reversal in the dollar to help EUR/USD bounce back above key support at 1.1100. At 50.6, Markit manufacturing was its lowest since May 2016. Whilst this is still ‘expansive’ above 50, it is only just. Furthermore, as its tracking global PMI lower and signals weaker growth expectations, traders saw a higher chance of the Fed cutting rates, despite the Fed minutes signalling no rate moves for ‘some time’ this week. Regardless, the USD is on the back ropes as we head towards the weekend.
Whilst the US dollar index (DXY) is mostly weighted against the Euro at 57.6%, it remains a proxy for overall US dollar strength or weakness. Yesterday’s bearish outside day was its 2nd most volatile bear-candle of the month. The fact this happened at a key breakout level sends a signal to dollar bulls: USD isn’t ready for a breakout yet.
- Bias remains bearish on a near-term basis
- We’d prefer to sell into USD strength on intraday timeframes
- Although the longer-term trend remains bullish, we’d like to see a higher low/base form above 97.03 before seeking bullish setups
- A break above yesterday’s high assumes the bullish breakout in line with the dominant trend
Correlations to watch:
As you’d expect, EUR/USD retains its almost perfectly inverted correlation, which paints upside potential for EUR/USD whist above 1.1100.
- Contrarian opportunities may arise on AUD/USD, NZD/USD or GBP/USD.
- All three inverted correlations are becoming stronger with DXY
- As they’re heavily oversold, it builds a case for a corrective bounce
- Out of the three, NZD/USD appears ‘technically’ closer to a correction
NZD/USD formed a bullish engulfing candle at the lower Keltner
- The bearish leg appears in need of a correction, and the bullish engulfing candle is above the October bullish pinbar
- RBNZ shifted to neutral, which has removed a key argument to the bear case (although the risks surrounding trade wars persist)
- A break above 0.6527 marks a deeper correction against the trend and provides bullish setups on intraday timeframes
- The 38.82% and 50% retracement levels can be used as near-term bullish targets
- Further out, we're looking for it to revert to its bearish trend and break to low lows