The Weekly Close Out

Dollar Index (DXY):

It was a fairly busy week for the greenback with FOMC speakers, inflation data – CPI and PPI, bond auctions and jobless claims. Bostic like many others believes that another strong month or two of job gains will be enough to taper and his timeline for this is around October-December with the possibility of this being brough forward on strong upside surprises from successive NFP reports. Excluding volatile items such as food and energy core CPI inflation was bang in-line with YoY expectations, but the MoM figure came in under expectations. Rates and breakevens pared back a touch, indicating reduced fears of runaway inflation. Inflation remains well anchored to the Fed’s target. The December 2022 Eurodollar futures contract (shows likelihood of a rate hike by the Fed in December 2022) softened a tiny bit but has almost retraced that move. The market’s focus remains on jobs reports for now given the Fed’s emphasis on this data point. PPI numbers certainly caught my attention beating handsomely across headline and core YoY and MoM numbers. This will be squeezing companies margins and makes me wonder how long before producers pass this along to consumers through higher CPI. The US 10-year bond auction was very strong – large tail, strong bid to cover ratios and a very large indirect number (foreign demand). The last big data point for this week was jobless claims. Initial claims printed in-line at 375k and continuing claims beat expectations. The labour market continues to push ahead to the light at the end of the tunnel with momentum from the July NFP number likely to continue into August. Next week we get US retail sales data.

DXY broke above the 92.5 mark as the week began and has continued to remain above this point as we approach the weekend. There is some decent support at 92.8, as indicated by the solid white horizontal line. Price is also right on the lower trend line of the ascending channel. The RSI is showing divergence though as price makes higher highs which is my only concern. I want to see price action backed up by solid momentum. It still is above the key 55 level though. Both shorter term moving averages are pointing in the right direction – upwards. Targets wise, on the upside I like 93.2 and the March 31 high just below 93.5. On the downside, I’d want to see what price does around the 21-day EMA and below that the 50-day SMA and horizontal support around 92.

EURUSD:

Not even hawkish remarks from Weidmann about the ECB having to tighten policy in order to counter inflation could stem euro weakness. Heaping on the bearish factors was the ZEW Economic Sentiment Index which missed on the current conditions and standard reading too. German inflation data didn’t budge from expectations, however, euro wide industrial production was softer than expected. Next week we’ll get the 2^nd estimate of euro area Q2 GDP and the final estimate for July inflation.

EURUSD is slightly down on the week after Monday’s fairly sizeable bearish candle. We broke through the 1.175 support seen in mid-July and now price is seeing a modest oversold bounce off the 1.17 support line. The 21-day EMA is still acting as nice dynamic resistance to think about levels to short at. Price is firmly below all 3 moving averages and the death cross gap continues to widen. Only problem for the bears like myself is the RSI divergence as price pushes lower it’s not being confirmed by the momentum indicator. Targets to the upside would be the 21-day EMA around 1.18 and then 1.185 above that. On the downside – 1.17 support and below that the September November double bottom around 1.16.

GBPUSD:

It’s been a very quiet week on the domestic front here in the UK. However, there were some interesting developments that popped up on my radar. The CBI has been lobbying the BoE to hold off on tightening monetary policy until recovery is more guaranteed, much to the chagrin of sterling bulls. In terms of vaccinations, the UK has now inoculated 75% of adults with two doses – great news. The only data point we got this week was Q2 UK GDP, which grew by 4.8% QoQ and 1% MoM (tad better than expectations, but netted off by the downward revision for May), leaving the UK economy 4.4% below pre-covid (Q4 2019) levels. This gap should be closed into the final months of 2021. Growth likely peaked in Q2. The market was unreactive due to these numbers being well priced in. Next week the data calendar is a bit busier with employment, inflation and retail sales scattered throughout the week.

Cable has been struggling to push higher as the 50-day SMA applies pressure to upside moves. Price is now right on its 200-day SMA and will need to remain above this for bullish price action to continue. The 50-day SMA is also approaching the 200-day SMA, a death cross would be bad news for GBPUSD bulls. The RSI currently sits in no man’s land around 45. Positive data next week may see some bids filter through for sterling. Targets, on the upside 1.385 and the 50-day SMA, above that 1.40 would come back into play. On the downside, the 200-day SMA is key and below that the 1.366 support area would be pivotal.

USDJPY:

USDJPY has been rangebound this week mirroring the price action seen in US 10-year yields. Domestically, covid cases are exploding with the Olympics likely to have played a part in this. If yields continue to push higher over the next few months combined with covid headwinds, then USDJPY should find bids. Technicals are alright for USDJPY with price just above its 50-day SMA and 21-day EMA. The RSI remains above 46 support. Price actually tagged the 110.8 resistance and fell back. Targets for this cross are 110.8 on the upside and 110 on the downside.

AUDNZD:

The Aussie dollar is getting hit on two fronts – 1) Further lockdowns, Melbourne’s has just been extended by a week and Canberra has joined the list of locations being placed into lockdown. 2) Amid a lack of domestic data, iron ore futures fell toward a four-month low ($159) as China pushes to curb steel production to lower its pollution as well as rising supply. Next week Wednesday we have a New Zealand Central Bank meeting, where it is almost a certainty we’ll see a 25bps hike with an outside chance for 50bps, but my money is on 25bps. This would make the RBNZ the first major central bank to initiate rate lift-off. This should help keep AUDNZD contained to the downside. There is also Aussie employment data out next week, which feeds into RBA policy rationale.

AUDNZD has been boring over this week, sticking in a tight range. The RSI has risen from out of oversold, with some divergence taking place with price too. Keeping selling pressure in check. Next week’s RBNZ meeting will be key to see if we can break the 1.045 level and potentially push down to the December 1 lows around 1.041. The head and shoulders pattern still calls for 1.025. On rallies I’d be thinking about shorts around the 21-day EMA or back at former range support at 1.06, however, a rally of that magnitude would make me take pause to reassess my bearish outlook.

Gold:

The yellow metal had a very rough start to the week with a flash crash in the early hours of Monday morning. At one point just over $80 had been erased off gold’s value. A number of reasons for this move swirled around – 1) Forced liquidation 2) Illiquid market conditions 3) Technical death cross triggering the algos to sell 4) Big block of $4 bln in sell orders hitting the market. Hawkish remarks from voting FOMC members probably didn’t help the yieldless asset either. However, despite its confidence being dented gold has retraced most of its flash crash losses. Wednesday’s US inflation data missed on the MoM core measure and saw a slight pullback in the US 10-year yield as a result. Gold’s key driver real 10-year yields came off too as well as a softening in the greenback. These two factors combined to push gold higher.

Gold tagged the $1683 level and bounced hard back to where it is now around $1760. There is support at $1750 so if price can close above this into the weekend then further weakness could be held back. The RSI is moving out of oversold and back towards the key 55 level which has marked previous price peaks. The death cross gap is opening up further too. Short the rallies approach for the yellow metal seems the best bet. The 21-day EMA would provide opportunities and the $1800 resistance level/50-day SMA. On the downside, the low from Monday around $1680 would be a good one to watch.

Oil:

It seemed like Monday was just a bad day for commodities. Oil’s weakness were for different reasons to gold, with traders concerned about how demand could be affected due to covid restrictions across Asia, particularly China, the 2^nd largest oil consumer globally. China’s growth profile for 2021 was downgraded by Goldman Sachs to 8.3% vs 8.6% previously. The dollar strength wouldn’t have helped either. To make matters worse the UN published a dire warning on climate change and the need to cut our carbon footprint, which would obviously impact use of and production of oil. Then on Wednesday, Biden obviously fearing higher prices at the gas pump called on OPEC to boost production from their current 400k per month. Price first dropped on this news then retraced higher as the market realized Biden’s call to the Saudis was going straight to voice mail. Inventory data out Wednesday evening showed a smaller than expected draw, however, considering the whisper number was for a build it was well received by the market. The IEA have forecast for global oil demand for 2021 to fall after more virus related restrictions than expected. Joining IEA, OPEC in its most recent report, believes demand will be lower by 1.1 mln b/d in 2022. Softness in the dollar is helping the black liquid rally back a bit.

Oil is stuck between $70 and $72. With copious amount of bullish and bearish factors to digest, I’m not surprised by the price action on the charts. The 21-day EMA also won’t help upside moves around the $72 resistance. The RSI is sideways around 45. Still think a buy the dips approach is best for oil, with support holding around $70. Upside targets would be $72 and $74 resistance around the 50-day SMA.

Bitcoin:

Bitcoin saw a big bullish candle on Monday gains with risk sentiment remaining favourable, however, an amendment to the infrastructure bill that would limit a proposal to increase federal regulation of cryptocurrencies has been blocked causing Bitcoin to stall around its 200-day SMA. Regulation does seem an issue for cryptocurrency from China’s clampdown to a more hawkish SEC lead. However, additional regulatory oversight could bring further participants into the fray who are concerned about security issues etc. No tweets out from Elon Musk this week to add vol to the digital currency.

Bitcoin has a good week price wise. The 200-day SMA is now just below the big bullish candle today. The RSI is close to overbought territory though and some very minor negative divergence has opened up. On pullbacks I’d be monitoring the 21-day EMA and the $41K horizontal support. On the upside $48k would be an area of interest as it used to be former support.

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