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Talking Points:

  • Following weeks of pressure, the Dollar finally won a bullish break, but it is a move of restraint rather than drive
  • Risk appetite was buoyant for much of Thursday until sentiment deflated in the US afternoon to put in for a S&P 500 upper wick
  • The Euro slides as Italy's budget pressures rise, the Swiss Franc tumbles on its own, Loonie feels the wait of trade talks

See how retail traders are positioning behind EURUSD, Gold and US oil as they struggle to take specific direciton along with the FX majors, indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

Gasps of Risk Trends as Trade Wars Deepen

The US and China are fully engaged in a $360 billion trade war with threats to expand further, but you wouldn't know it going back the top headlines in financial media or the performance of the standard 'risk assets'. Despite the ever-growing threat to the global economy and financial system, the newswires were dominated by political drama in Washington - and yes, these updates were even spilling into the market news. There is a sizable gap between political theme and immediate market movement even in the best of times; but what crowded out the first page of search results was more theater than practical market influence. Looking to the S&P 500 or Dow alone, our reading on sentiment would perhaps be more dour than what was seen through previous sessions or the potential in another asset classes. An afternoon retreat put the US indices back on the lam with sizable upper wicks. Yet, European and Asian indices were performing more admirably. The EEM emerging market and HYG junk bond ETFs were both hugging resistance holding back key breaks. If we are looking for a fundamental tiebreaker, this is plenty on the horizon. The US seems to be ready to move on without trade resolution with Canada and the country is due to discuss trade with Japan next week. A hawkish trajectory on monetary policy has been refreshed by the Fed's hike. Be wary of conviction in 'risk on' but mindful of timing 'risk off'.

Daily Chart of S&P 500 and 'Tails'

Dollar Breaks Higher and Drains All of its Speculative Potential

It is tempting to label the US Dollar's bullish break this past session a speculative move that ushers in the next bull trend. The technical picture is certainly decisive with a clean break through the upper bound of a month-long descending trend channel. Armed with a committed bullish bias, we could find fundamental justification in this week's top event risk: the rate hike by the Federal Reserve Wednesday. It may prove the case that bulls have been genuinely charged with this move, but there is good reason to remain skeptical. On the technical side, the DXY Dollar Index and my equally-weighted index produced a short-term break; but this move pulls the currency back into a multi-month range. The alternative outcome to the terminal wedge would have been cleared out the floor on a much more provocative reversal effort - a move for which the markets were ill-prepared to commit. In technical terms, the currency chose the path of least resistance. Using a delayed response to the Fed hike is simply an evaluation of convenience. If a hike along with forecasts of another move in December and three through 2019 can't leverage a meaningful rally the day-of, there is little reason to believe there will be a second wind later. It is important to distinguish motivation as the resultant momentum will determine what kind of trade we have on our hands: a limited short-term break or a dedicated and lasting run. A swing for EURUSD or AUDUSD seems more appropriate than a breakout for USDJPY.

Daily Chart of DXY Dollar Index

Loonie and Euro Find Drive, The Swiss Franc's Tumble is Extemporaneous

For fundamental charge this past session, both the Canadian Dollar and Euro were well-supported through event risk: scheduled and unscheduled. Reported leaks of the language from the United States Trade Representative office's deal with Mexico made clear that the immediate relationship was bilateral, but Canada would be allowed to join in the future should conditions be met. USDCAD slowly advanced while an equally-weighted CAD index showed a little more progressive a slide. Another fundamental charge with limited market-moving capacity was registered with the Euro. EURUSD's drop was obvious but it was helped along by the Dollar. An equally-weighted Euro index showed a second day of retreat for heavily used currency as reports confirmed Italy's government was ready to proceed with a 2.4 percent deficit-to-GDP target over the next three years. That is a clip that more than walks back previous governments' commitments and could further the spat between the EU / Eurozone and their third largest economy. As for the biggest move on the day, the Swiss Franc registered a wide tumble that earned notable clearance from weeks of congestion. I am partial to EURCHF but still have exposure to CADCHF. The Franc slide would also put GBPCHF back into a technical position for a bullish breakout and reversal, but I will not be baited back into the pair that I was stopped out of at break even.

Equally-Weighted Swiss Franc Index

Gold's Short-Term Break Lower and 6-Month Bear Trend

As we close in on the end of the week, we once again find the period closure coinciding with the month and quarter conclusion. There are a lot of interest technical pictures to be reviewed and the prompt to raise time frame can help us make a more wholesale evaluation of fundamentals. I will look over more of the markets in the weekend videos, but one performance that sticks out already is from gold. The metal earned a notable break lower Thursday, but that seems a byproduct of the Dollar's gains - already discussed as a lackluster effort - and was a technical development that puts it back into a broader range. Yet, looking beyond the congestion of late, the monthly chart offers a notable decline. And that particular decline will fill in a series of six consecutive months of retreat. That will be the longest bear run on this time frame since January 1997 and there are no series longer since at least 1970. We discuss all of this and more in today's Trading Video.

Monthly Chart of Gold

If you want to download my Manic-Crisis calendar, you can find the updated file here.