EURUSD Finally Breaks but Does It Rally and Will SPX Overcome the Shutdown?
Dollar Reversal Talking Points
- The US government shutdown continues with more political drama and reminder of costs with credit rating agencies issuing warnings
- EURUSD finally clear 1.1500 resistance, dragging the DXY Dollar Index into a tentative reversal, as the Fed softened its language
- UK PM May had another unfavorable Parliamentary vote go against her, the BOC held rates and crude accelerated its climb
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The Government Shutdown Goes on and Recognition of Costs Rise
Politics are exerting greater weight on the markets and their participants. Hopes for a breakthrough on the ongoing US government shutdown this past session were dashed by President Trump and Congress's Democratic leadership. In his late Tuesday address, the President made a bid to sway the country to support his position to partially close the government to force support for a southern border wall. Following on that televised plea, a meeting between Trump and leaders Nancy Pelosi and Chuck Schumer ended in clear acrimony. The President Tweeted that he had walked out on the meeting as he felt the two were not serious about compromising. As the squeeze on US GDP slowly increases, we were reminded of another more abstract (but arguably more financial threatening) impact. Credit rating agencies have started to issue warnings, including one this past session. If the shutdown continues - particularly into the debt ceiling discussion deadline on March 1 - the country's top credit rating could be at risk. Too many in the market consider downgrades unthinkable or the US Treasury as the unquestioned global reserve, but it has already received a downgrade (S&P back in 2011) and the world is already making an effort to diversify away from the Dollar and Treasuries. The longer this continues, the more its weight on general risk trends will increase. Another systemic theme, trade wars, continues to scratch at investors' fears but has yet to find resolution one way or the other. There is still only loose words of 'confidence' on US and Chinese negotiations and there were no material highlights offered from the meeting between trade representatives for the US, EU and Japan in Washington. Perhaps a silver lining were reports that Trump is pushing for a resolution to help get markets back on track. That is not hard to believe, but it may need to happen before the markets bite. And, the consideration that truly concerns me is what happens if there is breakthrough in trade wars yet markets still struggle?
S&P 500 vs. US 10-year Bond Yields Chart (Daily)
A Critical Dollar Break Does Not Guarantee Follow Through
As we monitor critical, overarching fundamental themes for their influence on global risk trends; it is important to remember that they can have regional impact as well. The trade war and government shutdown both carry serious weight for US assets. The Dollar seemed to show that the pressure was acute enough to earn the currency a distinct breakdown. EURUSD Wednesday broke above 1.1500 resistance which was the range high of the past few months and the 100-day moving average. Technically-speaking, that same overhead boundary qualified as a 'neckline' in an inverse head-and-shoulders pattern; so speculative anticipation is set potentially very high. However, as experienced traders have come to recognize over these years of extreme low then extreme high volatility, a break does not ensure a follow through. We have a fundamental spark today, but keeping the Greenback rising is another matter altogether. The dense and convoluted backdrop for the US currency can work to disrupt clear runs rather than offer a clean charge. At present, one of the more proactive fundamental themes for Dollar traders to keep tabs on is Fed policy forecasts. The rebound from the implied Fed Funds rate through year end took a step back this past session. Following the tumble over the preceding month, NFPs this past Friday sparked a modest bounce. Yet, the FOMC minutes released this past session showing uncertainty over pace and timing moving forward reminded us why expectations dropped in the first place. Further, a host of Fed officials were on the wires with a general message reinforcing the more dovish tone taken recently. The most explicit concern was voiced by Bullard who suggested further hikes could potentially tip the US economy into recession if they go too far. Another round of Fed speeches are penciled in ahead, but make sure to pay particular attention to Chairman Powell's speech.
EUR/USD Chart (Daily)
Fear of an EZ Recession Cools While the Brexit Fever Refuses to Break
One of the more remarkable fundamental discussions Tuesday was the sudden rise in recession fears surrounding the Eurozone following Germany's industrial production figures. Though the monthly drop in activity was sharp, it was the deepest contraction in the year-over-year figures since the Great Recession that triggered fears. While the concern remains, the intensity has cooled somewhat this past session. Nevertheless, the economic calendar was still offering up concern through the region's largest member economy. Germany's latest trade report showed an increase in its surplus month over month (to 20.5 billion euros) but it saw that jump owing to a sharper drop in imports than the drop in exports - a drop in domestic demand is not exactly encouraging. We may see the attention afforded to the Euro shift to monetary policy ahead as the ECB minutes will delve into the central bank's wavering intent to normalize its extreme monetary policy. Meanwhile, the Sterling has not broken its fundamental stare from Brexit. This past session BOE Governor Mark Carney answered questions and veered back into the Brexit conversation suggestion they are ready for the divorce no matter what form it takes. On that point, Parliament dealt PM May yet another blow by passing a vote that would require her to offer up a Plan B in three days if her next proposal were to be rejected at the vote on January 15th. So long as this hangs over the Pound, don't expect clear trading.
GBP/USD vs. GB VIX Chart (Daily)
BOC Holds, Crude Oil's Run Continues, Consider Gold Without the Dollar
One of the more prominent yet traditional fundamental events this past session was the Bank of Canada (BOC) rate decision. As was clearly expected by the speculative rank, the central bank held its monetary policy course steady. At its last gathering the group took a decidedly more cautious tone in its expectations for the future, so this didn't come as much of a surprise. Nevertheless, the Loonie's recent rally has raised the bar for the market's response. We have seen a modest wobble from the Loonie in general, but it hasn't broken the five-day trend. USDCAD in the meantime continues in its charge with a sixth straight day higher. Speaking of Canada, oil prices notably accelerated Wednesday with the second largest single day rally in six months. This extends the commodities climb to match its longest series of daily advances (seven) since December 2016. This is looking more and more like a lasting recovery, but be mindful of the status of 'risk trends'. Finally, gold seemed to break the past week's congestion with a bullish clearance on the wedge that has developed. I am a medium-term bull on the metal owing to its appeal in risk aversion predicated on faltering monetary and fiscal policy options. That said, we aren't seeing progressive risk aversion at the moment. When you look at gold priced equally across all of the four major currencies, the congestion still stands and appears more like a reversal formation. We discuss all of this and more in today's Trading Video.
Light Crude Oil Futures Chart (Daily)
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