EURO : Mid Point

(Fri, 4 Dec 2020). The US Dollar extended its slide this past session, and Thursday activity showed it was a move that spread beyond EURUSD. Nevertheless, EURUSD extended its run to test the midpoint of its historical range as high-level technical resistance. Risk trends continue to struggle with the S&P 500 posting a doji; but perhaps NFPs can stir more growth traction than Stimulus and Covid headlines have been capable.

RISK TRENDS ARE NOT DEFINED BY SIMPLE RELATIVE HIGHS

If you were to evaluate the state of the broader market just by the relative position of the market’s favorite speculative benchmarks, it would seem that risk trends are in top form. The S&P 500 and Dow Jones Industrial Average are only slightly off record highs while the Nasdaq 100 actually earned a new peak on a close-over-close basis. That said, the technical picture offers very little enthusiasm for momentum behind the speculative rank with a notably restrained level of activity for the SPX and crew this week. Yet, a surprising faction of the financial market only refer to closing price versus a more contextualized candlestick or bar chart – institutional, fund and central bank interests among them.

It is important that when we make a sweeping assessment of the market – which you do in evaluating ‘risk trends’ – that we look at a broad array of regions and asset types with an eye towards correlation and intensity. That said, carry trade failed to spur what would have been key breakouts this past session for the likes of EURJPY and AUDJPY among others. International indices were of a mixed bag between the UK FTSE 100’s edge higher from depressed levels to Japan’s Nikkei 225 easing back from three decade highs. Perhaps the most impressive showing on the benchmarks I follow was the extension by emerging markets. The unevenness considered, the VIX is still holding above its historical average (around 20). In fact, market’s favorite ‘fear gauge’ has held above this tipping point for an astounding 198 trading days. This suggests there is an undercurrent of concern and markets are still positioned to take an unnerving turn to risk aversion on short notice.

THE DOLLAR’S RELATIVE PERSPECTIVE IS EXPOSING IT TO FUNDAMENTALS

It is proving difficult to develop a head of steam for risk-based markets - whether for risk benchmarks like the S&P 500 or safe havens like Gold. However, FX traders are familiar with the greater ‘relative’ influences that can play through. It seems those factors are hard at work against Dollar bulls. Amid coronavirus, growth and stimulus headlines; the DXY Dollar Index has extended it slide to more than two-and-a-half year low. The tumble from the Greenback is generating some of the most interesting volatility and trends in the financial system at present – from EURUSD to Gold.

To be clear, I don’t believe the fundamentals are any more extraordinary in intensity behind the USD or US assets, rather market bias seems to be more keep to respond to important event risk than many other benchmarks. And, ultimately, that is often all that is needed to urge movement. For a fundamental spark this past session, the news of coronavirus deaths in the United States and a state of emergency in Los Angeles reflects the concern about the outlook distinctly. Adding the economic take on that human toll, the ISM service sector survey would slip more than expectation for the November print.

In the final session of the week, there will be another big-ticket focus on the US docket in the form of the November nonfarm payrolls (NFPs) release. Last month’s 638,000 addition is extraordinary without context, but the US economy is still trying to recovery the jobs lost back during the pandemic; and the tempo looks like we will fall far short of the mark. With initial jobless claims still at 712,000 this week with some long-term unemployment benefits due to expire at the end of this year, there is very little leeway to see a positive story out of this data. Traders are no doubt taking note of that skewed scenario.

THE DOLLAR MAJORS TO WATCH

As we move into the final trading session of the week and look into the week ahead, I am evaluating more closely the productivity of the Dollar based majors. The most impressive move in my book is from EURUSD which cleared a multi-month range to at 1.2000 and proceeded to pressure the pair’s historical range midpoint at 1.2150. This level is not likely to give lightly, but it can still break. If we do clear resistance, I will take it as evidence that this market is more driven towards momentum that I had thought possible for the recently stoic currency. As for the Euro’s part, the EU-UK trade negotiations and held up European stimulus are still factors offsetting the latent swell from playing the ‘next most liquid currency’ role.

Speaking of the UK-EU trade discussions, the perspective of the market and inside sources seems to ping pong between the situation improving to deteriorating and back again in an intraday time frame. GBPUSD is pushing a key technical overhead defined by a range high that stretches back multiple years at 1.3500. While the Dollar’s pummeling matters, I will remain dubious of any attempt at breakout (bullish) with follow through if there isn’t resolution that benefits the Sterling’s backdrop.

Finally, a Dollar cross that deserves a closer look through Friday’s session is USDCAD. While the pair has slid through meaningful support of its own (~1.3000), the traction for bearish momentum remains in doubt in my mind. This is a pair notorious for restraint on technical pacing – common for pairs with very strong economic and financial ties – but there are also periods of remarkable pace. With the Canadian employment and trade data to bounce off NFPs Friday as well as the backdrop of a thawing trade outlook, a case for momentum could be made if the data cooperates.

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