Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
FX Breakout Monitor: EURUSD awaits follow-through
John J. Hardy
Chief Macro Strategist
Summary: EURUSD, GBPUSD, USDMXN, and AUDNZD in focus today.
For a PDF copy of this edition, click here.
As we discuss below, the Monday EURUSD breakout is still in play despite yesterday’s backup. The weaker USD yesterday was apparently inspired by positive US-China trade negotiation headlines and the possibility that a fresh US government shutdown would be avoided. But the return of USD buying today (and it never really went away in USDJPY) suggests that the dollar remains bid and we keep an eye on further USD upside potential.
Elsewhere, the JPY weakness has extended again, most obviously in USDJPY, but several other JPY crosses are near resistance. It will likely require a further extension of the remarkable risk rally to drive additional JPY cross breakouts – seeing is believing.
We also saw two mini-trainwrecks overnight as the Reserve Bank of New Zealand and Riksbank both came out less dovish than expected and drove a significant backup in the NZD and SEK, respectively.
Breakout signal tracker
We add a EURUSD short to our breakout signal tracker after it closed at a 19-day low on Monday – we post the trade at the current market level of 1.1290 and employ a 1.1 ATR initial stop.
As we discuss below, the Monday EURUSD breakout is still in play despite yesterday’s backup. The weaker USD yesterday was apparently inspired by positive US-China trade negotiation headlines and the possibility that a fresh US government shutdown would be avoided. But the return of USD buying today (and it never really went away in USDJPY) suggests that the dollar remains bid and we keep an eye on further USD upside potential.
Elsewhere, the JPY weakness has extended again, most obviously in USDJPY, but several other JPY crosses are near resistance. It will likely require a further extension of the remarkable risk rally to drive additional JPY cross breakouts – seeing is believing.
We also saw two mini-trainwrecks overnight as the Reserve Bank of New Zealand and Riksbank both came out less dovish than expected and drove a significant backup in the NZD and SEK, respectively.
Breakout signal tracker
We add a EURUSD short to our breakout signal tracker after it closed at a 19-day low on Monday – we post the trade at the current market level of 1.1290 and employ a 1.1 ATR initial stop.
Today’s FX Breakout monitor
Page 1: USDJPY and USDCHF have been among the pairs most rewarding to dollar bulls on the interest in carry trades and risk-on stance across markets; these pairs could suddenly lurch into underperformance if risk sentiment changes. Meanwhile, we focus on further EURUSD downside potential after Monday’s signals.
Elsewhere, EURCAD is also eyeing new lows for the cycle and our AUDCAD short is frustrating with its lack of performance.
Page 1: USDJPY and USDCHF have been among the pairs most rewarding to dollar bulls on the interest in carry trades and risk-on stance across markets; these pairs could suddenly lurch into underperformance if risk sentiment changes. Meanwhile, we focus on further EURUSD downside potential after Monday’s signals.
Elsewhere, EURCAD is also eyeing new lows for the cycle and our AUDCAD short is frustrating with its lack of performance.
Page 2: The SEK pairs have pulled well away from break levels after Sweden's Riksbank waxed less dovish than expected today. Emerging markets look relatively quiet, but they are getting more interesting for USD bulls as USDMXN eyes another new high close and USDZAR is not far from an upside pivot as well.
Chart: EURUSD
The EURUSD close to a new low looked credible on Monday; though still frustrating, we’re within the range down to the low 1.1215. It’s more comforting for the bears to see the follow-up selling today after a fairly weak consolidation bar yesterday relative to the size of the recent sell-off. We add a EURUSD short to our Breakout Monitor signal tracker.
The EURUSD close to a new low looked credible on Monday; though still frustrating, we’re within the range down to the low 1.1215. It’s more comforting for the bears to see the follow-up selling today after a fairly weak consolidation bar yesterday relative to the size of the recent sell-off. We add a EURUSD short to our Breakout Monitor signal tracker.
Chart: GBPUSD
GBPUSD posted a new 19-day low close on Monday, but as this break was at a less interesting chart level given the prior strong rally wave, we’re a bit reluctant to bite. New low closes from here may take on added interest, given the development of a pivot zone around the recent lows.
The chief trouble with sterling trades is the headline risk, so we would prefer to trade the break potential with short-term options rather than in the spot market.
GBPUSD posted a new 19-day low close on Monday, but as this break was at a less interesting chart level given the prior strong rally wave, we’re a bit reluctant to bite. New low closes from here may take on added interest, given the development of a pivot zone around the recent lows.
The chief trouble with sterling trades is the headline risk, so we would prefer to trade the break potential with short-term options rather than in the spot market.
Chart: AUDNZD
AUDNZD breaks lower after the less dovish than expected RBNZ overnight. Note the prior sell-off bar finding support around the 1.0400 level and the RBNZ’s Orr out speaking tonight as two risks to a further downside view.
AUDNZD breaks lower after the less dovish than expected RBNZ overnight. Note the prior sell-off bar finding support around the 1.0400 level and the RBNZ’s Orr out speaking tonight as two risks to a further downside view.
Chart: USDMXN
This is a breakout from a very compressed trading range in recent weeks and a significant move higher may require a change in temperature in asset markets for the worse, but the expanding momentum in the positive direction is a hopeful sign for the bulls.
This is a breakout from a very compressed trading range in recent weeks and a significant move higher may require a change in temperature in asset markets for the worse, but the expanding momentum in the positive direction is a hopeful sign for the bulls.
REFERENCE: FX Breakout Monitor overview explanations
The following is a left-to-right, column by column explanation of the FX Breakout Monitor tables.
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout. NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
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