Legacy of dollar strength from payrolls to continue

Weekly Outlook Monday 8th August with Richard Perry, Market Analyst

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WHEN: Friday, 12th August 1330BST

LAST: +0.7% MoM

FORECAST: +0.2% MoM

Impact: Recent US data as been mixed and has done

little to help drive the Fed towards tightening monetary

policy. The latest tier one data release to focus on is

how consumers are spending their money. The month

on month growth has been positive for the past three

months (consistently seen n the early summer months)

whilst adjusted year on year data has improved to back

over 2%. However this is still only tepid compared to

consistently over 3% growth of 2013/14. Retail sales

are not forcing the Fed into a hike and if consensus is

achieved this is not likely to change wither this month.

Key Economic Events

Date Time Country Indicator Consensus Last

Tue 9th August 02:30 China CPI / PPI (both YoY) +1.8% / -2.0% +1.9% / -2.6%

Tue 9th August 09:30 UK Industrial Production +1.6% +1.4%

Wed 10th August 15:00 US JOLTS jobs openings 5.50m

Wed 10th August 15:30 US EIA crude oil inventories +1.4m

Wed 10th August 2200 New Zealand RBNZ monetary policy 2.00% 2.25%

Thu 11th August 13:30 US Weekly Jobless Claims 265,000 269,000

Fri 12th August 03:00 China Industrial Production +6.1% +6.2%

Fri 12th August 03:00 China Retail Sales (YoY) +10.5% +10.6%

Fri 12th August 13:30 US Retail Sales (MoM ex autos) +0.2% +0.7%

Fri 12th August 15:00 US Michigan Sentiment (prelim) 91.5 90.0

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1 N.B. Please note all times are BST (GMT+1), data source Reuters

Macro Commentary

After the market had spent the past few weeks seriously questioning the viability of just one Fed rate hike being

possible this year (as opposed to the four that we had been originally led to believe), where does the strong August

Nonfarm payrolls report leave markets? The outlook moving into the report was cautious. The rather tepid

sequence of a procrastinating July FOMC, GDP disappointment and underwhelming ISM had pulled a corrective

period for the dollar. However, we have now had two months of strong Non-farm payrolls reports in a row and the

dollar has reacted strongly. Headline number of 255,000 smashed estimates (with a small upward revision to

June’s number, whilst average hourly earnings of +0.3% means traction is being seen in wage growth to 2.7% for

the year. It will now be interesting to see if there will be another near term dollar bull run, and economic data will be

important now in the coming days/weeks, starting with retail sales on Friday. So far, market reaction has also been

risk positive, with good news being seen as good for markets. This tends to the reaction when expectations of an

imminent rate hike are low. However this could change if the September payrolls are again strong. I am still of the

expectation that the Fed will make their next move in December (September is all rather close to the Presidential

election, which is a great excuse for a cautious FOMC). For now, expect strong dollar moves to be seen.

Must Watch for: US Retail Sales

US Retail Sales

+0.2% MoM would drag YoY back to c. 2% again


Foreign Exchange

After a short period of correction the strong Non-farm Payrolls report should drive a period of dollar strength.

The lack of US data in the early part of this week should also ensure this dollar euphoria continues at least for

the next few days. It is interesting that the dollar has made some decisive near term moves across the forex

majors. The main key more has been seen on Cable. With the Bank of England significantly loosening

monetary policy on Thursday and the dollar strength of payrolls, Cable has broken below the key near term

floor at $1.3060. There is little standing in the way now for a move back towards a test of the lows again at

$1.2796. Euro/Dollar has been more mixed in its outlook in the past couple of weeks, however clearly the

payrolls report give the dollar momentum and a close back below $1.1050 would re-open the July low at

$1.0950 this week. Dollar/Yen has been a interesting mover as the pair is always highly reactive to payrolls and

the rally higher is now into the resistance 101.95/102.85, a resistance band the near term bulls will keep a close

eye on this week. The Aussie has been remarkably strong despite the RBA rate cut and a somewhat dovish

outlook statement from the RBA on Friday. It will be interesting to see whether once again the $0.7675

resistance once again proves too much.

WATCH FOR: Chinese economic data will provide an interesting guide to risk appetite through the week

with the US getting its next move off US retail sales on Friday.


2

FX Outlook

GBP/USD

Watch for: A decisive breach of $1.3060 re-

opens the post-Brexit low of $1.2796

Outlook: The period of support above $1.3060

seems to be coming to an end with Friday’s

intraday breach of the support. This is a floor

that had been holding for a few weeks, however

momentum indicators have been tepid in their

unwinding recovery and never really suggested

any conviction in the bulls. The changed outlook

of this chart now suggests that any rallies will be

seen as a chance to sell this week, whilst a two

day closing breach of $1.3060 would confirm the

breakdown and then re-open the early July low

of $1.2796 amidst further sterling weakness.

EUR/USD

Watch for: A close below the $1.1050/$1.1100

pivot band is bearish once more

Outlook: The outlook for the euro has been

mixed of late, with the bull rally going further

than expected, however retracing quickly now.

The mixed outlook on the momentum indicators

reflects the near to medium term uncertainty.

However another high formed below the old

uptrend channel resistance (at $1.1235)

suggests that the bears are gaining control

again. The long term pivot band between

$1.1050.$1.1100 comes back into play this week

and a closing breach of the support would re-

open $1.0950 once more. The major support

remains the post-Brexit low at $1.0909.


Equity Markets

If markets have been looking for their next catalyst, the strong Non-farm Payrolls report may just have given

them the boost. Earnings season is in its dotage now so with a risk-on view of the payrolls report the next move

higher could be seen. There is still no imminent prospect of a rate hike so markets are happy to taker the good

news as good for sentiment (when fears of a rate hike by the Fed have been elevated, strong US data has been

negative for sentiment as tighter monetary policy is seen as equities negative). The other aspect to consider is

the significant easing measures put in place by the Bank of England. Not only has the BoE helped the banking

sector with its measures, the QE increase is also another shot in the arm. Weaker sterling is another boon for

UK equities and this should help to underpin gains on the FTSE 100. Will the ECB follow suit in easing too?

Well the DAX and CAC have also reacted strongly in the last couple of sessions, with the DAX also looking to

react positively with risk positive events. I have been looking towards using corrections on the European

markets as a chance to buy due to the next wave of monetary easing from major central banks. If the bulls can

really get behind on the momentum there is little reason why there cannot be a sustainable test/break of the key

April highs of 10,474 on the DAX, and 4607 on the CAC. The FTSE 100 has already broken back out to its

2016 high and the resistance band 6800/6900 now stands in its way towards a push back above 7000.

WATCH FOR: Sterling weakness remains a driver of FTSE 100 gains. Risk appetite across indices

(especially those with exposure to basic resources) will be driven by the various releases of Chinese

data, whilst US Retail Sales will be of interest too.


3

DAX Xetra

Watch for: Can the DAX sustain the momentum

for a break above key resistance?

Outlook: For the past few months the resistance

band between 10,393 (the 50 % Fibonacci

retracement and 10,474 the key April high) has

consistently proved too much for the bulls as a

range to take profits and scupper a rally. But with

other major markets driving key breakouts in the

past couple of days, the hopes for the DAX

sustaining the move this time will be high.

Momentum is turning more positive with the

Stochastics and RSI turning positive again. After

so many failed attempts around this resistance it

would be a considerably positive move to

breakout this week. Interestingly the old pivot

around 10,120 is the basis of support again.

FTSE 100

Watch for: A test of the overhead resistance

band 6800/6900 can be expected this week

Outlook: Has the Bank of England now given

the FTSE 100 the rocket fuel necessary for a

push back towards the all time highs again?

Perhaps it is a bit early to start talking about a

rally to 7119, but the strong bull move to a 2016

high has opened a test of the next overhead

resistance band 6800/6900. The cross higher on

the Stochastics and MACD lines is bullish and

the RSI suggests there is further upside potential

in the breakout. The basis of support is now

strong at 6612, whilst the former breakout

resistance 6770/6780 becomes a basis of

support now this week.

Index Outlook


Other Assets: Commodities & Bonds

Traditionally there is a strong negative correlation between the reaction on the US dollar and that of gold, and

the latest move was no different. The strong payrolls report which drove significant dollar strength has been

negative across the commodities space, however the safe haven precious metals have really suffered amidst

the double whammy with the combination with improved risk appetite. It will now be interesting to see how long

these moves against the precious metals will last. I remain a medium to longer term buyer into weakness on

gold and silver despite the near term profit-taking seen on both. Once the euphoria surrounding the dollar starts

to wane I expect the strong outlook on gold and silver to kick in once more. The outlook on oil is somewhat

uncertain as the risk positive move should be positive for oil demand. The technicals are at an interesting

crossroads around $42.00 as the bulls have been threatening to return once more. Perhaps this strong payrolls

report will ultimately prove to be just what the oil bulls needed.

A sharp rally on Treasury yields in the wake of the payrolls report shows the market reaction to the improved

prospects for Fed tightening. It could also now begin another leg higher across yields, but also a further

tightening of the 2:10 spreads and a flattening of the yield curve as the front end of the curve quickly re-prices

hiking prospects.

WATCH FOR: China data impacting risk appetite and therefore commodities & bonds. Also Retail Sales.


4

Gold

Watch for: Once a near term corrective move

plays out the medium to longer term support

around $1306 remains a key buy level

Outlook: Strong dollar and positive risk appetite

have hit the gold price, driving a bout of profit

taking. However this should only be a near term

move that helps to unwind momentum and

allows another chance to buy. The sell signal on

the Stochastics should be seen as a profit-trigger

as trading against the trend is always a risky

strategy. The key breakout remains at $1306 so

any correction that starts to find support above

$1300 should be seen as a good opportunity for

medium to longer term long positions again. The

Bank of England monetary easing could be just

one of a series of banks to ease and this is

positive for gold.

Markets Outlook

Brent Crude oil

Watch for: Is a near term recovery going to turn

into something more sustainable?

Outlook: After several weeks of selling

pressure, finally the oil price has started to build

from some support. With Brent crude leaving a

low at $41.50 the question is whether this is now

a sustainable near term low that can turn into

something more? Momentum indicators are

certainly reflecting the improvement, with the

Stochastics (the most sensitive of the indicators I

look at) giving a near term buy signal. The bulls

would need to pull the RSI above 50 to really

suggest there is something in a rally that will not

just be sold into, whilst the falling 21 day moving

average is also a barrier to gains. Initial key

resistance is at $45.90 this week.



5

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Economy & Finance

Legacy of dollar strength from payrolls to continue