Weekly Report

Dollar to Take the Spotlight Back as Senate Passed Tax Bill

Typography

Dollar took a back seat last week as traders were cautious ahead of the Senate's vote on the tax bill. Sterling took lead instead as boosted by positive Brexit news, as UK and EU seemed to have agreed on the divorce bill and Irish border. Canadian Dollar followed as the second strongest as stellar employment data raised the chance of more BoC hike next year. Meanwhile, Yen ended as the weakest one. It's followed by Euro, despite solid Eurozone data. Now, with the tax bill finally passed in Senate on Saturday, the greenback would likely come back to spotlight this week, with non-farm payroll also featured.

Senate passed tax bill after marathon session

After marathon debate and numerous amendments, Senate Republicans finally passed their version of the tax bill on Saturday, by 51-49 vote. Bob Corker was the only Republican who dissented. Even Rob Johnson, the first one openly objected the bill, and Susan Collins, the one who was forever unsure, voted for the bill after getting something they wanted. Republicans will now move on to reconcile the versions of House and Senate, starting as soon as Monday. The party targets to put the legislation for President Donald Trump's signature by the end of the year.

To summarize some key points of the versions, both bills would cut corporate tax rate to 20% from 35%. House version will start that corporate tax cut in 2018 while Senate version will start in 2019. Senate version will only provide temporary tax relief to individuals, ending the cut in 2026. Meanwhile, both bills would ad more than USD 1.4T in federal deficit over a decade.

US equities survived Russian Probe jitter, closed strong

The optimism on the tax bill pushed major US equity indices to record high last week. DOW reached as high as 24327.82 before closing at 24321.59. S&P 500 reached as high as 2657.74 before closing at 2642.22. NASDAQ also reached 6914.19 before closing at 6847.59. There are two key points to note regarding the stock markets. Firstly, NASDAQ clearly underperformed as investor fled from tech to banking after Fed Chair nominee Jerome Powell said current banking regulations were "tough enough" and hinted his preference on easing them.

Secondly, stocks suffered sharp intraday selloff on Friday on news that the Russian probe is getting closer and closer to the White House. Former national security adviser Michael pleaded guilty confessed lying to FBI regarding his contacts with Russian Ambassador Sergey Kislyak. And there could be a possibly testimony of Flynn against Trump ahead. In any case, it's very likely that the Russian Probe would widen further. The news sent DOW to as low as 23921.90 on Friday before ending at 24231.59, down just -0.17%.

The strong rebound in DOW has indeed showed much resilience in the index. And the intraday dip was merely a knee jerk reactions. We'd pointed out in prior report that after a year of working with Trump, the Republicans finally found their way. And that is, ignore his political outcries and carry on business as usual. The development of the tax bills showed that House and Senate Republicans were working on their own. So, news about the Russian Probe could cause some jitters in the markets but unlikely a trend change.

DOW heading to 24642 as up trend extends

DOW's strong breakout last week indicates that the long term up trend is picking up solid momentum again. Near term outlook will stay bullish as long as 23602.12 resistance turned support holds. Next target is 161.8% projection of 20379.55 to 22179.11 from 21731.12 at 24642.80. We'll be cautious on near term topping there. But break will pave the way to 200% projection at 25330.34 next.

TNX stays near term bullish

Similar jitter was seen in 10 year yield on Friday, when it dipped to as low as 2.315 but closed at 2.362. TNX is so far holding on to 55 day EMA, and well above 2.273 key support. Thus, it's maintaining near term bullish outlook. For the moment, we'd expect the TNX to resume the rebound from 2.034 through 2.475 to 2.621 key resistance later. The development in stocks and yield would provide the needed support for Dollar index to rebound.

DXY could be finishing pull back soon

It's too early to say whether DXY's pull back from 95.15 has completed after drawing support from 61.8% retracement of 91.01 to 95.15 at 92.59. But we'd maintain that 91.91/3 cluster support is a key support region (38.2% retracement of 72.69 to 103.82 at 91.93). At this point, we'd favor downside to be contained well above 91.01 low. Break of 94.16 resistance should then resume the rebound from 91.01 through 95.15.

DAX showed its vulnerable

Development of Euro will be a crucial factor on the fate of the Dollar index. Before looking ahead the common currency, we'd like to point out that European stocks were surprisingly weak in spite of positive economic data. Some might attribute Friday's sharp fall in DAX to the news regarding Russian Probe in the US. But after all, prior range trading and the sharp downside breakout does show much vulnerability. Such vulnerability might be due to uncertainty over German coalition talks. Or it could be due to the concerns over the large swing in Eonia which could be due to market stress. We're uncertain on the reason yet but the development is worth close attention.

Euro struggled despite positive data

While Euro is maintaining near term bullishness against Dollar, Yen, Swiss Franc and Aussie, momentum is getting more unconvincing after the last up swing. In particular, bearish divergence is clearly seen in 4 hour MACD in EUR/CHF with recent price action in terminal triangle shape. Near term reversal could be around the corner.

EUR/AUD could have formed a short term top at 1.5770 and deeper fall would be seen back to 1.5458 support and below. The cross might only get enough support near to 1.5226 key level.

EUR/GBP has been range trading since September. Technically, consolidative price actions indicate fall from 0.9305 is not completed yet. Fundamentally, recent breakthrough in Brexit negotiations suggest that there could finally be a breakthrough in the December EU summit to move on to trade negotiations. In that case, EUR/GBP could finally resume the fall from 0.9305 towards next key level at 0.8303.

EUR/JPY failed to sustain above long term fibonacci level of 61.8% retracement of 149.76 to 109.03 at 134.20 after multiple attempt. A break of 131.16 support will at least reversal the near term trend.

Trading strategy

Regarding trading strategies, there two options to consider. Canadian Dollar could be a candidate to buy as strong employment data revived hop for more BoC rate hike next year. AUD/CAD is a good one fundamentally on policy divergence but it's too close to 0.9591 support. CAD/JPY could also finished recent pull back from 91.62 but there China stock rout may not be completed yet. And there seems to be an underlying theme of flattening yield curve that would give Yen some support. And we'd prefer not to sell USD/CAD as Dollar could be boosted by passage of the tax bill.

Another option to consider is selling Euro. For example, EUR/CAD could have topped at 1.5371 after failing to sustain above 1.5279 resistance (2016 Nov high). But after climax selling on Friday, EUR/CAD could stage a brief recovery first. Selling EUR/GBP could on be consider on positive Brexit news. But then it could also have another up-leg as recent consolidation extends, before finally staging a downside breakout. Hence, patience is required in both short strategy. Considering the clearer technical picture, we'd try to sell EUR/GBP on recovery to 0.8880, around mid point of recent range, with a stop at 0.9050. 0.8300 will be put as the target first.

GBP/JPY Weekly Outlook

GBP/JPY rose to 152.47 last week but failed to take out 152.82 high and retreated. Initial bias is neutral this week first. At this point, we're favoring the case that consolidation from 152.82 has completed at 146.96 already. Break of 152.82 will resume medium term rally to 61.8% projection of 139.29 to 152.82 from 146.96 at 155.32. This will be the preferred case as long as 146.96 support holds.

In the bigger picture, medium term rebound from 122.36 is still expected to resume after consolidation from 152.82 completes. Firm break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. In that case, GBP/JPY could target 61.8% retracement at 167.78. However, break of 46.96 support will indicate rejection from 150.43 key fibonacci level. And the three wave corrective structure of rebound from 122.36 will argue that larger down trend is resuming for a new low below 122.26.

In the longer term picture, current rebound argues that the down trend from 195.86 (2015 high) has already completed at 122.36. Focus is now on 55 month EMA (now at 154.76). Firm break there will suggest that rise form 122.36 is developing into a long term move that target 195.86 again. And, price actions from 116.83 (2011 low) is indeed a sideway pattern that could last more than a decade. However, firm break of 139.29 will suggests that the long term down trend is still in progress and could break 116.83 low ahead.

GBP/JPY 4 Hours Chart

GBP/JPY Daily Chart

GBP/JPY Weekly Chart

GBP/JPY Monthly Chart