Reflation Trade Heats Up, Democrats Prepare to Impeach Trump
The reflation trade appears to be in full swing with the US 10-year yields (US10Y), copper and oil prices closing to fresh highs. Traders remain confident about an economic recovery despite the rise in COVID-19 cases and the slow rollout of vaccines. Or, more to the point, they are happy with the stimulus measures in place and abundance of liquidity which is the real driver behind higher asset prices.
US10Y closed above 1% for the first time since March 2020 and copper (XCUUSD) futures trader near a 7-year high and WTI and Brent are near 12-months highs. Wall Street closed to fresh record high on Friday, with the Nasdaq 100 (USTEC) leading the surge and closing 1.28% higher. The S&P 500 (US500) and Dow Jones (US30) closed 0.55% and 1.18% higher respectively. All three indices produced bullish outside weeks.
Ethereum (ETHUSD) closed higher for a fourth consecutive week, with last week’s candle rallying nearly 50% alone before closing the week 31.3% higher. The US dollar index produced a small bullish candle last week closed back inside the 20-week Bollinger Bands which suggests the dollar could be approaching a period of mean reversion.
In US politics, Democrats are expected to file papers of impeachment for Donald Trump later today with a view to vote to impeach him either today or tomorrow. The bigger question will be whether the Republican Senate will also vote in favour (with two-thirds majority required) to make the impeachment official and remove Trump from office. Separately, it has been reported that Vice-President Mike Pence has not ruled out invoking the 25th Amendment to remove Trump from office, yet has fallen short of implementing it.
Today’s Calendar Events (Times are GMT+11 Sydney)
- There is no major economic calendar events scheduled for today, although AUD pairs and Asian indices may be sensitive to Chinese CPI and PPI data if there is a notable change from the prior release. Stronger data would be seen as inflationary so could support AUD.
EUR/USD: Dollar Correction is Underway
We have mentioned a few times recently that bearish momentum on the US dollar was waning, which increased the potential for a correction. As the US dollar index (DXY) is weighted 57% to the Euro, EUR/USD shares a strong inverted correlation with DXY and can be an effective instrument to trade a bias on DXY.
A bearish divergence has formed between price action and the RSI (relative strength index) after RSI had spent some time in overbought level (above 70). Friday’s candle closed beneath the rising trendline to conform the divergence and we see potential for EUR/USD to trade towards the base of the trendline near 1.2060.
- The bias remains bearish below the broken trendline, so bears could consider fading into minor rallies towards this technical level.
- Alternatively, bears could seek bearish continuation patterns on lower timeframes.
- The next major support level for the daily chart is the support zone around 1.2060, making it a viable target for bears.
ASX 200 (AUS200): Bullish Breakout Pending?
The ASX 200 has spent the last 7-weeks trading within a sideways range, although last week’s bullish outside candle closed at the high of the week and top of the range to suggests a bullish breakout could be pending. As it closed at the high of the week, the weekly chart also produced bullish closing marabuzo candle, which suggests support sits around 6,690 (50% retracement between open and close of the week). And given the bullish sentiment on US indices, it further points towards a bullish breakout for the Australian market.
- Bulls can wait for a break above 6,775 or wait to see it is confirmed as support before entering long.
- Neet major resistance is the February lows around 6,900.
Silver (XAGUSD): Looks Weak Below $26
The rally on precious metals came to an abrupt end last week. Whilst we had retained a bullish view on gold, clearly this has not played out as expected. And with bearish volatility now retutning we have flipped to a near-term bearish bias.
Friday’s bearish session closed firmly beneath the bullish trendline and $26 support. Note how it’s one of the most volatile sessions since September, and that it appeared after an uptrend to show a bearish momentum shift.
- Bears can fade into minor rallies below 26.00 resistance or revert to a lower timeframe and seek bearish continuation patterns.
- Next major support is around the 23.48 – 24.00 zone which make it a viable target for bears.