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A thermonuclear North Korea has traders buying precious metals this morning, but be cautious of overbought RSI's.

Gold gapped higher this morning as North Korea's hydrogen bomb test yesterday, and heightened rhetoric from the U.S. saw traders rushing for safe havens. Having closed in New York at 1324.00, gold has rushed to a high of 1339.00 before subsiding to a still impressive 1334.00 in early trading. Friday's price action was constructive anyway following a less than impressive Non-Farm Payrolls figure and a weaker dollar following the number. The only story in town this week though will be the ramping up in tensions on the Korean Peninsula with North Korea's possible achievement of thermonuclear capability and aggressive rhetoric from the U.S. both a worrying escalation that comes in a very Central Bank rate announcement week.

GOLD

Gold's technical picture is impressive having retraced and held its 1296.00 breakout level. This is now strong support and a key longer term pivot level. Gold flirts with its next key resistance at 1337.00 having peeked above it this morning. A close above is significant technically, opening up further gains to the 1375.00 highs last seen in July 2016.

We would caution though that the daily RSI is now in a solid overbought territory. This implies that although the technical picture remains strong, some consolidation may now be necessary for further meaningful gains to be made.

SILVER

Silver closed just below its key resistance at 17.7600 on Friday and North Korea has ensured it has burst through that level this morning, touching 17.9000 in early trading.

Like Gold, the technical picture remains constructive as we trade at 17.8325 mid-Asia session. The charts are now clear of resistance until the April high around 18.6570, with support at 17.3900 and comfortably above its 100 and 200-day averages and trend line support on the chart below.

That said, Silver's RSI is also approaching very overbought territory, implying that some consolidation may be required around these levels to catch its breath again.

Geopolitical headlines will override technicals potentially and traders should be aware that Gold and Silver may move suddenly and unpredictably on them as the week progresses.

North Korea conducted its sixth nuclear test which registered as a magnitude 6.3 earthquake on Sunday, which it said was of an advanced hydrogen bomb for a long-range missile, prompting the threat of a “massive” military response from the United States if it or its allies were threatened.

South Korea's military said on Monday its air forces and the army carried out a missile drill early in the day in response to North Korea's nuclear test, adding the drills targeted the area where the test had been carried out.

President Trump responded via twitter: ‘the US is considering … stopping all trade with any country doing business with North Korea', pressuring countries including China and India to reduce trade with the ‘rogue nation', as he described it.

Yen Edges Higher. The Japanese yen strengthened nearly 0.5% against the greenback and other currencies as North Korea's latest and most powerful nuclear test provoked the usual knee-jerk shift to safe havens.

Gold Hits 10-Month High. Gold prices hit their highest in nearly 10 months early on Monday after North Korea's nuclear test drove investors out of risky assets. Spot gold reached its strongest since Nov. 9 at $1,336.79 per ounce.

A note on lower timeframe confirming price action...

Waiting for lower timeframe confirmation is our main tool to confirm strength within higher timeframe zones, and has really been the key to our trading success. It takes a little time to understand the subtle nuances, however, as each trade is never the same, but once you master the rhythm so to speak, you will be saved from countless unnecessary losing trades. The following is a list of what we look for:

• A break/retest of supply or demand dependent on which way you're trading.
• A trendline break/retest.
• Buying/selling tails ... essentially we look for a cluster of very obvious spikes off of lower timeframe support and resistance levels within the higher timeframe zone.
• Candlestick patterns. We tend to only stick with pin bars and engulfing bars as these have proven to be the most effective.

We typically search for lower-timeframe confirmation between the M15 and H1 timeframes, since most of our higher-timeframe areas begin with the H4. Stops are usually placed 1-3 pips beyond confirming structures.

EUR/USD

Weekly gain/loss: – 58 pips

Weekly closing price: 1.1861

After seeing the EUR/USD shake hands with the weekly resistance level at 1.2044, a strong succession of sell orders reigned over this market last week. As a result of this, the week ended with price marginally closing beyond weekly support pegged at 1.1871. Inversely, we also saw the USDX weekly support at 11854 hold firm and print a weekly indecision candle going into the close. Although a close has been seen below support on the EUR, it may be worth waiting for the piece to print a somewhat deeper move beyond this line before presuming that all bids are consumed here.

Down on the daily timeframe, we can see that demand at 1.1739-1.1823 came into play on Thursday (USDX daily supply also came into view on Thursday at 11969-11938). A violation of this area could send the unit down to a demand positioned at 1.1612-1.1684, which happens to fuse nicely with a trendline support fixed from the low 1.0839.

On Friday, the H4 candles moved aggressively higher in the immediate aftermath of a soft US job’s report. However, despite this, the pair was unable to sustain gains beyond resistance at 1.1962, and ended the day closing back below the 1.19 handle.

Suggestions: Apart from breaching the 1.19 handle, H4 price also opened up the trapdoor for the major to challenge August’s opening level seen nearby at 1.1830, followed closely by the 1.18 boundary. Technically speaking though, our desk has absolutely no interest in these levels, as lurking just below is a H4 Harmonic Gartley reversal zone (PRZ) marked in green at 1.1725/1.1752. Not only does this area boast a H4 mid-level support at 1.1750 and a 161.8% H4 Fib ext. point at 1.1725 (taken from the high1.2070), it is also located around the lower limits of the daily demand mentioned above at 1.1739-1.1823.

As far as we see things, there are two options here:

Place a pending order at 1.1750 and position the stop below the X point of the Harmonic formation at 1.1660.

Wait for H4 price to connect with the PRZ and let the H4 candles prove buyer intent. Personally, we look for at least a full, or near-full-bodied bullish to materialize before pulling the trigger. Should this come to fruition, stops can either be placed beyond the candle’s tail (aggressive), or a few pips outside of the PRZ.

Data points to consider: No high-impacting news events on the docket today (US banks are closed in observance of Labor Day).

Levels to watch/live orders:

• Buys: 1.1725/1.1752 ([waiting for a reasonably sized H4 bullish candle to form – preferably a full, or near-full-bodied candle – is advised] stop loss: ideally beyond the candle’s tail).
• Sells: Flat (stop loss: N/A).

GBP/USD:  

Weekly gain/loss: + 74 pips

Weekly closing price: 1.2950

From the weekly timeframe, we can see that the British pound retained a minor bid tone last week despite trading around the underside of a supply base coming in at 1.3120-1.2957. Should the USDX weekly support at 11854 continue to bid prices higher this week, this could bolster weekly sellers from the current supply zone, and eventually send the unit back down to demand penciled in at 1.2589-1.2759.

In conjunction with the weekly timeframe, daily price recently connected with a resistance area at 1.3058-1.2979 which has, so far, done a superb job in holding back the bulls. Given its strong history dating back to mid-May, we feel this zone will continue to hold and ultimately push cable down to the support area seen below at 1.2818-1.2752 that converges with a channel support line taken from the low 1.2365.

Friday’s lower-than-expected US job’s print helped lift H4 price above the mid-level resistance barrier at 1.2950. As can be seen from the chart, the piece missed the large psychological boundary 1.30 by a hair, before mildly trimming gains into the closing bell.

Despite price not connecting with 1.30 on Friday, this number is still of interest. Not only because it is a large psychological level that the majority of the market is likely watching and is positioned within both of the said higher-timeframe resistances, but also due to it converging with a H4 supply at 1.3022-1.3000 and July’s opening level at 1.3003.

Suggestions: Watch for H4 price to challenge the noted H4 supply. In the event that the market prints a reasonably sized full, or near-full-bodied H4 bearish candle from this region, a sell from here is valid, in our opinion, with a target objective set at 1.2950 as an initial take-profit level.

Data points to consider: UK construction PMI at 9.30am GMT+1. US banks are closed in observance of Labor Day.

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: 1.3022-1.3000 ([waiting for a reasonably sized H4 bearish candle to form – preferably a full, or near-full-bodied candle – is advised] stop loss: ideally beyond the candle’s wick).

AUD/USD:  

Weekly gain/loss: + 35 pips

Weekly closing price: 0.7963

Since weekly price linked with the support area at 0.7849-0.7752 three weeks ago, the commodity currency has remained reasonably well-bid. The next objective, assuming that price continues to push north, can be seen around resistance drawn from 0.8075. Before weekly action can reach the noted resistance, however, it may be worth noting that daily price must first consume both Quasimodo resistances seen at 0.7980/0.8030.

A disappointing US job’s report on Friday saw H4 candle action run through the mid-level resistance at 0.7950 and touch gloves with the daily Quasimodo resistance mentioned above at 0.7980. Although this daily line could potentially drag the pair lower today, we really like the look of the large psychological level planted just above it at 0.80, due to the following nearby converging structures:

August’s opening level at 0.7998.

A H4 Quasimodo resistance level at 0.8007.

A H4 161.8% Fib ext. point at 0.8008.

Suggestions: A short from the green H4 sell zone is, in our technical opinion, appealing, given its confluence. To trade this area though, we would ideally want to see H4 price whipsaw through the current daily Quasimodo resistance and test the zone in the shape of a pin bar, and ultimately close on/near its low (as drawn on the H4 chart). The reason we require this candle confirmation is due to both the risk of a fakeout being seen up to the daily Quasimodo resistance at 0.8030, and weekly price currently showing room to extend up to weekly resistance at 0.8075.

Data points to consider: No high-impacting news events on the docket today (US banks are closed in observance of Labor Day).

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: 0.8008/0.7998 ([ideally we want to see price whipsaw through the current daily Quasimodo resistance and test the zone in the shape of a H4 pin bar] stop loss: either beyond the candle’s wick or above 0.8008).

USD/JPY:

Weekly gain/loss: + 90 pips

Weekly closing price: 110.22

During the course of last week’s trading, USD/JPY bulls went on the offensive from weekly demand at 108.13-108.95 and printed a strong-looking weekly bullish engulfing candle. The move from this area could encourage further buying this week and propel the unit up to within striking distance of a supply area formed at 115.50-113.85.

Last week’s upside move, nevertheless, has placed the daily candles within shouting distance of a resistance level pegged at 110.76. Capping upside twice during the month of August, and boasting reasonably strong history, we feel price will, at the very least, bounce lower from here. Should a push above the line be seen, however, this would likely expose another resistance marked at 111.91.

A quick recap of Friday’s session on the H4 timeframe shows price spiked through the 110 handle following lower-than-expected US job’s figures, reaching a low of 109.56, before rejoining the 110 level. Following this, the pair received a minor boost on robust US manufacturing PMI data, consequently bringing price up to August’s opening level at 110.30 into the close.

Suggestions: At current price, we see very little to hang our hat on as far as technical setups go. A little higher up on the curve, nevertheless, June’s opening level at 110.80 shows promise owing to it converging closely with a H4 Quasimodo resistance level at 110.84, the 111 handle and the daily resistance noted above at 110.76 (green area – 111/110.80).

Unfortunately, trading short from this area would entail selling into potential weekly buyers from demand mentioned above at 108.13-108.95. With that being the case, additional confirmation in the form of a reasonably sized H4 bearish candle (preferably a full, or near-full-bodied bearish candle) would be required to show seller interest, before pulling the trigger.

Data points to consider: No high-impacting news events on the docket today (US banks are closed in observance of Labor Day).

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: 111/110.80 ([waiting for a reasonably sized H4 bearish candle to form – preferably a full, or near-full-bodied candle – is advised] stop loss: ideally beyond the candle’s wick).

USD/CAD:  

Weekly gain/loss: – 88 pips

Weekly closing price: 1.2392

The USD/CAD managed to retain its offered tone last week, after weekly price hammered its way through a long-term weekly trendline support extended from the low 0.9633. Technically speaking, this has likely set the stage for further selling this week at least until we reach weekly demand penciled in at 1.2127-1.2309.

The story on the daily timeframe reveals that the bears did not make a stand until Thursday’s segment, after topping around the 1.2662 neighborhood. The drop from here, shaped by two reasonably decisive bearish candles, brought the unit into the jaws of a demand base drawn from as far back as June 2015 at 1.2303-1.2423.

The result of Friday’s disappointing US job’s report saw price aggressively extend below both the H4 mid-level support at 1.2450 and1.24 handle. It was only once the piece connected with H4 support at 1.2362/H4 mid-level support at 1.2350 did we see price begin mildly paring losses.

Suggestions: To our way of seeing things right now, a H4 close above 1.24 would confirm upside to 1.2450/H4 supply at 1.2491-1.2461. In addition, this move would likely confirm strength from the current daily demand area. On the flip side, a rejection at 1.24 could lead to price retesting 1.2350, and quite possibly the 1.23 boundary (1.23 [not seen on the screen] is positioned just beneath daily demand, and also denotes the top edge of the weekly demand).

Preferably, we would love to be sellers in this market given the pair’s underlying trend. However, selling into daily demand and H4 support is just too risky for our liking. In regard to longs, we would not feel comfortable buying this market above 1.24 due to weekly price showing room to drive lower. To that end, the only place of interest is the 1.23 handle due to its location on the higher timeframes. For us, we would look to place stops below the H4 low @ 1.2276 formed on the 24th June 2015, and target 1.2350 as an initial take-profit level.

Data points to consider: No high-impacting news events on the docket today (US and Canadian banks are closed in observance of Labor Day).

Levels to watch/live orders:

• Buys: 1.23 region (stop loss: 1.2274).
• Sells: Flat (stop loss: N/A).

USD/CHF:  

Weekly gain/loss: + 81 pips

Weekly closing price: 0.9640

Weekly price turned higher last week after crossing swords with a support area at 0.9443-0.9515, consequently clawing back the majority of the prior week’s losses. Seeing as the USDX also bounced from weekly support at 11854, dollar buying on the Swissy could lead to price retesting the trendline resistance extended from the low 0.9257.

Daily price on the other hand is somewhat restricted at the moment. To the upside, we have supply lodged at 0.9699-0.9641 (daily supply also seen on the USDX at 11969-11938) that held price lower on Thursday. And to the downside, there’s nearby support marked at 0.9546, which converges nicely with a channel support line etched from the low 0.9438.

The impact of Friday’s less-than-stellar US job’s report sent H4 price storming through July’s opening level at 0.9580 to a demand printed at 0.9538-0.9557. Despite the dismal numbers, the pair easily clawed back immediate losses and rose above the 0.96 handle to a high of 0.9652 on the day.

Suggestions: As of current price, we are particularly fond of the green area marked on the H4 chart at 0.97/0.9672. Comprised of June/August’s opening levels at 0.9680/0.9672, a H4 Quasimodo resistance level at 0.9685, a psychological boundary at 0.97 and being positioned within the upper limits of the current daily supply, a bounce lower from here is likely on the cards. The only grumble we have, however, is knowing that weekly price can potentially stretch as far north as the aforementioned trendline resistance! For that reason, we would only recommend executing a sell position between 0.97/0.9672 if H4 candle confirmation is present (preferably in the shape of a full, or near-full-bodied bearish candle).

Data points to consider: No high-impacting news events on the docket today (US banks are closed in observance of Labor Day).

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: 0.97/0.9672 ([waiting for a reasonably sized H4 bearish candle to form – preferably a full, or near-full-bodied candle – is advised] stop loss: ideally beyond the candle’s wick).

DOW 30:  

Weekly gain/loss: + 159 points

Weekly closing price: 21977

Recent dealings show US equities extended its bounce from weekly demand at 21462-21645 last week, finishing near its highs. With little overhead resistance to contend with on the weekly timeframe, a fresh record high could be achieved this week!

On the other side of the field, nevertheless, daily flow recently crossed paths with supply at 22076-21929, and chalked up a nice-looking selling wick into the week’s end. While this supply boasts strong momentum and could send the index lower this week, let’s not forget where weekly price is trading from!

After retesting August’s opening level at 21913 as support on Thursday, the H4 candles extended north on Friday, and managed to clock a high of 22038 before trimming gains into the closing bell. Sited within the upper limits of the aforesaid daily supply, the next area to the upside is a H4 resistance level at 22062 (also denotes a Quasimodo resistance left shoulder marked by the black arrow).

Our suggestions: A difference of opinion is currently being seen on the higher timeframes. On the one hand, the weekly chart shows price is ready for higher levels, and on the other hand, daily movement is capped by a supply. This leaves traders in a somewhat precarious position on the H4 timeframe. A long at 21913 is high-probability according to the weekly scale, but ill-advised from a daily perspective. In a similar fashion, going short from the H4 resistance at 22062 would have you selling into potential weekly buyers, but alongside possible daily flow!

Given the above factors, our team will remain on the sidelines for the time being.

Data points to consider: No high-impacting news events on the docket today (US banks are closed in observance of Labor Day).

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: Flat (stop loss: N/A).

GOLD:  

Weekly gain/loss: + $33.4

Weekly closing price: 1324.6

In recent trading, the yellow metal stormed above weekly resistance at 1295.4 and concluded trade closing just ahead of weekly resistance at 1337.3 that stretches all the way back to late 2010!

A quick recap of Friday’s movement on the H4 timeframe shows price challenged Tuesday’s high at 1325.9, but failed to muster enough strength to close beyond the number. As we highlighted in Friday’s report, this is, we believe, the last major obstacle stopping price from gravitating north up to the said weekly resistance.

Our suggestions: A H4 close above Tuesday’s high, followed up with a retest and a H4 bullish candle in the shape of either a full, or near-full-bodied bullish candle would, in our view, be enough to validate a long, targeting the weekly resistance mentioned above at 1337.3.

Levels to watch/live orders:

• Buys: Watch for H4 price to engulf 1325.9 and then look to trade any retest seen thereafter ([waiting for a reasonably sized H4 bull candle to form following the retest is advised] stop loss: ideally beyond the candle’s tail).
• Sells: Flat (stop loss: N/A).

U.S. refining makes a rapid comeback in a supportive development for WTI in particular.

Oil traded positively on Friday with WTI, in particular, the star, pulling itself up off the floor as U.S. refining production restarts in earnest following the passing of Hurricane Harvey. With the storm having passed, it appears that damage to refining capacity is minimal and with only 5.50% now offline from fully 25% a week ago, traders are hopeful that crude backlogs will be cleared, taking the pressure of both WTI and gasoline futures. The Brent/WTI spread has also closed from a six dollar premium to an only four dollars this morning.

WTI

WTI spot trades unchanged in Asia at 47.50 having regained its 100-day moving average at 47.30 in a positive technical development. Support is at 46.50 with resistance at 48.70.

BRENT

Brent spot continues to trade constructively to start the week, opening at its previous longer term resistance at 52.70. It now appears poised to attack resistance at 53.50 which could begin a move to the 55.00 area. Support appears at 52.40 initially.

Both contracts will be vulnerable to North Korean headlines this week, with any signs of escalation from this weekend's events potentially giving the oil a significant tailwind.

Daily Pivots: (S1) 142.16; (P) 142.57; (R1) 143.20; More

GBP/JPY gaps lower today but stays in range of 141.40/143.18. Intraday bias remains neutral first. Deeper decline is mildly in favor as long as 143.18 resistance holds. Below 141.40 minor support will turn bias back to the downside first. Break of 139.29 will target 135.58 key support level. At this point, price actions from 148.42 are seen as a sideway consolidation pattern. Hence, we'll expect strong support from 135.58 to contain downside and bring rebound. Meanwhile, break of 143.18 will indicate short term reversal and turn bias back to the upside.

In the bigger picture, the sideway pattern from 148.42 is still unfolding. In case of deeper fall, we'd expect strong support from 135.58 and 50% retracement of 122.36 to 148.42 at 135.39 to contain downside. Medium term rise from 122.36 is expected to resume later. And break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. However, firm break of 135.58/39 will dampen the bullish view and turn focus back to 122.36 low.

Yen and Swiss Franc gap up as the week starts while Dollar and Aussie trade broadly lower. Nikkei tumbles in early trading and is down -170 pts at the time of writing. Gold resumes recent rally and surges to as high as 1343.5. Korea tension resurfaces as North Korea conducted a sixth nuclear test on Sunday. It's believed that this one, an advanced hydrogen bomb or a long-range missile, is of a significantly larger scale and more powerful, as an Pyongyang described the underground explosion in a televised statement that it's a "perfect success in the test of a hydrogen bomb for an ICBM". And, "the creditability of the operation of the nuclear warhead is fully guaranteed." It's even claimed that the detonation of the bomb triggered an initial magnitude 6.3 earthquake in the northern part of North Korea. The United Nations Security Council was set to meet later on today to discuss fresh sanctions against the country.

US Defense Secretary James Mattis had a meeting with President Donald Trump, Vice President Mike Pence and other top national security advisers. Mattis briefed Trump on each of the "many military options" and warned of a "massive military response, a response both effective and overwhelming" to any threat from North Korea. Trump condemned that the "words and actions" of North Korea "continue to be very hostile and dangerous" to the US.

US Trump: South Korea appeasement will not work

Trump also named other countries in his tweets regarding the issue. He said that Pyongyang "has become a great threat and embarrassment to China, which is trying to help but with little success." Trump also warned that the US is " is considering, in addition to other options, stopping all trade with any country doing business with North Korea." That clearly refers to China, which continue to be a key economic partner of North Korea despite supporting the economic sanctions. Besides, Trump also said that "South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!" Trump also hinted at withdrawing from the US-Korea Free Agreement agreements earlier.

South Korea: Destruction of war should not be repeated in this land

Taking about South Korea, President Moon Jae-in's office issued a statement emphasizing that "South Korea is a country that experienced a fratricidal war. The destruction of war should not be repeated in this land". And Moon pledged that "we will not give up and will continue to push for the denuclearization of the Korean Peninsula through peaceful means working together with our allies." The country said today that it's preparing fresh military drills with US in response to situation. And it's reported that President Moon, initially opposed the so called Thaad (terminal high-altitude area defense) system, appears to have soften his stance. And South Korea is poised to approve further deployment of the US Thaad system.

Japan Abe talked twice with Trump during the weekend

Japan's prime minister Shinzo Abe held two phone calls with Trump discussing the situation. Abe told reporters after the call that "President Trump and I shared the view that we cannot overlook North Korea's reckless act and that the international community must show its resolve by applying stronger pressure than had so far been used". Separately, Abe seemed to have agreed with "Russian President Vladimir Putin to cooperate on North Korean as both agreed that "North Korea's reckless act is a serious threat" 

Elsewhere

Japan monetary base rose 16.3% yoy in August. Australia TD securities inflation rose 0.1% mom in August. Australia company operate profits dropped -4.5% qoq in Q2. Eurozone will release Sentix investor confidence and PPI in European session. UK will release construction PMI. US and Canada will be on holiday today.

Three central banks to meet this week: RBA, BoC, ECB

Looking ahead, we have a busy week ahead. Besides the BOC meeting scheduled on Wednesday, we have the RBA meeting on Tuesday and the ECB meeting on Thursday. The strong GDP data from Canada lifted the chance of a rate hike by BoC this week to 50%, according to overnight index swaps market pricing. However, considering that BoC has just raised interest rate by 25bps to 0.75% back in July, September seems to be too early for another move. Nevertheless, Canadian Dollar would likely stay firm at the initial part of the week. And buying will jump in again if BoC signals in the statement that it's ready to move again in October.

There have been rumors that the ECB would delay its QE tapering due to the recent rally in the single currency. Indeed, the late selloff in Euro last week was due to report that ECB would not act until December. However, we believe euro's strength of late has more been due to the unattractiveness of other currencies, especially the greenback and sterling. We expect the ECB to warn of euro's strength but maintain the rhetoric that it stands ready to extend/expand asset purchases, if needed. The central bank might begin formal discussion in October.

Throughout the week, we would be receiving a number of speeches from Fed presidents, beginning with Governor Brainard, Minneapolis' Kashkari (voter) and Dallas' Kaplan (voter) all speaking on Tuesday, followed by Cleveland's Mester (nonvoter), New York Fed President Dudley and Kansas City's George (nonvoter) on Thursday and Philadelphia Fed President Harker (nonvoter) on Friday.

Here are some highlights for the week ahead:

• Tuesday: RBA rate decision; Swiss GDP, CPI; Eurozone PMI services revision, retail sales; UK PMI services; US factory orders
• Wednesday: Australia GDP; German factory orders; Eurozone PMI retail; Canada trade balance, labor productivity, BoC rate decision; US trade balance, ISM services, Fed Beige Book report
• Thursday: Australia retail sales, trade balance; Japan leading index; Swiss foreign currency reserves; German industrial production; ECB rate decision; Canada building permits, Ivey PMI; US jobless claims
• Friday: New Zealand manufacturing activity; Japan GDP; China trade balance; Australia home loans; Swiss unemployment; German trade balance; UK productions, trade balance; Canada employment

GBP/JPY Daily Outlook

Daily Pivots: (S1) 142.16; (P) 142.57; (R1) 143.20; More

GBP/JPY gaps lower today but stays in range of 141.40/143.18. Intraday bias remains neutral first. Deeper decline is mildly in favor as long as 143.18 resistance holds. Below 141.40 minor support will turn bias back to the downside first. Break of 139.29 will target 135.58 key support level. At this point, price actions from 148.42 are seen as a sideway consolidation pattern. Hence, we'll expect strong support from 135.58 to contain downside and bring rebound. Meanwhile, break of 143.18 will indicate short term reversal and turn bias back to the upside.

In the bigger picture, the sideway pattern from 148.42 is still unfolding. In case of deeper fall, we'd expect strong support from 135.58 and 50% retracement of 122.36 to 148.42 at 135.39 to contain downside. Medium term rise from 122.36 is expected to resume later. And break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. However, firm break of 135.58/39 will dampen the bullish view and turn focus back to 122.36 low.

Economic Indicators Update

GMT	Ccy	Events	Actual	Forecast	Previous	Revised
23:50	JPY	Monetary Base Y/Y Aug	16.30%	15.60%	15.60%
01:00	AUD	TD Securities Inflation M/M Aug	0.10%		0.10%
01:30	AUD	Company Operating Profit Q/Q Q2	-4.50%	-4.00%	6.00%
08:30	EUR	Eurozone Sentix Investor Confidence Sep		27	27.7
08:30	GBP	Construction PMI Aug		52	51.9
09:00	EUR	Eurozone PPI M/M Jul		0.10%	-0.10%
09:00	EUR	Eurozone PPI Y/Y Jul		2.10%	2.50%

 

STOCKS

Dow (21987.56, +0.18%) rose up to test 22040 on the upside before coming off from there to close at lower levels. Note that 22040-22060 is an immediate resistance which could keep the index trapped for a few sessions. An eventual rise towards 22100-22200 looks possible in the near to medium term.

Dax (12142.64, +0.72%) could test levels near 12300 on a break above 12200; else a fall back towards 12000 is possible. Overall broad range of 12300-11900 may hold for some more sessions before we gain some clarity on further course of direction.

Nikkei (19521.44, -0.86%) came off sharply from levels below our expected upside limit of 19800-19850. Although the index has been trying to move up, some inherent weakness seems to be still hovering around for the coming sessions. A fall back towards 19400-19300, is seen would not be surprising. Restating that while the US-Japan 10Yr yield differential (2.16%) has chances of falling towards 2% Dollar Yen (109.78) and Nikkei could be vulnerable to a sharp fall in the coming sessions.

Shanghai (3368.85, +0.05%) has been very quiet and stable above 3350 levels and could possibly continue to remain sideways for some sessions.

Nifty (9974.40, +0.57%) could possibly target 10200 levels again while above 9950 before seeing another down-leg towards 9800. Near term looks bullish.

COMMODITIES

Gold (1337) moved higher as expected and trading above its interim resistance of 1335. As it is not overbought yet, a quick rally could be seen towards 1350. Similarly Silver (17.94) has also broken its resistance of 17.80 and reached almost 18.00 mark. We had mentioned earlier that Gold and Silver both are out of their short term bearish channel with a strong bullish momentum as the supports of 1280 and 16.90 are intact.

Finally Copper (3.14) has penetrated its recent trading range of 3.00-3.12 on the higher side. we had told that above 3.12, higher levels of 3.26 can come into consideration. The only concern in the short term overbought condition which could be resulted short term profit taking anywhere between 3.12-3.26 levels. But we will remain bullish on copper while it is trading above 2.88 levels in the medium term time frame.

Brent (52.48) is hovering around the resistance of its near term trading range of 49.70-52.80.Only a close above 52.80 could open up 55 regions. WTI (47.41) is also trading within the range of 46.50-49 as well. We will remain neutral on Brent and WTI while they are trading below 52.80 and 48 regions respectively.

FOREX

Overall Dollar weakness still prevails for now with the Dollar Index (92.65) trading below crucial Resistances near 92.80-95 and 93.37. But, we have to be careful about chances of a break of this trend.

Some two-way volatility was seen in the Euro (1.1882) after the lower than expected US NFP data on Friday (+156K against the expectation of +180K), but there has not been much movement in Asia today in response to the North Korean provocations over the weekend. 1.1830 is a decent Support for the day, and we may see a range of 1.1830-1930 for a few days within the still prevailing overall uptrend.

There's been a bit of strengthening of the Yen (USDJPY 109.78) today in response to the North Korean tension. The two-way possibility talked about on Friday seems to be resolving into a sideways range of 108.50-109.50 for the next few days. Within this, a break below 109.50 can yield a dip to 109.20-10, even 109.00.

Contrary to expectation of a rise towards 132.45, the Euro-Yen (130.48) has broken below the earlier support of 130.80, being pulled down by Dollar-Yen. This opens up chances of a dip to 129.45 this week.

The Pound (1.2955) has managed to move up a bit more, perhaps drawing advantage from the slight weakness in the Euro. But, the trend is still not very clear. In the bigger picture, we might say it is trading sideways within a broad range of 1.2750-3150, with decent Resistance at the upper end of the range.

The Aussie (0.7960) has been unable to break above 0.80 yet, but is maintaining its overall strength and chances of an eventual break above 0.80 which could target 0.81.

The Chinese Yuan (USDCNY = 6.5482) continues to strengthen relentlessly for now, breaking below the 6.5785 support mentioned on Friday. Maybe the next target might be 6.50. We will not stand in front of the trend now.

Dollar-Rupee is likely to continue to trade sideways between 63.90-64.10 for some more days, waiting for global triggers to move the market.

INTEREST RATES

Euro moved lower asThe German-US 2 Yr Spread (-2.13%) has dipped from previous levels. There is no change in German-US 10Yr Spread (-1.76%) but Eur seems to be responding more to the German-US 2Yr Spread in short term time frame.

Sideways move had been seen in the benchmark US 10Yr yield, between 2.09-2.16 regions. But there are rooms for further downside towards 1.97 if the US 10Yr will close below 2.09% on a daily closing basis.

Muted price action in the Japanese 5Yr JGB (-0.14%), 10Yr JGB (0.00%) and the 30Yr JGB (+0.82%) as they are continuing their consolidation at current levels, suggesting a possible bounce in near term time frame.

The UK 5Yr and 30Yr Gilt Yields (5Yr 0.46% and 30Yr 1.61%) are continuing their bullish momentum in line with our expectation.The UK 10Yr (1.06%) has also rebound from its low of 1.00 as expected and moved higher .

USDCHF - With the pair backing off lower prices to close higher the past week, more strength is envisaged in the days ahead. On the downside, support lies at the 0.9600 level. A turn below here will open the door for more weakness towards the 0.9550 level and then the 0.9500 level. On the upside, resistance resides at the 0.9700 level where a break will clear the way for more strength to occur towards the 0.9750 level. Further out, resistance comes in at the 0.9800 level. Above here if seen will turn attention to 0.9850. All in all, USDCHF faces further upside pressure on corrective recovery.

EURUSD - With the pair rejecting higher to close lower the past week, more decline is envisaged. Resistance comes in at 1.1900 level with a cut through here opening the door for more upside towards the 1.1950 level. Further up, resistance lies at the 1.2000 level where a break will expose the 1.2050 level. Conversely, support lies at the 1.1800 level where a violation will aim at the 1.1750 level. A break of here will aim at the 1.1700 level. A cut though here will open the door for more strength towards 1.1650 level. All in all, EURUSD faces further downside pressure on corrective pullback.

North Korea detonated its largest test yet as it sprints toward nuclear-power status, and perhaps towards war. The yen and Swiss franc are strongly higher in early trading as a result. Gold gapped up to 1337 from Friday's 1325. CFTC positioning data showed further bets against the pound. US and Canadian markets are closed on Monday. 3 Premium trades are in progress but 2 trades will be added ahead of what will be prove to be a busy 1st week of September (Korea, BoC and ECB).

North Korea tested a nuclear weapon underground on Saturday that appeared to be 5-10x more powerful that previous tests. It was Pyongyang's 6th nuclear test, which triggered a 6.3-magnitude quake and was felt throughout northeastern China. A statement from Kim Jong-Un's government said it was a hydrogen bomb that was small enough that it could be loaded onto an ICBM.

Risk trades are under pressure with the yen and Swiss franc around 50 pips higher across the board. Expect more risk aversion as Europe begins trading and note that markets will be thin with the US on holiday.

The speed of North Korea's progress and testing is alarming. They are evidently years ahead of where experts had believed. In a tweet, Donald Trump said the United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea. That's almost-certainly a hollow threat because China is by far its largest trading partner with India second.

Most of the UN Security Council is angling to cut off North Korea's oil supplies. As recently as last week China said it didn't want further sanctions.

The immediate risk probably isn't nuclear war but some kind of trade spat between China and the United States. According to reports, Trump has already asked aides for tariffs on China for trade and political issues but if they pass and Trumps justifies them geopolitically, then it would certainly be interpreted as an escalation.

Ultimately, the fears and rhetoric will subside but at this point it looks like it will get worse before it gets better.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +87K vs +88K prior GBP -52K vs -46K prior JPY -69K vs -74K prior CHF -2K vs -2K prior CAD +53K vs +51K prior AUD +67K vs +60K prior NZD +19K vs +22K prior

The moves were modest this week but the trend has been a slow build in pound shorts and that's understandable given the endless Brexit risks. One spot that's vulnerable in the week ahead is NZD, which has caught specs off guard in a continuing slide.