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NFP data this evening squashes volatility in Asia as traders adopt and sit and wait approach.

Crude Oil

Caution seemed to be the catchword in oil markets overnight. Traders were unwilling to add substantial risk approaching the weekend, and both Brent and WTI spot contracts had a quiet session with both falling approximately 50 cents from the previous day. Having had such a strong run higher in the last two weeks, contradictory inventory data this week and apparent record high OPEC production seemed to have sapped the appetite for upside risk for now.

Oil most likely remains vulnerable to more sell side profit taking into the weekend as traders chose to lock in profits in a sideways market.

Brent spot trades at 51.75 this morning, just above its 200-day average at 51.425. It remains locked between its triple top at 52.70 and support in the 50.45/65 regions, its 50% Fibonacci retracement and the 100-day average.

WTI spot trades at 48.90 this morning and its likewise ranging between major support and resistance. Resistance being the double top at 50.30 with support being in the 47.75/48.20 zone, containing its 50% retracement and the 100-day average.

Gold

Position squaring ahead of today’s Non-Farm Payrolls data also seems to be pervading both currency and stock markets with gold also no exception. Sellers locking in profits saw gold drop 10 dollars to 1256.00 at one stage, before recovering strongly to finish slightly higher than its open at 1268.75.

We expect gold to trade entirely of the nuances of the U.S. dollar into the data moving inversely to dollar strength of weakness in what may be a somewhat directionless Asia session today.

Gold trades almost unchanged at 1267.75 in early Asia. Resistance is initially at 1274.20 ahead of a double top around 1282.00. Support should appear in the first instance at 1262.50 before yesterday’s low of 1256.00, ahead of the much more significant 100-day moving average at 1252.65.

Key Points:

• DJIA breaches 22,000 level and continues to move higher.
• Market may be underestimating the impact of either a tightening or tapering phase.
• Keep a close watch on Federal Reserve policy and sentiment in the near term.

The Dow Jones Industrial Average recently crossed the mythical 22,000 mark in open defiance of potential monetary tightening coming from the U.S. Federal Reserve. As many of you may know, there is a direct negative correlation between interest rates and equity prices so it's especially surprising to see the Dow forging ahead despite all the expectation setting for either a rate hike or a taper. Subsequently, it begs the question as to whether equity investors completely lost their minds…or do they know something the rest of us do not.

At a guess, maybe equity investors have little faith in the Fed's ability to follow through on their threats of a massive balance sheet taper given the lack of strong inflationary pressures. On this point, they may be correct given that the Fed has a poor track record of telling the truth when it comes to setting forward expectations.

However, although inflation has recently dipped, it was largely due to a fall in crude oil and energy prices and really didn't impact the PCE Deflator or the Core very much. So there are still building inflationary pressures, as well as a strong disconnect between the public and the Fed, that provides a relatively dangerous environment for equity prices.

Subsequently, there is a real risk that if the Federal Reserve does indeed embark upon a cycle of either interest rate hikes, or balance sheet reduction, that a sharp fall in U.S. equities would soon follow. This presents a relatively real risk to U.S. equity valuations given the historically high levels that the DJIA currently resides at.

Ultimately, U.S. equity markets have been fuelled by loose monetary policy and a drive towards yields for some time and many working within the advisory space in this sector have never traded through a bear market. Subsequently, all the ingredients are there for a significant revaluation in the coming months. The reality is that, without an economic shock, the central bank is likely to be under pressure to commence reducing their balance sheet overhang in the coming months. Given the amount of expectation setting that the FOMC has been doing this year it's almost guaranteed that they will act decisively in some way lest their credibility become at risk. Subsequently, it's a matter of when, not if, we eventually move towards lift off. So watch this space!

STOCKS

Dow (22026.10, +0.04%) is stable near current levels. But it could move up slowly towards 22500 from where some rejection is possible. Dax (12154.72, -0.22%) on the other hand is stuck within the 12350-12080 region for the last 8-9 sessions and could continue for a few more sessions. There is some scope of coming off towards 12000 in the next few sessions.

Shanghai (3280.92, +0.24%) needs to sustain above 3300 in order to continue moving up. Else a corrective dip towards 3200 is possible in the coming sessions. Trend remains firmly up. Nikkei (19956.58, -0.36%) continues to remain in the sideways consolidation and lacks directional clarity just now. We need to wait for a few more sessions to get some cue on whether it would move above 20200 or come down below 19900.

Nifty (10013.65, -0.67%) is clearly coming off from the resistance visible on the 3-day charts. It could now come off towards 9900 as mentioned yesterday.

COMMODITIES

Gold (1267) is struggling to rise above the 1270-75 regions and only a break above that may open up the higher target of 1295. Crucial supports are poised at 1258 and 1245 levels. In case the Support at 1245 breaks, there will be a further dip to 1230 and 1210 levels respectively. Silver (16.66) stands comparatively strong due to the recent strength in copper prices. Immediate resistance poised at 17 levels. Only a close below 16.50 could open up 16.20 and 15.90 levels respectively. We might see significant fall in Silver if there will be any short term price correction in Copper towards sub 2.85 levels.

Muted price action has been seen in Copper (2.88). Midterm resistance comes at 3.12 regions from where we may see some correction due to profit taking. We will remain bullish on copper while it is trading above 2.78 regions.

Brent (51.90) and WTI (48.94) are trading within the ranges of 48-53 and 47.60-49.50 respectively. We might see some weekend profit booking at current levels, but we will remain bullish on Brent and WTI, while they are trading above 48.70 and 45.50 levels on a weekly closing basis.

FOREX

A worse than expected reading of US ISM manufacturing index keeps Dollar Index (92.78) weak and on track to its downside target of 92.00. Euro (1.1875) is seeing a narrow range day as the wait for the US NFP data goes on. A weak US NFP data would be beneficial for Euro to test 1.20 and push Dollar Index to 92.00.

Dollar-Yen (110.14) faced a sharp rejection from exactly our resistance of 111.00-10 to test sub-110.00 levels. In the near term, a trending move can be expected next week but only on a break from the range of 109.30-111.10. Otherwise, the pair may oscillate in this range for a few more days before a breakout.

BOE kept the rates unchanged but a cut in the GDP and wage growth projection triggered a sharp decline in Pound (1.3139) taking it to the near term support of 1.3100. A recovery can be expected if it manages to stay above 1.3100-1.3050. There is an equal probability of a breakdown below 1.3050 signaling a top at 1.3260. Wait and watch.

Aussie (0.7970) continues its consolidation mode in the range of 0.7875-0.8050 which may continue for a few more sessions. The larger trend remains up and the higher targets of 0.8100-70 remain unchanged.

Dollar Rupee (63.70) closed flat at 63.70 after making an intra-day low of 63.55 as expected. There are chances of testing lower levels of 63.30/25 in the coming sessions while price remains below 63.95.

INTEREST RATES

The US yields have fallen and could move down in the coming sessions to test respective supports. The 5Yr (1.79%), 10Yr (2.23%) and the 30Yr (2.80%) are all trading lower from previous levels of 1.82%, 2.26% and 2.85%; and could test supports near 1.70%, 2.10% and 2.60% respectively. Near term looks bearish.

The UK-US 10Yr (-1.08%) has fallen and could test support near -1.13% from where a bounce back is possible.

Price edged lower on Thursday, but failed to reach the 23.6% retracement level and the 0.7375 static support. Maintains a bullish perspective, despite the minor decrease, could bounce back if the support will hold. Only a valid breakdown below the mentioned support levels will open the door for more declines. We may have a minor consolidation here before will start a significant move.

USD/CHF decreased in the last session, but maintains a chance to reach new high in the upcoming period. Could decrease to retest the 0.9634 static support before will try to take out the dynamic resistance from the median line (ml). I’ve said in a previous report that we may see a minor consolidation above the 0.9634 level before the rate will have enough energy to jump much higher.

The USD/JPY dropped significantly on Thursday and erased the last two day's gains, should touch new lows because the Nikkei stock index is still expected to drop in the next days. Price moves sideways on the Daily chart, but I hope that we'll have a clear direction very soon.

It is expected to breakout from the symmetrical triangle, but remains to see the direction. A breakdown looks imminent at this moment because the Yen could dominate the currency market if the JP225 will drop towards the 19700 major static support.

Technically and Nikkei's drop is natural after another failure to stabilize above the 20058 long term horizontal resistance. The Japanese currency will appreciate aggressively versus the other major currencies if the Nikkei will drop below the 19700 major static support (resistance turned into support).

Japan is releasing the Average Cash Earning later, which is expected to rise by 0.5% in June, less versus the 0.6% growth in the former reading period. We may have some volatility in the afternoon as the US will publish some high impact data.

USD/JPY move within a symmetrical triangle, should hit the downside line of this pattern in the upcoming hours and the 50% retracement level. Support can be found also at the warning line (wl1) of the minor ascending pitchfork. A valid breakdown below the mentioned support levels will open the door for more declines in the upcoming weeks, only a rejection along with a JP225 increase will send the rate higher again.

Price is trading right below the 110.00 psychological level, but we'll see how will reach when will touch the mentioned support levels.

Pound Trading In The Red

The Cable has taken a hit from the BOE today, as you already know, the Official Bank Rate was left unchanged, at 0.25%, matching expectations. The interest rate remains steady since August 2016 when was decreased from 0.50%. The MPC members voted by a majority of 6 to 2 for this decision, the Pound plunged versus all its major rivals after this decision, the bulls were disappointed.

BOE maintains unchanged the Asset Purchase Facility, at 435B, matching expectations, the MPC members voted unanimously for this decision. BOE Carney sustained that the economic growth will remain sluggish and also that some tightening will be needed in the upcoming three years.

The Pound has turned to the downside even if the United Kingdom Services PMI increased from 53.4 to 53.8 points, beating the 53.6 estimate and signaling a further expansion.

USD Uninspired By US Figures

US dollar remains sluggish after the United States data publication, the figures have come in mixed and weren’t able to boost the currency. Unfortunately, the greenback lost some ground versus its rivals in the second part of the day also because the ISM Non-Manufacturing PMI plunged from 57.4 to 53.9 points, has come much below the 56.9 estimate.

The Unemployment Claims dropped again after one week increase, were reported at 240K in the previous week, below the 242K estimate and much below the 245K in the former reading period, while the Factory Orders surged by 3.0% in June, beating the 2.9% estimate, the orders rallied after the 0.3$ drop in May. Moreover, the Final Services PMI surged from 54.2 to 54.7 points, exceeding the 54.2 estimate, the Challenger Job Cut dropped by 37.6%, more versus the 19.3% drop in the former reading period, but failed to help the dollar to stay higher against its counterparts.

USDJPY - With the pair taking back its gains to close lower on Thursday. On the downside, support comes in at the 109.50 level where a break if seen will aim at the 109.00 level. A cut through here will turn focus to the 108.50 level and possibly lower towards the 108.00 level. Its daily RSI is bearish and pointing lower suggesting further weakness. On the upside, resistance resides at the 110.50 level. Further out, we envisage a possible move towards the 111.00 level. Further out, resistance resides at the 111.50 level with a turn above here aiming at the 112.00 level. On the whole, USDJPY looks to weaken further short term.

The Political headline cup runneth over

There's never a dull moment in the Foggy Bottom these days as the market's conviction was dented overnight by uncertain monetary policy and the constant stream of US Special Prosecutor Mueller's Russia-Gate headlines which explain the overnight dollar swoon. Special Counsel Mueller has reportedly empanelled a grand jury to investigate Russia's alleged interference in the 2016 national elections. The grand jury is a sign that the investigation is growing in intensity over the Trump campaign's possible collusion with Russia. Another toxic elixir for the Greenback is brewing.

The Old Lady of Threadneedle Street ( Bank of England) kept policy on hold by a 6-2 vote, but the BOE statement views were very balanced and a complete departure from recent hawkish overtones that some MPC members have been expressing. On cue, the pound tanked 100 pips on the initial decision with EURGBP ripping higher through the .90, levels we have not seen since Nov 2016. With the BOE 2017 rate hike window likely nailed shut we should expect GBP to underperform G-10 particularly against the crosses. ( EURGBP and GBPAUD)

The US 10 years yield dipped on the BOE dovish tones which now has currency markets shifting their view to a similar dovish tack by the Federal Reserve Boards due to the incessant political fracas in Washington. US yields remained heavy all NY session weighing on the Greenback which received little help from economic data when US Non-manufacturing business grew slower than expected in July. Markets continue to re evaluate the likely impact of Fed policy in the wake of the political headlines and soft US data. The 10-year yield dropped five bps to 2.22%, while 30-year yield lost six bps, reaching 2.79%.

However, it was the Trump Russia -Gate headlines in late NY that has seen the psychologically key 110 level taken out in USDJPY.The Russia headlines are coming out fast and furious sending a shiver down investors spines. Where there is smoke, there may be fire so look for headlines risk to be front and centre as this inquisition expands.

And of course, we have the NFP later today as the all-important wage data will come under the markets glare. Crystal ball assumptions aside, one thing current price action is suggesting, this month's headline is unlikely to affect current market Fed view and that only much keener than expected rise in hourly earnings could provide any support to the beleaguered Buck. Given the elusiveness of wage growth in the current economic climate, a top side beat is highly unlikely. Even in an unlikely USD dollar rally post-NFP scenario, traders will be more inclined to fade dollar strength so look for any dollar rallies to be sold.

Blue chips continue to hit the higher ground, with the Dow posting a new all-time high again at 22,040 before trading lower towards day end. Apple and Amazon both lost nearly 1%, putting the most pressure on the S&P
Euro

The Euro is doing what the Euro has been doing for the past month, a buy in the dip but on an eventual clean break of 1.1900, we are likely in for some serious profit taking ahead of the magnetic 1.200 levels.The reason is the Drahi risk which is speaking at Jackson Hole later this month. While President Draghi did not sound any alarm bell about the Euros surge after last month's ECB, there are some concerns that the speed of the Euro rise will trigger a Jackson Hole response for the ECB president.

Japanese Yen

Abe's cabinet reshuffle overnight came and went without much ado but the US political headline risk, which is again rearing its ugly head, has sent a tremor across all asset classes as the USDJPY tracks in risk averse mode. We had been basing just below 110 in recent days so that the 109.75-85 area will be critical. However, with NFP later today it's unlikely we'll see any aggressive dollar moves until after the US jobs print.

Australian Dollar

The Australian Dollar traded heavy overnight only to get a reprieve from the general USD malaise.The focus will now be on Retail sales and the RBA's quarterly Monetary policy report later this morning.

Overnight RBA Harper told the Wall Street Journal that AUD strength was due to a disarticulate USD “The real economy in the U.S. is staging a quite remarkable recovery. You would expect that would lead to a stronger U.S. dollar.”

The Canadian dollar has fallen versus the US dollar on Thursday with little help from energy prices that are softer after OPEC compliance concerns and awaiting the U.S. non farm payrolls (NFP) to be published on Friday, August 4 at 8:30 am EDT.

Canadian employment data will also be published on Friday. The jobs data has crushed expectations this year, with an outlier in the report published in May. While the forecast remains close to the past two month's estimate of 11,000 jobs the Canadian economy added 54,500 and 43,300. The US NFP report will get most of the spotlight as the USD will trade based on the indicator release, Canadian dollar investors will be on the lookout for confirmation of a strong recovery north of the border.

NAFTA renegotiations talks will begin in two weeks. Mexico and the US have said they favour a quick resolution to avoid further politicizing the negotiations with upcoming elections in 2018. Today the Mexican Minister of the Economy Idelfonso Guajardo has said that under a best case scenario the NAFTA would not be implemented before the end of 2018.

The USD/CAD gained 0.227 percent in the last 24 hours. The currency pair is trading at 1.2619 awaiting the US and Canadian employment reports from July. The loonie is near a two week low after having rallied for most of 2017 against the USD on the back of rising Trump uncertainty and a sudden change in monetary policy rhetoric for the Bank of Canada (BoC).

The central bank cut rates twice in 2015 to soften the blow to the economy from a drop in oil prices, but as crude has stabilized thanks to the efforts of the Organization of the Petroleum Exporting Countries (OPEC) the central bank had a quick turnaround in June and is now expected follow the July interest rate hike with another in October. The timing of the decision makes sense if the Canadian central bank wants to see if the Fed decides to start reducing stimulus in September and a Canadian rate rise could preempt a rate hike by the Fed in December

Housing prices in Canada, specially in Toronto seem to have come down following a change in regulation and the 25 basis rate hike in June. A second rate hike in October would further cool rising house prices as mortgage prices would climb. Toronto home sales have dropped 40 percent compared to a year ago, but higher prices prevail gaining 5 percent over the same period.

Energy prices fell 1.519 percent on Thursday. West Texas Intermediate is trading at $48.74 after yesterday's US crude inventories in particular the larger than expected rise in gasoline demand but the rise in Organization of the Petroleum Exporting Countries (OPEC) exports has reversed the trend.

The OPEC and other major producer agreement to limit crude production has stabilized prices but it enters into uncertain territory ahead of a meeting to discuss tighter compliance of members. There have been several voices of dissent and Iraq and the United Arab Emirates (UAE) are seen as wavering as their compliance numbers have slipped. The meeting on August 7 and 8 follows through the meeting in Russia last month where the same topics were discussed.

Market events to watch this week:

Friday, August 4
8:30 am CAD Employment Change
8:30 am CAD Trade Balance
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change