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Market Analysis 03/01/2014
Daily Commentary 03.01.2014, Time of writing: 03:30 GMT
The Big Picture Starting the year with mean reversion:
The new year began with the reversal of last year’s trends. Looking at the G10 currencies, most of the movement was mean reversion: the currencies that gained in December lost, and those that lost (notably the yen) gained. (AUD was the only G10 currency to buck the trend, eking out a small gain on top of December’s 2.1% rise.) The mean reversion trend was not so great in the EM currencies, though, with only 13 out of 22 EM currencies that we track following this pattern. It held in other markets though as gold rallied and stocks generally declined around the world. US bond yields declined and the Fed Funds rates expectations eased one or two bps further in the long end.
The beginning of the year is by no means a guaranteed indicator of what’s to come. Last year USD/JPY hit its lows for the year on 1 January and its high on 31 December. The S&P 500 hit its 2013 low on 8 January and its high on 31 December. EM equities hit their highs for the year on 3 January (lows on 24 June), while EM bonds also hit their highs for the year in early January. Gold’s high was 22 January, its low 19 December. On the other hand, the dollar overall didn’t bottom until 2 February (as measured by the DXY index). Nonetheless, the 1.2% decline in EM stocks yesterday bodes ill for EM currencies this year, particularly as it went along with lower US Treasury yields. That suggests the Fed’s tapering is starting to hit sentiment towards EM (Asian ex-Japan stock markets are lower this morning as well). So far, the market’s expectation of dollar strength this year is indeed playing out. The case looks particularly strong for the dollar to rally against the EM currencies as the Fed’s tapering draws liquidity away from those countries.
On Friday, the calendar includes several releases from the UK. The nationwide house price index (which will be released by the time this comment is published) is expected to have risen 0.7% mom in December, an acceleration from 0.6% mom in November. Construction PMI for December is forecast to fall slightly to 62.0 from 62.6 in November, but mortgage approvals for November are estimated to rise to 69.7k from 67.7k in October. Such figures would corroborate the idea that Britain’s housing boom continues unabated, which is likely to support GBP.
Elsewhere, Eurozone’s M3 annual growth is estimated to have accelerated to 1.5% yoy in November from 1.4% yoy in October. Nonetheless on that basis the 3-month moving average would slow to 1.7% from 1.9%. The main point of interest will be whether bank lending starts to turn up. It’s been falling on a yoy basis since May 2012and the pace of decline has been accelerating, not decreasing. This must be a big concern for the ECB. Continued deceleration in money growth and contraction in credit should eventually push the ECB to taking further steps to loosen monetary policy. This divergence of policy with the Fed is what we believe will drive EUR/USD lower this year. Italy’s preliminary CPI for December is estimated to have risen 0.3% mom in December, a turnaround from a revised -0.3% mom in November. Outside the Eurozone, Switzerland’s manufacturing PMI for December is estimated to fall slightly to 56.2 from 56.5.
We have four Fed speakers during the day. Fed Chairman Bernanke addresses the American Economic Association annual meeting. Philadelphia Fed President Charles Plosser speaks on “Transitioning from a low interest rate environment”, Federal reserve Governor Jeremy Stein speaks on “Banks as Patient Debt Investors” and Richmond Fed President Jeffrey speaks on the economic outlook.
The Market EUR/USD
• EUR/USD fell sharply yesterday, breaking the short-term blue uptrend line. The fall was stopped by the 1.3625 (S1) support barrier. A downward violation of that level may argue that the recent uptrend has finished and we may experience extensions towards the next support level at 1.3540 (S2). On the other hand, a rebound near the 1.3625 (S1) support would confirm a trading range between that barrier and the resistance at 1.3810 (R2).
• Support: 1.3625 (S1), 1.3540 (S2), 1.3400 (S3).
• Resistance: 1.3730 (R1), 1.3810 (R2), 1.3893 (R3).
EUR/JPY
• EUR/JPY moved significantly lower after failing to overcome the psychological resistance barrier of 145.00 (R2). The pair violated the blue support line and is now trading below the resistance of 142.80 (R1). We may see the price moving lower to challenge the support level of 140.88 (S1). The MACD oscillator, already below its trigger line, entered its negative territory, confirming the recent bearish momentum.
• Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).
• Resistance: 142.80 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
• GBP/USD moved significantly lower after getting a taste of the key 1.6600 (R2) level. The pair penetrated below the 1.6465 (R1) barrier and is now consolidating slightly below it. The rate is trading above the blue uptrend line with the 50-period moving average still above the 200-period on, thus technically, the short-term uptrend remains intact. Nonetheless, we can identify a bearish engulfing candlestick pattern on the daily chart and observe negative divergence between the daily MACD and the price action, so we should be cautious as the trend is losing momentum.
• Support: 1.6395 (S1), 1.6320 (S2), 1.6260 (S3).
• Resistance: 1.6465 (R1), 1.6600 (R2), 1.6735 (R3).
Gold
• Gold moved higher, breaking above the 1224 level. If the bulls are strong enough to maintain the price above that barrier, I would expect them to drive the battle higher and challenge the resistance hurdle of 1251 (R1). Relying on our momentum studies does not seem a solid strategy. The MACD remains above both its signal and zero lines, but the RSI is still finding resistance near its 70 level. On the daily and weekly charts the longer-term downtrend remains in effect.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI collapsed on Thursday, after confirming the validity of the 98.90 (R2) resistance barrier. The plunge was halted by the 61.8% Fibonacci retracement level of the 92.00-100.60 advance. The MACD oscillator lies below both its trigger and zero lines, while the RSI lies within its oversold area, thus we may experience some consolidation or an upward corrective wave before the bears prevail again. The 50-period moving average remains above the 200-period moving average, but is pointing downwards. A bearish cross in the near future may increase the possibility of establishing a new short- term downtrend.
• Support: 95.35 (S1), 94.00 (S2), 92.00 (S3).
• Resistance: 97.25 (R1), 98.90 (R2), 100.60 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 06/01/2014
Daily Commentary06.01.2014, Time of writing: 03:30 GMT
The Big PictureWeak China growth suggests market’s AUD forecast too optimistic:
Today’s round of service sector Purchasing Managers Indices (PMIs) for December got off to a disappointing start as the HSBC/Markit Services PMI for China fell to 50.9 from 52.5 in November. This comes on the heels of a drop in China’s manufacturing sector PMI in December and confirms the slowdown in the Chinese economy. As the government there comes to grips with the twin problems of overcapacity in manufacturing and excessive local government debt, China is likely to be the next country to go through the deleveraging process, which will naturally result in slower growth. That would be bad news for countries that sell commodities to China, including Australia, New Zealand to a lesser extent, and many emerging-market countries. This is one reason why I think the market’s bullish forecast for AUD/USD this year is excessive. AUD is forecast to be the second-best performing currency among the G10 on a total return basis (end-year consensus forecast, according to Bloomberg: 0.87, but with interest return of 2.9%, that’s enough to result in a positive total return against the dollar). I would expect to see AUD/USD move lower than that as the Chinese economy slows, leading to worse performance than the market consensus.
USD/JPY came off from its highs during the day as the Tokyo stock market fell (0.8% on the TOPIX but 2.4% on the Nikkei), but it managed to remain slightly above Friday’s opening levels (104.29 vs 104.09). That demonstrates to me the resilience of the dollar in 2014. The US currency is probably being supported by expectations for today’s US data: the non-manufacturing ISM index is expected to rise on 54.6 from 53.9, in contrast to the expected fall in the Eurozone service-sector PMI, and US factory orders are seen rising 1.7% mom in November after falling 0.9% in October. That would confirm the picture of an expanding US economy contrasting with a Eurozone economy that is just barely stabilizing, which is positive for the dollar.
The European day starts with Norway’s manufacturing PMI for December, which is expected to remain unchanged at 54.5. Then come the service-sector PMIs. Italy’s is expected to have risen to 48.8 in December from 47.2 in November, while UK’s figure is estimated to be slightly up to 60.3 from 60.0 in the previous month. We also have the final service-sector PMIs for December from France, Germany and Eurozone as a whole, which as usual are forecast to be unchanged from the preliminary figures.
Other indicators coming out Monday include Germany’s preliminary CPI for December, which is estimated to have accelerated to +0.7% mom from 0.2% mom in November, although that would imply a slowdown in inflation on a yoy basis. A slowdown in German inflation would be EUR-negative, although it remains to be seen whether the market focuses on the month-on-month or year-on-year figure. Last month the regional CPIs from Germany announced before the national figure were market-affecting so this indicator is likely to be closely watched.
As for the rest of the week, on Thursday Bank of England and ECB are holding their policy meetings. Once again, no change is expected from either Bank, so the attention will fall on the press conference held by ECB President Mario Draghi. If he again plays down the likelihood of any further easing near-term, as he has in recent speeches, that could cause a bounce in EUR/USD. But the next day brings the US nonfarm payrolls for December. They are expected to be up 193k, which would be enough to support continued tapering off of the Fed’s bond purchases and would therefore be USD-supportive, in my view.
The Market EUR/USD
• EUR/USD continued falling on Friday and managed to overcome the previous low of 1.3625. During the early European morning, the rate is trading between the support level of 1.3540 (S1) and the resistance of 1.3625 (R1). A clear dip below 1.3540 (S1) may trigger extensions towards the next support at 1.3400 (S2). Nonetheless, the RSI indicates oversold conditions, thus an upwards corrective wave, perhaps testing the validity of the 1.3625 (R1) level as resistance, cannot be ruled out.
• Support: 1.3540 (S1), 1.3400 (S2), 1.3295 (S3).
• Resistance: 1.3625 (R1), 1.3730 (R2), 1.3810 (R3).
EUR/JPY
• EUR/JPY moved slightly lower, remaining between the support of 140.88 (S1) and the resistance of 142.80 (R1). The 200-period moving average lies near the 140.88 (S1) support, thus a downward break of that area may have larger bearish implications. The MACD lies below both its trigger and zero lines, while the RSI seems ready to cross above its 30 level, thus I would expect further consolidation or an upward corrective wave, before the bears prevail again.
• Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).
• Resistance: 142.80 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
• GBP/USD moved lower, breaking below the barrier of 1.6395 and below the short-term blue uptrend line. The pair confirmed my worries stemming from the bearish engulfing candlestick pattern on the daily chart and the negative divergence between the daily MACD and the price action. The rate is now trading above the 1.6320 (S1) support level, where a downward penetration would confirm a lower low and may turn the bias to the downside.
• Support: 1.6320 (S1), 1.6260 (S2), 1.6130 (S3).
• Resistance: 1.6395 (R1), 1.6465(R2), 1.6600 (R3).
Gold
• Gold continued moving higher on Friday. The metal is trading above the 200-period moving average for the first time since the last days of October. A break above the 1251 (R1) hurdle may trigger extensions towards the next resistance at 1268 (R2). The MACD remains above both its signal and zero lines, but the RSI is still finding resistance near its 70 level. On the daily and weekly charts the longer-term downtrend remains in effect.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI continued falling on Friday, breaking below the 95.35 hurdle. The decline was halted by the key support barrier of 94.00 (S1). A break below that level may trigger extensions towards the next key support at 92.00 (S2). The 50-period moving is getting closer to the 200-period moving average, thus a bearish cross in the near future may increase the possibility of establishing a new short- term downtrend.
• Support: 94.00 (S1), 92.00 (S2), 90.15 (S3).
• Resistance: 95.35 (R1), 97.25 (R2), 98.90 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 06/01/2014
Daily Commentary 06.01.2014, Time of writing: 03:30 GMT
The Big Picture Weak China growth suggests market’s AUD forecast too optimistic:
Today’s round of service sector Purchasing Managers Indices (PMIs) for December got off to a disappointing start as the HSBC/Markit Services PMI for China fell to 50.9 from 52.5 in November. This comes on the heels of a drop in China’s manufacturing sector PMI in December and confirms the slowdown in the Chinese economy. As the government there comes to grips with the twin problems of overcapacity in manufacturing and excessive local government debt, China is likely to be the next country to go through the deleveraging process, which will naturally result in slower growth. That would be bad news for countries that sell commodities to China, including Australia, New Zealand to a lesser extent, and many emerging-market countries. This is one reason why I think the market’s bullish forecast for AUD/USD this year is excessive. AUD is forecast to be the second-best performing currency among the G10 on a total return basis (end-year consensus forecast, according to Bloomberg: 0.87, but with interest return of 2.9%, that’s enough to result in a positive total return against the dollar). I would expect to see AUD/USD move lower than that as the Chinese economy slows, leading to worse performance than the market consensus.
USD/JPY came off from its highs during the day as the Tokyo stock market fell (0.8% on the TOPIX but 2.4% on the Nikkei), but it managed to remain slightly above Friday’s opening levels (104.29 vs 104.09). That demonstrates to me the resilience of the dollar in 2014. The US currency is probably being supported by expectations for today’s US data: the non-manufacturing ISM index is expected to rise on 54.6 from 53.9, in contrast to the expected fall in the Eurozone service-sector PMI, and US factory orders are seen rising 1.7% mom in November after falling 0.9% in October. That would confirm the picture of an expanding US economy contrasting with a Eurozone economy that is just barely stabilizing, which is positive for the dollar.
The European day starts with Norway’s manufacturing PMI for December, which is expected to remain unchanged at 54.5. Then come the service-sector PMIs. Italy’s is expected to have risen to 48.8 in December from 47.2 in November, while UK’s figure is estimated to be slightly up to 60.3 from 60.0 in the previous month. We also have the final service-sector PMIs for December from France, Germany and Eurozone as a whole, which as usual are forecast to be unchanged from the preliminary figures.
Other indicators coming out Monday include Germany’s preliminary CPI for December, which is estimated to have accelerated to +0.7% mom from 0.2% mom in November, although that would imply a slowdown in inflation on a yoy basis. A slowdown in German inflation would be EUR-negative, although it remains to be seen whether the market focuses on the month-on-month or year-on-year figure. Last month the regional CPIs from Germany announced before the national figure were market-affecting so this indicator is likely to be closely watched.
As for the rest of the week, on Thursday Bank of England and ECB are holding their policy meetings. Once again, no change is expected from either Bank, so the attention will fall on the press conference held by ECB President Mario Draghi. If he again plays down the likelihood of any further easing near-term, as he has in recent speeches, that could cause a bounce in EUR/USD. But the next day brings the US nonfarm payrolls for December. They are expected to be up 193k, which would be enough to support continued tapering off of the Fed’s bond purchases and would therefore be USD-supportive, in my view.
The Market EUR/USD
• EUR/USD continued falling on Friday and managed to overcome the previous low of 1.3625. During the early European morning, the rate is trading between the support level of 1.3540 (S1) and the resistance of 1.3625 (R1). A clear dip below 1.3540 (S1) may trigger extensions towards the next support at 1.3400 (S2). Nonetheless, the RSI indicates oversold conditions, thus an upwards corrective wave, perhaps testing the validity of the 1.3625 (R1) level as resistance, cannot be ruled out.
• Support: 1.3540 (S1), 1.3400 (S2), 1.3295 (S3).
• Resistance: 1.3625 (R1), 1.3730 (R2), 1.3810 (R3).
EUR/JPY
• EUR/JPY moved slightly lower, remaining between the support of 140.88 (S1) and the resistance of 142.80 (R1). The 200-period moving average lies near the 140.88 (S1) support, thus a downward break of that area may have larger bearish implications. The MACD lies below both its trigger and zero lines, while the RSI seems ready to cross above its 30 level, thus I would expect further consolidation or an upward corrective wave, before the bears prevail again.
• Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).
• Resistance: 142.80 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
• GBP/USD moved lower, breaking below the barrier of 1.6395 and below the short-term blue uptrend line. The pair confirmed my worries stemming from the bearish engulfing candlestick pattern on the daily chart and the negative divergence between the daily MACD and the price action. The rate is now trading above the 1.6320 (S1) support level, where a downward penetration would confirm a lower low and may turn the bias to the downside.
• Support: 1.6320 (S1), 1.6260 (S2), 1.6130 (S3).
• Resistance: 1.6395 (R1), 1.6465(R2), 1.6600 (R3).
Gold
• Gold continued moving higher on Friday. The metal is trading above the 200-period moving average for the first time since the last days of October. A break above the 1251 (R1) hurdle may trigger extensions towards the next resistance at 1268 (R2). The MACD remains above both its signal and zero lines, but the RSI is still finding resistance near its 70 level. On the daily and weekly charts the longer-term downtrend remains in effect.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI continued falling on Friday, breaking below the 95.35 hurdle. The decline was halted by the key support barrier of 94.00 (S1). A break below that level may trigger extensions towards the next key support at 92.00 (S2). The 50-period moving is getting closer to the 200-period moving average, thus a bearish cross in the near future may increase the possibility of establishing a new short- term downtrend.
• Support: 94.00 (S1), 92.00 (S2), 90.15 (S3).
• Resistance: 95.35 (R1), 97.25 (R2), 98.90 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 07/01/2014
Daily Commentary07.01.2014, Time of writing: 03:30 GMT
The Big PictureUSD partially overcomes weak service PMI; weather supports natural gas
A surprisingly weak US service-sector PMI caused further mean reversion in US asset markets and weakened the dollar somewhat, but it still managed to gain against several of its G10 counterparts, indicating continued underlying strength (see technical section on EUR/USD). The December non-manufacturing ISM index fell to 53.0, a six-month low, from 53.9. The decline was largely due to a deterioration in new orders, but since that series includes many weather-sensitive sectors, such as construction and agriculture, it may be due more to the weather than to the economy. Nonetheless US bond yields fell – the 10-year Treasury was down about 4 bps – and implied interest rates on the longer-dated Fed Funds futures declined 4-5 bps, while the stock market fell for the third consecutive day, continuing the mean reversion that has characterized US asset markets in 2014. The dollar lost some support as US rates eased, yet it still managed to open this morning stronger compared with Monday morning’s levels vs CAD, AUD, JPY and NOK, albeit weaker vs EUR, GBP, SEK and NZD.
The performance of USD/JPY is again impressive against the background of another down day for Japanese stocks, which usually implies a down day for USD/JPY as well. Similarly, the recovery of the GBP after yesterday’s announcement that its service-sector PMI fell in December for the second consecutive month is also impressive and underlines the continued demand for that currency. A long position in GBP/JPY might be a way of capitalizing on these two trends.
The main indicator during the European day today will be the Eurozone CPI for December. Both the headline and the preliminary core figures are expected to slow to +0.8% yoy from +0.9% yoy. The slowdown in inflation could be a concern for the ECB; their forecast for headline inflation in 2014 is 1.1%.However we do not expect a decline on this scale would be enough to cause any change in policy at this week’s meeting. Germany’s unemployment rate for December is expected to have remained unchanged at 6.9%, while France’s consumer confidence is expected to have seen no change in December from 84 in November. Later in the day, the US trade deficit is forecast to have narrowed slightly to USD 40.0bn in November from USD 40.6bn in October, although this number rarely moves markets. There are two Fed speakers scheduled during the day: Boston Fed President Eric Rosegren and San Francisco Fed President John Williams.
In addition to the economic news, investors might want to watch the US weather. The US is suffering from one of the coldest periods in the last 20 years, with temperatures in many areas approaching record lows. The market most affected by the cold weather has been US natural gas futures, which are up sharply as the coldest start to the US heating season in 13 years boosts fuel demand. Power generation accounts for 32% of US natural gas usage and about 49% of all homes use the fuel for heating, according to the US Energy Information Administration. Also, wheat prices are rising as the cold damages Great Plains winter wheat that isn’t yet covered by a layer of snow to insulate the plants. According to www.weather.com the cold is continuing throughout much of the US. Market participants looking to diversify their trades might consider looking into these markets. The question is whether there is further to go in the trade or if conditions are now fully priced in. Partially that’s up to the weather, a subject I claim no special insight into. Nonetheless we can say that the technical outlook for natural gas still seems to be bullish (see below).
The Market EUR/USD
• EUR/USD moved higher on Monday after forming a new low at 1.3570 (S1), but the advance was stopped at 1.3650 (R1). The 50-period moving average is getting closer to the 200-period moving average, thus a bearish cross in the near future may confirm the establishment of a new short-term downtrend. On the daily chart, we can identify negative divergence between the daily MACD and the price action, increasing the probabilities for further decline.
• Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).
• Resistance: 1.3650 (R1), 1.3730 (R2), 1.3810 (R3).
USD/JPY
• USD/JPY rebounded from the support of 103.90 (S1) and moved slightly higher. The short term uptrend remains in effect, but a break above the resistance area between the barrier of 105.45 (R1) and the 423.6% Fibonacci extension level of the 17th -25th Oct. bearish wave is needed to signal its continuation. If the longs are strong enough to overcome that strong resistance area, I would expect them to trigger extensions towards the area of 107.00 (R2).
• Support: 103.90 (S1), 102.14 (S2), 101.12 (S3).
• Resistance: 105.45 (R1), 107.00 (R2), 109.00 (R3).
EUR/GBP
• EUR/GBP consolidates between the support of 0.8270 (S1) and the resistance of 0.8330 (R1). The outlook remains bearish, since the pair is trading below the blue short-term downtrend line. If the bears manage to take control and drive the battle below the 0.8270 (S1) support, I would expect them to target the next support at 0.8220 (S2). On the daily chart, the rate remains within a downward sloping channel (purple lines).
• Support: 0.8270 (S1), 0.8220 (S2), 0.8080 (S3).
• Resistance: 0.8330 (R1), 0.8390 (R2), 0.8431 (R3).
Gold
• Gold moved in a consolidative mode, remaining above the 200-period moving average and below the resistance of 1251 (R1). A break above the 1251 (R1) hurdle may trigger extensions towards the next resistance at 1268 (R2). The RSI moved slightly lower after finding resistance near its 70 level for an extended period of time, while the MACD, although in a bullish territory seems ready to cross below its trigger line, thus further consolidation or a pullback should not be ruled out. On the daily and weekly charts the longer-term downtrend remains in effect.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Natural Gas
• Natural Gas is finding resistance at the red downward sloping resistance line. A violation of that line, followed by an upward break of the 4.39 (R1) hurdle, may trigger extensions towards the next resistance barrier at 4.57 (R2). The overall trend is to the upside, as indicated by the blue uptrend line and by the fact that the 50-period moving average remains above the 200-period moving average.
• Support: 4.20 (S1), 4.10 (S2), 4.00 (S3).
• Resistance: 4.39 (R1), 4.57 (R2), 4.83 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 08/01/2014
Daily Commentary08.01.2014, Time of writing: 03:30 GMT
The Big PictureImproving US trade feeds into improving US growth
The US trade data usually isn’t market affecting, and indeed yesterday’s US trade data for November didn’t have an immediate impact on the FX market, but it gradually lifted the dollar as economists started to consider its implications for growth. The deficit narrowed sharply to USD 34.3bn from USD 40.6bn, far better than market expectations of USD 40.0bn, as exports reached a record high (+5.2% yoy) and imports declined (-1.1% yoy). Most of the improvement in the goods trade balance was due to petroleum; exports are rising and imports are falling due to increasing US domestic oil production. The US Energy Information Administration said that US oil production in 2015 should be at a 43-year high – so much for “peak oil” in the US – and the top Republican on the Senate Energy Committee urged an end ban on exporting crude oil. That means the prospect is for oil to cause further improvement in the trade balance in the future as well. The important point for the FX market yesterday was that many economists revised up their Q4 GDP forecasts due to the improvement in the trade balance. As those revisions started filtering into the market, the dollar strengthened generally. It’s higher this morning against CAD, JPY and CHF, while falling against NOK and NZD. This fits into the thesis I put forward in my 2014 outlook that the stronger growth forecast for the US in 2014 would be one of the main drivers of USD strength this year.
The CAD was particularly weak as the country registered its 23rd consecutive month of trade deficits and the Ivey PMI (the Canadian PMI survey) plummeted to 46.3 from 53.7 (market expectation was for a rise to 54.5). The trade data is particularly worrisome because it appears that the traditional relationship between a strengthening US economy and rising Canadian exports to the US is weakening. In case traders weren’t convinced of the direction of USD/CAD, Bank of Canada Gov. Poloz said he was most worried about Canadian inflation undershooting its target.
Ireland’s auction of 10-year bonds went well yesterday; the country was able to sell more bonds than it had planned at a higher price than it had hoped for because of strong demand. The news helped other peripheral bond yields to decline as well. The better tone in peripheral European bonds encouraged some money that had flowed into safe-haven CHF to flow back into EUR and EUR/CHF rose as a result.
Natural gas prices were extremely volatile yesterday as record low temperatures were set across the US yesterday, but forecasts are for unseasonably warm weather later in the week. The near February contract, the most active one, ranged between +2.9% in early New York trading and -1.1% near the end of the New York day. At the time of writing it’s +0.8% up from Tuesday’s close. Watch the weather report for that trade.
The European trading day starts with current account data from Germany. The country’s trade surplus is expected to have risen to EUR 18.9bn in November from EUR 17.9bn in October, while its current account surplus is forecast to have risen slightly to EUR 19.3bn from EUR 19.1bn. German factory orders are estimated to have risen 1.5% mom in November vs a revised fall of 2.1% in October. This is an important number for the markets and could be EUR-positive. Eurozone’s retail sales are expected to rise modestly by 0.1% mom in November, a turnaround from -0.2% in October, while the Eurozone’s unemployment rate is forecast to have remained at 12.1% in November.
In US, the ADP employment data is forecast to show that companies added 200k employees in December vs 215k in November. That would be in line with the consensus forecast of around 195k for Friday’s non-farm payrolls. The relationship between the ADP report and the NFP is fairly random, though; over the last two years, the ADP has been higher 13 times and lower 12 times, with the average miss a large 43k. But it’s the best guide we have, which isn’t saying much. Also the Fed releases the minutes from the Dec.17-18 meeting, when the FOMC announced that it plans to start trimming its monthly bond buying to USD 75bn from USD 85bn. The market will read the minutes closely for further insight into the reasons behind the decision and any clues about how quickly the Fed will wind down the stimulus.
The Market EUR/USD
• EUR/USD moved in a consolidative mode, remaining below the resistance barrier of 1.3650 (R1) and the 200-period moving average. The pair lies below the blue short term uptrend line but remains above the longer-term one (light blue), identified from the daily chart. A break below the light blue support line, followed by a dip below the 1.3525 (S2) key support, may challenge as a first target the next support at 1.3400 (S3). The 1.3525 (S2) level coincides with the 61.8% Fibonacci retracement level of the prevailing short-term uptrend, thus it may not be so easy to break that level. On the daily chart, we can identify negative divergence between the daily MACD and the price action, increasing the probabilities for further decline.
• Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).
• Resistance: 1.3650 (R1), 1.3730 (R2), 1.3810 (R3).
USD/JPY
• USD/JPY continued moving higher after Monday’s rebound at the 103.90 (S1) support barrier. The rate is now heading towards the resistance area between the barrier of 105.45 (R1) and the 423.6% Fibonacci extension level of the 17th -25th Oct. bearish wave. An upward violation of that strong resistance area is needed to signal the continuation of the upward path. If the longs are strong enough to overcome that ceiling, I would expect them to trigger extensions towards the area of 107.00 (R2).
• Support: 103.90 (S1), 102.14 (S2), 101.12 (S3).
• Resistance: 105.45 (R1), 107.00 (R2), 109.00 (R3).
EUR/GBP
• EUR/GBP continued moving sideways, remaining below the resistance barrier of 0.8330 (R1) and the blue short term downtrend line. As long as that resistance holds, the outlook remains bearish. A dip below the support of 0.8270 (S1) is needed to signal the continuation of the downward path. If that happens, we may experience further decline towards the barrier of 0.8220 (S2). On the daily chart, the rate remains within a downward sloping channel (purple lines).
• Support: 0.8270 (S1), 0.8220 (S2), 0.8080 (S3).
• Resistance: 0.8330 (R1), 0.8390 (R2), 0.8431 (R3).
Gold
• Gold moved lower, confirming the weakness signs provided by our momentum studies yesterday. The yellow metal remains slightly above the support of 1224 (S1), where a dip may target the recent lows of 1187 (S2). On the other hand an upward violation of the 1251 (R1) barrier may turn the short term bias to the upside. I consider the short term picture neutral, but on the daily and weekly charts, the longer-term downtrend remains impact.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI fell below the 94.00 barrier on Monday and moved slightly higher yesterday to test it as a resistance. If the bears manage to maintain the price below the 94.00 (R1) level, I would expect them to drive the battle lower, maybe towards the key support of 92.00 (S1). Nonetheless, the RSI seems ready to exit its oversold area, while the MACD, although in bearish territory, lies above its trigger line, thus it would not be surprising to see WTI once again above 94.00 (R1) before the bears prevail again. The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil negative.
• Support: 92.00 (S1), 90.15 (S2), 4.00 (S3).
• Resistance: 94.00 (R1), 95.35 (R2), 87.85 (R3).
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Market Analysis 09/01/2014
Daily Commentary08.01.2014, Time of writing: 03:30 GMT
The Big PictureUSD gaining on solid fundamentals
USD is clearly reacting to strong US economic news, contrary to what was happening late last year. This confirms to me that the rally in EUR/USD in December was seasonal and probably influenced by repatriation by banks ahead of the Asset Quality Review this year. Thus yesterday’s action makes me even more confident in my bullish view on the dollar in 2014.
The euro yesterday failed to rally even after German factory orders exceeded expectations, Eurozone retail sales rose the most in 12 years and peripheral bond yields continued to decline, signaling increased confidence in the region. By contrast, yesterday’s ADP employment report was even stronger than anticipated and encouraged those market participants who are expecting strong growth from the US this year. The 10-year Treasury yield gained 5 bps and the implied interest rate on 2016 Fed Funds futures added a sharp 9 to 13 bps. Subsequently the minutes of the December FOMC meeting added little to our knowledge of Fed thinking beyond what outgoing Chairman Bernanke had said at his press conference following the meeting. Nonetheless the dollar continued to move higher, albeit slowly, and this morning in early European time it’s higher than it was this time yesterday against all the G10 currencies except the pound. GBP was the best performing G10 currency yesterday after the Bank of England said mortgage availability increased in Q4 last year and will continue to rise as the government’s plan to help first-time buyers improves access to mortgages. The dollar has also gained against most of the EM currencies we track too.
During the European day, BoE and ECB hold their monetary policy meetings. The market expects no changes from either bank, so the focus will be on the press conference held by ECB’s President Mario Draghi and his comments about taking any action the following months if necessary, especially after the slowdown in Eurozone’s CPI figures on Tuesday. EUR/USD tends to be quite volatile on days when there is an ECB meeting even when there is no change in policy – almost twice the normal volatility last year -- and I would recommend caution in taking positions ahead of the meeting or indeed immediately afterwards. For example, last June there was a 1.8% daily range on EUR/USD on the day of the ECB meeting even though they made no change, the same as the range in November, when they did surprise the market with a change (although admittedly that was the most extreme example of the year – the average range on ECB days was 1.3%.) My expectation is that once again Draghi says that they stand ready to take further measures than necessary, but given his recent statements I’d expect him to stress that the economy is moving as they envision and they do not see further steps as necessary at this point. That could give EUR some temporary support and provide opportunities to establish new short positions. As the graph shows, on average EUR/USD last year tended to move higher on days when there was no change in policy, and it rose significantly following the December meeting (although that may have also included year-end factors as mentioned above).
As for the Bank of England meeting, those have tended to be non-events ever since the new system of forward guidance went into effect, as the graph shows. We could envision them lowering their unemployment target as the economy is recovering faster than expected even while inflation falls also faster than expected. That would likely be negative for GBP, but we do not put a high probability on such a move.
As for the indicators, the UK trade deficit for November is estimated to have continued narrowing to GBP 2.3bn from GBP 2.6bn in October, although this is not likely to be market-affecting as so far the huge trade deficit has done nothing to prevent GBP strength. Eurozone releases its final data on consumer confidence for December. It’s expected to be unchanged from the initial estimate at -13.6, higher than the -15.4 in November. From Germany, industrial production for November is forecast to have risen 1.5%, a turnaround from -1.2% on October.
In Canada, housing starts are forecast at 190.0k SAAR in December, down from 192.2k in November, while building permits are estimated to have fallen 2.7% mom in November vs a 7.4% mom rise in October. The country’s new housing price index is expected to have risen a modest 0.1%, the same pace as in the previous month. CAD has been quite weak recently and these indicators give further evidence that a rate hike is nowhere in sight. Long GBP/CAD might be worth looking into for investors interested in riding this trend.
The only indicator coming out from US is the weekly jobless claims for Jan 4. Market expects that 335k individuals applied for their unemployment benefits vs 339k the previous week. This would probably not be market-affecting.
The Market EUR/USD
• EUR/USD moved lower on Wednesday, reaching the support barrier of 1.3570 (S1) and the long-term uptrend line (light blue line). A break below the light blue support line followed by a dip below the 1.3525 (S2) key support may challenge as a first target the next support at 1.3400 (S3). The 1.3525 (S2) level coincides with the 61.8% Fibonacci retracement level of the prevailing short-term uptrend, thus it may not be so easy to break that level. On the other hand, a rebound at the light blue trend line, followed by a rise above 1.3650 (R1), will keep the longer-term uptrend intact. The 50-period moving average seems ready to cross below the 200-period moving average and on the daily chart, we can identify negative divergence between the daily MACD and the price action, indications that give more weight to the first (bearish) scenario.
• Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).
• Resistance: 1.3650 (R1), 1.3730 (R2), 1.3810 (R3).
EUR/JPY
• EUR/JPY moved lower after finding resistance at 143.15 (R1). The 200-period moving average remains near the 140.88 (S1) support, thus a downward break of that area may have larger bearish implications. On the other hand, a rebound near that area may target once again the highs of 145.00 (R2). On the daily and weekly charts the longer term uptrend is still impact, thus I would consider any short-term decline as retracement of the long-term upward path.
• Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).
• Resistance: 143.15 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
• GBP/USD moved higher after finding support at 1.6335 (S1) and the 200-period moving average. At the time of writing, the pair is testing the resistance hurdle of 1.6465 (R1), where an upward break may target once again the highs of 1.6600 (R2). A dip below the 1.6335 (S1) is needed to turn the short term picture negative. My worries for now is that on the daily chart, we can identify negative divergence between the daily MACD and the price action. This suggests that the longer-term uptrend is losing momentum for now.
• Support: 1.6335 (S1), 1.6260 (S2), 1.6130 (S3).
• Resistance: 1.6465 (R1), 1.6600 (R2), 1.6735 (R3).
Gold
• Gold moved slightly higher after rebounding near the 1224 (S1) support level. The yellow metal is now trading slightly above that support where a dip may target the recent lows of 1187 (S2). On the other hand an upward violation of the 1251 (R1) barrier may turn the short term bias to the upside. I still consider the short term picture neutral, but on the daily and weekly charts, the longer-term downtrend remains impact.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI fell sharply after confirming the validity of the 94.00 (R1) resistance hurdle. The price is now trading slightly above the floor of 92.00 (S1). I expect the price to find strong support near that level and consolidate for some time before taking its next directional path. The last time WTI rebounded from 92.00 (S1), the price rallied towards 97.25 (R3). Nonetheless, if the 92.00 (S1) level fails to hold this time, we may experience extensions towards the next support barrier at 90.15 (S2). The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil negative at the moment.
• Support: 92.00 (S1), 90.15 (S2), 87.85 (S3).
• Resistance: 94.00 (R1), 95.35 (R2), 97.25 (R3).
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Market Analysis 10/01/2014
Daily Commentary10.01.2014, Time of writing: 03:30 GMT
The Big PictureDraghi sets new tone for ECB
ECB President Draghi set a new tone for the ECB yesterday. While he did not announce any new measures, his statement included several changes designed to signal the ECB’s heightened readiness to ease policy further if necessary to avoid deflation. Saying several times that the ECB’s mandate to maintain price stability operates “in both directions,” he said the ECB “strongly emphasizes” and “firmly reiterates” its accommodative stance and said it was “determined to maintain the high degree of monetary accommodation and to take further decisive action if required” to avoid inflation getting too low. He said several times that the Governing Council is ready to use “all instruments allowed by the Treaty,” which suggests that policy measures may be less constrained than the market thinks – this may be interpreted as allowing some measure of quantitative easing. He also specifically mentioned two events that could trigger action by the ECB: an unwarranted tightening of conditions in the short-term money market and a worsening of their medium-term outlook for inflation. EUR/USD declined, but as Draghi pointed out that the fall in inflation in December was caused by some technical changes to the seasonal adjustment factors in Germany, the implication being that it was not a cause for concern on the ECB’s part, the euro soon based and this morning in Europe EUR/USD is higher than it was Thursday morning. The recovery in EUR/USD dragged other currencies with it and the dollar is generally lower.
Looking at movements in the commodity market, Draghi may soon have something to worry about. Brent is down about 5% from its late December peak while copper just fell 1.5% overnight. Weaker commodity prices suggest that inflation is likely to fall further, which increases the likelihood that the ECB will have to act (the ECB targets headline inflation, not core inflation). I still expect the ECB to loosen policy further later this year, the complete opposite of the Fed’s “tapering,” and that divergence in policy should drive EUR/USD lower, indeed support the dollar overall.
Today the focus will of course be on the US non-farm payrolls. Payrolls are estimated to rise by 197k, a bit lower than 203k in November but not significantly so, while the unemployment rate is forecast to have remained unchanged at 7.0%. The number could be lower because of the unusually cold weather in the US. But as long as it’s above 150k, the market will assume that the Fed will continue tapering down its quantitative easing at the same pace as it is now and the dollar should remain supported.
In UK, industrial production is estimated to have risen 0.4% in November, the same pace as in October. Canada’s unemployment rate is estimated to remain unchanged at 6.9%. Elsewhere, Switzerland’s unemployment rate for December is forecast to have remained unchanged at 3.2% and its CPI to have declined 0.1% mom in December whereas it was unchanged mom in November. French industrial output is estimated to have risen 0.4% mom in November, a turnaround from -0.3% mom in October. Thursday’s better-than-expected German IP didn’t affect the market, but good news for France is so rare that this might. Sweden’s industrial production for November is estimated to have risen 1.0% mom, a turnaround from -1.7% mom in October. Norway’s CPI is estimated to have risen 0.2% mom from 0.1% mom in November.
Finally we have three Fed speakers during the day: Minneapolis Fed President Narayana Korcherlakota, Richmond Fed President Jeffrey Lacker and St. Louis Fed President James Bullard.
The Market EUR/USD
• EUR/USD managed to recover a big portion of the ground lost on the comments of the ECB president Mario Draghi. The pair remained well supported by the longer-term uptrend line (light blue line) and the support level of 1.3570 (S1). A break below the light blue support line followed by a dip below the 1.3525 (S2) key support may challenge as a first target the next support at 1.3400 (S3). However, the 1.3525 (S2) level coincides with the 61.8% Fibonacci retracement level of the prevailing short-term uptrend, thus it may not be so easy to break that level. On the other hand, a rebound at the light blue trend line, followed by a rise above 1.3650 (R1), will keep the longer-term uptrend intact. The 50-period moving managed to cross below the 200-period moving average and on the daily chart, we can identify negative divergence between the daily MACD and the price action, indications that give more weight to the first (bearish) scenario.
• Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).
• Resistance: 1.3650 (R1), 1.3730 (R2), 1.3810 (R3).
USD/JPY
• USD/JPY moved in a consolidative mode, remaining between the support of 103.90 (S1) and the resistance of 105.45 (R1), near the 423.6% Fibonacci extension level of the 17th -25th Oct. bearish wave. An upward violation of that strong resistance area is needed to signal the continuation of the upward path. If the longs are strong enough to overcome that ceiling, I would expect them to trigger extensions towards the area of 107.00 (R2). As long as the rate is trading above the blue support line, the short–term outlook remains bullish. Only a dip below the low of 103.90 (S1), would be a reason to reconsider our analysis.
• Support: 103.90 (S1), 102.14 (S2), 101.12 (S3).
• Resistance: 105.45 (R1), 107.00 (R2), 109.00 (R3).
EUR/GBP
• EUR/GBP violated the barrier of 0.8270 on Wednesday and moved lower on Thursday after testing it successfully as a resistance. I would expect the price to continue moving lower and challenge the support at 0.8220 (S1). A downward break of that hurdle, may have larger bearish implications, targeting next support areas. As long as the rate is printing lower highs and lower lows below the blue short-term downtrend line, the bias remains to the downside. On the daily chart, the pair remains within a downward sloping channel (purple lines).
• Support: 0.8220 (S1), 0.8080 (S2), 0.7960 (S3).
• Resistance: 0.8270 (R1), 0.8330 (R2), 0.8390(R3).
Gold
• Gold moved higher, remaining above the support of 1224 (S1). The metal has formed a higher low than the previous one, and now we need the price to overcome the previous high in order to establish a new short-term uptrend. The 50-period moving average is getting closer to the 200-period moving average, thus a bullish cross in the near future, may increase the probabilities for further advance. On the daily and weekly charts, the longer-term downtrend remains in effect, and as a result I would consider any short-term advance as a retracement of the major downward path, for now.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI managed to reach the floor of 92.00 (S1). Actually, at some point yesterday it was below it, but after what seems as profit-taking near that area, the price came back slightly above it. I still expect the price to consolidate near that area for some time before taking its next directional path. The last time WTI rebounded from 92.00 (S1), the price rallied towards 97.25 (R3). Nonetheless, if the 92.00 (S1) level fails to hold this time, we may experience extensions towards the next support barrier at 90.15 (S2). The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil negative at the moment.
• Support: 92.00 (S1), 90.15 (S2), 87.85 (S3).
• Resistance: 94.00 (R1), 95.35 (R2), 97.25 (R3).
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Market Analysis 13/01/2014
Daily Commentary13.01.2014, Time of writing: 03:30 GMT
The Big PictureDown almost across the board!
Friday’s disappointing nonfarm payrolls has sent the dollar down almost across the board. This morning it’s lower – considerably lower, in some cases – against all the G10 currencies except the CAD (more on that below). The payroll figure was particularly surprising to the market because the ADP report on Wednesday had exceeded expectations, causing some people to revise up their expectations for payrolls and for the dollar to rise ahead of the figure. The result was amazing volatility when the number came out, which highlights the risk of trading these numbers.
The FOMC has said that its decision on whether to continue to reduce its bond purchases every month depends on the data supporting “the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.” So does this news mean labor market conditions are no longer improving? St. Louis Fed President Bullard said Friday that the Fed expects stronger growth, “which should put additional downward pressure on unemployment.” He said he would be “disinclined to react to one month’s numbers,” especially as the numbers are usually revised. Moreover, he focused on the large decline in the unemployment rate rather the disappointing small rise in the non-farm payrolls. Some analysts tend to view the fall in the unemployment rate as another disappointing indicator in that it was driven largely by a fall in the participation rate, not a rise in employment, but Bullard argued that “today’s labor force participation rate is about right, given observed demographic trends.” If that view is representative of the FOMC’s thinking, then further tapering is almost assured.
Bullard’s comments agree with the view of Wall Street Journal Fed reporter Jon Hilsenrath, who is thought to be close to the thinking of the FOMC. His article following the payrolls report noted that outgoing Chairman Bernanke had strongly suggested that the FOMC would continue to reduce its bond purchases by $10bn a month at each meeting, and Hilsenrath commented that “one weak jobs report–possibly reflecting weather effects, after several weeks of stronger-than-expected economic data on trade and consumer spending and in the face of surprising declines in the unemployment rate–probably won’t alter that calculation.” One thing that could alter the Fed’s thinking though is a substantial decline in inflation. Even Mr. Bullard made that point in his comments. So we have to watch both the employment data and inflation data carefully. My expectation is that they do taper further at the next FOMC meeting on Jan. 28th-29th and the dollar should get some support from that.
The big question then is how long does it take for the effects of Friday’s report to wear off and the market start to discount a change in view. Looking at the last six times the NFP figure disappointed the market, there seems no sure pattern – four times EUR/USD was higher a week after the figure, twice it was lower. Two weeks later, it was higher three times and lower three times – a coin toss. Given that there are about two weeks to the FOMC meeting, I’d expect EUR/USD to move higher this week and then lower next week, but that’s just a guess – past performance gives no sure clues. Thursday’s US CPI figure takes on new importance in the light of the disappointing payrolls. If US inflation rises slightly, as it’s expected to, then tapering expectations may recover and USD start recovering as well.
CAD was the outlier, falling after Canada’s employment report Friday was even worse than the US’. Unemployment rose to a five-month high of 7.2% from 6.9% (expected: unchanged) and employment fell 46k (expected: +14k) and to make matters worse, Statistics Canada said there was no impact from the weather. Our favorite GBP/CAD trade is going well and we see no reason to change course at the moment. Meanwhile, the fall in USD/JPY was notable – recently it had risen several times even when Tokyo stocks had fallen, and today it’s fallen when Tokyo stocks are up. Is that correlation breaking down? More likely, JPY is moving more in line with the sentiment towards the US than with sentiment towards Japan at the moment. USD/JPY has traded with a 105 handle on four days now this year but has yet to close over that level.
We have a relatively empty calendar ahead of us on Monday with only Italy’s industrial production for November out. It’s forecast to have risen 0.4%, a slowdown from +0.5% in October. The focus will then be on the speech by Atlanta Fed President Dennis Lockhart, who will speak on the U.S. economic outlook. It will be interesting to hear whether he agrees with Bullard that Friday’s payroll figure hasn’t changed his view. If he does, then USD could start recovering earlier than I expect. One person is just a data point; with two points, you can draw a line.
The Market EUR/USD
• EUR/USD moved higher on Friday after the worse-than-expected US non-farm payrolls. The pair rebounded from the 1.3570 (S2) support barrier, near the longer-term uptrend line (light blue line), and managed to rise above the barrier of 1.3650. This keeps the longer term uptrend intact. The next resistance level is found at 1.3730 (R1), where an upward violation may challenge the key barrier at 1.3810 (R2). Only a break below the 1.3525 (S3) will argue that the long-term uptrend has probably reached its end.
• Support: 1.3650 (S1), 1.3570 (S2), 1.3525 (S3).
• Resistance: 1.3730 (R1), 1.3810 (R2), 1.3893 (R3).
EUR/JPY
• EUR/JPY moved lower on Friday after finding resistance for a third time at the 143.15 (R1) barrier. The 200-period moving average remains near the 140.88 (S1) support, thus a downward break of that area may have larger bearish implications. On the other hand, a rebound near that area may target once again the highs of 145.00 (R2). The MACD oscillator, already negative, crossed below its trigger line, indicating bearish momentum for the price action. On the daily and weekly charts the longer term uptrend is still intact, thus I would consider any short-term decline as a retracement of the long-term upward path.
• Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).
• Resistance: 143.15 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
• GBP/USD continued moving higher and after the miss on the US non-farm payrolls figure, managed to overcome the hurdle of 1.6465. I would expect the rate to move higher and challenge once again the highs of 1.6600 (R1). A dip below 1.6335 (S2) is needed to turn the short-term picture negative. As long as the rate is trading above both the moving averages and the blue support line, the picture of cable remains positive. My only concern is that on the daily chart, we can identify negative divergence between the daily MACD and the price action. This suggests that the longer-term uptrend is losing momentum for now.
• Support: 1.6465 (S1), 1.6335 (S2), 1.6260 (S3).
• Resistance: 1.6600 (R1), 1.6735 (R2), 1.6885 (R3).
Gold
• Gold continued its advance on Friday and reached the resistance level of 1251 (R1). At the time of writing, the precious metal is testing that hurdle and if the longs are strong enough to overcome it, I would expect them to target the next resistance at 1268 (R2). The 50-period moving average is getting closer to the 200-period moving average and a bullish cross in the near future may increase the probabilities for further advance. The RSI seems ready to exit its overbought zone, thus a pullback before the bulls prevail again cannot be ruled out. On the daily and weekly charts, the longer-term downtrend remains in effect, and as a result I would consider any short-term advance as a retracement of the major downward path, for now.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI moved in a consolidative mode, remaining slightly above the key barrier of 92.00 (S1). I remain neutral on WTI until we have a clearer picture for its next directional path. The last time WTI rebounded from 92.00 (S1), the price rallied towards 97.25 (R3). Nonetheless, if the 92.00 (S1) level fails to hold this time, we may experience extensions towards the next support barrier at 90.15 (S2). The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil negative at the moment.
• Support: 92.00 (S1), 90.15 (S2), 87.85 (S3).
• Resistance: 94.00 (R1), 95.35 (R2), 97.25 (R3).
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Market Analysis 14/01/2014
Daily Commentary14.01.2014, Time of writing: 03:30 GMT
The Big PictureStocks in focus!
Equities got the most attention overnight as the US stock market fell sharply and closed near its lows for the day (-1.3% on the S&P 500). The market was led down by two sectors: oils (-1.9%), which have been falling along with the price of crude, and retailers (-1.5%). A Wall Street Journal story noted a survey showing that all but one apparel retailer missed forecasts in December and observed that this may bode ill for today’s US retail sales figure. The WSJ story said this “may encourage a more cautious approach on easing stimulus efforts,” which hurt the USD. On the other hand, Atlanta Fed President Lockhart (a non-voting member of the FOMC) said he hadn’t changed his view on tapering off the Fed’s bond-buying program, echoing what St. Louis Fed President Bullard said on Friday. That raised the likelihood of further tapering at this month’s FOMC meeting – bad for stocks perhaps, but USD-supportive. USD recovered much of its losses and this morning is trading higher against most G10 and EM currencies.
The dollar’s biggest gain overnight was against GBP, which fell largely on further position-cutting after last week’s disappointing industrial production data. I continue to believe in the long GBP trade and see this technical decline as an opportunity to establish new longs, particularly in GBP/CAD, which saw a large shake-out of positions yesterday. The Bank of Canada’s quarterly Business Outlook Survey showed that business expansion plans are being restrained by weak demand, but nonetheless the balance of opinion for investment intentions and employment rose, refuting to some degree the disappointing employment data last week. Still, I believe expectations for the UK economy will continue to exceed those for Canada and GBP is likely to gain on CAD, in my view.
On the other hand, USD fell vs NZD as New Zealand business confidence surged to almost a 20-year high and house prices rose the most in six years, increasing the likelihood of a rate hike. New Zealand is the only G10 country with a distinctly hawkish central bank view and I expect NZD to continue to benefit from this fact, particularly vs AUD.
The focus in European time today will be on CPIs. We get December CPIs from France, Sweden, Italy and the UK. In the Eurozone, French CPI is expected to have risen 0.4% mom in December vs an unchanged figure in November, while Italy’s final release for the month is the same as the initial estimate at +0.6% yoy. ECB President Draghi commented that the drop in inflation in the Eurozone in December according to the preliminary data was due largely to a technical change in the statistics in Germany. There may be more attention than usual paid to the French and Italian data in order to see whether the trend of slowing inflation is in fact gaining traction in the Eurozone. UK inflation is estimated to be up +0.5% mom, an acceleration from +0.1% mom. This will keep the yoy at 2.1%, pretty close to the 2% inflation target of BoE, and allow the Bank of England to keep rates lower for longer – hence potentially GBP-negative if it’s not already discounted in the market. Meanwhile UK PPI is estimated to have shown no change on a mom basis in December, compared with -0.2% mom in November. Also, Eurozone’s industrial production for November is expected to have risen 1.4% mom, a turnaround from -1.1% mom in October.
In the US, retail sales for December are expected to slow to +0.1% mom from +0.7% mom in November. The retail sales excluding autos and gasoline are also forecast to slow to +0.3% mom from +0.6% mom in November. Over the last 12 months the figure has not been that market-affecting for EUR/USD, particularly on the day of the announcement. Oddly enough, on average EUR/USD has declined (= USD has strengthened) in the week following retail sales regardless of whether it beat estimates or not, which suggests that other factors, such as tapering, might have been in play.
Finally, ECB governing council member Ewald Nowotny gives a keynote speech at a conference. Philadelphia Fed President Plosser and Dallas Fed President Fisher will also speak. If they too come out in favor of continuing with the taper, then all doubt should dissipate. That could outweigh a weak retail sales figure and prove USD-supportive.
The Market EUR/USD
• EUR/USD moved sideways on Monday, remaining slightly above the barrier of 1.3650 (S1). This leaves the longer-term uptrend intact for now. We may experience a further advance over the next few days, but as long as the peak of 1.3810 (R2) holds, the possibility for the formation of a lower high still exists. Only a break below the 1.3525 (S3), which coincides with the 61.8% Fibonacci retracement level of the 7th Nov. – 27th Dec. advance, would suggest that the longer term uptrend has probably reached its end.
• Support: 1.3650 (S1), 1.3570 (S2), 1.3525 (S3).
• Resistance: 1.3730 (R1), 1.3810 (R2), 1.3893 (R3).
USD/JPY
• USD/JPY moved significantly lower, breaking below the blue uptrend line and the 103.90 level. The pair found support at the 103.00 (S1) barrier and then moved slightly higher. A decisive dip below 103.00 (S1) may challenge the next support at 102.14 (S2), which coincides with the 38.2% Fibonacci retracement level of the prevailing short-term uptrend. On the daily chart, the daily MACD, although in a bullish territory, lies below its trigger line, increasing the odds for further decline.
• Support: 103.00 (S1), 102.14 (S2), 101.12 (S3).
• Resistance: 103.90 (R1), 105.45 (R2), 107.00 (R3).
EUR/GBP
• EUR/GBP moved higher after rebounding from the purple support line (connecting the lows on the daily chart) but the advance was halted by the 50% retracement level of the 17th Dec. – 9th Jan. decline. A violation of that barrier may signal further bullish extensions and target the light blue longer-term downtrend line, near the 0.8400 area. The MACD indicator lies above both its trigger and zero lines, confirming the bullish momentum of the price action.
I would consider the bias to the downside again upon a fall below the low of 0.8230 (S3).
• Support: 0.8330 (S1), 0.8285 (S2), 0.8230 (S3).
• Resistance: 0.8390 (R1), 0.8430 (R2), 0.8465 (R3).
Gold
• Gold moved in a consolidative mode, remaining near the area of the 1252 (R1) resistance barrier. If the longs manage to drive the metal above that resistance, I would expect them to challenge the next hurdle at 1268 (R2). The 50-period moving average is getting closer to the 200-period moving average and a bullish cross in the near future may increase the probabilities for further advance. The RSI exited its overbought zone, thus a pullback before the bulls prevail again cannot be ruled out. On the daily and weekly charts, the longer-term downtrend remains in effect, and as a result I would consider any short-term advance as a retracement of the major downward path for now.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1252 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI moved lower on Monday and found support at the 91.50 (S1) barrier. A break below that level may signal the continuation of the decline and challenge as a first target the next support at 90.15 (S2). Nonetheless, both momentum studies follow upward paths, thus we may experience an upward corrective wave before the bears take control again. The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil negative at the moment.
• Support: 91.50 (S1), 90.15 (S2), 87.85 (S3).
• Resistance: 93.30 (R1), 94.00 (R2), 95.35 (R3).
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Market Analysis 15/01/2014
Daily Commentary 15.01.2014, Time of writing: 03:30 GMT
The Big Picture FOMC members unanimous so far: more tapering!
Yesterday’s good news for the dollar – higher-than-expected retail sales in December – took some time to sink in to the market, but eventually the market looked beyond the lower headline number to the higher “core” figures (excluding autos and gas stations, and the “control” series that also excludes food and building materials) that reassured investors on the economic outlook. A higher-than-expected number on business inventories didn’t hurt, either. As a result 10-year Treasury yields rose 5 bps, implied interest rates on the 2016 Fed Funds futures rose 7 bps, and the dollar gained against most currencies. This morning it is higher against most of its G10 counterparts, especially AUD and JPY, and lower vs only the Scandis and GBP.
The rally in USD/JPY is understandable, given the strong rally in Tokyo stocks this morning – the TOPIX up 1.7% at the time of writing – but the dollar’s gains against AUD need some explanation. With short-term rates probably frozen for some time in both countries, AUD/USD seems to be driven recently more by interest rate differentials at the long end of the yield curve rather than the short end. As US Treasury yields rise, narrowing the spread between Australian and US bond yields, AUD/USD tends to decline recently. This is one reason why I expect AUD to remain weak for some time, as the government there appears to be in no rush to raise rates, while on the other hand, I believe the market is underestimating the likelihood that the Fed continues to taper off its bond purchases at a regular pace. Philadelphia Fed President Plosser, a noted hawk, yesterday said not only that he was pleased the FOMC had started to taper off its monthly bond purchases but also that “I’d prefer it to be a little faster,” while Dallas Fed President Fisher said he wished they had cut the monthly bond purchases by double what they did. It’s now four out of four FOMC members who have spoken following last week’s disappointing payroll data and said they remain committed to tapering, so I expect that the FOMC will continue to do so at the meeting later this month. That should support the dollar further, in my view, especially vs AUD as the yield spread narrows further.
As for the rally in the Scandis, this was no doubt a continuation from yesterday’s trend, when higher-than-expected inflation in Sweden sent both SEK and NOK higher. GBP seems to be regaining some of its poise after the sudden position-cutting last week following the disappointing industrial production figures; even yesterday’s further decline in inflation didn’t halt the GBP rally for long. Meanwhile, CAD weakened even though oil had a good day and the Teranet-National Bank home price index showed that the rise in house prices accelerated in December. The positive trend for GBP and the negative trend for CAD both seem to be intact and I reiterate my suggestion to look at GBP/CAD.
The only important indicator coming out in Europe today is Eurozone’s trade balance for November. The region’s trade surplus is forecast to be largely unchanged at EUR 14.8bn in November vs EUR 14.5bn in October (SA). This figure is usually not market affecting, but it is in fact one of the underlying reasons why the euro has been so strong over the past year. Later in the day, in the US the Empire State manufacturing survey is forecast to rise to 3.50 in January from 0.98 in December. US PPI for December is expected to be up 0.4% mom, a turnaround from -0.1% in November. A rise in the Empire State survey and higher PPI are likely to support the dollar. Also, the Fed releases its Beige Book business survey two weeks before the FOMC gathers to consider whether to continue tapering off its bond purchases.
We have three speakers on Wednesday’s schedule. ECB executive board member Yves Mersch takes part in a panel discussion on the future of euro; Bank of England Governor Mark Carney speaks at a hearing of the UK Parliaments’ Treasury Committee; and Chicago Fed President Charles Evans speaks on current economic conditions and monetary policy.
The Market EUR/USD
• EUR/USD moved lower on Tuesday after touching the 1.3700 (R1) level. The rate remains above the light blue support line, leaving the longer-term uptrend intact. However both momentum studies are pointing downwards, while the MACD crossed below its trigger, thus I would expect the recent decline to continue and challenge once again the support of 1.3570 (S1). A break below the 1.3525 (S3), which coincides with the 61.8% Fibonacci retracement level of the 7th Nov. – 27th Dec. advance, would suggest that the longer-term uptrend has probably reached its end.
• Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).
• Resistance: 1.3700 (R1), 1.3810 (R2), 1.3893 (R3).
EUR/JPY
• EUR/JPY moved higher after finding support at the 140.88 (S1). At the time of writing, the pair is testing the upper boundary of the purple downward sloping channel where an upward break, followed by a violation of the 143.15 (R1) resistance, may be a first sign that the recent decline was just a short retracement of the prevailing uptrend. On the other hand, if the rate moves lower within the channel and manages to overcome the support of 140.88 (S1), we may experience further bearish extensions. On the daily and weekly charts, the longer term uptrend is still in progress and there is no clear sign of topping yet.
• Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).
• Resistance: 143.15 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
• GBP/USD hit the resistance of 1.6465 (R1) and moved slightly lower. I remain neutral on the pair since it is not in a clear trending phase. The rate seems well supported by the 200-period moving average and a dip below it, followed by a downward break of the 1.6335 (S1) level, may turn the picture negative. On the other hand, a penetration above the high of 1.6600 (R2) is needed to signal the continuation of the longer-term uptrend. On the daily chart, the negative divergence between the daily MACD and the price action is still in effect, indicating that the longer-term uptrend is still losing momentum for now.
• Support: 1.6335 (S1), 1.6260 (S2), 1.6130 (S3).
• Resistance: 1.6465 (R1), 1.6600 (R2), 1.6735 (R3).
Gold
• Gold was not able to overcome the resistance barrier of 1,252 (R1). After hitting that level, the metal moved lower, breaking below the short-term (blue) support line. The price is trading near the moving averages, above the previous low, thus the possibility of a higher low still exists. A break below the 1,224 (S1) support is needed to turn the picture negative once again. The MACD, although in a bullish territory, crossed below its trigger line, while we can identify negative divergence between the oscillator and the price action. This indicates that the bulls are not strong enough to push the precious metal higher at the moment. On the daily and weekly charts, the longer-term downtrend remains in effect, and as a result I would consider any short-term advance as a retracement of the major downward path for now.
• Support: 1224 (S1), 1187 (S2), 1155 (S3).
• Resistance: 1252 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI moved higher after hitting the support barrier of 91.50 (S1). The movement confirms our suspicion that an upward corrective wave was likely. A break below the 91.50 (S1) barrier may signal the continuation of the decline and challenge as a first target the next support at 90.15 (S2). On the other hand, further advance and a break above the 93.30 (R1) may complete a short-term double bottom and extend the advance towards next resistance areas. The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil mildly negative at the moment.
• Support: 91.50 (S1), 90.15 (S2), 87.85 (S3).
• Resistance: 93.30 (R1), 94.00 (R2), 95.35 (R3).
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