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IronFX Daily Commentary 16/03/15
Language English
Big week for Central Banks This is a big week for the G10 central banks. Four central banks hold their policy meetings (the Fed, Bank of Japan, the Swiss National Bank and Norges Bank) and three release the minutes of previous meetings (Reserve Bank of Australia, Bank of England and Bank of Japan).
Patient or not? Among these of course the big event will be the Federal Open Market Committee (FOMC) meeting that ends Wednesday. The focal point will be whether the statement repeats the phrase that they “can be patient in beginning to normalize the stance of monetary policy.” Fed Chair Janet Yellen said recently in her biannual testimony to Congress that they would change this phrase at least “a couple” of FOMC meetings before they start raising rates. “A couple” means two. So if they drop the phrase this month, they could start hiking rates at the June meeting, which would be convenient as there’s a press conference scheduled after it. (Next is the July meeting with no press conference, then the September meeting with one.) Several Fed officials speaking recently seemed to be “comfortable” with a rate hike by the first half of the year, thus expectations have increased that the Fed may drop the “patient” word at this meeting.
By the FOMC’s standards, conditions have improved since their last meeting on Jan. 28th. The unemployment rate has fallen while the participation rate has risen (5.6% 5.5%; 62.7% 62.8%). Average hourly earnings are rising a bit faster (2.0% yoy vs 1.7%). The inflation rate has fallen a bit; core PCE deflator, their preferred measure of inflation, is now 1.3% yoy vs 1.4% yoy. But indicators of inflation expectations, as measured by the breakeven inflation rate or the University of Michigan survey, show that investors expect inflation to rise in the future more than they did back in January.
On the other hand, there are indications that growth is slowing. The Atlanta Fed estimates that GDP rose only 0.6% qoq SAAR in Q1, down sharply from 2.2% in Q4 last year. Can the Fed raise rates in a slowing economy? It’s not an easy decision. Nonetheless, I expect that they will remove the “patient” phrase to give themselves the option of raising rates when they decide the time is ripe. I expect that this decision will push the dollar still higher.
UK house prices slow further During the Asian day, the UK Rightmove house price index for March was released, showing that house prices rose 5.4% yoy, down from 6.6% in February. The continued slowdown in house price inflation in the UK may weigh on the pound.
Today’s highlights: During the European day, the ECB will announce its QE purchases. This will show how much it bought and in which markets in the week ended March 13. It will be important for judging the likely impact. If they managed to achieve this much with only a fraction of their EUR 60bn planned monthly purchases, then the euro could fall further. On the other hand, if they already reached much of their target for the month, then we could see some stabilization. Separately, ECB President Mario Draghi speaks.
In Switzerland, the Swiss National Bank will release its weekly sight deposits, which could reveal if the Bank intervened in the FX market in the week ended in March 13th. Deposits fell somewhat in the previous week as EUR/CHF gyrated around 1.0670.
In the US, the Empire State manufacturing index for March is expected to show slightly improved business conditions for NY manufacturers, while industrial production for February is forecast to rise at the same 0.2% mom pace as in January. The NAHB housing market index for March is expected to show a small improvement. Indicators coming in along these lines would show growth continuing.
As for the rest of the week, on Tuesday, the Bank of Japan ends its two-day policy meeting. There are no expectations of any new policy actions at this meeting but the market is always keen to hear what Gov. Kuroda says at the press conference afterwards. After their last meeting, he said that the QQE policy is having the intended effects and there’s no need for further easing now, but he wouldn’t hesitate to act again in the future if needed. Since then inflation has slowed further and some BoJ board members have expressed reservations about whether they will be able to hit their inflation target. The market will be waiting to hear what if anything he plans on doing about it.
Separately, the Reserve Bank of Australia releases the minutes of its March meeting, where it surprised the markets and left rates unchanged despite expectations of a back-to-back rate cut. The minutes will probably show that the main reason the Bank left rates steady is the overheating housing market. The German ZEW survey for March is also coming out. Both indices are forecast to have risen. This could be the 5th consecutive rise in the indices, adding to the recent encouraging data from the country.
On Wednesday, we get the UK unemployment rate for January and Bank of England March meeting minutes. We don’t expect much more from the minutes than what BoE Governor Mark Carney said recently about how inflation would return to its 2% target within the next two years and the strength of sterling is a risk for the economy. It could also reassure the markets that the Bank is ready to cut interest rates if necessary.
On Thursday, the Swiss National Bank (SNB) and Norway’s central bank hold their policy meeting. The forecast is for the SNB to remain on hold, while the Norges Bank is expected to cut its key rate by another 25bps. Such an outcome could put further selling pressure on NOK.
Finally on Friday, Bank of Japan releases the minutes of its Feb. 17-18 meeting. As usual, these are not the minutes from the most recent meeting but rather from the previous one. Therefore, they shouldn’t be of much interest. Canada’s CPI for February is expected to decelerate from the previous month and fall below the Bank’s lower boundary of 1%-3% target range. Along with the low oil prices this is likely to keep CAD under selling pressure.
Currency Titles:
EUR/USD finds support below 1.0500
GBP/USD continues its tumble
EUR/JPY falls after finding resistance at 129.00
Gold trades in a consolidative mode
WTI touches January’s low
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Currencies Text:
EUR/USD slid on Friday and hit support at 1.0460 (S1). However, it rebounded to trade back above 1.0500. I still believe that the short-term picture is negative and I would expect a move below 1.0460 (S1) to see scope for extensions towards the 1.0360 (S2) barrier, defined by the low of the 8th of January 2003. I would stay cautious though that we may see another minor bounce before the next leg down. My worries are derived from our momentum indicators. The RSI exited its oversold territory, while the MACD stands above its trigger pointing up. There is also positive divergence between the RSI and the price action. With regards to the broader trend, I believe that the pair is still in a downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.0460 (S1), 1.0360 (S2), 1.0185 (S3).
• Resistance: 1.0665 (R1), 1.0800 (R2), 1.0900 (R3).
GBP/USD kept falling to break below the support (now turned into resistance) obstacle of 1.4820 (R1), determined by the lows of March and July 2013. The decline was halted at 1.4700 (S1), where a clear break is likely to challenge the low of the 17th of June 2010, at 1.4640 (S2). The price structure has been lower peaks and lower troughs since the 26th of January, thus the near-term bias is negative. Our daily oscillators support the notion. The 14-day RSI fell below its 30 line, while the MACD moved deeper in its negative territory, confirming the recent strong downside momentum. In the bigger picture, the move below January’s low confirmed a forthcoming lower low on the daily chart and turned the overall outlook of Cable back to the downside.
• Support: 1.4700 (S1), 1.4640 (S2), 1.4550 (S3).
• Resistance: 1.4820 (R1), 1.4900 (R2), 1.5000 (R3).
EUR/JPY hit resistance at 129.00 (R2), and declined to move below the support (turned into resistance) area of 127.80 (R1). The rate is now trading between that hurdle and the support line of 126.60 (S1), the low of the 26th of June 2013. The bias stays to the downside, thus I would expect a clear move below 126.60 (S1) to pull the trigger for the 125.00 (S2) psychological zone, marked by the lows of the 16th of April and 13th of June 2013. Nevertheless, given that there is still positive divergence between the RSI and the price action, I would be mindful that a minor bounce back above 127.80 (R1) could be in the works before the next leg down. On the daily chart, the dip below the round figure of 130.00 (R3) confirmed a forthcoming lower low and signaled the continuation of the longer-term downtrend.
• Support: 126.60 (S1), 125.00 (S2), 123.85 (S3).
• Resistance: 127.80 (R1), 129.00 (R2), 130.00 (R3).
Gold moved in a consolidative manner on Friday, staying between the support line of 1150 (S1) and the resistance of 1165 (R1). The precious metal is still trading below both the 50- and the 200-period moving averages, and below the downtrend line taken from back at the high of the 22nd of January. Therefore I still consider the short-term outlook to be negative and I would expect a break below 1150 (S1) to have more bearish extensions and perhaps trigger extensions towards the 1140 (S2) zone. However, the RSI edged higher and is getting closer to its 50 line, while the MACD stands above its trigger and points north.
• Support: 1150 (S1), 1140 (S2), 1130 (S3).
• Resistance: 1165 (R1), 1175 (R2), 1190 (R3).
WTI continued collapsing on Friday after government data showed US output and stockpiles rose to the highest level in more than 30 years. The fall was halted by the key support hurdle of 43.50 (S1), defined by the low of the 29th of January. Subsequently, WTI rebounded somewhat. Given that the price is trading below the downtrend line taken from the peak of the 5th of March, I still see a negative short-term outlook. A clear and decisive dip below 43.50 (S1) could pull the trigger for the 42.00 (S2) area, marked by the low of the 11th of March 2009. Nevertheless, taking a look at our short-term oscillators, I would be careful that the minor bounce may continue for a while. The 14-hour RSI moved higher and could move above its 30 line soon, while the hourly MACD has bottomed and looks ready to cross above its signal line. On the daily chart, WTI is still trading below both the 50- and the 200-day moving averages. Meanwhile, the 14-day RSI left its 50 line and moved lower, while the MACD slid below both its zero and signal lines. This keeps the longer-term bias to the downside, in my opinion. I believe that a daily close below 43.50 (S1) would signal the continuation on the larger downtrend.
• Support: 43.50 (S1), 42.00 (S2), 40.00 (S3).
• Resistance: 45.00 (R1) 45.70 (R2), 46.65 (R3).
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IronFX Daily Commentary 17/03/15
Language English
More thoughts about the FOMC meeting Yesterday I discussed the main question around Wednesday’s FOMC’s statement, namely whether they would drop the line about being “patient” about raising rates. According to the FT, my view is by now the consensus – most people think that they will indeed drop the line. The Fed wants policy to depend on the data, not on FOMC pronouncements, and so eliminating that forward guidance is the necessary first step.
Other topics to be discussed will be the new economic forecasts, including the famous “dot plot” of forecasts for the Fed funds rate. It’s likely that the members will upgrade their outlook for the labor market, which has improved since the last meeting, but they might also lower their forecasts for inflation, at least for this year. That would probably lead to lower forecasts for Fed funds, too. However the weighted average path of the “dot plot” is still so much higher than the market’s estimate of the likely course of rates that I don’t think it would make any difference to the FX market. If the actual pace of rate increases evolves anywhere near where the FOMC predicts, the market will be quite surprised and the dollar is likely to move significantly higher.
Assuming they do remove the word “patient,” the press conference will probably be taken up with explaining why the FOMC wants to begin the process of normalizing rates. I would expect to hear that there is no fixed date for the first hike and that it all depends on the incoming data. We will be looking for any clarity on what kind of data the FOMC would need to see in order to pull the trigger. In particular, the extremely bad weather and the dock strike in the US make it difficult to discern the underlying trend in output. How will they account for this?
DXY longs, AUD shorts hit record as speculators short almost everything Last Friday’s “Commitment of Traders” report showed two records for speculative positions: a record long DXY and a record short AUD. Such extended positions sometimes signal turning points in the market. While I certainly agree with the fundamental case here –- I’m also bullish on the dollar and bearish AUD -- the record positions suggest that there could be some short-covering at some point, leading to a (temporary) turnaround in the dollar. In a larger context, it’s also worrying that speculators are net short every currency covered in the COT report except RUB.
BoJ admits temporary defeat The Bank of Japan (BoJ), which had pledged to get inflation up to 2% by now, finished a Monetary Policy Committee meeting today with a statement admitting that CPI inflation “is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices.” Nonetheless there were few other changes to its statement and in conclusion, the Board simply repeated that it “will continue with QQE, aiming to achieve the price stability target of 2 percent…” as long as necessary. Again, only one Board member dissented, meaning there is no rebellion building against the current program. Nonetheless, market-based estimates of inflation forecasts show that nobody believes they will hit their target. This makes me think (along with most other economists) that either the BoJ will have to increase its stimulus later in the year, or the government will have to try to push the yen lower again, or perhaps both. I remain bullish on USD/JPY.
The Reserve Bank of Australia (RBA) released the minutes of its March meeting, when it surprised the markets and left rates unchanged at 2.25% despite expectations for another 25bps cut. Nonetheless the minutes show that “members were of the view that a case to ease monetary policy further might emerge.” In other words, the market’s expectations were not wrong, just early as the RBA wants time to assess the impact of its previous cut before taking any new action. With the Chinese economy continuing to slow, I believe the RBA will have to ease policy further and I remain bearish on AUD as a result.
Today’s highlights: During the European day, the German ZEW survey for March is expected to show a rise in both indices. This would be the 5th consecutive rise in the indices, adding to the recent encouraging data from the country. Any EUR bounces however following the release are expected to be short-lived and the common currency is expected to continue its longer-term downtrend. Eurozone’s final CPI for February and the unemployment rate for Q4 are also coming out.
In the US, we get housing starts and building permits, both for February. The housing starts are expected to decrease, while the building permits are forecast to rise a bit. Even though the data are likely to show a mixed condition, the overall trend is consistent with an improving housing market. This could signal that the housing market supports what appears to be growing strength in the broader economy and keep the USD supported somewhat.
On Wednesday morning New Zealand time, the NZ current account deficit is expected to narrow. This could prove NZD-positive.
As for the speakers, German Chancellor Angela Merkel and ECB President Mario Draghi meet to discuss but no statement is planned to be released. ECB Executive board member Peter Praet also speaks.
Currency Titles:
EUR/USD trades higher
AUD/USD lower after RBA minutes
USD/JPY consolidated above 121.00
Gold still trades in a consolidative mode
WTI trades below January’s low for a while
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Currencies Text:
EUR/USD raced higher on Monday, confirming the positive divergence between our short-term oscillators and the price action. Bearing in mind that both the German ZEW indices for March are anticipated to have risen, I see the likelihood that the rebound may continue for a while, perhaps for another test near the 1.0665 (R1) resistance line. However, I still believe that the short-term picture is negative. I would expect any up moved to be short-lived and I would expect a move below 1.0460 (S1) to see scope for extensions towards the 1.0360 (S2) barrier, defined by the low of the 8th of January 2003. With regards to the broader trend, I believe that the pair is still in a downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.0460 (S1), 1.0360 (S2), 1.0185 (S3).
• Resistance: 1.0665 (R1), 1.0800 (R2), 1.0900 (R3).
AUD/USD slid somewhat after the minutes of the latest RBA policy meeting showed what we already know, that further easing over the period ahead may be appropriate. The minor slide was stopped at 0.7610 (S1), where a dip is likely to aim for another test at the 0.7560 (S2) barrier, defined by the low of the 11th of March. Both our oscillators, although pointing sideways, remain within their negative territories, showing that the momentum is still negative. Switching to the daily chart, I see that the overall trend of the pair is still to the downside, and the recent low at 0.7560 (S2) confirmed my view that the 3rd – 26th of February advance was just a corrective move of the larger uptrend. I still believe that we are going to see AUD/USD challenging the 0.7500 (S3) territory in the future.
• Support: 0.7610 (S1), 0.7560 (S2), 0.7500 (S3).
• Resistance: 0.7680 (R1), 0.7750 (R2), 0.7840 (R3).
USD/JPY moved in a consolidative manner staying between the support line of 121.00 (S1) and the resistance hurdle of 121.60 (R1). The rate is also trading pretty close to the black uptrend line and the 50-period moving average. As a result I would expect the forthcoming directional move to be positive, perhaps for another test at the 122.00 (R2) territory, the high of the 10th of March. Our momentum studies support the notion. The RSI hit support at its 50 line and rebounded somewhat, while the MACD, already positive, shows signs of bottoming and could move above its signal soon. As for the broader trend, the rate is still trading above both the 50- and the 200-day moving averages, and above the upper bound of the triangle that had been containing the price action since November. This keeps the overall picture of USD/JPY positive.
• Support: 121.00 (S1), 120.55 (S2), 120.00 (S3).
• Resistance: 121.60 (R1), 122.00 (R2), 122.50 (R3).
Gold hit resistance near our 1165 (R1) barrier and declined to hit once again the support line of 1150 (S1). The precious metal continues to trade in a sideways manner between these two hurdles, but taking into account that it is still trading below both the 50- and the 200-period moving averages, and below the downtrend line taken from back at the high of the 22nd of January, I still consider the outlook to be negative. I would expect a break below 1150 (S1) to have more bearish extensions and perhaps trigger extensions towards the 1140 (S2) zone. However, the RSI continues higher, while the MACD remains above its trigger and points north. Therefore, I would stay cautious that another minor bounce could be looming before sellers take the reins again.
• Support: 1150 (S1), 1140 (S2), 1130 (S3).
• Resistance: 1165 (R1), 1175 (R2), 1190 (R3).
WTI tumbled and managed to break below the key support hurdle of 43.50 (S1), defined by the low of the 29th of January. However, the bears held the price below that barrier only for a couple of hours, as it triggered some buy orders at 42.85 (S2) and rebounded to trade above 43.50 (S1). In any case, given that the price is trading below the downtrend line taken from the peak of the 5th of March, I still see a negative short-term outlook. I would expect another test near the 42.85 (S2) line, and eventually a dip towards the 42.00 (S3) area, marked by the low of the 11th of March 2009. On the daily chart, WTI is still trading below both the 50- and the 200-day moving averages. Meanwhile, the 14-day RSI reached its 30 line and appears ready to move below it, while the MACD stays below both its zero and signal lines. This keeps the longer-term bias to the downside, in my opinion.
• Support: 43.50 (S1), 42.85 (S2), 42.00 (S3).
• Resistance: 45.00 (R1) 45.70 (R2), 46.65 (R3).
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IronFX Daily Commentary 18/03/15
Language English
Last words about the FOMC meetingAs I said before, I still expect the FOMC to remove the reference to “patient” in the statement, not necessarily because they want to raise rates immediately but rather because they want to have the option to raise rates. Removing that term will allow them to raise rates if the data warrant it. So far, the data don’t necessarily warrant it. While the employment situation is improving nicely, wage growth remains tepid. The recent plunge in oil prices suggests inflation might turn down again, and inflation expectations have started falling in anticipation. The Atlanta Fed’s “GDPNow” forecast of Q1 GDP is a mere +0.3% qoq SAAR, although how much of this is due to the bad weather and US port strikes and how much to underlying economic weakness is open to question. Fed funds rate expectations have fallen by up to 17 bps since the last US payroll data. So there is clearly no rush to raise rates. However, it appears that Chair Yellen and her colleagues would like the decision to be dictated by the data, not by their views, and so want to cut themselves free of the “forward guidance” that they themselves put into place in order to convince the market that they were serious about keeping rates low. This view is probably consensus by now, so if they do not remove the line, then USD is likely to fall sharply.
Will the statement mention the dollar? The dollar was not a big topic of discussion at the January meeting. It didn’t make it into the statement following the meeting; there was only a vague mention of “international developments,” which might have referred to the Greek elections as much as the dollar. Looking at the minutes, the members though it would be “a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further.” However, US exports are only 13% of GDP and net exports 2.8%, which may be significant enough to warrant some discussion but not a determining factor in setting policy. While the huge companies in the S & P 500 make a lot of noise about the dollar, it’s not a big concern for the average pizza parlor or barber shop. Some participants also noted that a stronger dollar would offset the impact of lower real interest rates to some degree. This phenomenon could lead to a slower pace of growth in tightening but would not be likely to veto it entirely.
Yellen is not likely to say anything about the dollar’s value or “currency wars” The dollar is the concern of the Treasury, not the Fed, and Fed officials rarely if ever comment on it. If she is asked about the “currency wars,” Yellen is likely to dismiss the idea, saying that weaker foreign currencies are simply a spillover from valid monetary policies taken to support domestic demand in other countries. Insofar as these policies help to revive global growth, they are good for the US too. She can hardly say otherwise, given that the Fed ran such a massive QE program for so long.
Look for more volatility FOMC days tend to be more volatile than the average day, and FOMC days with a press conference tend to be more volatile than FOMC days without one. Get ready for some big moves!
Big move in gold The gold prices was falling sharply in the late European afternoon despite the weaker dollar – a bad sign for the precious metal -- when all of a sudden it went shooting up on a huge buying order. That may have been related to a headline from Eurogroup Chairman Jeroen Dijsselbloem that “Capital Controls Could Prevent Greek Euro Exit.” The story mentioned the Cyprus bank holiday and capital controls as a template for what can be done to keep a country in the Eurozone. The Greek government was not amused; a spokesman called this a “fantasy scenario” and reprimanded him for overstepping his institutional role. It was notable though that gold quickly lost most of its gains, which suggests that the safe haven bid for gold is just not there anymore.
NZD the big loser as milk prices fall The NZD was the biggest loser against the dollar among the G10 currencies over the last 24 hours after the average price for milk at yesterday’s auction fell to USD 3136.10 from USD 3374.00. Still, milk prices are doing better than iron ore – they’re up 20% so far this year, while Australia’s iron ore export price to China is down 9.1%. The Australian government overnight cut its outlook for iron ore prices from its December forecast due to weak Chinese demand meeting increased supply. This is causing them to trim their budget forecast, which means a slightly tighter fiscal policy. I still prefer NZD to AUD. This could be a good opportunity to short AUD/NZD.
Today’s highlights During the European day, we get Eurozone’s trade balance for January.
Wednesday is a big day for the UK. The unemployment rate for January and Bank of England March meeting minutes will be announced. Unemployment is expected to fall and weekly earnings accelerate somewhat, which in theory should put upward pressure on sterling, but the currency seems to be dominated more by political concerns, plus comments from officials. In that respect, the minutes may be more important. We don’t expect to learn much more beyond what BoE Governor Mark Carney said recently about how inflation would return to its 2% target within the next two years and the strength of sterling is a risk for the economy. It could also show that BoE next move on monetary policy will be to raise interest rates, but they might cut them further below their record low level if very low inflation becomes self-reinforcing. Separately, the government will also announce the final budget before the May general election. With the vote too close to call, Chancellor Osborne may introduce new fiscal and spending measures in a bid to persuade voters that five years of austerity are paying off with an improved economic outlook.
On Thursday morning New Zealand time, the Q4 GDP is expected to expand at a slower pace from Q3. This could prove NZD-negative.
As for the speakers, besides Fed Chair Janet Yellen’s post-FOMC press conference, ECB President Mario Draghi, ECB Executive board member Benoit Coeure, and Bank of England Deputy Governor for Financial Stability Jon Cunliffe speak.
Currency Titles:
EUR/USD slightly higher ahead of the FOMC decision
NZD/USD breaks below 0.7320
GBP/JPY trades within a near-term downside channel
Gold finds support marginally above 1140
WTI continues the downtrend
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Currencies Text:
EUR/USD continued to trade higher on Tuesday, but the up leg found resistance at 1.0650 (R1). The rate is now trading slightly below the crossroad between that barrier and the near-term downtrend line taken from back the peak of the 26th of February. The bears may take the reins at that point and drive the rate down for another test of 1.0460 (S1), the low of the 13th of March. Today the Fed ends its two day policy meeting. Market attention is focused on whether officials will remove the word “patient” from their statement, which would give them the flexibility to start raising rates as early as in June. This could be the trigger for the aforementioned down leg and the test or even the break of the 1.0460 (S1) hurdle. A possible dip would open the way for the 1.0360 (S2) barrier, defined by the low of the 8th of January 2003. With regards to the broader trend, I believe that the pair is still in a downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.0460 (S1), 1.0360 (S2), 1.0185 (S3).
• Resistance: 1.0650 (R1), 1.0800 (R2), 1.0900 (R3).
NZD/USD tumbled on Tuesday and managed to move below the support (now turned into resistance) hurdle of 0.7320 (R1). The break confirmed a forthcoming lower low on the 4-hour chart and in my view, it could pave the way for a test near the 0.7215 (S1) hurdle. Our short-term oscillators detect negative momentum and magnify the case for further downside extensions. The RSI moved lower after breaking below its 50 line, while the MACD has topped slightly above zero, turned negative and crossed below its trigger. In the bigger picture, the plunge from near 0.7625 confirmed my view that the recovery from 0.7175 (S2) was just a corrective phase of the larger downtrend. Nevertheless, I would like to see a move below 0.7000 (S3) before getting more confident on that larger path. The reason is that the lows of the 3rd of February and the 11th of March are at about the same level, which could evolve as a double bottom pattern. Moreover, I see positive divergence between the daily momentum studies and the price action.
• Support: 0.7215 (S1), 0.7175 (S2), 0.7000 (S3).
• Resistance: 0.7320 (R1), 0.7405 (R2), 0.7450 (R3).
GBP/JPY tumbled yesterday after finding resistance at 180.25 (R1), and hit support at 178.50 (S1). The rate is trading below both the 50- and the 200-period moving averages, within a downside black channel and this keeps the near-term outlook negative. A break below 178.50 (S1) would confirm a forthcoming lower low and perhaps challenge the 177.70 (S2) line. Nevertheless, today we have several events from the UK that could distort the technical picture of this pair. The UK employment data are expected to come positive, which is supportive for the pound, but the minutes of the latest BoE meeting could reinforce what governor Carney said recently, that the strength of sterling is a risk for the economy, a comment which is negative for GBP. Plus there’s the wild card of the UK Budget. On the daily chart, GBP/JPY has moved well below the 50-day moving average, but is getting closer to the 200-day one, which provided reliable support to the price action back in January. This is another reason I prefer to take the sidelines today and wait for clearer directional signals.
• Support: 178.50 (S1), 177.70 (S2), 176.00 (S3).
• Resistance: 180.25 (R1), 181.60 (R2), 183.15 (R3).
Gold traded lower on Tuesday, but hit support two dollars above the 1140 (S2) hurdle and rebounded to trade back above 1150 (S1). The FOMC statement today could prove the catalyst for another test near the 1140 (S2) barrier, and if the bears are strong enough to overcome it, I would expect them to set the stage for extensions towards our next support at 1130 (S3). Taking into account that the precious metal is still trading below both the 50- and the 200-period moving averages, and below the downtrend line taken from back at the high of the 22nd of January, I still consider the outlook to be negative. Our oscillators support the case for further declines as well. The RSI hit resistance at its 50 line, moved lower, and now appears ready to break its upside support line, while the MACD, already negative, touched its toe below its trigger line.
• Support: 1150 (S1), 1140 (S2), 1130 (S3).
• Resistance: 1165 (R1), 1175 (R2), 1190 (R3).
WTI hit resistance near the 44.00 (R2) barrier and tumbled to trade below the 43.00 (R1) level. The price found support at 42.40 (S1), but I still expect a test of the 42.00 (S2) line, marked by the low of the 11th of March 2009. The near-term path remains negative and I would expect a move below 42.00 (S2) to set the stage for larger downside extensions towards the psychological zone of 40.00 (S3). However, at the moment I would be careful that an upside corrective move could be looming before sellers seize control again. This is because I see positive divergence between the RSI and the price action. Moreover, the MACD looks ready to cross above its signal line. On the daily chart, WTI is still trading below both the 50- and the 200-day moving averages. Meanwhile, the 14-day RSI just crossed below its 30 line, while the MACD moved deeper into its negative field. This keeps the longer-term bias to the downside, in my opinion.
• Support: 42.40 (S1), 42.00 (S2), 40.00 (S3).
• Resistance: 43.00 (R1) 44.00 (R2), 45.00 (R3).
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IronFX Daily Commentary 19/03/15
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Lower “maximum employment” and inflation leads to slower rate hikes leads to massive USD profit-taking The FOMC meeting went pretty much as I had expected, but the market reaction was much greater than I had anticipated. The range in EUR/USD was 4.38%, the biggest since 4.89% in Sept. 2000, when the ECB intervened in the market to support the euro (it was below 0.90 then). Moreover, the carnage in the markets lasted a significant length of time, not the usual five-minute frantic trading before settling down.
As expected, the statement eliminated the “patient” phrase and replaced it with
Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
In other words, the FOMC removed its forward guidance that depends on the date and replaced it with guidance that depends on the data. At the same time, they lowered their economic forecasts significantly, including the all-important “dot plot” of the FOMC members’ estimates for the Fed funds rate. The median estimate for Fed funds for 2015 fell by 50 bps to 0.625%, 2016 fell 63 bps to 1.875% and 2017 fell 50 bps to 3.125%. In other words, two rate hikes were taken out, reducing the estimated pace of normalization notably. Moreover, the dots are more closely clustered than they were before, indicating more of a consensus on policy among the FOMC members than before.
The other significant change was a reduction in the estimate of the longer-term unemployment rate to 5.0%-5.2% from 5.2%-5.5%. This is in effect a reduction in their estimate of “maximum employment” as stipulated in their mandate. By lowering this, they in effect said that they can hold off raising rates for longer than they previously thought, because it will take longer to achieve their goal of “maximum employment.” Coupled with a reduction in their estimate of inflation for this year, it means significantly less pressure to raise rates. Fed Chair Yellen said, “Just because we removed the word “patient” doesn’t mean we’re going to be impatient.” I now expect that they will not hike until the September meeting at the earliest.
The only other significant change to the statement was the line, “export growth has weakened.” This was the only allusion to the dollar, implying that it is not yet a major concern for the Fed.
Does this change my view on the dollar? Not at all! Given the huge net long USD/short currency positions built up in the market (as I mentioned on Tuesday with regards to the Commitment of Traders report), it’s no surprise than when the Fed pushes back its estimate for the pace of tightening, people take some profits. But the fundamental facts remain: the Fed is on track to tighten policy while the rest of the world is still in a loosening mode (e.g., Sweden yesterday). While the pace of tightening was slowed, the end point (the FOMC’s estimate of the “longer run” Fed funds rate) was more or less unchanged. Moreover, with US yields still maintaining a healthy spread over euro rates, I still expect the flood of liquidity out of the Eurozone into the US. USD should still appreciate, in my view, just not at the same extraordinary pace we’ve seen recently.
SNB likely to tread carefully The Swiss National Bank (SNB) meets today. It’s likely to tread carefully to avoid saying anything that could strengthen the CHF. CHF has risen against all its G10 counterparts this year, with the exception of the surging dollar. At the same time, the country’s deflation rate of -0.8% is the lowest in the G10 and on par with that of some of the crisis countries, such as Spain (-1.2%) and Greece (-1.8%). Some people would argue that with Swiss prices totally out of line with prices elsewhere in the world (note the Big Mac in Geneva at CHF 11.70), deflation is absolutely the correct policy for the country, but that is a hard argument for a central bank to swallow. CHF interest rates are already significantly negative: 3m CHF LIBOR is -0.81%, in the middle of the SNB’s target range of -1.25% to -0.25%, and the CHF LIBOR futures forecast that rates will stay at that level for the rest of the year and only move slowly back to the bottom of that range by March 2018. I expect that after the trauma of the January CHF unpegging, they will do their best not to rile the markets while also trying to avoid doing or saying anything that might strengthen the already overvalued CHF. They are likely to adjust both their growth and inflation forecasts lower and mention the possibility of cutting rates further into negative territory if necessary, but I expect that they will reaffirm the LIBOR target at the current range and the negative deposit rate at -0.75%. The absence of any further easing measures could cause CHF to firm up a bit.
Norges Bank likely to cut The Norges Bank, on the other hand, is likely to cut rates, in my view (and the view of all but one of the 19 economists polled by Bloomberg). This was likely even before Sweden unexpectedly cut its rates yesterday, but after that move, it’s almost a sure thing – as certain as the EUR/CHF floor (that was a joke). Indeed, the Swedish move might even convince the Norwegians to move by more than the expected 25 bps. The country needs to prevent further appreciation of the NOK as it grapples with the effects of a plunge in the price of oil and the accompanying slowdown in its oil industry. When it cut rates in December, Norges Bank said that the depreciation of the NOK “is helping to dampen the effects (of lower oil prices) on the Norwegian economy and underpin inflation,” so they would clearly welcome it. NOK/SEK is far lower than the difference between the two countries’ policy rates would suggest. That implies either NOK has to strengthen considerably relative to SEK – highly unlikely -- or that Norwegian rates have plenty of room to come down. The reaction in the FX market could be to sell NOK if Norges Bank reinforces its dovish view.
Today’s highlights: In addition to the two central bank meetings, the ECB allots its third Targeted Longer-Term Refinancing Operation (TLTRO). The first two allotments were disappointing. Banks took up only around EUR 200bn compared to EUR 400bn that ECB President Mario Draghi hinted at. This was another reason the Bank introduced its QE program in January as it was becoming clear that the liquidity injected into the system was falling below official expectations. The difficulties that the ECB is having in meeting its target for buying bonds suggests that banks do not need more cash, so we do not expect this TLTRO to be particularly successful.
In the US, initial jobless claims for the week ended Mar.14 are expected to rise a bit but the overall trend is expected to remain consistent with an improving labor market. The Philadelphia Fed business activity index for March is forecast to increase a bit, while Conference Board leading index for February is expected to remain unchanged in pace from the previous month.
As for the speakers, besides Norges Bank Governor Oeystein Olsen’s press conference following the rate decision, Riksbank Deputy Governor Cecilia Skingsley and Fed Governor Daniel Tarullo speak.
Currency Titles:
EUR/USD surges after the FOMC decision
GBP/USD rallies on Fed’s view as well
EUR/JPY hits resistance near 131.85
Gold firms higher after Fed’s dovish tone
WTI higher due to the weaker dollar
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EUR/USD flew approximately 400 pips higher after the Fed, despite dropping “patient”, lowered its interest rate trajectory and downgraded its view on economic growth and inflation. EUR/USD moved above the near-term downtrend line taken from back the peak of the 26th of February to hit resistance at 1.1045 (R2), close to the 61.8% retracement level of the 26th of February – 13th of March decline. Subsequently the pair retreated to trade below 1.08000. My humble opinion is that, although an astonishing rally, it is far from a trend reversal signal. Therefore I would treat yesterday’s move as a corrective phase of the larger downtrend. I believe that the retreat from the highs will continue today as well and that we are likely to experience a test of the 1.0650 (S1) barrier soon. A break below that hurdle could aim for another test at 1.0460 (S2). Our momentum studies support the notion as well. The RSI exited its overbought zone and is pointing down, while the MACD, although turning positive, shows signs that it could start topping.
• Support: 1.0650 (S1), 1.0460 (S2), 1.0360 (S3).
• Resistance: 1.0910 (R1), 1.1045 (R2), 1.1160 (R3).
GBP/USD rocketed higher on Wednesday following the stance of the FOMC members and hit resistance at 1.5165, near the 200-period moving average. After the surge, Cable gave back a noteworthy amount of its gains and is currently trading back below the 1.4900 (R1) level. Here as well, I believe that yesterday’s move was just a corrective move and that the greenback is likely to regain its glamour very soon. A clear break below the 1.4850 (S1) support line is likely to confirm my view and could see scope for larger bearish extensions, perhaps towards our next support at 1.4700 (S2). As for the broader trend, the absence of any bullish reversal signals supports my view to treat yesterday’s move as a correction. The overall path is still to the downside, from my perspective.
• Support: 1.4850 (S1), 1.4700 (S2), 1.4640 (S3).
• Resistance: 1.4900 (R1), 1.5035 (R2), 1.5140 (R3).
EUR/JPY raced higher on Wednesday, but the advance was halted near the 131.85 (R2) resistance hurdle. The pair entered within the prior downside channel for a while, but retreated to trade below its lower boundary again. Consequently, I would expect the forthcoming wave to be negative and challenge the 129.00 (S1) hurdle. A move below that bar could extend the bearish move, perhaps towards 128.00 (S2). On the daily chart, I still see a longer-term downtrend. I would see the recovery from 126.90 (S3) as a retracement of that larger down path. Nevertheless, there is positive divergence between our daily oscillators and the price action. This gives me a reason to take the side lines as far as the overall trend is concerned. I would like to wait for momentum and price action alignment.
• Support: 129.00 (S1), 128.00 (S2), 126.90 (S3).
• Resistance: 130.75 (R1), 131.85 (R2), 133.50 (R3).
Gold shot up yesterday following the more-dovish-than-anticipated tone of the Fed, and hit resistance near our 1175 (R1) hurdle. Nevertheless, the precious metal is still trading below the downtrend line taken from back at the high of the 22nd of January, therefore I still consider the outlook to be negative. A move below the support line of 1165 (S1) would probably confirm that the bears are back in the game and perhaps pull the trigger for another test at the 1147 (S2) line. As for the broader trend, the decline from 1307 seem to be in force from a technical standpoint, but only a move below 1140 (S3) would signal a forthcoming lower low on the daily chart and probably the continuation of that down path.
• Support: 1165 (S1), 1147 (S2), 1140 (S3).
• Resistance: 1175 (R1), 1190 (R2), 1200 (R3).
WTI rallied on Wednesday as well, but found resistance slightly above the 45.00 (R2) barrier, and remained below the downtrend line drawn from the peak of the 5th of March. After hitting resistance near 45.00 (R2), WTI took the down road and during the early European morning is trading back below 44.00 (R1). Having in mind that the price remained below the aforementioned trend line, I would expect the current down wave to continue and test the 43.00 (S1) line. A clear move below that level is likely to set the stage for another test at the 42.00 (S2) obstacle, marked by the low of the 11th of March 2009. Our short-term oscillators amplify the case that the decline may continue. The RSI exited its overbought territory and is now approaching its 50 line, while the MACD has topped and appears ready to fall below its trigger line. On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the longer-term downtrend intact in my view.
• Support: 43.00 (S1), 42.00 (S2), 40.00 (S3).
• Resistance: 44.00 (R1) 45.00 (R2), 45.70 (R3) .
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IronFX Daily Commentary 20/03/15
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Surprise surprise! Central banks keep rates steady! Yesterday I mentioned that a rate hike by Norges Bank was as certain as the Swiss National Bank (SNB) floor for EUR/CHF. I meant it as a joke, but it turned out to be true. Norges Bank did not cut rates. It was a measure of the market’s expectations that USD/NOK, which had been rising into the announcement, immediately plunged 4% -- almost as big as its reaction to the FOMC statement. It's since stayed around those levels. Gov. Olsen sounded much like Bank of Canada’s Gov. Poloz when he said that the Bank had cut rates in December “as a hedge against much weaker development in the real economy” but that the weakness “has not come through so far. That gives us the opportunity to wait and see now.” Weaker oil prices haven’t hurt the economy as much as expected while house prices continue to rise, he explained. Although Olsen held out the promise of rate cuts in the future if the economy develops as they expect, nonetheless the market rapidly readjusted and NOK gained 2.4% vs USD. NOK could continue to be an outperformer if the economy holds up better than expected. With GDP growth at 3.2% yoy and CPI inflation at 1.9%, it’s certainly one of the healthier of the major economies. So long as it stays there, NOK should be able to outperform EUR.
Meanwhile, the SNB sounded like the RBA and RBNZ as it complained that “the Swiss Franc is significantly overvalued and should continue to weaken over time.” They’re certainly right that it’s overvalued, but according to the OECD it’s been significantly overvalued since 1987 (36% overvalued vs USD then), so I wouldn’t hold my breath waiting for a big change. SNB said it would “remain active in the foreign exchange market, as necessary, in order to influence monetary conditions.” Nonetheless it “substantially” lowered its forecast for inflation, which it does not expect to go back to positive until 1Q 2017 (it’s been pretty steadily in deflation since 4Q 2011). Apparently even they aren’t willing to bet on their own success. I think USD/CHF remains a buy, but that’s only because of the strong dollar; EUR/CHF will struggle to stay steady and more likely will drift lower, in my view.
GBP was the big loser yesterday after a speech by Bank of England Chief Economist Andrew Haldane. He said that while he did not see an immediate reason to move interest rates either up or down, “I think the chances of a rate rise or cut are broadly evenly balanced.” This is in contrast to the assumed stance of the Bank’s Monetary Policy Committee (MPC), which is supposed to be considering the timing for a rate hike, much like the Fed. While markets have pushed back the assumed date of tightening by the Bank, it’s been assumed it was a question of “when,” not “whether.” Haldane is just one member of the MPC and his comments are in contradiction to those of Gov. Carney, who recently said it would be “extremely foolish” to cut rates or resume QE unless lower inflation was hurting wage growth, consumer spending and business investment. Nonetheless as Chief Economist, Haldane’s words do carry weight. Reopening this debate on top of the political uncertainty that the pound currently faces makes for a difficult background for GBP. I’m now bearish on the currency all around.
Today’s highlights: Back to worrying about Greece! During the European day, investors will probably shift their focus back to politics as Greece has to roll over EUR 1.6bn of short-term notes, repay EUR 350mn to the IMF and pay around EUR 110mn in interest to the ECB. Payments on a swap originally arranged by Goldman Sachs in 2001 – one of the infamous swaps that disguised Greece’s fiscal position so it could qualify for Euro membership -- are also due. Greece gathered EUR 1.3bn in a Treasury bill auction on Wednesday, but the remaining amount will simply drain the country’s available liquidity. The way things are going it will be a matter of weeks before Greece runs out of money. To make matters worse, comments by Eurogroup president Jeroen Dijsselbloem about Greece possibly imposing capital controls have spurred withdrawals from the banks, which are estimated at some EUR 300mn a day – pretty much using up the EUR 400mn increase in the Emergency Liquidity Assistance (ELA) that the ECB recently granted. No surprise that Greek bank stocks are collapsing even while bank stocks elsewhere in Europe perform well. Tensions between Greece and its creditors escalated further last week with the former filing a complaint against German Finance Minister and the latter saying he couldn’t rule out Greece leaving the euro. Greek PM Tsipras meets with German Chancellor Merkel on Monday; we’ll see if they can kiss and make up or whether the exchange of views just makes things worse.
As for the indicators, Eurozone’s current account for January is coming out.
In Canada, CPI inflation for February is expected to decelerate from the previous month and fall below the Bank’s lower boundary of 1%-3% target range, adding to pressure on the Bank of Canada to loosen further. Along with the low oil prices this is likely to keep CAD under selling pressure.
As for the speakers, during the US session, Atlanta Fed President Dennis Lockhart and Chicago Fed President Charles Evans speak. It will be interesting to hear their takes on the FOMC decision.
Finally, don’t miss the eclipse today!
Currency Titles:
EUR/USD gives back all its FOMC gains
USD/CAD waits for Canada’s CPI
EUR/GBP rebounds from a short-term uptrend line
Gold trades virtually unchanged
WTI hit support around 43.00 and rebounds
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EUR/USD tumbled on Thursday and gave back all its gains achieved on Wednesday after the FOMC decision. The fall was halted at 1.0610 (S1) and subsequently EUR/USD rebounded somewhat. I still believe that Wednesday’s rally was a 61.8% retracement of the 26th of February – 13th of March decline, and that the bears will get into the game again, driving the rate below 1.0610 (S1). A move below that hurdle could aim for another test at 1.0460 (S2). Our momentum studies corroborate my view. The RSI, although above 50, points down and appears ready to move below its equilibrium barrier, while the MACD has topped and could fall below its trigger any time soon. As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.0610 (S1), 1.0460 (S2), 1.0360 (S3).
• Resistance: 1.0910 (R1), 1.1045 (R2), 1.1160 (R3).
USD/CAD recovered a large portion of its FOMC plunge and during the early European morning Friday is trading between the support barrier of 1.2620 (S1) and the resistance of 1.2800 (R1). Today, Canada’s CPI for February is coming out and is expected to have slowed down. This could give buyers a reason to challenge again the key resistance territory of 1.2800 (R1). A clear close above 1.2800 (R1) is likely to see scope for extensions towards our next resistance at 1.2900 (R2). Switching to the daily chart, the rate is still trading above the 50- and 200-day moving average. Moreover the upside exit of the triangle that had been containing the price action since the beginnings of February signaled a trend continuation. Therefore, the overall trend of this pair stays to the upside.
• Support: 1.2620 (S1), 1.2535 (S2), 1.2370 (S3).
• Resistance: 1.2800 (R1), 1.2900 (R2), 1.3000 (R3).
EUR/GBP raced higher on Thursday after finding support near the short-term uptrend line taken from the low of the 11th of March, and near the 50-period moving average. As long as the rate is trading above the aforementioned uptrend line and above the downtrend line drawn from the peak of the 3rd of February, the short-term bias is positive in my view. I would expect another test near the 0.7300 (R1) barrier, which happens to be the 50% retracement level of the 3rd of February – 11th of March down wave. As for the broader trend, after the downside exit of the triangle pattern on the 18th of December, the price structure has been lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the overall downtrend intact and therefore, I would see the short-term uptrend as a corrective move of the larger negative path.
• Support: 0.7175 (S1), 0.7100 (S2), 0.7000 (S3).
• Resistance: 0.7300 (R1), 0.7350 (R2), 0.7430 (R3).
Gold moved lower yesterday but found support slightly below 1165 (S1) and rebounded to trade virtually unchanged. The precious metal remains below the downtrend line taken from back at the high of the 22nd of January, therefore I still consider the outlook to be negative. A clear close below 1165 (S1) would probably confirm that sellers took control again and perhaps set the stage for another test at the 1147 (S2) line. As for the broader trend, the decline from 1307 seem to be in force from a technical standpoint, but only a move below 1140 (S3) would signal a forthcoming lower low on the daily chart and probably the continuation of that down path.
• Support: 1165 (S1), 1147 (S2), 1140 (S3).
• Resistance: 1175 (R1), 1190 (R2), 1200 (R3).
WTI slid on Thursday, found support at our 43.00 (S1) barrier, and rebounded to challenge our 44.00 (R1) line as resistance this time. As long as WTI is trading below the downtrend line drawn from the peak of the 5th of March, I would consider the near-term outlook to be negative. Therefore, I would expect the forthcoming wave to be negative. I expect another test near the 43.00 (S1) hurdle, where a clear dip could pull the trigger for the key zone of 42.00 (S2), defined by the low of Tuesday and the trough of the 11th of March 2009. On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the longer-term downtrend intact in my view.
• Support: 43.00 (S1), 42.00 (S2), 40.00 (S3).
• Resistance: 44.00 (R1) 45.00 (R2), 45.70 (R3).
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IronFX Daily Commentary 23/03/15
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A break in the dollar rally? The USD is opening up in Europe significantly lower this morning, ranging from -0.4% vs SEK to -2.6% vs NZD. What’s going on? Part of it is probably just technical – people taking profits after some extremely rapid USD strength. For example, I highlighted last week that the Commitment of Traders (COT) report showed AUD positions at a record short. This week’s data shows that those positions – and most other of the short positions – were cut notably. The only currencies where speculators added to their shorts were GBP, MXN, and oddly enough, EUR (although only a little bit for EUR). Don’t forget that this data is taken on Tuesday, so EUR positions could have been cut more by the end of the week.
Also, it was quite notable that many currency pairs suddenly moved early in the US day Friday to stand close to the level at which options were expiring later in the day. It looked a lot like tactical USD selling by option writers in order to minimize the amount they’d have to pay out.
Part of the rally may also have been fundamental, though. On the one hand is the massive European current account surplus announced Friday of EUR 29.4bn, up sharply from December’s revised level. The rising current account surplus in theory should be good for the euro. In fact, I would argue that the dominant factor for the markets will be the Eurozone capital account deficit, that is to say, the outflow of savings from Europe. A current account surplus implies savings are greater than investment, and investors are likely to search the globe for some return on those excess savings, meaning large capital outflows, probably to the US. I expect those flows to push the dollar up. German yields fell to another record low Friday.
The other European story that boosted EUR Friday was some indication of compromise about Greece among European leaders. German Chancellor Merkel does seem committed to keeping Greece in the Eurozone. We’ll know more about that after today’s meeting between Merkel and Greek PM Tsipras. My suspicion is that while it’s easy for Tsipras to say calming things in the company of his Eurozone counterparts, it’s another thing for him to actually pass the kind of legislation that Greece’s creditors are looking for. As the Greek newspaper Ekathimerini said, “Greece bought some time at the recent meeting but the clock is ticking. The government has to present a full list of structural reforms to the lenders in the next few days.” The newspaper questions whether the Greek civil service will actually be able to put together the proposals before the government runs out of money. I think we’ve got more to go in the Greek drama.
Fed funds expectations down On the other side of the equation, Fed funds rate expectations were down a sharp 7.5 bps in the long end on Friday as the market re-evaluated the FOMC statement. The FOMC’s growth forecasts have come down considerably, reducing the likelihood that the Fed will tighten abruptly.
Lew repeats the old “strong dollar” mantra How nostalgic! I haven’t heard this phrase in years. US Treasury Secretary Jack Lew Friday said that “A strong dollar is good for America, and it reflects a strong US economy.” This was an echo of President Clinton’s Treasury Secretary, Robert Rubin, who frequently used that phrase to bolster a sagging dollar. The fact that Lew used it to justify a rising currency in the face of US industry objections was significant. It shows that the US is far away from intervening, verbally or otherwise, to weaken the dollar. On the contrary, Lew attributed the dollar’s strength to weak demand overseas and urged foreign countries to take steps to shore up demand, which means encouraging loose monetary policies and Eurozone QE. Even his comments failed to arrest the dollar’s slide, which suggests to me that this bout of profit-taking could carry on for some time.
No Podemos: The Socialist Party won a plurality in the Andalusian election, with the ruling People’s Party in second place. The anti-austerity Podemos party came in third with only about 15% of the vote. This suggests the party is not likely to take over the government this year and so is EUR-positive.
Kiwi jumps NZD was the strongest of the G10 currencies this morning. Apparently there were large stops above 0.7610 in NZD/USD as well as liquidation of long AUD/NZD positions. I see AUD/NZD hitting parity as the outlook for Chinese steel demand and therefore iron ore prices worsen. Coal prices are also coming down.
Today’s highlights: Eurozone’s preliminary consumer confidence for March is coming out. This isn’t a big market-mover. Consumer confidence took a big hit last year when the trouble started in Ukraine, but nowadays despite everything that’s going on with Greece, it’s relatively high. The improvement in confidence in the peripheral countries, including Greece, is particularly noticeable. This should gradually lead to a virtuous circle of higher consumer demand and increased investment, but until it leads to higher prices, it’s not likely to affect monetary policy or the currency. The Swiss National Bank releases its weekly sight deposit data, which could show if the Bank intervened in the FX market in the week ended March 20. Indications of intervention could weaken CHF somewhat.
In the US, existing home sales for February are forecast increase a bit. That would be a welcome turnaround in the general trend, which has been down recently. The housing start figures last week were catastrophic, but the more forward-looking building permits improved. The difference between the two could be due to bad weather, which made it difficult to build. If the existing home sales are in line with the encouraging estimate, it could probe USD-supportive.
As for the rest of the week, Tuesday is a PMI day. The preliminary manufacturing and service-sector PMI data for March from several European countries and the Eurozone as a whole are coming out. We could see further improvement in the Eurozone PMIs, but signs of economic recovery don’t seem to do much for the euro, which is dominated more by QE than by growth.
From the UK, we get the CPI for February. According to the Bank of England February’s inflation report, the country is likely to fall into deflation at some point this year. to drop below zero. To make matters worse, inflation expectations are coming down too, which is a particular concern to central bankers. A further decline in inflation could be negative for the pound.
In the US, the headline CPI rate for February is expected to remain in deflation, while the core CPI rate is expected to remain unchanged in pace. This suggest that the low energy prices are the main reason behind the deflationary pressure. The Fed has said that this is just a transitory effect, and so it’s willing to look past it. We’ll have to see how long that view lasts, particularly if oil continues to decline.
On Wednesday, we get the German Ifo survey for March. A strong number could support the growing confidence that Europe’s largest economy is back on track.
US durable goods for February are also coming out. Durable goods orders haven’t been very robust recently, and the February data is expected to continue the trend.
On Thursday, UK retail sales for February are coming out. Rising retail sales are generally associated with a stronger pound. So a stronger number here could help boost GBP on the crosses at least.
On Friday, we have the usual end-of-month data dump from Japan. The National CPI rate for February, the Tokyo CPI rate for March and the employment report for February are due to be released. Even the BoJ has admitted that once the effect of last April’s hike in the consumption tax falls out of the year-on-year comparison by May, the country’s likely to be back in deflation. Right now wage growth is probably more important than the CPI data.
In the US, the 3rd estimate of the Q4 GDP is expected to show that the US economy expanded at a faster pace than the 2nd estimate. The 3rd estimate of the core personal consumption index, the Fed’s favorite inflation measure is also coming out.
Currency Titles:
EUR/USD rebounds from 1.0610
NZD/USD prints a possible double bottom
GBP/JPY turns neutral
Gold breaks a downtrend line
WTI soars above 45.00
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EUR/USD shot up on Friday after finding support at 1.0610 (S2). Nevertheless, the surge was halted below the resistance line of 1.0910 (R1), which also happens to be the 50% retracement level of the 26th of February – 13th of March decline. Taking into account that the rate is trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the 13th of March, I would consider the short-term bias to be cautiously positive. A move above 1.0910 (R1) would confirm that and perhaps pull the trigger for another test at the 1.1045 (R2) hurdle, the 61.8% retracement level of the 26th of February – 13th of March down move. As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.
• Support: 1.0700 (S1), 1.0610 (S2), 1.0460 (S3).
• Resistance: 1.0910 (R1), 1.1045 (R2), 1.1160 (R3).
NZD/USD continued trading higher and during the Asian morning managed to move above the key resistance (now turned into support) barrier of 0.7625 (S1). The short-term bias remains positive in my view, and this is also supported by our short-term oscillators. The RSI moved above its 70 line and is pointing up, while the MACD, already positive, accelerated higher. I would now expect a price test at the 0.7700 (R1) hurdle. A break above that resistance could prompt extensions towards 0.7785 (R2). In the bigger picture, a daily close above 0.7625 (S1), would confirm the positive divergence between our daily momentum studies and the price action, and could also signal the completion of a possible double bottom formation.
• Support: 07550 (S1), 0.7450 (S2), 0.7375 (S3).
• Resistance: 0.7700 (R1), 0.7785 (R2), 0.7850 (R3).
GBP/JPY traded higher but hit resistance slightly below our 180.25 (R1) line and consequently retreated somewhat. The pair has been oscillating between that resistance line and the support area of 177.70 (S2) since the 13th of March, thus I would prefer to sit on the sidelines as far as the near-term picture is concerned. On the daily chart, GBP/JPY has moved well below the 50-day moving average, but stayed supported by the 200-day one, which provided reliable support to the price action back in January as well. This is another reason I prefer to take the sidelines today and wait for clearer directional signals.
• Support: 178.50 (S1), 177.70 (S2), 176.00 (S3).
• Resistance: 180.25 (R1), 181.60 (R2), 183.15 (R3).
Gold edged higher on Friday breaking above the downtrend line taken from back the peak of the 22nd of January, but stayed below the resistance line of 1190 (R1). The move above the trend line shifts the short-term bias cautiously to the upside in my view. As a result, I would expect a move above 1190 (R1) to aim for the psychological round figure of 1200 (R2). Our daily momentum studies corroborate my view. The 14-day RSI firmed up and appears able to move above its 50 barrier in the near future, while the MACD, although negative, has bottomed and crossed above its trigger line. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.
• Support: 1175 (S1), 1165 (S2), 1147 (S3).
• Resistance: 1190 (R1), 1200 (R2), 1210 (R3).
WTI rallied on Friday, violated the downtrend line taken from the high of the 5th of March and subsequently broke above the resistance (turned into support) obstacle of 45.00 (S1). WTI seems now to be trading within a short-term upside channel and this turns the short-term outlook cautiously to the upside in my opinion. Nonetheless, bearing in mind our proximity to the upper bound of that channel and taking into account our momentum signs, I would expect the forthcoming wave to be negative, perhaps below 45.00 (S1) again. The 14-hour RSI exited its overbought field and points down, while the MACD shows signs of topping. On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the overall picture of WTI negative. However, there is positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for price and momentum alignment.
• Support: 45.00 (S1), 44.00 (S2), 43.00 (S3).
• Resistance: 46.50 (R1) 47.30 (R2), 48.70 (R3).
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IronFX Daily Commentary 24/03/15
Language English
Fed view on the dollar not affecting their view on rates We’ve heard a lot of Fed officials commenting on the dollar and its impact on their outlook. From my point of view, the market seems to be misinterpreting their statements in order to justify profit-taking. Take Cleveland Fed President Loretta Mester’s comments yesterday, for example. Her views on the dollar were similar to those that Chicago Fed President Evans and Atlanta Fed President Lockhart expressed on Friday. She said that the level of the dollar is one of the conditions Fed officials look at and that a strong dollar will affect US exports. The market focused on these comments and ignored her other comments: that it is appropriate for the Fed to raise rates this year and that a June rate hike is possible. San Francisco Fed President Williams, a voting FOMC member, said that “by mid-year it will be the time to have a discussion about starting to raise rates,” and that the dollar’s strength isn’t an impediment.
If you don’t believe him, Fed Vice Chair Stanley Fischer said that a rate hike “likely will be warranted before the end of the year,” with the exact date depending on the data (as they’ve made very clear already). Fisher did not comment explicitly on the dollar, but did say that he thought other countries weren’t manipulating exchange rates – in other words, he’s OK with a rise in the dollar caused by other countries’ loose monetary policies. The impression I get from all these comments is that yes, the dollar may restrain exports. But that was already factored into their forecast for slightly slower growth and will not put them off raising rates. Almost all the comments I’ve heard from Fed officials still imply that they’re considering a rate hike by mid-year. I believe the market is over-emphasizing the likely impact of the stronger dollar and drawing the wrong conclusion with regards to policy. I expect a reversal of this approach at some point and the resumption of the dollar rally.
Merkel offers tea & sympathy but no money Greek PM Tsipras met with German Chancellor Merkel and had what appeared to be pleasant talks, but there was no change in Greece’s financial position as a result. Merkel insisted that Greece had to talk to the Troika, not her. “Reforms have to be discussed with the institutions, not with Germany,” she emphasized. A Greek government official said that the country may submit a list of reforms by the end of this week. The German newspaper Frankfurter Allgemeine Zeitung reported that the Greek government has until April 8th before it runs out of money. That’s consistent with what some Greek officials have been saying. Meanwhile, the Greek economy is collapsing; industrial production (the turnover index in industry) plunged 16.0% yoy by value in January, a sharp acceleration from –7.7% yoy in December. Greece remains a major risk for the euro.
Today’s highlights: Today is PMI day. The graph shows the general trend of the global PMIs, with the level of the PMI on the X axis and the change over the last three months on the Y axis. The best place to be is in the upper right-hand corner, which shows an accelerating expansion (PMI over 50 and rising). The second quadrant, the upper left-hand corner, shows the PMI is below 50, meaning activity is contracting, but the PMI is still higher than three months ago, so at least things are improving. The lower right-hand corner is also mixed; there, the PMI is above 50, but the pace of expansion is slowing. And the place you really don’t want to be is the third quadrant, the lower left-hand corner, where your PMI is below the 50 line and also it’s contracting – that’s where you have an accelerating contraction.
China and Japan were first, as usual. China’s HSBC/Markit PMI was down sharply and is now back in contractionary territory. Both the Chinese PMIs are in the dreaded third quadrant (accelerating contraction). This confirms the slowdown in Chinese growth that began to appear in the data during January and February. AUD is the currency most vulnerable to slowing Chinese growth and I would expected AUDNZD to resume its slow grind towards parity. The Japanese manufacturing PMI, which attracts little attention, is now just barely in expansionary territory.
The preliminary manufacturing and service-sector PMI data for March from several European countries and the Eurozone as a whole are coming out today. It’s noticeable that the Eurozone is in the favorable upper right-hand quadrant. It’s likely that we could see further improvement in the Eurozone PMIs this time too. However, that doesn’t seem to do much for the currency, which is dominated more by QE than by signs of economic recovery. The US Markit manufacturing PMI is expected to slow, but remain well in expansionary territory.
Note how well Sweden is doing. It’s far in the upper right-hand corner. That’s one reason I was surprised that they cut interest rates. Probably they’re more concerned about being in deflation than about economic activity. However, their main export market is the Eurozone, which takes 60% of their exports. As the ECB’s QE program kicks in and consumer confidence comes back in the Eurozone, as we saw yesterday, their exports ought to do well. I’m bullish on the SEK, at least relative to the euro or NOK.
On the other hand, Australia and Canada are in the lower left-hand quadrant, the worst place to be. These economies are suffering from the fall in commodity prices, particularly iron ore and oil. I expect their currencies to weaken as the terms of trade turn against them, their economies suffer, and their central banks have to cut rates to keep things going.
From the UK, we get the CPI for February. It’s expected to fall to +0.1% yoy, just above deflation. The Bank of England’s February inflation report warned that the CPI may drop below zero. On top of that, the minutes of the latest BoE meeting showed that the members seemed more concerned than previously about inflation as it may remain below the target for longer. UK inflation is far below the BoE’s target and to make matters worse, inflation expectations are coming down too. A further decline in inflation could be negative for the pound.
In the US, the headline CPI rate for February is expected to remain in deflation on a yoy basis, but the core CPI rate is expected to accelerate slightly. This suggest that the low energy prices are the main reason behind the deflationary pressure. The Fed has said that this is just a transitory effect, and so it’s willing to look past it. We’ll have to see how long that view lasts, particularly if oil continues to decline.
Currency Titles:
EUR/USD continues higher
GBP/USD waits for the UK CPI
EUR/JPY trades in a short-term uptrend
Gold hits the 1190 zone
WTI hits resistance at 47.50 and pulls back
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EUR/USD continued to race higher on Monday and hit resistance at 1.0970 (R1). The rate is still trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the low of the 13th of March, therefore I would consider the short-term bias to remain positive. Although we may experience a minor retreat, I would expect the next leg up to challenge the resistance hurdle of 1.1045 (R2). As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.
• Support: 1.0885 (S1), 1.0765 (S2), 1.0700 (S3).
• Resistance: 1.0970 (R1), 1.1045 (R2), 1.1160 (R3).
GBP/USD rebounded yesterday after finding support at 1.4835 (S1) and hit resistance at 1.4975 (R1). Today we get the UK CPI for February, which is expected to have slowed. This could encourage the bears to pull the trigger for another test at the 1.4835 (S1) hurdle. A break below that line is likely to extend the bearish wave, perhaps towards our next support obstacle of 1.4775 (S2). Zooming on the 1-hour chart, I see that our hourly oscillators amplify the case for a leg down. The 14-hour RSI fell near its 50 line and could fall below it, while the MACD, although positive, stands below its trigger and points down. As for the bigger picture, the price structure on the daily chart still suggests a larger downtrend. Therefore, I would consider the recovery from 1.4630 as a corrective move of the longer-term down path.
• Support: 1.4835 (S1), 1.4775 (S2), 1.4725 (S3).
• Resistance: 1.4975 (R1), 1.5035 (R2), 1.5140 (R3).
EUR/JPY continued to gain pips on Monday, but the positive wave was stopped between the support of 130.30 (S1) and the resistance of 131.85 (R1). The pair started printing higher peaks and higher troughs above the uptrend line taken from the low of the 13th of March, thus I see a positive near-term picture. A break above 131.85 (R1) would confirm a forthcoming higher high on the 4-hour chart and could see scope for extensions towards our next resistance of 133.50 (R2). On the daily chart, I still see a longer-term downtrend. I would treat the recovery from 126.90 as a retracement of that larger down path. Nevertheless, there is positive divergence between our daily oscillators and the price action. This gives me a reason to take to the side lines as far as the overall trend is concerned. I would like to wait for signs that the downtrend is gaining back momentum.
• Support: 130.30 (S1), 129.00 (S2), 128.00 (S3).
• Resistance: 131.85 (R1), 133.50 (R2), 134.60 (R3).
Gold traded somewhat higher on Tuesday but the advance was stopped by our resistance line of 1190 (R1). The move above the trend line on Friday shifted the short-term bias cautiously to the upside in my view, thus I would expect a move above 1190 (R1) to aim for the psychological round figure of 1200 (R2). Our daily momentum studies support the notion. The 14-day RSI reached its 50 line and could move above it in the near future, while the MACD, although negative, stayed above its trigger and continued north. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.
• Support: 1175 (S1), 1165 (S2), 1147 (S3).
• Resistance: 1190 (R1), 1200 (R2), 1210 (R3).
WTI rallied on Monday, but the up leg was stopped by the 47.50 (R1) key resistance. Subsequently, the price retreated somewhat. Given that the price slid from near the upper line of a possible triangle pattern, and that there is negative divergence between the 14-hour RSI and the price action, I would expect the current decline to continue. A move below 46.50 (S1) is likely to target the lower line of the triangle or the next support at 45.70 (S2). On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the overall picture of WTI negative. However, there is positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for price and momentum alignment.
• Support: 46.50 (S1), 45.70 (S2), 44.80 (S3).
• Resistance: 47.50 (R1) 48.85 (R2), 49.45 (R3).
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IronFX Daily Commentary 25/03/15
Language English
1.10 seems the limit EUR/USD moved higher once again, confounding those of us who expected to see parity within a matter of days. But once again, 1.10 seems to be the new upper limit for the pair. It broke through there briefly on 19 March and again several times yesterday, but seems unable to hold above that level. The euro’s peak yesterday came after the US CPI data came slightly stronger than expected, which should have been USD-positive: the headline figure (just) escaped from deflation and the core figure showed some acceleration to +0.2% mom. Moreover, US new home sales were better than expected and the Markit PMI surprised on the upside. This indicator is less closely watched than the US ISM index, but it showed that US manufacturing is doing fine despite the higher dollar: new orders were up as was employment. Nonetheless Fed funds rate expectations continued to decline. It looks to me like the better-than-expected data, if it continues, should change attitudes towards the Fed and start supporting the dollar.
USD retreat is fundamentally based I have to admit that though there are some good reasons why the dollar has retreated from its recent peak. The recent low for EUR/USD was in the early hours of Monday, March 16th. Since then, the implied yield on the end-2016 Fed funds rate contract has fallen from 1.37% to 1.13% (the recent peak was 1.46%), taking out one implied rate hike, and the US Treasury-Bunds spread has come in considerably, mostly due to US rates declining: from 89 bps to 78 bps in the two years (it’s widening out to 80 bps this morning) and from186 bps to 164 bps in the 10 years (unchanged today). So US rate expectations and rates have come off considerably as the market unwinds some of its expectations of Fed tightening. Nonetheless, I still assume that the US rate advantage over Europe is going to draw in investors over time. As QE proceeds, Eurozone rates are only going lower, while US rates seem likely to drift higher as US inflation edges up. PriceStats, a firm that gathers prices off the internet to produce daily inflation estimates, has shown a considerable uptick in US inflation recently. If it continues, higher US inflation would tend to bolster the dollar.
CHF rallies despite IMF recommendations CHF was the big winner yesterday without any major news to send the currency higher. EUR/CHF fell below the 1.05-1.08 trading range it had been in since mid-February. It seems that market participants are beginning to think that with 3-month CHF LIBOR already at -0.80%, the Swiss National Bank (SNB) has little room to lower interest rates further, something that Kevin Fletcher, the IMF’s mission chief to Switzerland, recently confirmed. “It’s hard to say where the effective lower bound (of Swiss interest rates) is – in the current framework, it’s probably close to that,” he was quoted as saying. Swiss bond yields are negative out to 10 years, and anyway the country doesn’t have that much in the way of government bonds outstanding – only CHF 96.6bn, of which one-quarter come due by end-2016 (compared to CHF 585.5bn in foreign reserves). That’s why the IMF recommended in its annual review of the Swiss economy that the country should do a form of foreign-currency quantitative easing by buying foreign-currency assets. A member of the SNB’s Governing Board Monday said that the SNB was considering this suggestion, although from my point of view it’s not that different from what they were doing before – just that they would be announcing the amount they would buy and letting the market determine the price, rather than announcing the price and letting the market determine the amount. The sight deposit data shows that SNB hasn’t been intervening in the market much despite its pledge to do so if necessary. That may indicate their acceptance of a lower range for EUR/CHF than the market estimates. I expect the market to continue to test the downside for EUR/CHF, which in today’s context probably means also testing the downside for USD/CHF, too.
WTI up even though API stats show another big build Yesterday’s inventory statistics from the American Petroleum Institute (API) apparently showed yet another big rise in oil stocks, yet WTI was up slightly on the day, perhaps because of the all-round positive PMI figures (except for China). Oil seems like it could be vulnerable to tonight’s release of the US Department of Energy’s more comprehensive inventory figures.
Cleveland Fed says don’t worry about dollar’s impact on inflation One of the reasons why investors have assumed that a stronger dollar would delay Fed tightening is the idea that the stronger dollar would lower import prices and therefore push down US inflation, which as mentioned above is already bordering on deflation. But the Cleveland Fed published a research paper yesterday that said “the threat is real, but certainly overblown.” It explained that “most of the change in import prices reflects declines in petroleum products, which have not been driven by exchange-rate movements.” It concluded that “the overall impact is fairly small.” A 1% rise in the dollar’s broad value raises non-oil import prices by 0.3% over six months – and of course import prices are not the main determinant of the headline CPI by any means. So that channel of feedback is “overblown,” as they mentioned.
Today’s highlights: We have a relatively quiet schedule today.
During the European day, the spotlight will be on the German Ifo survey for March. All three indices are expected to have risen. Following the encouraging ZEW survey released last week and the strong German PMI data released on Tuesday, this could support the growing confidence that Europe’s largest economy is gathering steam again.
In Sweden, we get the economic tendency survey for March. A strong figure could prove SEK-positive.
In the US, durable goods for February are coming out. The headline figure is expected to decelerate from the previous month, while durable goods excluding transportation equipment is estimated to accelerate a bit. The market may pay more attention on the core figure, thus USD could strengthen somewhat.
As for the speakers, ECB Governing council member Erkki Liikanen, Chicago Fed President Charles Evans and Bank of Canada Deputy Governor Timothy Lane speak.
Currency Titles:
EUR/USD finds resistance slightly below 1.1045
AUD/USD struggles near 0.7900
USD/JPY trades back below 120.00
Gold hits 1195
WTI trades in a consolidative mode
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EUR/USD continued trading higher on Tuesday but hit resistance at the 61.8% retracement level of the 26th of February – 16th of March down move, which stands slightly below the resistance hurdle of 1.1045 (R1) and the 200-period moving average. Thereafter the rate pulled back to meet the support line of 1.0885 (S1). Having a look at our short-term oscillators, I would be careful that the retreat may continue for a while. The RSI hit resistance at its 70 line and slid, while the MACD has topped and fallen below its trigger line. Nevertheless, the rate is still trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the low of the 13th of March, therefore I would consider the short-term bias to remain positive. A move above 1.1045 (R1), could see scope for extensions towards the 76.4% retracement of the 26th of February – 16th of March decline, at 1.1160 (R2). As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.
• Support: 1.0885 (S1), 1.0765 (S2), 1.0700 (S3).
• Resistance: 1.1045 (R1), 1.1160 (R2), 1.1260 (R3).
AUD/USD continued to trade higher, hit resistance above the 0.7900 (R1) line and returned to settle just below it. I believe that the near-term picture is positive and that a close above 0.7900 (R1) is likely to open the way for the psychological barrier of 0.8000 (R2). However, our momentum indicators reveal signs of weakness, therefore I would be cautious that a minor pullback could be in the works before buyers seize control again. The RSI turned down near its 70 line, while the MACD topped and could move below its trigger any time soon. As for the bigger picture, on Friday, the rate surged above the downtrend line taken from back the peak of the 5th of September, confirming my view that the pair could continue correcting higher. On the daily chart, it is also visible that the psychological zone of 0.8000 (R2) coincides with the 23.6% retracement level of the 5th of September – 11th of March downtrend.
• Support: 0.7840 (S1), 0.7760 (S2), 0.7700 (S3).
• Resistance: 0.7900 (R1), 0.8000 (R2), 0.8035 (R3).
USD/JPY trades back below the 120.00 (R1) barrier and yesterday the bears showed willingness to drive it lower, below the support of 119.35 (S1). Bearing that in mind, I believe that the short-term bias stays negative and that we are likely to see the rate challenging the 119.00 (S2) in the near future. As for the broader trend, the rate is still trading above both the 50- and the 200-day moving averages, and above the upper bound of the triangle that had been containing the price action since November. This keeps the overall picture of USD/JPY positive. Nevertheless, our daily momentum studies support my view that we may see the rate correcting lower. The 14-day RSI fell below its 50 barrier, while the MACD has topped and fallen below its trigger.
• Support: 119.35 (S1), 119.00 (S2), 118.60 (S3).
• Resistance: 120.00 (R1), 120.60 (R2), 121.20 (R3).
Gold traded somewhat higher on Tuesday, but found resistance at 1195 (R1), near the 200-period moving average, and pulled back. Since the yellow metal is still trading above the downtrend line taken from the peak of the 22nd of January, I believe that the short-term outlook remains cautiously positive. Nevertheless, our momentum studies indicate that the short-term uptrend is slowing. The RSI hit resistance near its 70 line and is now pointing down, while the MACD has topped and crossed below its signal. Given these momentum signs, the fact that the price found resistance at the 200-period MA, and the proximity to the round figure of 1200 (R2), I would like to switch my stance to neutral for today. I prefer to wait for clearer signals on whether the up leg is over or has more to go. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.
• Support: 1185 (S1), 1175 (S2), 1165 (S3).
• Resistance: 1195 (R1), 1200 (R2), 1210 (R3).
WTI traded higher during the European morning Tuesday but later in the day, it pulled back to move in a consolidative manner between 47.15 (S1) and 47.75 (R1). Our hourly momentum studies amplify the case for further consolidation or even a minor down move, perhaps towards 46.60 (S2). The RSI gyrates around its 50 line, while the MACD, although positive, stands below its trigger and is getting closer to zero. On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the overall picture of WTI negative. However, there is still positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for price and momentum alignment.
• Support: 47.15 (S1), 46.60 (S2), 45.80 (S3).
• Resistance: 47.75 (R1) 48.25 (R2), 48.90 (R3).
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Daily Commentary | Forex Analysis 26/03/15 | IronFX™
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1.10 holds againOnce again the 1.10 barrier proved too much for EUR/USD. Despite more encouraging European data (better-than-expected Ifo survey) and disappointing US data (worse-than-expected durable goods orders), the pair spent only a few minutes above the 1.10 barrier before coming down. We seem to be getting ready for another challenge of that line again in early trading this morning. Nonetheless, the fundamental background is slightly different as the bond market yesterday ignored the weak US data. Fed funds rate expectations rose by 3 bps yesterday while bond yields were up 4-5 bps across the curve and inflation expectations also rose, perhaps because of the rise in oil prices (see below). Meanwhile the FX market appears to be settling down and reaching more of a consensus as shown by the narrower and narrower trading range for EUR/USD each day: 3.99% last Thursday, 2.53% Friday, 1.74% Monday, 1.27% Tuesday and 1.04% Wednesday. The big question is which direction the market will break out on: 1.1045 or under 1.0885 (see technical comment for details).
Oil surges on Saudi airstrikes Oil prices initially fell Wednesday after the US Energy Information Administration (EIA) confirmed yet another rise in oil inventories, but then the market turned around and prices rose sharply on news that Saudi Arabia started bombing targets in Yemen. The Saudi offensive raises the possibility that Middle East supplies could be disrupted. Yemen is not a big oil producer (it produces only 133,000 b/d) but at one end of the country lies the Bab el-Mandab straits, a 3.2km (2 mile) wide bit of water. An estimated 3.8mn b/d flows through this narrow stretch as oil tankers sail from the Persian Gulf to the Suez Canal. If it were to be closed off, tankers would have to sail around Africa to reach markets in Europe and the Americas, adding many days to the journey and raising the cost of transport considerably.
My view though is that in recent months we have seen numerous threats to Middle East supplies, such as the collapse of Libya and ISIS’s advance in Iraq, and so far supplies have only increased. I’m going to be optimistic and assume that this time too it will be a false alarm. Meanwhile, US inventories just keep climbing and climbing, as the latest data showed. At the current rate, storage at the main US loading port of Cushing, Oklahoma will be full by the end of June. Then what? Nothing to do but to dump the oil on the market at any price. So assuming that the Saudi foray does not result in any disruption to supplies, I expect prices to hit new lows within the next several months. However, it’s impossible to tell when the market will turn from worrying about the fighting to worrying about storage again. It depends on how the fighting goes, which nobody can predict.
Nonetheless, the increased tension in the Middle East is likely to weigh on currency markets. AUD and NZD were the worst performing currencies overnight as risk aversion hit the market, while JPY and the oil-sensitive NOK and CAD gained.
Today’s highlights: During the European day, we get the final GDP figures for Q4 for France. Since the final data is expected to confirm the preliminary growth figure, the market reaction could be limited as usual.
Eurozone’s M3 money supply is forecast to have risen 4.3% yoy in February, a slight acceleration from 4.1% yoy in January. The 3-month moving average is expected to accelerate if the forecast is met. We could also see bank lending turn positive on a yoy basis for the first time since March 2012. Such figures would suggest that the ECB’s preliminary measures to boost money supply growth, such as the targeted long-term refinancing operations (TLTROs), were already taking effect even before the QE program began in March. It would add to the recent data indicating a nascent recovery in the European economy.
In Norway, the AKU unemployment rate for January is forecast to have remained unchanged at 3.7%. The official unemployment rate for the same month had increased, thus the possibility for an increase in the AKU unemployment rate is high, which could prove NOK-negative.
In Sweden, the trade surplus for February is expected to increase a bit. This could strengthen SEK somewhat.
In the UK, retail sales for February are expected to rise, a turnaround from the previous month. This could strengthen GBP, at least temporarily, as rising retail sales in the UK are generally associated with a stronger pound. It’s not clear though whether economics is dominating the pound nowadays or politics. Or maybe it’s being swayed by comments by Gov. Carney and his friends about the likely path of interest rates.
In the US, we get initial jobless claims for the week ended March 21. The preliminary Markit service-sector PMI for March is also coming out.
We have several speakers on Thursday’s agenda: St. Louis Fed President James Bullard, Atlanta Fed President Dennis Lockhart, ECB President Mario Draghi and Bank of Canada Governor Stephen Poloz speak.
Currency Titles:
EUR/USD stays below 1.1045
EUR/JPY shows signs of weakness
EUR/GBP continues higher
Gold reaches 1200
Gold reaches 1200
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EUR/USD traded somewhat higher on Wednesday, but the up leg was limited once again by the 61.8% retracement level of the 26th of February – 16th of March decline, which stands slightly below the resistance hurdle of 1.1045 (R1) and near the 200-period moving average. Looking at our short-term momentum studies, I am still cautious that a pullback from the recent uptrend may be in the works. The RSI approached its 70 line again and turned sideways, while the MACD stays below its trigger line and points south. On the other hand, the rate is still trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the low of the 13th of March. Consequently, I would consider the short-term outlook to remain positive. A move above 1.1045 (R1), could see scope for extensions towards the 76.4% retracement of the 26th of February – 16th of March decline, at 1.1160 (R2). As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.
• Support: 1.0885 (S1), 1.0765 (S2), 1.0700 (S3).
• Resistance: 1.1045 (R1), 1.1160 (R2), 1.1260 (R3).
EUR/JPY traded virtually unchanged yesterday, staying between the support of 130.30 (S1) and the resistance of 131.85 (R1). Although the rate is trading above the uptrend line taken from the low of the 13th of March and this keeps the short-term uptrend intact, our momentum indicators reveal signs of weakness for further upside extensions. The RSI turned down and is now heading towards its 50 line, while the MACD has topped and fallen below its trigger line. Bearing these signs in mind, I would switch my stance to neutral for now. I would like to see a move above 131.85 (R1), before trusting again the short-term upside path. As for the broader trend, I still see a longer-term downtrend. I would treat the recovery from 126.90 as a retracement of that larger down path. Nevertheless, there is positive divergence between our daily oscillators and the price action. This gives me a reason to take the side lines as far as the overall trend is concerned as well. I would like to wait for signs that the downtrend is gaining its momentum back again.
• Support: 130.30 (S1), 129.00 (S2), 128.00 (S3).
• Resistance: 131.85 (R1), 133.50 (R2), 134.60 (R3).
EUR/GBP continued to race higher yesterday and managed to move above the resistance (now turned into support) of 0.7370 (S1), which also happens to be the 61.8% retracement level of the 3rd of February – 11th of March down wave. I would now expect the bulls to pull the trigger and target the 76.4% retracement line, at 0.7455 (R1). As long as the rate is trading above the uptrend line taken from the low of the 11th of March, and above the downtrend line drawn from the peak of the 3rd of February, the short-term bias stays positive in my view. However, I believe that the broader trend is still negative. After the downside exit of the triangle pattern on the 18th of December, the price structure has been lower peaks and lower troughs below both the 50- and the 200-day moving averages. With no major bullish trend reversal signals on the daily chart, I would see the short-term uptrend as a corrective move of the larger negative path.
• Support: 0.7370 (S1), 0.7300 (S2), 0.7230 (S3).
• Resistance: 0.7455 (R1), 0.7500 (R2), 0.7590 (R3).
Gold continued to trade higher on Wednesday. It emerged above the 200-period moving average and eventually reached the psychological round figure of 1200 (R1). Since the yellow metal is still trading above the downtrend line taken from the peak of the 22nd of January, I believe that the short-term outlook remains cautiously positive. A move above the key barrier of 1200 (R1) could aim for the next resistance at 1210 (R2), defined by the peak of the 5th of March. Our daily oscillators support the short-term picture. The 14-day RSI continued to race higher and moved above its 50 line, while the daily MACD, already above its trigger, points up and is getting closer to its zero line. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.
• Support: 1185 (S1), 1175 (S2), 1165 (S3).
• Resistance: 1200 (R1), 1210 (R2), 1222 (R3).
WTI surged on Wednesday after Saudi Arabia began a military operation in Yemen, raising concerns over crude supplies from the Middle East. The news overshadowed an earlier report from the US which showed that crude supplies increased for the 11th consecutive week. WTI rallied, hit resistance fractionally below the 52.00 (R1) hurdle, marked by the peak of the 10th of March, and thereafter pulled back to meet the support line of 50.70 (S1). In my opinion, the short-term picture is positive and the momentum is still strong. The 14-hour RSI, already above 30, has turned up, while the hourly MACD, already above its trigger, accelerated higher. I believe that the forthcoming wave is likely to be positive and perhaps challenge again the 52.00 (R1) line. A move above that line could challenge the high of the 9th of March at 52.45 (R2). On the daily chart, WTI is trading well below the 200-day moving average, but tries to emerge above the 50-day one. Moreover, there is still positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for clearer directional signals.
• Support: 50.75 (S1), 50.00 (S2), 49.45 (S3).
• Resistance: 52.00 (R1) 52.45 (R2), 53.40 (R3).
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IronFX Daily Commentary | 27/03/15
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US yields rise on jobless claims, USD benefits EUR/USD did manage to get over 1.10 yesterday for a relatively long time – about five hours – but it was already back below that level when the US jobless claims came out better than expected. Even if many of the US economic indicators are missing expectations, the labor data remains strong, and that’s one of the two key points for the Fed. Growth isn’t in the Fed’s mandate, “maximum employment” is. Signs of continuing strong employment sent Fed funds rate expectations and bond yields higher and supported the dollar all around. Talk of the end of the dollar rally was quite premature! The markets will be waiting to hear what Fed Chair Janet Yellen has to say on the topic later today (see below).
Japanese data as expected Early Friday we had the usual end-of-month data dump from Japan. The key point was that the Bank of Japan’s measure of inflation that takes into account last year’s hike in the consumption tax showed inflation at zero in February. So much for their goal of hitting 2% inflation by April 2015! The jobless rate and job offers-to-applicants’ ratio, also for February, both improved as expected. The government hopes that this tightening labor market will put pressure on companies to raise wages, which would help to create “good” demand-pull inflation (instead of “bad” cost-push inflation caused simply by oil prices rising, which eats into peoples’ purchasing power). Dream on. Household spending for February fell on a yoy basis, although not as much as expected, and retail trade rose less than expected on a mom basis – although large retailers’ sales beat expectations. Some major companies have increased their wages modestly, but there’s no sign yet that households in general are feeling any richer or spending any more as a result. I expect Japan will continue to rely on monetary stimulus and currency depreciation for growth, which is why I remain bearish JPY.
More on why I’m bearish on oil Yesterday I observed that at the current rate, storage at the main US oil distribution facility of Cushing, Oklahoma will be full by the end of June. I’d like to elaborate on that point to explain why I’m still bearish on oil (assuming no disaster in the Middle East).
Everyone thought that US production would drop as prices dropped because so much of US production is from “fracking,” which is expensive. However, that hasn’t happened. On the contrary, US oil production keeps climbing and may be at a record level. However, US producers aren’t allowed to export oil. So much of the increased supply is going into storage. Inventories have risen for 11 weeks in a row, the longest rising streak on record, and are now at record levels, too.
Unfortunately there’s a limit to how much oil they can put in storage. There’s just so many oil tanks in the world. Inventories at Cushing have been rising by a little over 2mn barrels a week this year. Cushing only has storage for 85mn barrels of oil. At this rate, all the tanks in Cushing will be full by late June. After that, there’s nothing they can do except to dump the oil on the market at any price.
That would be bad enough, but it gets worse! Production in the US is likely to rise, because of regulations in North Dakota, the #2 oil-producing state after Texas. There are around 125 wells in the state that have to be finished by the end of June in order to comply with state requirements to complete drilling within a year. At the same time, oil taxes in North Dakota will probably fall in June, because the state reduces taxes when prices average below a certain level for five consecutive months. That would mean most of the wells in the state will be exempt from the oil extraction tax. The combination of that tax break and many wells running up against one-year state deadlines means an increase in production in North Dakota.
So in June, US oil production is likely to surge just as the storage tanks get full! If that happens, then oil prices may plunge. Actually, they’re likely to plunge before that, as investors get ready for the eventuality. That’s why I’m bearish on oil over the next several months – and on the oil currencies, particularly CAD, NOK, AUD and RUB.
Of course, this depends on my assumption that the fighting in the Middle East doesn’t interfere with oil production or shipping there. If it does, then all bets are off. That could change the total environment for financial markets.
Today’s highlights: During the European day, French consumer confidence for March is coming out.
From Sweden, retail sales for February are forecast to decelerate a bit. Following the poor economic tendency survey released on Tuesday, another weak figure is likely to weaken SEK somewhat.
In Norway, the official unemployment rate for March is expected to remain unchanged at 3.0%, while retail sales for February are forecast to rebound from the previous month. On top of the higher oil prices due to the fighting in Yemen, the positive data are likely to keep NOK supported.
In the US, the 3rd estimate of the Q4 GDP is expected to show that the US economy expanded at a faster pace than the 2nd estimate. The 3rd estimate of the core personal consumption index, the Fed’s favorite inflation measure is also coming out. A strong reading could strengthen USD. The final University of Michigan consumer sentiment for March are coming out along with the surveys of 1-year and 5-to-10 year inflation expectations.
Four central bank governors and one Vice Chair speak Friday: Bank of England Governor Mark Carney, Fed Vice Chair Stanley Fischer, Riksbank Governor Stefan Ingves, Norges Bank Governor Oeystein Olsen and Fed Chair Janet Yellen. Yellen Is speaking on monetary policy at a San Francisco Fed conference entitled, “The New Normal for Monetary Policy.” She will also take questions from the audience.
Currency Titles:
EUR/USD pulls back to test the uptrend line
GBP/JPY looks ready to go for the 176.00 barrier
AUD/USD trades near the moving averages
Gold breaks above 1200
WTI hits 52.45 and turns down
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EUR/USD fell sharply after hitting once again resistance near the 1.1045 (R2) barrier and the 61.8% retracement level of the 26th of February – 16th of March decline, which happens to coincide with the 200-period moving average. The decline was halted by the 50-period moving average and the short-term uptrend line taken from the low of the 13th of March. The rate still stands above that line and above the downtrend line drawn from the peak of the 26th of February, therefore I still see a cautiously positive short-term picture. A move back above 1.0885 (R1), would confirm my view and perhaps pull the trigger for another test near the 1.1045 (R2) hurdle and the 61.8% retracement level.
As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.
• Support: 1.0765 (S1), 1.0700 (S2), 1.0610 (S3).
• Resistance: 1.0885 (R1), 1.1045 (R2), 1.1160 (R3).
GBP/JPY fell below the lower line of the consolidation range that had been containing the price action since the 13th of March and turned the short-term bias back to the downside, in my view. I would now expect sellers to continue pushing the rate lower and target the strong support zone of 176.00 (S1). Our daily momentum studies detect negative momentum and amplify the case for such a move. The 14-day RSI stand below its 50 line and continues lower, while the MACD, lies below both its zero and signal lines, pointing south. As for the bigger picture, the rate fell below the 200-day moving average, while a decisive dip below 176.00 could complete a 5-month failure swing top and perhaps turn the overall outlook negative.
• Support: 176.00 (S1), 175.00 (S2), 174.00 (S3).
• Resistance: 177.70 (R1), 178.50 (R2), 179.25 (R3).
AUD/USD moved lower to meet both the 50- and the 200-period moving averages. Our short-term momentum studies reveal negative momentum, but personally I would like to see a dip below 0.7760 (S1) before getting confident on the downside. For now, I prefer to sit on the sidelines. In the case of a move below 0.7760 (S1), we will have a lower low on the 4-hour chart and we may see extensions towards the 0.7700 (S2) line.
As for the bigger picture, the rate is still trading above the downtrend line taken from back the peak of the 5th of September, confirming the positive divergence between our daily oscillators and the price action. This is another reason I would hold a neutral stance for now. I would like to wait for clearer directional signals.
• Support: 0.7760 (S1), 0.7700 (S2), 0.7600 (S3).
• Resistance: 0.7900 (R1), 0.8000 (R2), 0.8035 (R3).
Gold surged on Thursday, breaking above the psychological figure of 1200 (S1). Subsequently, the metal found resistance marginally below our 1222 (R1) hurdle and pulled back to challenge the 1200 (S1) as a support this time. The short-term outlook remains positive and I would expect the bulls to seize control again and set the stage for a test at the 1222 (R1) line. Our daily oscillators support the near-term picture. The 14-day RSI continued to race higher and moved above its 50 line, while the daily MACD, already above its trigger, points up and is getting closer to its zero line.
As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows. However, yesterday’s rally almost reached the prior peak of the downtrend. I would switch my stance to neutral as far the longer-term trend is concerned.
• Support: 1200 (S1), 1185 (S2), 1175 (S3).
• Resistance: 1222 (R1), 1235 (R2), 1245 (R3).
WTI continued its surge during the European morning Thursday and managed to hit our resistance line of 52.45 (R2) before turning down. The price now seems to be forming a failure swing top formation, thus I believe that the picture on the 1-hour chart has turned neutral. I would like to see a clear move below the psychological barrier of 50.00 (S1) before getting confident on the downside. Such a move would signal the completion of the failure swing and would confirm a forthcoming lower low. Our short-term momentum studies support the notion. The RSI slid below its 50 line, while the MACD, although positive, stands below its trigger, points down, and is headed towards its zero line. On the daily chart, WTI is trading well below the 200-day moving average, but traded for a while above the 50-day one. Moreover, there is still positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend as well and wait for clearer directional signals.
• Support: 50.00 (S1), 49.45 (S2), 48.70 (S3).
• Resistance: 51.65 (R1) 52.45 (R2), 53.40 (R3).
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