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Market Analysis 29/01/2014
Daily Commentary29.01.2014, Time of writing: 03:30 GMT
The Big PictureThe Turkish Central Bank surpassed expectations by more than doubling its key interest rate to 10% from 4.5% in a late-night meeting last night, as well as raising other benchmark rates. The move was particularly significant as PM Erdogan said yesterday that he was opposed to higher rates, but the central bank defied his wishes. The TRY immediately strengthened by 2.6%, but this just erased the last two weeks of weakening and still leaves the currency as the second-worst-performing currency in the world over the last month or two (after the ARS, which was devalued). Nonetheless the fact that it was willing to take these steps, coming after India’s surprise hike in rates yesterday, improved sentiment in markets and most Asian stock markets were up this morning. Risk-sensitive currencies such as the NOK, AUD and NZD were higher as well and the safe-haven JPY and CHF were lower.
In this context the weakness of CAD stands out as indicative of the negative sentiment surrounding the currency. (AUD and NZD may also have been boosted by a report that investors in a troubled high-yield trust will be bailed out, thus averting a possible credit crunch in the country.) Most EM currencies that we track were also higher, with INR, ZAR, MXN and IDR all gaining 1% or more. RUB and CZK were lower however, suggesting that their troubles are more idiosyncratic.
However, if the recent bout of EM turmoil necessitates general tightening of monetary conditions in EM countries, then it is likely to slow down global growth. In this context, I wonder how long the high-beta G10 currencies can continue to gain. Moreover, are the EM countries willing to make the fundamental reforms necessary to renew investor confidence? The independent central banks may be willing, but the governments are a different story. I don’t think the EM turmoil is over.
As mentioned yesterday, EUR is positively correlated with TRY, yet EUR/USD moved slightly lower. This may be because of a story in a German newspaper that the decision by the German constitutional court on the legality of the Eurozone bail-out system has been delayed until April because of "intense differences of opinion" among the eight judges. A decision was initially expected last October, after the German elections. The longer the case drags on, the less likely it is that the court will agree to the German government’s request for a ruling that underpins the agreed bail-out machinery. The court can force German institutions to withdraw support for EU operations, which would cause the system to lose all market credibility and probably spark another Eurozone crisis. This is potentially a very serious problem that bears watching. It is potentially a big negative for the euro.
The focus of attention today will of course be on the FOMC meeting. The market expects a standard statement following the meeting. From what all the Fed speakers have said, I expect them to continue tapering off their bond purchases at the same pace. The economic data since the last meeting has been mixed but generally positive; although the December payrolls were disappointing, it’s likely that growth in the second half was faster than the Fed expected, so the low level of new jobs may be attributed to the weather. In any case the unemployment rate continues to decline. Inflation is below target but stable. Although unemployment is getting near to their 6.5% threshold, I wouldn’t expect any change in that threshold at the current meeting. The statement is unlikely to mention the recent turmoil in EM, since the Fed has consistently said that it sets monetary policy with regards to the US, not the world. As for the market reaction, at their last meeting in December they were not widely expected to begin tapering and the decision to do so sent EUR/USD lower by around 1 euro-cent. On the other hand, back in September when they were expected to begin tapering and didn’t, EUR/USD immediately jumped by about 2 euro-cents. Those two reactions give the possible extremes in case of a surprise. If they act as the market expects and continue tapering by USD 10bn, EUR/USD could decline slightly, given that there are probably some people who think it might not happen, but I wouldn’t expect a major impact. There is no press conference after the meeting.
As for the indicators, Eurozone’s M3 annual growth is estimated to accelerate in December, but the 3-month moving average is expected to slow. Italy’s business confidence for January is estimated to be higher than in December and Norway’s AKU unemployment rate for November is forecast to remain unchanged at 3.3%. There are no major US indicators out. As for the speakers, BoE Gov. Carney speaks at a lunch in Edinburgh. He will hold a press conference after the event. There is also a South Africa Reserve Bank policy board meeting that will probably be more closely watched than usual, given the recent moves by India and Turkey. No change is expected.
The Market EUR/USD
• EUR/USD moved slightly lower, remaining between the support level of 1.3650 (S1) and the resistance barrier at 1.3700 (R1). In early European trading the pair is testing the support of 1.3650 (S1), where a downward violation may target the area between 1.3525 (S3) and 1.3570 (S2). On the other hand, a successful break above 1.3700 (R1) may open the way towards 1.3810 (R2). Both momentum studies continued moving lower, while the MACD, although in bullish territory, remains below its signal line, confirming the weakness of the longs to drive the price higher for now.
• Support: 1.3650 (S1), 1.3570 (S2), 1.3525 (S3).
• Resistance: 1.3700 (R1), 1.3810 (R2), 1.3893 (R3).
USD/JPY
• USD/JPY moved higher on Tuesday after Turkey’s central bank sharply raised its main interest rates at a late-night meeting, reducing demand for safe-haven currencies. Nonetheless, there is still the possibility for a lower high and that the correcting phase has not yet ended. The pair is once again above 103.00, finding resistance at the 50-period moving average. A lower high may push the price below 103.00 (S1) and challenge once more the 102.14 (S2) support, near the 38.2% Fibonacci retracement level of the 8th Oct. - 2nd Jan. advance. An upward violation of 105.00 (R2) is needed to signal a probable completion of the recent correcting phase.
• Support: 103.00 (S1), 102.14 (S2), 101.12 (S3)
• Resistance: 103.90 (R1), 105.00 (R2), 105.45 (R3).
EUR/GBP
• EUR/GBP moved lower on Monday and yesterday moved in a consolidative mode near the support at 0.8230 (S1). The recent advance was limited at 0.8305, near the 200-period moving average. A clear dip below the 0.8230 (S1) hurdle may trigger further bearish extensions towards the next support barrier at 0.8167 (S2). Both momentum studies lie near their neutral levels, confirming the recent consolidation, but they are both pointing down, favoring a possible bearish momentum for the near future.
• Support: 0.8230 (S1), 0.8167 (S2), 0.8080 (S3).
• Resistance: 0.8305 (R1), 0.8345 (R2), 0.8390 (R3).
Gold
• Gold continued moving lower, riding the longer term trend line as a support. The metal is now trading near the 50-period moving average and the possibility for a higher low still exist. Both momentum studies continued declining. The MACD, already below its trigger line, seems ready to obtain a negative sign. Nonetheless, I would wait for a break below the low of 1235 (S2), before assuming that the violation of the trend line was a false break-out and that the recent correcting advance has ended. If the metal continues printing higher highs and higher lows I would expect it to overcome the 1268 (R1) barrier and target the next resistance at 1290 (R2).
• Support: 1250 (S1), 1235 (S2), 1224 (S3).
• Resistance: 1268 (R1), 1290 (R2), 1315 (R3).
Oil
• WTI rebounded from the blue trend line and the moving averages and moved significantly higher, violating the barrier of 96.50. Furthermore, the 50-period moving average crossed above the 200-period moving average, giving an additional bullish indication. The price is now heading towards the 97.85 (R1) resistance hurdle, the violation of which may open the way towards the next resistance at 98.90 (R2). The MACD, already in a bullish territory, crossed above its signal line, confirming the recent positive momentum.
• Support: 96.50 (S1), 95.00 (S2), 94.00 (S3).
• Resistance: 97.85 (R1), 98.90 (R2), 100.55 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 30/01/2014
Daily Commentary 30.01.2014, Time of writing: 03:30 GMT
The Big Picture Central banks dominate the market The FOMC meeting went as expected – a further reduction in its monthly bond purchases of USD 10bn and no significant changes in the statement or its forward guidance -- and had almost no impact on trading. The Fed said that underlying strength in the economy was improving and the risks to future activity had become more balanced. We’ll learn more about this later in the day, when the US announces the flash estimate of Q4 GDP. It’s expected to show an annualized rise of 3.2%, a deceleration from +4.1% in Q3. Private-sector demand is expected to be healthy, led by strong consumer spending and a pickup in exports, but this will be partly offset by a drop in federal spending because of the government shutdown. Investors may therefore look through the decline in the headline when assessing the data and focus on the details. Strong private sector demand could support USD even if the headline figure shows a slowdown in growth. On the other hand, the personal consumption core price index, the Fed’s favorite inflation measure, is forecast to slow to +1.1% qoq SAAR from +1.4%. Inflation this far below the Fed’s 2% target could start to make some FOMC members nervous about withdrawing too much stimulus, but so far this is largely a theoretical concern in the US.
The Reserve Bank of New Zealand (RBNZ) also kept its interest rates unchanged, but that pushed the NZD lower as the market had been pricing in about an even chance that they would hike at this meeting. Furthermore, the end of the statement merely said that the RBNZ “remains committed” to hiking rates as needed and that the pace of increase “will depend on future economic indicators.” The lack of any hint of a hike at the March meeting disappointed some investors. I think a hike is likely, or at least the possibility of a hike is likely – more than can be said for many markets – and recommend investors consider buying NZD on dips.
In this context, I remain bearish on AUD/NZD following this morning’s downward revision in the final HSBC/Markit China manufacturing PMI for January, the first sub-50 reading in seven months. Some economists are already marking down their forecasts for China’s Q1 GDP in response to the lower PMI. It appears to me that the AUD is more vulnerable to a slowdown in China than NZD is and so NZD should continue to gain on AUD. The next clue will be on Saturday, when the official Chinese manufacturing PMI for January will be announced. Although it’s forecast to remain in expansionary territory, nonetheless it’s also expected to fall to a seven-month low. That might provide another downward push to AUD.
EM turmoil the main story The main story though was not in the G10 currencies, but rather in the emerging market (EM) world. EM currencies continued to sell off despite – or perhaps due to? – the South African Reserve Bank’s (SARB) surprise 50 bps rate hike yesterday. In fact the ZAR was far and away the worst-performing currency overnight, falling 3.1% vs USD. But many other EM currencies saw large declines as well: HUF was down over 2%, MXN -1.7%, and PLN and INR off 1%. The SARB rate hike demonstrates the poor trade-offs that EM countries face with the Fed tapering: either let their currencies go and face higher inflation/lower purchasing power, or raise rates and stifle growth. With funds just starting to flee EM stocks markets (see graph), this crisis is just beginning, in my view. It has further to go and these currencies have further to fall.
EM to boost JPY, CHF On the other hand, heightened tensions in EM and thoughts of global monetary tightening sent the safe-haven JPY and CHF higher. Although I’m bearish on these currencies in the medium term, they could appreciate further as investors continue to cut their EM positions. During the EM turmoil in 2011 there was a close correlation between EM turmoil as measured by the EM VIX index and USD/JPY (see graph).
Today’s indicators: During the European day, the German unemployment rate for January is expected to remain unchanged at 6.9% and the country’s preliminary CPI is forecast to be down 0.6% mom in January, a turnaround from +0.5% mom in December. Nonetheless, the yoy rate is estimated to accelerate slightly to 1.3% from 1.2%. That could take some pressure off the ECB to ease and therefore be EUR-positive. From Eurozone as a whole we have the final consumer confidence index for January. In UK, BoE mortgage approvals for December are forecast to be higher than in November, confirming that the housing boom continues.
In the US, along with the GDP figures, initial jobless claims for the week ended on Jan. 25 are expected to rise to 330k from 326 the previous week, while the continuing claims are forecast to fall to 3000k from 3056k. Pending home sales for December are estimated to have fallen 0.3% mom, from a rise of 0.2% in November.
The Market EUR/USD
• EUR/USD moved in a consolidative mode yesterday and is now finding support near the moving averages. A clear break below the moving averages may target the area between 1.3525 (S3) and 1.3570 (S2). On the other hand, a successful break above 1.3700 (R1) may open the way towards 1.3810 (R2). Both momentum studies continued moving lower, while the MACD, although in bullish territory, remains below its signal line, confirming the decelerating momentum for now.
• Support: 1.3640 (S1), 1.3570 (S2), 1.3525 (S3).
• Resistance: 1.3700 (R1), 1.3810 (R2), 1.3893 (R3).
EUR/JPY
• EUR/JPY found resistance at 141.25 (R1), near the moving averages, and moved lower reaching the support level of 139.15 (S1). The pair now consolidates slightly above that barrier, the violation of which may trigger extensions towards the lower boundary of the downward sloping channel and the next support at 138.00 (S2). As long as the pair is trading below both the moving averages, within the downward sloping channel, the short-term picture remains negative. On the daily and weekly charts, the longer-term uptrend is still in progress and I would consider the short-term decline as a retracement of the major upward path, at the moment.
• Support: 139.15 (S1), 138.00 (S2), 137.10 (S3).
• Resistance: 141.25 (R1), 143.15 (R2), 145.00 (R3).
GBP/USD
• GBP/USD moved in a consolidative mode slightly above the 50-period moving average. The pair remains below the resistance of 1.6640 (R1). If the longs are strong enough to overcome that barrier, we may experience extensions towards the next hurdle at 1.6735 (R2). On the other hand, a break below the support of 1.6465 (S1) is needed to trigger further possible declines. On the daily chart, the rate is trading above both the moving averages with the 50-day moving average supporting the lows of the price action, thus I consider the longer term upward path intact for now.
• Support: 1.6465 (S1), 1.6335 (S2), 1.6260 (S3).
• Resistance: 1.6640 (R1), 1.6735 (R2), 1.6885 (R3).
Gold
• Gold rebounded from the 1250 (S1) barrier, near the longer term downtrend line, and moved higher, but the advance was halted once again by the resistance barrier of 1268 (R1). If the bulls regain momentum and manage to overcome that obstacle, I would expect them drive the battle higher and challenge the next resistance at 1290 (R2). The MACD rebounded near its zero line and crossed above its trigger, confirming the recent bullish momentum. Alternatively, a break below the low at 1250 (S1) may complete a failure swing to the downside and may change the short-term outlook of the precious metal.
• Support: 1250 (S1), 1235 (S2), 1224 (S3).
• Resistance: 1268 (R1), 1290 (R2), 1315 (R3).
Oil
• WTI gave another test of the blue uptrend line near the 96.50 (S1) support level and moved higher. The price is now heading towards the 97.85 (R1) resistance hurdle, the violation of which may open the way towards the next resistance at 98.90 (R2). The MACD remains in its positive territory and lies above its signal line, indicating bullish momentum. As long as the price is trading above the short-term trend line and above both the moving averages, I consider the short-term outlook positive.
• Support: 96.50 (S1), 95.00 (S2), 94.00 (S3).
• Resistance: 97.85 (R1), 98.90 (R2), 100.55 (R3).
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Market Analysis 31/01/2014
Daily Commentary 31.01.2014, Time of writing: 03:30 GMT
The Big Picture Market testing EM central banks’ resolve The market is testing central banks’ resolve to support their currency. BRL recovered around 1% after the central bank said it would offer USD 2.3bn of foreign-exchange credit lines to support the currency and limit import price indices. The beaten-down RUB appreciated after the Russian central bank affirmed unlimited market interventions to keep the currency within its target corridor, while even the ZAR recovered somewhat on expectations of further rate hikes after producer prices rose more than expected. On the other, the Eastern European currencies were weaker -- HUF, CZK and PLN all down about 1% as the market started testing the resolve of those countries’ central banks to raise rates. This sort of testing is the way that contagion spreads from weak, vulnerable currencies to previously strong currencies.
As the market probes for weak points, PLN looks temporarily vulnerable as it has so far avoided the worst of the sell-off despite its current account deficit. I believe the currency is fundamentally sound and should be able to withstand any attacks. The economic data are improving, inflation is low but rising and some analysts expect rate hikes later this year. While the country still has a current account deficit, it has narrowed considerably over recent years (from 8.1% in 2008 to an estimated 2.6% this year). Thus investors may want to consider buying the PLN if an attack by speculators pushes the currency down notably.
The dollar was generally stronger against the G10 currencies. NOK was the major loser ahead of today’s employment data, which are estimated to show a rise in the unemployment rate for January. November’s Norway labor force survey, released Wednesday, showed an increase. On the other hand, AUD appreciated as a rally in US and SE Asian stocks brought risk appetite back to the market.
The usual end-of-month data dump from Japan presented a fairly optimistic picture about the economy. In particular, inflation accelerated slightly as the national CPI rose 1.6% yoy in December, up from 1.5% yoy in November and closing in on the Bank of Japan’s 2% target. The core CPI (excluding fresh food and energy) also accelerated slightly, indicating that there is indeed some goods inflation. This is positive news for the yen as it reduces the need for the Bank of Japan to add to its stimulus program. Against this background, the yen appreciated only modestly, probably because the domestic news was offset somewhat by the improvement in risk appetite. I expect the yen can appreciate further however as I do not think the EM crisis is over yet, just moved to a different neighborhood.
The main item on the European agenda today is Eurozone’s first estimate of CPI for January. The headline figure is forecast to have accelerated to 0.9% yoy from 0.8% yoy in December. On the other hand, the core CPI is estimated to have decelerated to +0.8% yoy from +0.9% yoy. The ECB targets headline inflation, not core inflation, so an acceleration in headline inflation could take some of the pressure off the ECB to ease further and thereby support the euro. Eurozone’s unemployment rate for December is expected to have remained at 12.1% for the 9th consecutive month. Is this really possible?
In Canada, November’s GDP is forecast to rise at a slower pace than in October.
From the US, personal income for December is forecast to be up 0.2% mom, the same as in November, but personal spending for the same month is expected to decelerate to +0.2% mom vs +0.5%. Both the headline and core figures of PCE deflator are estimated to have accelerated in December on a yoy basis. Given that the flash estimate of Q4 GDP came out Thursday, it’s unlikely that these figures will affect the market. Other indicators may be mixed: the Chicago purchasing managers’ index for January is forecast to fall modestly and the final release of UoM consumer confidence to be higher than the initial estimate.
As for the speakers; ECB’s Nowotny, Noyer and Rimsevcs speak on “The euro dilemma: inside or outside” at a conference in Budapest and ECB’s Coeure speaks on “The euro area – challenges ahead”. Dallas Fed president Richard Fisher will deliver a speech on the Fed’s operations and the economy at a community forum hosted by the Dallas Fed. His speech will be significant as the first one following Wednesday’s FOMC meeting. We may get some insight into the FOMC’s thinking.
The Market EUR/USD
• EUR/USD moved lower, violating both the moving averages, and reached the support area between the support of 1.3525 (S1) and the resistance of 1.3570 (R1). A clear dip below the strong barrier of 1.3525 (S1) will retrace the whole rally of Jan 23rd and may open the way towards the next hurdle at 1.3400 (S2), which coincides with the 161.8% Fibonacci extension level of the aforementioned advance. The MACD oscillator, already below its trigger line obtained a negative sign, indicating bearish momentum. The RSI lies near its 30 level, thus some consolidation or an upward corrective wave before the bears prevail again cannot be ruled out.
• Support: 1.3525 (S1), 1.3400 (S2), 1.3300 (S3).
• Resistance: 1.3570 (R1), 1.3640 (R2), 1.3700 (R3).
USD/JPY
• USD/JPY reached the support area of 102.14 (S1), near the 38.2% Fibonacci retracement level of the 8th Oct. - 2nd Jan. advance, and moved higher. Nonetheless the pair seems to be forming a lower high and if the bears are strong enough to drive the battle below the aforementioned support area, I would expect them to target the 50% retracement level, near the support of 101.12 (S2). On the longer term time frames I still consider the short term downtrend as a retracement of the major upward path.
• Support: 102.14 (S1), 101.12 (S2), 100.00 (S3)
• Resistance: 103.00 (R1), 103.90 (R2), 105.00 (R3).
EUR/GBP
• EUR/GBP moved lower, breaking below the barrier of 0.8230. The pair is currently trading below that level, and if the bears regain their recent momentum, I would expect them to challenge the support hurdle at 0.8167 (S1). Relying on our momentum studies does not seem a solid strategy since the MACD lies below both its trigger and zero lines, but the RSI is turning its slope to the upside. As long as the rate is trading below both the moving averages and the purple short-term resistance line, the outlook remains negative.
• Support: 0.8167 (S1), 0.8080 (S2), 0.8035 (S3).
• Resistance: 0.8230 (R1), 0.8305 (R2), 0.8345 (R3).
Gold
• Gold failed to overcome the 1268 (R2) hurdle and moved lower, breaking the 1250 barrier and completing a failure swing to the downside. The precious metal is back below the longer-term downtrend line and a clear dip below the 1235 (S1) support may confirm that the recent advance was just a retracement of the major downtrend. Both momentum studies are following downward paths, while the MACD lies below both its zero and its trigger lines. On the other hand, only a break above the hurdle of 1268 (R2) may turn the picture positive again.
• Support: 1235 (S1), 1220 (S2), 1187 (S3).
• Resistance: 1250 (R1), 1268 (R2), 1315 (R3).
Oil
• WTI moved higher and managed to overcome the previous high of 97.85 (S1). The uptrend remains in effect since the price is forming higher highs and higher lows above the blue trend line and above both the moving averages. Nonetheless, it seems to be losing momentum as we can identify negative divergence between our momentum studies and the price action. Also the MACD, although in its positive area, seems ready to cross below its trigger line, confirming the decelerating momentum.
• Support: 97.85 (S1), 96.50 (S2), 95.00 (S3).
• Resistance: 98.93 (R1), 100.55 (R2), 102.00 (R3).
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MARKETS SUMMARY
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Market Analysis 03/02/2014
Daily Commentary 03.02.2014, Time of writing: 03:30 GMT
The Big Picture PMI Day The dollar was generally stronger this morning, gaining against most G10 and EM currencies. The only real exception in the G10 was the CAD. USD/CAD surged through 1.12 in early US trading Friday but then fell back sharply as money managers rebalanced their hedges at the end of the month. Given the technical nature of the move, I expect it will be only temporary and this pull-back may represent a good opportunity to establish new short-CAD positions. The government and the central bank agree that the currency is too strong; why fight them? On the other hand, the dollar’s gains against SEK, CHF, EUR and NOK were fairly even. It gained less against GBP and the two other commodity currencies. AUD/USD was down only slightly after the official Chinese PMI came in as expected at 50.5. The Australian PMI on the other hand fell further into below-50 territory and Australian building approvals were below expectations. The NZD rebounded after the Treasury said the Reserve Bank of New Zealand is expected to raise rates in March, which everyone knew already but it’s nice to have it officially confirmed.
Today is January PMI day. We already had the official Chinese PMI – as expected – and the Australian PMI – a decline. Note from the graph what outliers Australia and China are – Australia with its accelerating contraction and China with its decelerating expansion (according to the official PMI – the HSBC/Markit PMI says it has an accelerating contraction.) This is yet another reason why I remain bearish on AUD/USD. France also stands out within the Eurozone. Sweden’s PMI rose unexpectedly to 56.4 from 52.2. During the European day we will get PMIs from Norway, Switzerland, Italy and the UK. The UK PMI is expected to be unchanged from December, which should at least keep GBP steady. Germany, France and Eurozone as a whole also publish their final manufacturing PMIs for the same month. In US, the ISM manufacturing PMI is forecast to have fallen to 56.0 from a revised 56.5 in December. That could dent the strong dollar temporarily.
We have only one speaker scheduled: ECB executive board member Sabine Lautenschlaeger testifies at the European Parliament’s economic and monetary affairs committee in a hearing on her nomination to be vice chair of the ECB’s new supervisory Board.
As for the rest of the week, the main event will be the ECB meeting on Thursday. The market focus on this decision is increased after Friday’s announcement that inflation in the Eurozone slowed to +0.7% yoy from +0.8% yoy. Remember that the ECB cut rates back in November after the CPI dropped to +0.7% yoy from +1.1% yoy, and since then it has consistently warned that its mandate is “symmetrical,” that is to say, it is as worried about inflation being too far below target as it is about inflation being above target. Last month ECB President Draghi dismissed a drop in German inflation as a technicality related to a change in how they calculate the index; the market will be waiting to see whether he considers this month’s decline also to be a technicality or whether it is symptomatic of something the ECB should be concerned about. We also have a Bank of England rate decision at the same day, although those are generally non-events owing to the Bank’s forward guidance. It will be much more important to see what changes the Bank makes to that forward guidance in the following week’s Inflation Report.
Finally, there will be an RBA meeting on Tuesday. The market is pricing in a 96% probability that they do not change rates, so that looks pretty certain; the big question then will be what hints they give for the direction of future policy. Since September, Gov. Stevens has ended his statement with a neutral comment that “The Board will continue to assess the outlook and adjust policy as needed…,” without giving any indication whether they think they will need to adjust rates upward or downward next. That will be the market’s focus. Some people have argued that with inflation at 2.7%, in the upper half of their 2% to 3% range, it’s unlikely that they make any hints about easing policy. The last time they hinted about easing rates, in July, they said that “The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing…” They then cut rates the next month. However, inflation then was 2.5%, not far above where it is now, and note that they stressed the inflation outlook, not the current inflation situation. It’s possible that with China slowing and the Australian economy also weak, they come to the same conclusion again and hint about another cut in rates, which would weaken the AUD further – a result that they would probably welcome.
The other big event of the week will be the US non-farm payrolls for January. The figure is forecast to return to its normal levels, at +181k, after the surprisingly small rise of +74k in December. The US unemployment rate is estimated to have remained unchanged at 6.7%. Rising NFP and a steady unemployment may erase concerns whether the unemployment fell for bad reasons in December and as a result support the USD.
As for the indicators, on Tuesday, in Europe, we have the UK construction PMI for January and Eurozone’s PPI for December. The latter is expected to show a further decline in producer prices, which could add to the downward pressure on EUR ahead of the ECB meeting. From the US we have December factory orders and from New Zealand we get the unemployment rate for Q4. On Wednesday, we get the service-sector PMIs for January from several countries of Europe and the Eurozone as a whole. Eurozone’s retail sales for December are also coming out. In US, the ADP employment change and the ISM non-manufacturing PMI, both for January, are coming out. On Thursday we get December trade data for from Australia and the US. German factory orders for the same month are also coming out. On Friday the UK industrial and manufacturing production for December and German industrial production for the same month will be released. Canada’s unemployment rate for January is also coming out.
The Market EUR/USD
• EUR/USD moved significantly lower, breaking below the 1.3525 hurdle. The pair retraced the whole rally of Jan 23rd and is now heading towards support barrier of 1.3400 (S1), which coincides with the 161.8% Fibonacci extension level of the aforementioned advance. The MACD oscillator lies below both its trigger and signal lines, confirming the recent bearish momentum of the price action. However, the RSI entered its oversold territory, thus some price consolidation or an upward corrective wave upon the oscillator's exit from the extreme conditions cannot be ruled out.
• Support: 1.3400 (S1), 1.3300 (S2), 1.3220 (S3).
• Resistance: 1.3525 (R1), 1.3570 (R2), 1.3640 (R3).
USD/JPY
• USD/JPY rebounded for a third time from the 102.00 (S1) area, near the 38.2% Fibonacci retracement level of the 8th Oct. - 2nd Jan. advance. However, since the rate is trading below both the moving averages and the blue resistance line, the outlook remains negative. A clear violation of the aforementioned support area may drive the battle towards the next barrier at 101.12 (S2), near the 50% retracement level of the 8th Oct. - 2nd Jan. advance. On the longer-term time frames I still consider the short term downtrend as a retracement of the major upward path.
• Support: 102.00 (S1), 101.12 (S2), 100.00 (S3)
• Resistance: 103.00 (R1), 103.90 (R2), 105.00 (R3).
EUR/GBP
• EUR/GBP moved slightly lower, remaining between the support of 0.8167 (S1) and the resistance at 0.8230 (R1). If the bears are strong enough to continue pushing the price lower, I would expect them to challenge the support hurdle at 0.8167 (S1), the violation of which may open the way towards the next support at 0.8080 (S2). As long as the rate is trading below both the moving averages and the blue short-term resistance line, the outlook remains negative. Only an upward violation of the resistance line and the 0.8305 (R2) obstacle may change the rate's picture.
• Support: 0.8167 (S1), 0.8080 (S2), 0.8035 (S3).
• Resistance: 0.8230 (R1), 0.8305 (R2), 0.8345 (R3).
Gold
• Gold remained near its Friday opening levels, consolidating below the 1250 (R1) level. A clear dip below the 1235 (S1) support may confirm that the 19th Dec. - 27th Jan advance was just a retracement of the major downtrend. Both momentum studies follow downward paths, while the MACD lies below both its zero and its trigger lines. On the other hand, only a break above the hurdle of 1268 (R2) may turn the picture positive again. On the daily chart, a bearish engulfing candlestick pattern is identified, suggesting the continuation of the decline.
• Support: 1235 (S1), 1220 (S2), 1187 (S3).
• Resistance: 1250 (R1), 1268 (R2), 1290 (R3).
Oil
• WTI was unable to remain above the 97.85 barrier and moved lower, breaking below the blue uptrend line and confirming the negative divergence between our momentum studies and the price action. Nonetheless only a clear dip below the support level of 96.50 (S1) would turn the picture negative, since the possibility for a higher low still exists. The price is also testing the 50-period moving average, keeping alive the scenario for a rebound. I remain neutral on WTI for now until we have a clearer picture.
• Support: 96.50 (S1), 95.00 (S2), 93.30 (S3).
• Resistance: 97.85 (R1), 98.90 (R2), 100.55 (R3).
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Market Analysis 04/02/2014
Daily Commentary04.02.2014, Time of writing: 03:30 GMT
The Big Picture Questioning the US recovery Better-than-expected manufacturing PMIs from the Eurozone contrasted with a shockingly weak ISM from the US to send the dollar lower against most G10 currencies. The US ISM index showed weakness all around: in new orders, production and employment were all lower. It was the biggest drop since May 2011, when the earthquake in Japan disrupted global supply chains. Anecdotal evidence still suggests that the apparent slowdown in the US is really a weather story, and the regional Fed surveys are certainly showing more robust growth. Nonetheless the market is clearly worried that there’s more to it than simply the weather. Implied interest rates on the long-dated Fed Funds futures collapsed by as much as 12 bps yesterday; they are now slightly lower than they were before the Fed started tapering, indicating that all the expectations of Fed tightening have been unwound and then some. Naturally, this unwinds some of the support for the dollar.
Curiously, the euro was not a major beneficiary of the move as EUR/USD was only slightly lower. This was probably because of lingering thoughts of possible loosening measures at this week’s ECB meeting. The two safe-haven currencies JPY and CHF were bigger gainers, naturally. CAD also rose after the industrial price index and raw materials price index rose strongly in December. The market may be positioning for a strong Canada trade number on Thursday.
AUD rose the most though after the Reserve Bank of Australia (RBA) changed its policy statement to a more neutral view. Previously, the RBA had said that it would “adjust policy as needed to foster sustainable growth,” a statement that held out the possibility of rate cuts; they changed this to “the most prudent course is likely to be a period of stability in interest rates.” They also dropped references to the currency being “uncomfortably high,” indicating satisfaction with current levels. This could be the bottom for AUD/USD.
On the other hand, GBP lost significant ground against all currencies, including even the weaker USD, after its manufacturing PMI missed expectations. This was notable as the extent of the miss in the UK was nothing like that in the US (0.6 point below expectations in the UK vs a 4.7 point miss in the US) and the UK PMI remains much higher than in the US (56.7 vs 51.3). It’s odd that the pound should get hammered so badly on such a small miss. The economic surprise index for the UK, while still negative, is trending down and is now lower than the Eurozone surprise index. The market may feel that while the UK economy is indeed recovering nicely, the recovery is now fully discounted in the price. While I have been bullish on GBP, I now recommend caution as the large reaction to the small miss suggests a change in market sentiment.
The European day today starts with the UK construction PMI for January. The index is forecast to have fallen, which could put further pressure on GBP after Monday’s disappointing manufacturing PMI. Eurozone's producer price index (PPI) for December is forecast to have been up to +0.2% mom, a turnaround from -0.1% mom in November. This will bring the yoy rate up to -0.8% from -1.2%. After last week's decline in the first estimate of Eurozone's CPI, I would expect the market to ignore a small monthly rise in the PPI. On the other hand, a decline in Italian inflation may add weight to the scenario that the ECB could take further action on Thursday. Italy’s preliminary CPI for January is forecast to be up 0.6% yoy, a slowdown from +0.7% yoy in December.
From the US, factory orders for December are forecast to have been down 1.8% mom, a turnaround from +1.8% mom in November. This would be another USD-negative number following Monday’s terrible ISM figure and could put more pressure on the dollar.
We have five speakers scheduled during the day. ECB supervisory board chairman Daniele Nouy delivers her first progress report to the European Parliament. Bank of England Executive Director for Financial Stability Andy Haldane and Norges Bank Executive Director Birgen Vikoeren will also speak. In the US, Richmond Fed President Jeffrey Lacker and Chicago Fed President Charles Evans are scheduled to speak. It will be interesting to see if we get any further insights about the FOMC’s point of view following Monday’s speech by Dallas President Fisher.
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Market Analysis 05/02/2014
Daily Commentary 05.02.2014, Time of writing: 03:30 GMT
The Big Picture Recovery in risk sentiment The theme overnight was the recovery in risk sentiment. So the dollar was little changed against most of the G10 currencies but the safe-havens – JPY and CHF – eased, while the risk-sensitive SEK and NZD rose (more on NZD in a moment), as did GBP. The recovery in US stocks helped, but more than that was the recovery in EM currencies. Most EM currencies were either unchanged or stronger vs USD, some quite notably so – PLN, RUB, BRL and HUF all gained 1% or more vs USD.
HUF was the big winner and one of the reasons why sentiment improved: the Hungarian debt agency found good demand for its 3m T-bills, selling HUF 80bn worth vs the HUF 60bn it had planned to sell. By contrast, they had failed to sell the planned amount at the previous two debt auctions. The turnaround may have been helped by positive comments about the country by the rating agency Fitch. In any case, it suggests that investors don’t necessarily dislike EM assets, they just dislike the price, and once the price adjusts they’re willing to buy. That would change the perception of the recent decline from the beginning of a rout to a simple correction, which is a totally different story. It would mean a recovery in AUD and NZD, a retracement in JPY and CHF, and probably a stronger dollar. One day doesn’t make a trend however so I’m unwilling to call an end yet to a move that is based on solid fundamental analysis of some of these countries’ economic problems.
In contrast to Hungary, the US sold one-month T-bills at a median yield of 0.11%, compared with 0.04% at the previous auction on Jan. 28th and 0.0% at the one before that. Fears about the debt ceiling are starting to creep into the market again. Looking at market rates, so far the worst-case scenario being priced in is a brief suspension of payments lasting no more than one month. I doubt if the Republicans will be so foolish as to replay that disastrous event over again. If they didn’t succeed last time, I can’t imagine they would think they could succeed this time, but one never knows – for some members of Congress, demonstrating the strength of their convictions is more important than succeeding.
New Zealand's unemployment rate for Q4 came as expected, falling to 6.0% from 6.2%. The unemployment rate would have fallen even further except that the participation rate rose, which is another good sign. The NZ Treasury has already declared that the government is likely to raise rates in March, yet anticipation of the employment data strengthened NZD nonetheless. It was a “buy the rumor, sell the fact” event however as the data release proved to be the high of NZD/USD and the pair came off afterwards on profit-taking. I still like NZD as one of the rare currencies whose central bank has a distinct tightening bias.
During the European day today we have January's service-sector PMIs from Sweden, Italy and the UK. Sweden's index is forecast to decline but to remain above 50, while Italy's figure is forecast to be higher but still below the equilibrium barrier. UK service-sector PMI for January is expected to be up to 59.0 from 58.8, not much of a change but at least in the right direction. It will be interesting to see whether that has a more lasting impact than yesterday’s better-than-expected construction PMI did. If not, then it will become clear that sentiment towards GBP has really turned. We also get the final service-sector PMIs from France, Germany and Eurozone as a whole, alongside with Eurozone's final composite PMI. We also get Eurozone retail sales for December.
The focus of the day will be the US ADP employment change for January. It’s expected at 190k vs 238k in December. Of course, the December figure had no connection at all with the surprisingly low non-farm payrolls for the month (+74K), but people will still watch the figure as the best indicator we have for Friday’s number. The ISM non-manufacturing index for January is forecast to have risen to 53.7 from 53.0 previously, but that probably won’t be enough to offset the gloom caused by Monday’s plunge in the manufacturing ISM.
Elsewhere, Canada’s building permits from December are forecast to have been up 2.0% mom, a turnaround from a noticeable decline of 6.7% in November.
Three Fed speakers are on the day's schedule. Federal Reserve Governor Daniel Tarullo testifies on the Volcker Rule before the House Financial Services Committee, while Philadelphia Fed President Charles Plosser and Atlanta Fed President Dennis Lockhart speak on the economic outlook.
The Market EUR/USD
• EUR/USD moved in a consolidative mode on Tuesday, remaining below the resistance barrier of 1.3525 (R1). The pair confirms the validity of that barrier and if the longs fail to overcome it, I would expect the rate to move lower and target the support level of 1.3400 (S2) which coincides with the 161.8% Fibonacci extension level of the Jan 23rd rally. As long as the rate is trading below both moving averages, the outlook remains negative. Only a violation of the previous high at 1.3700 would signal that the decline from the 27th of December has ended.
• Support: 1.3480 (S1), 1.3400 (S2), 1.3300 (S3).
• Resistance: 1.3525 (R1), 1.3570 (R2), 1.3640 (R3).
EUR/JPY
• EUR/JPY rose yesterday, but after hitting the lower boundary of the purple downward sloping channel it moved slightly lower. I would expect the rate to continue moving lower and if it manages to overcome the support barrier at 136.20 (S1), we may experience further bearish extensions towards the next support at 134.10 (S2). As long as the pair is trading below both the moving averages and below the upper boundary of the downward sloping channel, the picture remains negative. On the daily and weekly charts, the longer-term uptrend is still in progress and I would consider the short-term decline as a retracement of the major upward path, at the moment.
• Support: 136.20 (S1), 134.10 (S2), 131.20 (S3).
• Resistance: 138.00 (R1), 139.15 (R2), 141.25 (R3).
GBP/USD
• GBP/USD rebounded from the 1.6260 (S1) support hurdle and moved higher. The pair is now testing the resistance at 1.6335 (R1), the violation of which may extend the advance towards the next obstacle at 1.6465 (R2), near the upper boundary of the downward sloping channel. However, as long as the rate lies within the downward sloping channel, the overall short-term trend is to the downside and I would consider any advance as an upward corrective wave. Both our momentum studies favor such a retracement since the RSI exited its oversold condition, while the MACD although in a bearish territory crossed above its trigger line.
• Support: 1.6260 (S1), 1.6135 (S2), 1.6060 (S3).
• Resistance: 1.6335 (R1), 1.6465 (R2), 1.6640 (R3).
Gold
• Gold found support at 1250 (S1) and moved slightly higher. I remain neutral on the precious metal, since a dip below the 1235 (S2) support is needed to confirm that the 19th Dec. - 27th Jan advance was just a retracement of the major downtrend, but a violation of the previous high at 1268 (R1) may turn the picture positive again. Both momentum studies lie near their neutral levels, confirming investors’ reluctance to choose the next trending direction of the metal. The picture gets even more mixed if we consider that the metal is trading below the blue trend-line, but above both the moving averages.
• Support: 1250 (S1), 1235 (S2), 1220 (S3).
• Resistance: 1268 (R1), 1290 (R2), 1315 (R3).
Oil
• WTI moved higher after finding support at the 96.50 (S1) level and reached the resistance of 97.85 (R1), slightly below the blue uptrend line. I would expect that area to provide strong resistance to the price action, but if the bulls are strong enough to overcome it, the picture may turn positive again. On the other hand, a dip below the 96.50 (S1) is needed to complete a possible short term reversal. Both momentum studies continue their downward paths, indicating weakening momentum.
• Support: 96.50 (S1), 95.00 (S2), 94.00 (S3).
• Resistance: 97.85 (R1), 98.90 (R2), 100.55 (R3).
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Market Analysis 06/02/2014
Daily Commentary06.02.2014, Time of writing: 03:30 GMT
The Big Picture What could the ECB do today? Last month, ECB President Draghi set out the two conditions that could induce the ECB to act: a worsening of the medium-term outlook for inflation and an unwarranted tightening of the short-term money markets. Since then, Eurozone inflation has indeed fallen and money market rates have indeed risen, with EONIA rising above the main refinancing rate in mid-January.
I don’t think either has gone far enough to get them to take any action yet. The fall in inflation is mostly accounted for by falling energy prices, which won’t be affected by EU monetary policy. Furthermore, the improvement in the Eurozone PMIs suggest that the ECB’s scenario of a gradually improving economy and rising inflation is still possible. Moreover, Draghi didn’t say they would take action if inflation fell further, he said they would take action if the medium-term outlook for inflation worsened. That suggests they are likely to wait at least until after the results of the ECB’s survey of professional forecasters is published on Feb. 13th to see whether inflation expectations are falling, and more likely until next month, when the new staff projections will be announced. As for the rise in money market rates, that probably hasn’t been severe enough to warrant action, in my view.
Nonetheless, it’s worth considering what they could do when they meet this afternoon, because they could be more concerned than I think.
As always, they could cut the key refi rate further, from the current 0.25% to 0.15% or 0.10%. This would obviously be of more symbolic importance than economic importance. They could even go further and cut the deposit rate, currently at zero, to negative. That would probably have a big impact on the euro, not only because of its effect but also because of what it would imply about how difficult the situation is. That’s also why I think there is little chance of them taking such a serious step now, because it would take away one of their more dramatic tools that they would probably want to keep in reserve.
More likely, the ECB could decide to inject more liquidity into the money markets in order to ease the recent tensions. There are several ways they could do that. The simplest would be new longer-term refinancing operations. However, on the one hand banks don’t want to look like they depend on ECB financing, while on the other hand, the ECB is reluctant to lend them cheap money that’s just going to be used for carry trades in the bond market. They could lend the money with conditions, but that’s hard to do as money is fungible.
One idea that has been widely discussed is that they might stop draining the liquidity that they injected into the market when they bought bonds of the troubled peripheral countries. (They bought about EUR 200bn of bonds from 2010 to 2012, which injected that amount of money into the markets, but they drain the money from the market every week by taking it back as deposits.) This would inject a relatively small amount -- something like EUR 180bn -- into the markets, but it would have important symbolic significance as it would be tantamount to quantitative easing, and if they can do it once, they can do it again. Press reports say that they might do this if they could get the Bundesbank’s blessing for it so as not to anger the German public. Finally, a third possibility is that they might reduce the required reserve ratio. If they cut it to 0.5% from 1.0% it would reportedly free up around EUR 50bn.
Other ideas that have been mentioned include a new program to support lending to the private sector, such as creating a market for asset-backed securities; strengthening its forward guidance further; starting a quantitative easing program by buying private-sector assets instead of government bonds; or publishing minutes of its meetings. None of these seem likely at this point however as there has not been sufficient time to prepare.
I think if they take any easing action, it is likely to send the euro lower. No action but a reaffirmation of their previous statement about policy being “symmetrical” is likely to send the euro a little bit lower. They are bound to get questions about the fall in inflation in January; if Draghi brushes this off again as a technical matter, as he did with the drop in German inflation in December, or reaffirms that the ECB thinks inflation will resume its upward trend, then EUR could rally. But if he appears concerned about the matter, then it’s headed lower again.
I don’t expect any news from the Bank of England meeting, nor do I expect any market reaction.
As for the indicators, German factory orders are forecast to have risen 0.2% mom December, a slowdown from a revised 2.2% advance, but that’s unlikely to make much impact on ECB day. In the US, the nation’s trade deficit is forecast to have widened to $36.0bn in December from $34.3bn in November. Initial jobless claims for the week ended on Feb 1 are forecast to have fallen to 335k from 348k, while the continuing claims for the week ended on Jan 25 are expected to have risen slightly to 2998k from 2991k the previous week. These US indicators are coming out during Draghi’s press conference, so there is likely to be a lot of volatility then.
The Market EUR/USD
• EUR/USD continues to consolidate at the area near the 1.3525 (R1) barrier, forming a possible flag pattern. A clear dip below the 1.3480 (S1) may confirm the formation and extend the decline towards the next support at 1.3400 (S2), which coincides with the 161.8% Fibonacci extension level of the Jan 23rd rally. As long as the rate is trading below both moving averages, the outlook remains negative. Only a violation of the previous high at 1.3700 would signal that the decline from the 27th of December has ended. Both momentum studies continued moving higher, while the MACD, although in a bearish territory, lies above its trigger line, thus the further consolidation or an upward corrective wave cannot be ruled out.
• Support: 1.3480 (S1), 1.3400 (S2), 1.3300 (S3).
• Resistance: 1.3525 (R1), 1.3570 (R2), 1.3640 (R3).
USD/JPY
• USD/JPY moved higher after rebounding from the area near the 101.00 (S1) support, which coincides with the 50% retracement level of the 8th Oct. - 2nd Jan. advance. I would expect the upward wave to continue, maybe to test the 102.00 (R1) barrier, as a resistance this time. Both the RSI and the MACD follow upward paths, favoring the continuation of the corrective advance. However, as long as the rate is printing lower highs and lower lows below both the moving averages the short-term downtrend remains intact.
• Support: 101.00 (S1), 100.00 (S2), 99.00 (S3)
• Resistance: 102.00 (R1), 103.00 (R2), 103.90 (R3).
EUR/GBP
• EUR/GBP found support at 0.8265 (S1), moved higher, but after hitting the resistance at 0.8335 (R1), moved lower. During the early European morning the rate consolidates near the 200-period moving average, above the previous purple downtrend line. Nonetheless, the price still lies below the longer-term (light-blue) line and only a break above it, followed by an upward violation of the resistance at 0.8390 (R2) may be a first indication that the longer downtrend might have reached its end. The MACD oscillator seems ready to cross below its trigger line, thus I would expect a pullback before the bulls prevail again.
• Support: 0.8265 (S1), 0.8240 (S2), 0.8187 (S3).
• Resistance: 0.8335 (R1), 0.8390 (R2), 0.8465 (R3).
Gold
• Gold returned back near the 50 period moving average after the unsuccessful attempt by the bulls to drive the metal above the 1268 (R1) resistance, thus the scenario remains the same. A dip below the 1235 (S2) support is needed to confirm that the 19th Dec. - 27th Jan advance was just a retracement of the major downtrend, but daily close above of the previous high at 1268 (R1) may turn the picture positive again.
• Support: 1250 (S1), 1235 (S2), 1220 (S3).
• Resistance: 1268 (R1), 1290 (R2), 1315 (R3).
Oil
• WTI hit the prior short-term uptrend line and moved slightly lower. A downward violation of the 96.50 (S1) support level may signal the completion of a possible short-term reversal. On the other hand, if the longs are strong enough to overcome the hurdle at 98.15 (R1), they may turn the picture positive again. Both momentum studies continue their downward paths, indicating weakening momentum.
• Support: 96.50 (S1), 95.00 (S2), 94.00 (S3).
• Resistance: 98.15 (R1), 98.90 (R2), 100.55 (R3).
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Market Analysis 07/02/2014
Daily Commentary07.02.2014, Time of writing: 03:30 GMT
The Big Picture Payroll day today Yesterday’s ECB meeting produced no change in policy stance. With rates so close to zero already, the ECB has little room for manoeuver and since the economic news has generally been going their way, they decided to wait for more data before taking a decision. The surprise was that next month’s revision will include the forecasts for 2016 nine months before they were expected. Usually the ECB only forecasts two years in advance. This may paint them into a corner: if the ECB forecasts that inflation will remain substantially below their “close to but below 2%” target even in 2016, then they will in fact trigger the very “dis-anchoring” of market inflation expectations that they are concerned about and they would probably be obliged to loosen policy further as a result. In short, next month’s ECB meeting is going to be a key event.
The US economic data was mixed. Initial jobless claims remain around the level that they’ve been for the last several months. The trade deficit widened in December because of a decline in exports, which will subtract a few basis points from Q4 GDP growth. But unit labor costs declined for the second consecutive quarter and are now falling yoy, which may help the employment picture (but push inflation down further). Nonetheless US bond yields crept higher and the implied interest rates on Fed Funds continue to climb back up slowly as fears about an EM collapse recede. In fact EM equities outperformed DM equities yesterday, most EM currencies were unchanged to higher, and the VIX index fell sharply (-2.7 points), indicating that fear is receding from the market. Against that background, JPY was the big loser on the day as the safe-haven flows reversed. AUD/USD also fell after the RBA’s quarterly monetary policy statement said that “with the terms of trade expected to decline, the exchange rate could decline further over time.” The dollar was stable vs CAD after Canada’s trade deficit widened far more than expected in December. It was also stable vs NZD, but lost ground against the rest of the G10 currencies.
The main event today will be the non-farm payrolls for January. The December report came out much worse than expected with payrolls increasing only by 74,000 as bad weather lowered job growth. There were periods of cold weather in January as well, but the weather was more normal during the week of the survey. The market expects the figure to return to normal levels at 180k, while the unemployment rate is forecast to remain unchanged at 6.7%. If the figure comes in below expectations, people will be looking to see whether it was due to the weather again or if something more structural is at play. The way to discern this will be by looking at construction employment, which is strongly affected by the weather. Construction payrolls fell by 16,000 in December, bucking the trend of small gains during most of the year. Payroll firm ADP Wednesday said private construction employment grew by 25,000 last month. Today’s report will also include the annual revisions that could reshape the market’s (and the Fed’s) views of the labor market in 2013. The data currently show an increase of 182k jobs a month last year. The 2012 revisions added nearly 30k a month to the estimate for that year; a similar revision for 2013 would improve the perception of the US economy, probably raising interest rate expectations somewhat and strengthening the dollar. The reverse is also possible, of course.
Which pair to play depends on whether you think the payrolls will beat the forecast or come in below forecast. If the number beats the forecast, then the most volatile currencies are JPY, silver, MXN, gold, NOK, DKK, and EUR, in that order. If they are below forecast, then the most volatile pairs are MXN, CHF, JPY, and gold (based on data over the last three years). Above-forecast numbers have tended to engender more volatility than below-forecast numbers, perhaps because for much of that time investors have thought that a strong number could bring about a change in monetary policy, whereas a weak number just meant the continuation of the current policy. That relationship might not continue going forward.
As for the rest of the indicators, we get industrial production for December from Sweden, Norway, Germany and the UK. Sweden’s IP is forecast to have been down mom, while Germany’s IP is expected to have slowed. On the other hand, UK industrial production are estimated to have accelerated, which could boost the pound, which has been beaten down recently. Canada’s unemployment rate is expected to have fallen to 7.1% in January from 7.2% in December.
We have four speakers scheduled on Friday’s schedule. During the Asian morning, Boston Fed President Eric Rosengren speaks at New College of Florida. ECB executive Board member Yves Mersch speaks on reviving growth in the Euro area, ECB Governing Council member George Provopoulos speaks on “The Greek financial crisis: From Grexit to Grecovery” and Bank of Canada Senior Deputy Governor Tiff Macklem will also give a talk.
The Market EUR/USD
• EUR/USD surged yesterday after ECB president Mario Draghi didn’t provide signals for further easing in the coming meetings. The rally was stopped by the 1.3618 (R1) barrier near the 200-period moving average. However, the possibility for a lower high still exist and only a clear break above the 1.3735 (R3) barrier would signal that the decline from the 27th of December has ended. I would expect the rate to remain near its current levels until the nonfarm payrolls are out. A positive release may confirm the lower high and drive the rate below 1.3555 (S1), targeting once again the support at 1.3480 (S2). On the other hand, a negative surprise may generate another rally challenging the area of 1.3700 (R2).
• Support: 1.3555 (S1), 1.3480 (S2), 1.3400 (S3).
• Resistance: 1.3618 (R1), 1.3700 (R2), 1.3735 (R3).
EUR/JPY
• EUR/JPY also rallied on Draghi’s comments and is back within the purple downward sloping channel. As long as the high of 141.25 (R2) holds the short-term trend remains a downtrend. The MACD oscillator, already above its trigger line, entered its positive territory, confirming the recent positive momentum. I expect any further advance to be limited near the 200-period moving average and the upper boundary of the downward sloping channel.
• Support: 137.55 (S1), 136.20 (S2), 134.10 (S3).
• Resistance: 139.15 (R1), 141.25 (R2), 142.45 (R3).
GBP/USD
• GBP/USD failed to overcome the strong barrier of 1.6260 (S1) and moved in a consolidative mode between that barrier and the resistance of 1.6335 (R1). A rise in UK industrial production coming out today could provide the impetus for a break above the 1.6335 (R1) resistance. Nonetheless, as long as the pair is printing lower highs and lower lows within the downtrend channel and the 50-period moving average lies below the 200-period moving average, the short-term trend remains to the downside. As a result, I would consider any additional advance today as a corrective wave. The corrective wave is also favored by two hammer candles on the daily chart.
• Support: 1.6260 (S1), 1.6135 (S2), 1.6060 (S3).
• Resistance: 1.6335 (R1), 1.6465 (R2), 1.6640 (R3).
Gold
• Gold moved slightly higher but remained between the support level of 1250 (S1) and the resistance at 1268 (R1). The precious metal maintains its price above both the moving averages, which is a bullish indication. A daily close above the aforementioned resistance could turn the picture positive again. On the other hand, a break below the support barrier of 1235 (S2) is needed to confirm that the 19th Dec. - 27th Jan advance was just a retracement of the major downtrend.
• Support: 1250 (S1), 1235 (S2), 1220 (S3).
• Resistance: 1268 (R1), 1290 (R2), 1315 (R3).
Oil
• WTI hit the prior short-term uptrend line once again and moved lower. A downward violation of the support at 96.50 (S1) may signal the completion of a possible short-term reversal and have larger bearish implications. On the other hand, an upward break above the resistance at 98.80 (R1) could turn the picture bullish again. The mixed picture is confirmed by the fact that the price is trading above both the moving averages, while both the MACD and the RSI continue declining. On the weekly chart a spinning top candle might be completed after the close of this week and confirm the neutral environment WTI is trading, for now.
• Support: 96.50 (S1), 95.00 (S2), 94.00 (S3).
• Resistance: 98.80 (R1), 100.55 (R2), 102.00 (R3).
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Market Analysis 10/02/2014
Daily Commentary10.02.2014, Time of writing: 03:30 GMT
The Big Picture What’s the fuss? It makes me wonder what all the fuss is about. Friday saw a lot of dramatic news, but with no real effect. The German Constitutional Court basically declared the ECB’s “outright monetary transactions” (OMT) program to rescue the euro to be unconstitutional and US payrolls missed expectations for a second month in a row – this time with no excuse from the weather – and yet at the end of the day there was little net movement. The dollar hit the lows of the day about a minute after the non-farm payroll figures came out and gradually recovered after that, although it’s lower against most currencies this morning in Europe compared to its levels Friday morning (JPY and AUD being the exceptions). In fact, the day’s range in most currencies we track was below average (USD/JPY and USD/CAD being the only two G10 exceptions – CAD probably because it had its own employment data out Friday too). It makes me wonder why the market focuses so much on these statistics every month.
In this case, there was the initial thought that two consecutive months of weaker-than-expected jobs data might convince the Fed to delay tapering off its bond buying, but that idea quickly faded as the unemployment rate fell while the participation rate rose. The Wall Street Journal’s Fed reporter, Jon Hilsenrath, wrote that “Federal Reserve officials don't appear inclined to alter the course they have set out for monetary policy, despite a disappointing jobs report Friday…” He noted that Boston Fed President Rosengren, who dissented from the decision to start tapering in December, said after the jobs report that “we don't want to be moving monetary policy very dramatically in either direction at this point unless we see strong validation in the data,” which apparently they haven’t seen yet. If even such a dovish person thinks they should keep tapering, then it’s likely that they will do so. Nonetheless US ten-year bond yields did end the day down 2 bps Friday and the implied rates on Fed Funds futures fell a further 8 bps in the long end as the market pushed out the date of the Fed’s tightening even further. This weakening of interest rate support is weighing on the dollar.
Against this background of surprisingly weak jobs growth, this week’s Congressional testimony by the new Fed chair Janet Yellen will be the main focus of market attention. She appears before the Republican-controlled House Financial Services Committee on Tuesday and the Democratic-controlled Senate equivalent on Wednesday. Although her testimony will be the same at both, the questions are likely to be different – she’s likely to get a more hostile reception from the Republicans. The testimony is likely to be more theatre than economics, particularly with the mid-term elections this coming November in mind. Amidst the odd and ill-informed questions that the Congressmen are likely to ask – questions aimed more at showing their constituents that they’re concerned rather than in eliciting any informative answers – Yellen will probably try to remain polite and give upbeat, optimistic answers that will play well on TV. In that respect her testimony may present a favourable picture of the US economy that could boost the dollar.
The other main event this week will be the Bank of England quarterly inflation report on Wednesday. The market will be closely watching it as is seeking for guidance on guidance after Carney’s comments in Davos about the appreciation of sterling and the 7% unemployment threshold.
As for today’s indicators Japan’s current account deficit for December widened more than expected to JPY 197bn SA from JPY -46.6bn in November. The unadjusted deficit hit a record.
During the European day, Switzerland’s unemployment rate is estimated to have risen to 3.6% in January from 3.5%. French industrial production for December is forecast show no change on a monthly basis after a 1.3% mom rise in November, while Italy’s IP is also forecast to have seen no change on a mom basis in December vs +0.3% in November. Norway’s CPI for January is expected to have declined 0.3% mom from -0.1% mom in December leaving the yoy rate untouched at +2.0%. In Canada, housing starts for January are expected to come at 185.0k from 187.5k in December.
As for the speakers, Jean-Claude Trichet, former President of the European Central Bank takes part in a discussion with the French journalist Jean-Marie Colombiani on “Lessons of the crisis: Improving the economic and fiscal governance of the Euro area”. Bank of Canada Deputy Governor John Murray will also speak.
Among this week’s other indicators, Tuesday we get Australian home loans for December and the house price index for Q4. From US, we have the wholesale inventories for December and On Wednesday, Japan’s Tertiary industry index and machine orders for December are coming out. From China we get trade data for January. Eurozone’s industrial production for December and the US monthly budget statement for January are also coming out. On Thursday, the Riksbank decides on its interest rates and Sweden’s unemployment rate for January is coming out. We also get the UK RICS house price index and Australia’s unemployment rate. During the day, Germany’s final CPI for January and US retail sales are coming out and ECB publishes its monthly report. Finally, Friday is GDP day. We get the preliminary GDP data for Q4 from France, Germany, Italy and Eurozone as a whole. China releases its CPI and PPI for January and from US we get the industrial production and the preliminary UoM consumer sentiment for the same month.
The Market EUR/USD
• EUR/USD moved higher, breaking above 1.3618, and is now ready to face the downward sloping blue line. The possibility for a lower high still exists and if the rate meets strong resistance near the blue line, it may fall once again below 1.3618 (S1). Only a clear break above the 1.3735 (R2) barrier would signal that the decline from the 27th of December has ended. The MACD lies above both its trigger and signal lines, confirming the recent positive momentum, but the RSI found resistance at its 70 barrier, enhancing my view that any further advance would be limited.
• Support: 1.3618 (S1), 1.3555 (S2), 1.3480 (S3).
• Resistance: 1.3700 (R1), 1.3735 (R2), 1.3810 (R3).
EUR/JPY
• EUR/JPY moved higher on Friday, breaking the barrier of 139.15. The rate is trading slightly below the upper boundary of the downward sloping channel and the 200-period moving average. I would expect the price to meet resistance near that area. The RSI lies near its 70 level increasing the probabilities for the aforementioned scenario. On the other hand, a break above the hurdle of 141.25 (R1) is needed to signal that the decline from the 27th Dec. has ended and the prevailing longer-term uptrend has resumed. As long as the rate is printing lower highs and lower lows within the channel, the short-term downtrend remains in effect.
• Support: 139.15 (S1), 137.55 (S2), 136.20 (S3).
• Resistance: 141.25 (R1), 142.85 (R2), 144.35 (R3).
GBP/USD
• GBP/USD violated the 1.6335 barrier and moved higher, confirming the hammer candles identified on the daily chart. However, as long as the rate is trading within the purple downward sloping channel, the short-term downtrend is still in force and a clear dip below the key barrier of 1.6260 (S2) would signal its continuation. Only an upward violation of the resistance at 1.6465 (R1) may be a first indication that the recent decline has bottomed.
• Support: 1.6335(S1), 1.6260(S2), 1.6135 (S3).
• Resistance: 1.6465 (R1), 1.6640 (R2), 1.6735 (R3).
Gold
• Gold continued moving higher and is currently finding resistance near the 1270 (R1) barrier. A clear violation of that level may have larger bullish implications and target the next obstacle at 1290 (R2). The price is trading above both the moving averages, while both the RSI and the MACD follow upward paths, confirming the recent positive momentum of the precious metal. A break below the support barrier of 1235 (S2) is needed to change the outlook and confirm that the 19th Dec. - 27th Jan advance was just a retracement of the major downtrend.
• Support: 1250 (S1), 1235 (S2), 1220 (S3).
• Resistance: 1270 (R1), 1290 (R2), 1315 (R3).
Oil
• Gold continued moving higher and is currently finding resistance near the 1270 (R1) barrier. A clear violation of that level may have larger bullish implications and target the next obstacle at 1290 (R2). The price is trading above both the moving averages, while both the RSI and the MACD follow upward paths, confirming the recent positive momentum of the precious metal. A break below the support barrier of 1235 (S2) is needed to change the outlook and confirm that the 19th Dec. - 27th Jan advance was just a retracement of the major downtrend.
• Support: 1250 (S1), 1235 (S2), 1220 (S3).
• Resistance: 1270 (R1), 1290 (R2), 1315 (R3).
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Market Analysis 11/02/2014
Daily Commentary 11.02.2014, Time of writing: 03:30 GMT
The Big Picture Waiting for Yellen Not much activity yesterday as the market waits to hear what the new Fed chair, Janet Yellen, has to say today in the Fed’s semi-annual report to Congress on monetary policy and the outlook for the US economy. When Fed officials first discussed tapering down their monthly bond purchases, they said that they could pause if necessary, but now that would seem to be a major disruption and a serious step (as Boston Fed President Rosengren said recently). The market is waiting to hear if Yellen says anything today about the possibility of pausing the tapering. I expect however that since it is her first appearance as Fed chair, she will want to give an upbeat, optimistic presentation and therefore will emphasize the likelihood of decent growth, not the possibility of disappointment. That should boost the dollar again, in my view.
There was little news out to move the market otherwise and activity largely consisted of unwinding last week’s trades. Some risk aversion send the dollar higher against most EM currencies, but stocks managed to close up slightly in any event, showing that investors are not entirely risk averse. US T-bill yields declined slightly as House Republicans met to discuss the debt limit, leading to hopes that it would be extended this time without a lot of fuss. That would be a relief and could help the USD to gain further.
The dollar was lower against all the G10 currencies except CAD. USD/CAD moved higher after housing starts missed expectations and Bank of Canada Deputy Gov. Murray said that a weaker CAD will lead to broader economic growth, a comment that was basically a green light for investors to sell the currency. NOK on the other hand remained the best performing currency after yesterday’s higher-than-expected CPI figure. The second-best performing currency was AUD, which gained after home prices rose and business sentiment in Australia improved.
As for today’s indicators, Sweden’s PES (Public Employment Service) unemployment rate is forecast to have risen to 4.7% in January from 4.6% in December. US wholesale inventories are expected to have been up 0.5% mom in December, the same as in November. The JOLTS (Job Openings and Labor Turnover Survey) report is forecast to show little change in the number of job openings in December, while the NFIB Small Business Optimism survey is forecast to be unchanged in January from December. Neither of those reports is likely to do much to the FX market against the background of Yellen’s speech.
Besides Yellen, we have three other speakers scheduled for the day. ECB Governing council member and Bundesbank President Jens Weidmann speaks on the political-economic regulatory framework, ECB’s Liikanen speaks to the UK House of Lords, and in the US, Philadelphia Fed President Charles Plosser speaks on the economic outlook.
The Market EUR/USD
• EUR/USD managed to overcome the blue downward sloping resistance line. The pair is now heading towards the resistance area between 1.3700 (R1) and 1.3735 (R2), where a clear break may signal that the decline from the 27th of December has ended and target the hurdle at 1.3810 (R2). However I remain neutral on this currency pair at the moment, since the possibility of a lower high still exists and a dip back below the trend line and the support of 1.3618 (S1) would confirm a false break out and may trigger further declines.
• Support: 1.3618 (S1), 1.3555 (S2), 1.3480 (S3).
• Resistance: 1.3700 (R1), 1.3735 (R2), 1.3810 (R3).
USD/JPY
• USD/JPY confirmed a lower high, but it remained consolidating near the 102.00 (S1) support area and the 50-period moving average. A downward violation of that barrier may challenge once more the support at 101.00 (S2) which coincides with the 50% retracement level of the 8th Oct. - 2nd Jan. advance. The MACD seems ready to cross below its trigger line, increasing the possibilities for further decline. On the other hand, an upward break of the 103.00 (R1) resistance may argue that the short-term downtrend has bottomed and that it was just a correcting phase of the longer-term upward path.
• Support: 102.00 (S1), 101.00 (S2), 100.00 (S3)
• Resistance: 103.00 (R1), 103.90 (R2), 105.00 (R3).
EUR/GBP
• EUR/GBP rebounded near the 200-period moving average and the 0.8290 (S1) barrier. The price still lies below the longer-term (light-blue) line and only a break above it, followed by an upward violation of the resistance at 0.8390 (R2) may be a first indication that the longer downtrend might have reached its end. The 50 period moving average is getting closer to the 200-period moving average, thus a bullish crossover in the near future may be an additional positive indication. If the rate meets strong resistance near the trend line, I would expect the rate to move lower and break once again the 0.8290 (S1) barrier.
• Support: 0.8290 (S1), 0.8240 (S2), 0.8187 (S3).
• Resistance: 0.8335 (R1), 0.8390 (R2), 0.8465 (R3).
Gold
• Gold managed to overcome the 1270 hurdle and rallied reaching levels slightly below the 1290 (R1) resistance hurdle. The picture has now turned positive again, and an upward break of the 1290 (R1) barrier may open the way towards 1315 (R2). The MACD remains above both its trigger and zero lines, confirming the recent bullish momentum. However, the RSI seems ready to exit its overbought conditions, thus a pullback or some consolidation before the continuation of the advance cannot be ruled out.
• Support: 1270 (S1), 1250 (S2), 1235 (S3).
• Resistance: 1290 (R1), 1315 (R2), 1340 (R3).
Oil
• WTI gave another test near the 100.55 (R1) area, after pulling back earlier in the day. The short-term outlook remains positive and a break of the 100.55 (R1) resistance may target the next one at 102.00 (R2). The MACD, although in a bullish territory, seems ready to cross below its trigger line, while the RSI is still pointing down after finding resistance near its 70 level, thus another corrective wave or further consolidation is possible.
• Support: 98.80 (S1), 96.50 (S2), 95.00 (S3).
• Resistance: 100.55 (R1), 102.00 (R2), 103.80 (R3).
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