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Market Analysis 02-05-2013: FOMC shifts the debate
Daily Commentary02.05.2013
The Big PictureFOMC shifts the debate: The FOMC made a small but significant adjustment in its statement, shifting the debate from whether or not to “taper off” quantitative easing (QE) to whether to increase it or taper it off. Specifically, it added a new sentence to the statement saying, “(t)he Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” That was the only change it made, leaving questions about just what it was in the data that prompted the move.
The change in nuance did not bolster markets, however. Despite the dovish shift, the markets focused on the worse-than-expected ADP employment report (+119k vs an expected +150k). This outweighed a slightly better-than-expected ISM manufacturing PMI (50.7 vs expected 50.5) as investors look to tomorrow’s nonfarm payrolls and caused a general risk-off sentiment. The stock market continued to fall, closing near the lows for the day, commodity prices fell, and the dollar rebounded in a typical risk-off rally. Commodity currencies were naturally the major losers. In any event, with the dollar having survived a shift in expectations for monetary policy, this meeting could prove at least a temporary bottom for the currency, as happened around other FOMC meetings in September and December of last year and also January this year.
Today it’s the ECB’s turn in the spotlight. We expect the ECB to cut the refi rates by 25 bps at today’s meeting (as do some 45 out of 70 economists polled on Bloomberg). The risks to the economy that concerned the Council at its last meeting, particularly a fall in inflation far below its target levels, have indeed come to pass it would be reasonable to expect them to react by cutting rates. We would not expect such a move to have a major impact on EUR/USD, however. Previously, when the consensus was for a 25 bps cut (as it is now) and such a cut was forthcoming, the impact on EUR/USD was either mostly before the announcement (May 2009) or even negative (July 2012) (although the latter may have had more to do with the Eurozone crisis at that time than with the rate cut). We would therefore expect no real change in the picture for EUR/USD in the case of a 25 bps cut. A cut in the refi rate would not lower peripheral bond yields, which are the main factor supporting EUR/USD at the moment.
The MarketEUR/USD
• EUR/USD formed a shooting star yesterday as the bears managed to overcome the bulls. This led to a close significantly lower than the 1.3242 peak, which was reached following the break of the significant 1 ½ month-high resistance level at 1.3200. The weaker-than-expected ADP employment figure, which gives an ominous sign for tomorrow’s nonfarm payrolls, aided the EUR/USD rally. Nonetheless the bears managed to drive the pair towards 1.3175 support as the dollar-boosting, risk-off sentiment prevailed with the major US equity indices shedding close to 1%. Bulls should be made aware of this potentially trend reversing candlestick, noting also that strong resistance above the high comes in the 1.3300 – 1.3320 area. Notable support levels include 1.3120 and 1.3075, both well-tested retracement levels.
USD/JPY
• USD/JPY marginally lost yesterday on the weak ADP figure, finding support at $97.05, with stronger tested support coming lower at $96.40. Trendline resistance for the day seems to come at $97.70, with resistance thereafter at $98.30. The very narrow trading range and the doji that formed yesterday essentially adds on to the previous two days of battle between bulls and bears as we are at oversold levels in the Stochastics.
GBP/USD
• Cable rallied during the European day on a better-than-expected manufacturing PMI, then spiked to the 50% retracement level of the January – March plunge, moving above the upward trading channel resistance at the time the Fed was explaining its policy, closing the hour with a long-legged doji. The down-move that followed found support at 1.5500, which is a significantly tested level, with support thereafter coming at 1.5480 and stronger support at 1.5410. With the Stochastics in overbought territories, a break of the high would be a good signal that the uptrend has room to go.
Gold
• Gold’s move yesterday confirmed the three days of tug-of-war between bulls and bears that was taking place with two spinning tops and a doji hinting to a change in direction. Interestingly, gold continued to display characteristics of a risky asset, something unthinkable three weeks ago, as it lost together with the other commodities following the weak ADP report, finding support at $1440, before rebounding to $1463 on the dovish Fed statement. Support thereafter came at $1450 with the next notable support levels being the $1423 - $1431 area and thereafter $1400, with well-tested resistance at $1476 and the recent highs coming at $1485.
Oil
• WTI collapsed again following the break of its strong trendline and Fibonacci support in the $92.15 - $92.85 area. The weak ADP report and thereafter the eight times larger than estimated increase in EIA crude storage, which brought inventories to a record high, further added to the down-move, with the commodity finding support at $90.10. Resistance now looks to come at $91.30, with confirmed bearish crossovers in the RSI and the Stochastics, with the latter crossovers at overbought levels. Further resistance is the noted $92.15 – $92.85 band, with $89.40 likely acting as a strong support with further support at $87.80.
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Market Analysis 03-05-2013: EUR decouples from risk on/risk off trade as ECB loosens
Daily Commentary03.05.2013
The Big PictureEUR decouples from risk on/risk off trade as ECB loosens: The ECB’s 25 bps cut in the refinancing rate was as expected. ECB President Draghi mentioned unconventional measures, such as aid for a securitized asset market, but nothing concrete. He did say that the ECB was willing to ease further if necessary, and he committed to full allotment for liquidity injections until mid-2014, which is perhaps as much forward guidance as can be expected from an institution that refuses to pre-commit. The main point of interest though was when Draghi said the ECB was opened to the possibility of a negative deposit rate, which could feed through to negative retail rates as well (as in Switzerland). That was seen as decisively EUR-negative.
All told, the ECB’s willingness to loosen conventional measures further is negative for the euro. At the same time, the delay in implementing unconventional measures, which are what might actually help to boost credit growth in the periphery, is also negative for the euro, but for different reasons. In my view we have probably seen the peak in EUR/USD for now (baring some disastrous figures from the US).
The Eurozone final PMIs yesterday were revised upwards on surprise improvements in Italy and Spain. Nonetheless, Markit said that the data show that manufacturing is “a significant and increasing drag on the (Eurozone) economy” that raised the likelihood of a recession in the Eurozone in Q2 as well. The economic news favoured the US, where initial jobless claims fell to 324k, the lowest level since 2008, and the US trade deficit narrowed by more than expected. For once, good news for the US was good news for the dollar too, and the US currency rose against most of its counterparts even as risk sentiment came back (stocks up, commodities up) and despite lower Treasury yields and a fall in expectations for Fed funds. Perhaps the seriousness of the economic problems in the Eurozone and the likely course of monetary policy in response to those problems have caused the EUR to decouple from the risk on/risk off trade. We have seen the correlation loosen before however so we will wait to see how the next few days go.
The market today will be waiting for the US non-farm payrolls for April. The consensus estimate on Bloomberg is +140k, up from +88k in March, with the unemployment rate unchanged at 7.6%. Most of those estimates were made before Wednesday’s disappointing ADP figure, so the real consensus is probably somewhat lower. In any event, predicting the market’s reaction to the data is as hard as predicting the data itself. We looked at the last six times the NFP beat estimates and the last six times it came in under estimates. On average there was little or no change for the first three days or so after the announcement, and then EUR/USD started falling when the NFP missed estimates and rose when the number exceeded estimates! In other words, on average a better-than-expected NFP number has been worse for the dollar in the week after the numbers. Be careful, though, because the average hides a wide dispersion of results, making it difficult to say with any certainty what the impact is likely to be.
The MarketEUR/USD
• EUR/USD moved significantly lower yesterday following the better-than-expected US jobless claims. After hitting its top Bollinger Bands level, it is now finding support around the 1.3075 level, which is its 20-day moving average and also its 38.2% retracement level from the up move of the past month. If we see a proper break of the current support level and also depending on the outcome of the NFP data, we could see the pair move lower towards the 1.30-1.2960 area where the bottom Bollinger Bands level is as well as its 200 moving average . A worse-than-expected NFP figure could shoot the pair towards 1.3120 and later on test again the 1.32 psychological level (assuming of course that the textbook correlation between bad economic news and the currency actually holds).
USD/JPY
• USD/JPY bounced off its 38.2% retracement level and managed to make substantial gains following the jobless claims. The pair found resistance at 98.30 level, which is also its top Bollinger Bands, while it is currently finding support on a long-term rising trend line at 97.80. Support is expected to be found at 97.35 and 96.40 while resistance around 98.40 and 99.
USD/CHF
• USD/CHF participated yesterday in the dollar’s general uptrend after bouncing up from a long-term up trendline at 0.9260. The pair found resistance at the 0.9340 level, which is a past resistance and also the 20 day moving average. The next resistance is expected to be found at 0.94 major psychological level, which is also its 200 day moving average. At a later stage we may see it test 0.9450. Support is likely to come at 0.9260, which is its long term up trendline, while a breakout of this level could see the pair drop to 0.9200.
Gold
• Gold moved higher yesterday despite the stronger dollar, reaching overbought levels in the short time stochastic while finding resistance at the $1475 level. Support today is expected to be found around $1460, which is also its 23.6% retracement level, and later level at $1450. However a weaker-than-expected NFP could see gold rise to $1485.
Oil
• WTI was a major gainer yesterday as it rose over $3 on the surprisingly strong jobless claims. The pair found resistance around $94.00 which is a major psychological level and also its 50% retracement level from the down move it has been following. Resistance is now expected to come at $94.50 and at a later stage at $95.50 where there is a falling trend line. However as the trend still remains bearish and with Stochastic being in overbought levels WTI could move lower again. Support is expected to found on its strong trendline and Fibonacci $92.15 - $92.85 area with a breakout of this area leading it lower to $91.30.
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Market Analysis 06-05-2013: Risk on = buy USD/JPY
Daily Commentary 06.05.2013
The Big Picture The initial reaction to the better-than-expected nonfarm payrolls on Friday was pretty much as one might have expected: USD/JPY soared 1.3%, EUR/USD collapsed 0.9% and other pairs reacted less (AUD/USD almost imperceptibly). The interesting point was that an hour later, EUR/USD had recovered entirely (as did GBP/USD and gold) while USD/JPY was moving sideways at its new elevated level. US service-sector ISM and factory orders were weak, but they came out after the move and so couldn’t be responsible – and in fact failed to dampen market sentiment, as stocks gained and 10yr yields jumped 10 bps, showing a definite “risk on” environment.
It seems the “risk on = sell USD” is still with us, or at least we have not yet progressed to “risk on = buy USD,” except with one noticeable exception: USD/JPY. Traders interested in expressing a fundamental view on the strength of the US economy should be looking at that pair. Supply & demand for EUR/USD is fairly well balanced at current levels, considering the bearish EUR news that’s come out in the last few days (possibility of negative interest rates and these payroll figures) without moving the pair notably. EUR/USD one month volatility is now 8.9%, below the average volatility since 2010 of 10.3%, while USD/JPY vol is 13.3%, above the 9.75% average vol. That seems to be where the action is nowadays.
We still have a fundamentally bearish view on EUR/USD, though. The low level of Eurozone inflation is likely to be the increasing focus of ECB policy. That means further loosening (eventually). Meanwhile in the US, the debate over “tapering off” QE, which we thought the FOMC statement had ended, is back on due to the improvement in the jobs figures, one of the preconditions for the Fed easing up. (Job gains have averaged 208k a month for the last six months vs 138k in the previous six months.) Accordingly, a lot of attention this week will focus on speeches by Fed officials. Thursday we hear from Lacker and Plosser. Lacker is one of the more hawkish people on the FOMC – he already said on Friday that there had been a “substantial improvement” in the labor situation and that “you ought to evaluate the likelihood of us reducing the pace of asset purchases accordingly.” On Friday we hear from Evans, who said in October that “we’d continue with those asset purchases until we see payroll employment (growth) more like 200,000 or 250,000,” and the ultimate, Chairman Bernanke.
Today is a quiet day for indicators. There are no indicators out of the US and the UK is on holiday, so that leaves the Eurozone, where the only potentially market-moving data are the final PMI for services and the final composite PMI The services index is forecast to be unchanged from the preliminary at 46.6, while the composite is expected to have risen by 0.1 point from the preliminary to 46.6 after the 0.2-point upward revision in the manufacturing index. But in any event, they are still negative, and with the manufacturing sector still in a slump, activity is unlikely to recover soon.
The Market EUR/USD
• EUR/USD initially plunged following the release of better than expected NFP data on Friday, but it found support at the 1 hour bottom Bollinger Bands level and a 1month rising trend line and eventually ended up the day with gains. The trend on the pair remains up, with resistance expected to be found at the 1.3180-1.32 area where the top Bollinger Bands level is. A breakout could lead towards 1.3250. The 1.3075 area still remains a support of interest as apart from the 20 day Moving Average and a 38.2% up move retracement, it now incorporates also a rising trendline. A break of this level could drag the pair lower toward 1.30
USD/JPY
• USD/JPY was one of the biggest gainers Friday as the NFP announcement boosted its already existing up trend. The pair broke the 98.30 level and found resistance at the 99.00 level, where it is sitting at the time of writing. The next resistance is expected at 99.50 and then could possibly see it hit the magic 100. However with RSI approaching overbought and with today being a bank holiday in the UK, it is likely for the pair to drop to 98.30, which is its 23.6% retracement level and a 6 month rising trend line. A break of this level could see the pair drop to 97.20 previous support level and 38.2% retracement level.
GBP/USD
• GBPUSD also managed to recover losses that were sustained after the release of the NFP data and continues rising. The pair tends to trade within a rising channel, finding resistance at its top Bollinger Bands level and a rising trendline. Should the 1.5630 resistance level break, the pair would be likely to test the 1.5700 psychological level. However with both the stochastic and 14 day RSI being overbought, we could see the pair move lower towards 1.5480 50% retracement level or 1.5380 which is the bottom of its rising channel.
Gold
• Gold moved lower as the dollar strengthened after the NFP, but as the dollar fell back, so too did gold nearly regain its former levels. The NFP announcement sent gold spiking lower but it found support at $1455, which is its 50% retracement level from the April downmove. Gold still remains likely to trade in narrow range between $1485 ,which is the 61.8% retracement level, and the $1455 50% retracement level . A break of the upper level could lead gold towards $1530, while a break of the lower level could drag it towards the $1430 rising trendline level.
Oil
• The increase in tensions in the Middle East, with a rocket attack in Syria, sent oil higher for the third day in a row. Significant resistance is expected to be found at $97.50, where there is both a previous resistance and the top Bollinger bands level. A break of this level could see WTI reaching towards $99.00. However given the importance of this resistance and the stochastic being highly overbought, it’s more likely to see WTI drop to $94.50, which is a former resistance turned to support now, and perhaps drop as low as $93.90.
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Market Analysis 07-05-2013: Draghi drag on EUR
Daily Commentary07.05.2013
The Big Picture Draghi drag on EUR: The dollar rebounded against most currencies in quiet trading yesterday, particularly after ECB President Draghi repeated his comments about the ECB standing ready to do more if necessary. What more can he do? Negative interest rates loom large in the market’s thinking as economies fall further into recession and inflation falls further below the ECB’s target. On the other side of the pond, the better-than-expected nonfarm payrolls have reignited the debate over “tapering off” quantitative easing. The FOMC every month says it will continue with QE “until the outlook for the labor market has improved substantially;” with job growth averaging 200k a month for the last seven months, reasonable people can argue that this qualifies as a “substantial” increase and that it’s time to make good on that promise. Two central banks being pulled in opposite directions suggests that the next break-out for EUR/USD is likely to be on the downside.
The S&P 500 closed at another record high last night and Asian stock markets were generally higher, too. Industrial metals had a very good day overnight (+6.2% for copper!) while safe-haven precious metals declined, suggesting confidence in the global economy. The dollar’s gains in this “risk on” environment bear noting. While we’ve been too early in saying that the “risk on = sell USD” correlation has broken down, clearly it’s diminishing. Note that USD/JPY was lower even in this risk-on environment, perhaps due to the Nikkei soaring 3.2% today, or reluctance to push through 100. This is a further suggestion that the usual relationships between risk and currencies may be changing as the view on the US and Europe changes to become more USD-bullish.
Reserve Bank of Australia cut its benchmark rate 25 bps to a record low 2.75%, sending AUD/USD lower. We discussed this possibility yesterday in the midday comment. Comments from RBA Gov. Stevens left room for further easing, which is likely to keep the pressure on AUD/USD despite the rebound in commodity prices overnight. At the time of writing it is near the 1.020 significant support level, with 1.015 likely to be tested if the pair continues lower. A break of 1.015 support could see the AUDUSD move toward parity.
The several Eurozone indicators due out today will be of particular interest following Draghi’s statement, which was in full: “(w)e will be looking at all the data that arrives from the euro-area economy in the coming weeks and, if necessary, we are ready to act again.” Note he said weeks, not months. German factory orders for March therefore take on additional importance as a leading indicator of German output even though the PMIs for April are out already. The forecast is bad: -0.5% mom, vs +2.3% in February. That’s to be expected, given the fall in the manufacturing new orders PMI in both March and April. Also, French industrial production is forecast to have fallen 0.3% mom in March, vs a rise of 0.7% in February. Again here too the dreadful French manufacturing PMIs have made this figure a bit of an anti-climax. In the US, the market is looking for USD 16bn of new consumer credit during April, down from $18.1bn in March. Consumers in the US are continuing to borrow.
The MarketEUR/USD
• EURUSD has moved lower and is currently ,as of the time of writing, testing its rising trendline support at 1.3075. If this level finally breaks to the downside the pair could drop to 1.2980. Resistance is expected at 1.3120 and further up at 1.3175 where a previous resistance lies.
USD/JPY
• USD/JPY did rise marginally yesterday, finding resistance at 99.50, while the slow stochastic still remains overbought. Therefore is more likely that we have to wait a couple more days till we see the pair head towards the magic 100. Today we think it is more likely that the pair may move lower towards 98.30, which is the 23.6% retracement level and a 6 month rising trend line. A break of this level could see the pair drop to 97.20, a previous support level and 38.2% retracement level.
USD/CHF
• USD/CHF moved higher yesterday but was unchanged overnight. The pair has been finding a resistance at 0.9400, which is its 50 day Moving Average and a significant psychological level. Should the pair move higher today we would expect this level to be revisited with a break of this level leading towards 0.9470, a previous resistance and top Bollinger bands level. Support can be found at the 0.93 phsycological level which is also a rising trendline and 0.9220 if broken.
Gold
• Gold moved marginally lower yesterday and continues to do so on signs that the recent rebound in prices has dampened demand for physical gold. The demand picture in the paper market remains the same: ETF holdings have fallen for 25 days in a row. The technical setup still remains the same as the precious metal continues to trade within the boundaries formed by its 61.8% and 50% April down move retracement levels. Resistance remains at $1485 with a break leading towards $1530 while support at $1455 and subsequently at the $1430 rising trend line.
Oil
• WTI ended yesterday slightly higher but was stopped at its tracks after finding resistance at its top Bollinger Bands level at $97.15. If the up move continues today it is likely for that resistance to be revisited followed by $ 97.50 and a break of these leading towards $99.00. WTI barely moved overnight and as of the time of writing remains at $95.60, which is yesterday closing pricing and a falling trendline from 1year ago. With a spinning top candlestick being formed yesterday, unchanged movement overnight and an overbought stochastic, we think it is likely to see WTI drop today to $94.50 and subsequently $93.90.
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Market Analysis 08-05-2013: A jolt from JOLTS?
Daily Commentary08.05.2013
The Big Picture EUR/USD went higher in European trading yesterday after German factory orders for March far outpaced expectations (consensus -0.5% mom, actual +2.2%). It’s a surprise to me why this should be so market-affecting, given that the April PMIs, which have already been released, were quite negative, but I suppose the factory orders series is thought to be more comprehensive and therefore give a better picture of the actual situation than the PMIs. Nonetheless the key point to note was that six hours later EUR/USD was back almost exactly where it had been before the news came out as the dollar rebounded against most currencies. The same USD rally was reflected in several currencies –GBP/USD fell about 100 pips right then, too. Net net there was little movement in most currencies over the last 24 hours. What movement there was seems to be down to individual country stories, no overarching theme.
It wasn’t clear whether the US JOLTS report (Job Openings and Labor Turnover Survey), which was announced at the same time as USD was rallying, was behind the dollar’s recovery. The figure was better than expected (3.84mn job openings in March, vs an expected 3.77) but nonetheless down from February’s 3.93mn. However the February figure was an upward revision from the initial 3.6mn, so March was an improvement from February’s initial figure, and if March is revised up even half as much as February was, the final March figure will be an improvement over February. But more to the point: does anyone care? The JOLTS figures are always a month behind the non-farm payrolls so they don’t usually attract much attention from the market. Moreover the data had no perceptible effect on US stocks. IBD/TIPP Economic optimism figure for May was out at the same time, but that was a disaster – below expectations and below the April figure – so that can hardly be responsible. And later in the day US consumer credit came out at a little bit more than half expectations, so that was no good either. All in all, the reasons behind the dollar’s rebound remain somewhat of a mystery.
NZD was the biggest loser overnight after RBNZ Gov. Wheeler said that the central bank had done “some” intervention in the FX market to stem the Kiwi’s appreciation, and that he was prepared to do more. Wheeler is certainly right that the currency is overvalued; the OECD calculates that it’s 20% overvalued vs USD and 16% vs EUR, although this is nothing compared to the NOK or CHF (37% and 34% vs USD, respectively) or even AUD (33%). AUD also declined, a continuation from yesterday’s RBA cut, but CAD was slightly higher, indicating that this was not a currency commodity rally but rather a move based on central bank policy. Indeed, the better-than-expected Chinese trade data out overnight should have supported AUD; the fact that it didn’t shows how central bank policy is dominating.
A very thin calendar today with only one major indicator out. After yesterday’s surprisingly good German factory orders figure, today’s German industrial production for March may be another pleasant surprise (although the March manufacturing PMI fell to 49.0 from 50.3, indicating contraction). The market is looking for a 0.1% mom decline (vs a 0.5% gain in February).
The MarketEUR/USD
• EUR/USD moved marginally higher overnight. Rising trendline support at 1.3075 continues to hold for the 3rd straight day. Lower support at 1.2980. Resistances remain same as yesterday at 1.3120 and further up at 1.3175 where a previous resistance lies.
USD/JPY
• USD/JPY dropping at the moment from its highs and testing its 20 day moving average . Fast stochastic still remains overbought so it’s quite likely for the pair to move still lower towards 98.30, which is the 23.6 retracement level and a 6 month rising trend line. The next support level can be found at 97.20, the previous support level and the 38.2% retracement level. Should the pair resumes its rise today, the 99.50 resistance is expected to be tested again with a break leading potentially towards the magic 100.00 level.
NZD/USD
• NZD/USD was the biggest loser overnight. The pair dropped as low as 0.8360, which is its bottom Bollinger Band, while 0.8390 is currently serving as a support. This level finds both a previous support and the pair’s 50 day Moving Average. The pair has been moving in an uptrend since March and a penetration of the 0.8360 support could see it complete a head and shoulders pattern, bringing the pair lower towards 0.8190. Should the pair moved higher however resistance is expected around the 0.8500 psychological level and the 0.8560 previous high.
Gold
• Gold moved lower yesterday, testing the important $1450 support level. Support is now expected to be found at $1440 where the 20 day moving average and mid-April rising trendline meet. A break of this support could see Gold move towards $1420. Resistance remains at $1485 with a break possibly leading towards $1530 .
Oil
• WTI moved slightly higher overnight, cutting the small loses sustained yesterday. For the 3rd day in a row we see WTI closing and finding both resistance and support around the $95.60 area which is a falling trendline from 1 year ago. Stochastic remains overbought with our support levels being $94.50 and subsequently $93.90. Should we see oil move higher $96.50 resistance likely to be tested followed by a very strong resistance at $97.50.
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Market Analysis 09-05-2013: The big debate
Daily Commentary 09.05.2013
The Big Picture The big debate: USD lost against virtually every major currency in the world yesterday except the RUB. It may be a renewed sense of confidence in the Eurozone after two days of better-than-expected data from Germany, or perhaps that the “risk on” sentiment as equities rally around the world is depressing the USD in general. (Germany’s DAX as well as the DJIA is now at a record high.) For Europe, I wouldn’t make too much of one month’s data; these were data for March, and the April PMIs were rather poor. Moreover, trade data from Asia suggests that global trade is slowing (except for yesterday’s China export numbers, which have some questions hanging over them). With German retail sales falling and global trade weak, where is the sustained demand likely to come from? We’ll know more tomorrow, when German trade data for March is released.
At the same time, I wouldn’t bet against the US right now. The debate over monetary policy in the US is heating up again and is likely to be USD-bullish. Yesterday Dallas Fed President Richard Fisher, a non-voting member of the FOMC and a well-known hawk, said the Fed was “at risk of overkill” with quantitative easing. Richmond Fed President Jeffrey Lacker and Philadelphia Fed president Charles Plosser, two other non-voting hawks, speak today (Plosser speaks twice) and are likely to make similar comments. The key though is Chicago Fed President Charles Evans’ appearance on Bloomberg TV today. He’s one of the most dovish voting members of the FOMC. He said back in October that job gains in the 200k-250k region would qualify as substantial enough to start tapering off QE. It’s easy to say something like that in theory; it will be significant if even he still thinks that way now that we are actually seeing numbers in that range. If so, then the Fed could be near to shifting its policy.
Another Bank of England meeting today…will anything come out of it? Data has improved slightly recently, particularly the PMIs (although “improved” encompasses “become less bad”) and the country avoided the dreaded “triple dip” recession with a relatively healthy +0.3% growth in Q1 GDP (subject to revision, of course). An extension to the Funding for Lending Scheme was just announced on 24 April and hasn’t yet had a chance to be evaluated. Not to mention of course that a new Governor will take over in July. I see little reason to expect a change in rates or in the asset purchase target today. GBP should be little changed as a result.
The Market EUR/USD
• EUR/USD rebounded yesterday from its upward sloping trendline following the better than expected German Industrial Production. Resistance came at the upper Bollinger band at the tested 1.3200 level, with the strongest US Mortgage Applications in 1½ months causing only a minor temporary retracement as the euro rallied. Trendline support comes at the well-tested1.3075 level, with 1.3120 being the 38.2% retracement level of the EUR/USD plunge in February and March. Some resistance may come at 1.3175, with the RSI and the Stochastics turning bullish, with a resistance level beyond 1.3200 being the 2 ½ month high of 1.3240.
USD/JPY
• USD/JPY rebounded yet again from its upward-sloping trendline that holds since November, but closed the day forming a doji, finding closing resistance at the downward-sloping trendline that has held since the April high. Support for the day looks to come at 98.30, with 98.80 likely acting as both support and resistance. Further support should the bearish RSI and Stochastics crossovers materialize may come at 97.70. Trendline resistance comes at 99.00 with 99.35 being a well-tested recent high.
GBP/USD
• Cable is continuing with its consolidation, trading between 1.5480 and the almost three-month high of 1.5600, retracing from that level yesterday following the formation of a shooting star candlestick on the one-hour chart, as it reached overbought levels on both the RSI and the Stochastics. Resistance, however also seems to come around 1.5550, with support below 1.5480 coming at 1.5410. A break of the 1.5600 high may see channel resistance at 1.5630, with a notable Fibonacci level coming at 1.5690.
Gold
• Gold rebounded from the significant support at $1450 as the dollar weakened and data from China showed record imports of the precious metal for the month of March. (April’s data from the world’s second largest market for gold is likely to break that record on account of the surge in demand following the price plunge in the second week of April.) Resistance came at the well-tested $1476 level, as further resistance still lies around the $1485 level.
Oil
• WTI managed to breakout from $95.60, which sees two Fibonacci levels, closing above its 5-year old trendline resistance, shown in blue, which extends from the all-time high of 2008. The up move was sustained yesterday as the strong German industrial production and US mortgage applications generated a positive economic outlook. Resistance today may come at $97.25, the eight-month slightly downward sloping trendline that has been tested in four occasions. $95.60 is likely to act as support again, as it did yesterday following the much lower than expected increase in EIA crude inventories. Further support comes at $94.50 with a breakout from resistance likely challenging the 2013 high of $98.60.
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Market Analysis 10-05-2013: We made it!
Daily Commentary 10.05.2013
The Big Picture We made it! Finally, the FX market broke through the magic 100 number on USD/JPY. The upmove in USD started with yet another better-than-expected jobless claims figure, but it’s hard to say exactly what the catalyst for the later leg up was; it seems to be an example of herding rather than a move triggered by any particular event or statement. Setting the positive mood for the dollar were statements by Fed officials suggesting that the beginning of the end of quantitative easing could be in sight. Of course a noted hawk like Phili Fed President Plosser (5 out of 5 on the Thompson/Reuters Dove-Hawk scale) was always going to be hawkish (as indeed he was), so the key point was whether the dovish Chicago Fed President Evans (rated a 1 – the opposite end of the spectrum) had changed his mind. He said that “the labor market has improved, definitely” but that he wanted to see the improvement sustained through the summer. Looked at another way, even he thought another three or four months of nonfarm payrolls at recent levels and the Fed could start tapering off.
The dollar’s biggest gains were against JPY but the US currency rose virtually against every currency we track, the opposite of Wednesday’s action. There are plenty of other central banks left to ease (South Korea, Vietnam and Sri Lanka cut rates overnight, for example), and don’t forget that Japan is just getting started and is planning to do more in the next two years than the Fed has done in the last four – and that in a much smaller economy. As a result, we expect USD to trend higher as the market anticipates the eventual withdrawal of stimulus there while other central banks around the world that were slower in easing continue to use the opportunity presented by declining inflation to support their economies (and weaken their currencies) with low interest rates.
Today the focus will be on a speech by Chairman Bernanke, the ultimate arbiter on the FOMC and moderately dovish (rated a 2). Kansas City Fed President George, another hawkish FOMC member (rated 4 out of 5), will speak on the economy at Jackson Hole, while Evans will be making another speech. The G7 finance ministers and central bank chiefs meet later this evening in London and the US is expected to make the case to Europe that more growth and less austerity would be appropriate at the current time. German Finance Minister Schaeuble seems to be getting the message; he said yesterday that EU governments had “enough room to manoeuvre” in fighting the recession.
The Market EUR/USD
• EUR/USD fell yesterday finding spike trendline support following the release of the lowest US initial jobless claims figure since January 2008 and the lowest continuous claims since April 2008. The improved U.S. labour market figures and remarks by Fed officials triggered a further decline for the pair, which found support at its 50-day MA and the Parabolic SAR stop-loss at 1.3010. Initial resistance for the day may come in the well-tested 1.3055 – 1.3075 area, with spike trendline support turned resistance coming at 1.3093. Strong support looks to come around 1.2985, which sees the 200-day MA and the 23.6% retracement level of the February – March decline. Further trendline support may come at 1.2935, with higher resistance coming at 1.3120. the 38.2% retracement level of the aforementioned plunge.
USD/JPY
• USD/JPY was a major gainer yesterday as it broke out from the 100 level. Initial resistance following the US jobless claims came at 99.35, with a breakout being triggered thereafter despite the overbought RSI and Stochastics levels. Short-lived resistance came at 99.85, with the pair hitting 100.75 before the release of data showing that Japanese investors were net buyers of foreign bonds in the last two weeks, which led to a high of 101.20. Strong resistance is likely to come in the 101.50 – 101.65 area, which sees the 5-year high that has acted as final support twice in the 12-year period from 1995 to 2007.
AUD/USD
• AUD/USD declined yesterday, finding support at 1.0185 following the US jobless claims data. Thereafter the break of the 1.0150 significant support level that had been tested five times the past 10 months triggered a breakdown, with the pair finding support at 1.0050, the 61.8% retracement level of the rally in the second half of 2012. A breakdown from this support level will likely drive the pair towards 0.9900, the 23.6% retracement level of the March 2009 – April 2011 up move, with further support coming at 0.9700, the 1½ year low. 1.0150 and 1.020 are now likely to act as resistance levels.
Gold
• Gold lost some of its shine yesterday as the strong US claims data and the prospect of the Fed tapering off QE strengthened the dollar, driving gold to trendline and notable Fibonacci support at $1450, the 38.2% retracement level of the rally following the financial crisis. A break of $1450 may see price moving towards the $1423 – 1431 area, with strong support thereafter at $1400, with strong resistance still being found at $1476 and spike resistance at $1485.
Oil
• WTI’s retracement from resistance in the $96.60 – 96.75 area found Fibonacci and trendline support at $95.60, rebounding from that level following the improved U.S. labour market and economic outlook. Thereafter, a minor break of support at $95.35 did not lead to a breakdown, as the commodity recovered, forming a hammer candlestick on the one hour chart at near oversold levels leading to a rebound to $96.45, before retesting trendline and Fibonacci support. Resistance above the noted area may come at $97.25, the eight-month long downward-sloping trendline that has been tested four times, with further resistance at the 2013 high of $98.60. Lower support below the well-tested $95.60 may be found at $94.50.
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Market Analysis 13-05-2013: USD/JPY to ¥130?
Daily Commentary13.05.2013
The Big Picture USD/JPY to ¥130?Having broken through the ¥100 mark on Thursday, USD/JPY just kept on going! One often sees profit-taking after a long-awaited move like that, but on the contrary, the pair rose steadily on Friday. The weekend’s G7 meeting gave no reason to sell as the group signalled acceptance of Japan’s monetary policy.
How high can USD/JPY go? According to the OECD, purchasing power parity (PPP) for USD/JPY is around ¥106. Currencies often go to 25% undervalued before correcting because of trade flows etc. That rule of thumb suggests ¥130 is possible. That’s not so extreme; since the Plaza Accord in 1985 the yen has averaged 37% overvalued vs USD, so a 25% deviation in the other direction is certainly possible. Currencies can move far away from PPP values and stay there for considerable length of time, as anyone who’s been to Switzerland knows. Japan is now a “twin deficit” country, with both a trade and government budget deficit, and the BoJ has just begun to launch the most aggressive quantitative easing program we’ve seen yet. Portfolio outflows have only recently resumed. Times have changed. Technical analysis supports such a high level as ¥125 seems like a strong longer-term resistance level having been a well-tested high as well as the resistance level of a downward-sloping trendline that extends since 1986. Initial resistance, however, may be witnessed in a number of notable levels; ¥108 sees another, better tested trendline as well as the 200-month Moving Average and the 20-year daily average; ¥112 acted as a well-tested resistance level and the neckline of a 3-year head-and-shoulders formation which peaked in 1998, with ¥116 being a noteworthy former support level, which again acted as a head-and-shoulders neckline in the 2001 – 2003 period.
The background to the USD strength is the fact that the debate over “tapering off” has resumed. There was an article in the Wall Street Journal entitled “Fed Maps Exit from Stimulus.” That says it all when other central banks are shifting their bias toward loosening in the face of sluggish economies and falling inflation. I expect that with Fed policy such a global outlier and the yen weakening so decisively, we are going to see the end of “risk on = sell USD” and instead see the return of the yen carry trade. That should make for a stronger USD against most currencies (as well as a weaker JPY). Note that USD gained more against CHF since Friday morning than it did even against JPY. USD may be the new safe haven currency.
Chinese industrial production, retail sales and fixed asset investment for April, released this morning, were generally in line with expectations and not far off the March releases. They will not shift the debate over Chinese growth much one way or the other. AUD/USD rose briefly ahead of the figures but then lost much of the gains.
Eurozone finance ministers will meet in Brussels today. Discussions will focus on the development of a European banking union, but no decision is likely yet. They may also check up on Slovenia and Cyprus, and sign off on two aid payments to Greece. The only indicator out today is US retail sales. Excluding the volatile items of autos and gasoline, the number is expected to show a turnaround to +0.3% from -0.1%. The rise in the workweek may be offsetting the rise in payroll taxes.
The MarketEUR/USD
• EUR/USD fell on Friday following the much worse-than-expected Italian industrial output, which reinforced the view that the Eurozone should seek alternative ways to stimulate regional economies rather than just relying on austerity. The pair found trendline support at 1.2935 before rebounding from oversold levels finding resistance at 1.2985. Some resistance for the day seems to come at 1.2980, the 23.6% retracement level of the February – March decline and the 200-day MA, with initial support at 1.2930. Stronger support may come in the1.2855 – 1.2875 area that sees the 50% retracement level of the up move in the second half of 2012 and the neckline of the developing head-and-shoulders formation. Further resistance may come at 1.3055, with the headline US retail sales figure due to show today a second consecutive month of declines.
USD/JPY
• USD/JPY gained substantially on Friday as the rally following the break of the ¥100-mark continued, with the pair finding resistance at 101.65, the 5-year high that acted as an ultimate support twice during the 1995 – 2007 period, with the pair spiking to 101.98. Overnight, a larger than expected increase in Japanese money supply added to the yen losses with the pair breaking the 102-level, spiking to 102.15. The 101.50 – 101.65 area is likely to act as support now with the next major resistance level coming at 103.90.
AUD/USD
• AUD/USD ‘s breakdown from the significant support at 1.0150 continued on Friday with the pair finding support near its upward-sloping trendline that has held since October 2011, before rebounding in the final hours of the trading session on the weakening US dollar, finding resistance near the 61.8% retracement level of the rally during the second half of 2012. The pair furthered its declines this morning, despite a greater-than-forecasted increase in Australian home loans for March, as business confidence deteriorated in April. Initial support seems to come at 0.9940 with further support at 0.9900, the 23.6% retracement level of the March 2009 – April 2011 rally, with resistance coming at 1.0020 and 1.0060.
Gold
• Gold’s breakdown from $1450, 38.2% retracement level of the post-financial crisis rally, triggered a technical sell-off driving price to the $1423 – $1431 support area as the dollar was strengthening. The dollar’s weakening thereafter drove the price again to $1450 where it found notable resistance, plunging again during the Asian session to the noted support area. Further support may come at $1400, with $1385 being the 23.6% retracement level of the April plunge.
Oil
• WTI plummeted on Friday following the break of its $95.60 significant support level and furthered its decline on the strengthening US dollar. Support came in the $93.20 – 93.50 area that sees Fibonacci as well as trendline support. The dollar weakened during the US. session, leading to a rebound that recovered almost all of the losses, but news that OPEC had increased output to a five-month high added to the commodity’s downward pressure. WTI is likely to find resistance at $95.60, with further resistance at $96.60, whilst support comes at $94.50 and $93.20, which sees trendline as well as 50-day MA support.
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Market Analysis 14-05-2013: Eurozone economy on the forefront
Daily Commentary14.05.2013
The Big Picture Eurozone economy on the forefront.With the market already poised to buy dollars, a much better-than-expected US retail sales figure for April, boosted sentiment further and USD continued its gains. The retail sales figures, which included an upward revision to February and March, caused brokerage firms generally to upgrade their US GDP forecasts for Q2 by a 0.2 or 0.3 ppt. Some profit-taking came in though and the US currency is trading this morning below its levels of Monday morning against several currencies.
Does stronger growth mean a stronger currency? Not necessarily. There is no consistent correlation between growth differentials and currency movements with the dollar. In fact, if anything, EUR/USD has tended to move higher when the US was growing faster than Europe (except when it didn’t). Nowadays though strong growth is going to be reflected in monetary policy. The US is now assumed to be the first of the major countries to reduce its extraordinary measures as policymakers gain confidence in the sustainability of the recovery. By contrast, the Q1 GDP figures due out this week from the Eurozone are likely to show that the region suffered the sixth consecutive quarterly decline in output, the longest since the start of the single currency. The head of Italy's central bank, Ignazio Visco, who is also on the ECB board, suggested in an interview with CNBC television yesterday that the ECB could cut its deposit rate below zero. It’s this policy differential, not growth differential per se, that is likely to drive USD higher.
In the Eurozone, industrial production for March is expected to rise +0.5% mom, a slight improvement from +0.4% in February. In Germany, the May ZEW survey index for the country’s economic sentiment index is expected to rise to 40.0 from 36.3. These figures could add to the rebound in EUR/USD today. The Euro-area finance ministers wrap up their meeting today and will hold a brief in the late afternoon. But with nothing likely to be decided on banking, it’s not expected that anything market-moving will be announced. In the US, the NFIB Small Business optimism survey is expected to show a small increase to 90.5 from 89.5.
The MarketEUR/USD
• EUR/USD was finding resistance at 1.2985, its 200-day MA for the greater part of the day yesterday, spiking lower to 1.2940, its trendline support and lower Bollinger band, with the release of improved U.S. retail sales when the markets were anticipating a further deterioration. The dollar gains were short-lived however as the pair moved to oversold territory. A breakout of resistance was triggered following the greater-than-estimated increase in Japanese domestic corporate goods prices, which weakened the US dollar versus the yen and caused an across the board dollar weakening. The breakout was accentuated with the simultaneous break of the 200- and 50-day MAs on bullish RSI and Stochastics crossovers on the 1-hour chart. More volatility is likely today with the publication of Eurozone Industrial Production, which has missed estimates four times the past five months, and improved Eurozone and German ZEW Economic sentiment, as Italy heads to the bond markets. 1.2985 may act as support now, with the pair trading around its 50- and 200-day MAs, which are on the verge of a “death cross”. Trendline and Bollinger band support may come at 1.2930, with resistance in the 1.3055 – 1.3075 area.
USD/JPY
• USD/JPY found support at 101.65, following the break of this significant level, however resistance came around 101.95. The higher-than-expected month-on-month rise in Japanese domestic corporate goods price index, however, triggered a breakdown from support, with the pair finding support at 101.35. Hence, 101.65 is likely to act as both resistance and support today, ahead of the Japanese consumer confidence index released early tomorrow. Longer-term resistance is likely to be found at 103.90, with stronger support at around 100.80, as the pair flirts with bearish crossovers.
GBP/USD
• Cable confirmed yesterday the bearish technical crossovers on the daily chart, seeing a significant breakdown from 1.5345 support shortly after the release of the US retail sales. Support came around 1.5270, a thrice tested ultimate support level during the 2010 – 2013 period that also sees the 50-day MA. Very strong support currently lies in the 1.5200 – 1.5220 area that concentrates three distinct Fibonacci levels. Channel trendline resistance is likely to come at 1.5400, with 1.5420 seeing two notable Fibonacci levels.
Gold
• Gold spent most of the trading session at the $1431 support level, spiking overnight to $1445 resistance as the dollar weakened. Resistance comes at the 38.2% retracement level of the 2008 – 2011 rally, with support in the $1423 - $1431 area. A breakdown of support finds further support around $1400 with further resistance at $1476.
Oil
• WTI retraced from $95.60 resistance following the release of mixed U.S. retail sales, which drove the commodity to $94.50 Fibonacci support, before rebounding to resistance as the dollar weakened. Downward-sloping trendline resistance is likely to come lower at $95.50, with trendline support and 50-day MA support at $93.40, with $94.50 still holding as an intermediate support. A breakout from resistance may find resistance at $96.60 and $97.40. 200-day MA and Fibonacci support may come at $92.35.
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Market Analysis 15-05-2013: GDP Day!
Daily Commentary15.05.2013
The Big Picture GDP Day!The news you haven’t been waiting for… the sixth consecutive quarter of contraction in the Eurozone! And that’s not likely to be the end of it; the market is forecasting that Q2 and Q3 will be negative as well. This morning we got provisional GDP figures from France and Germany, with the former officially in a recession following the second consecutive quarter of declining GDP, and the third negative quarter the past year. Germany narrowly avoided a recession as it showed ailing 0.1% growth missing the 0.3% estimate, yet showing an improvement from the 0.6% contraction in the previous quarter. Later in the day we get provisional, recessionary GDP data from Italy, Greece, Portugal, and the Eurozone as a whole. The big question is how bad will they be? And for the markets, what is in the price? Eurozone GDP is expected to be down 0.1% qoq, which would be an improvement from the -0.6% qoq decline in Q4 of last year. Italy and Portugal are expected to have contracted mildly (-0.4% and -0.6% respectively), and Greece is heading for a fifth consecutive year of contraction.
On the day, the usual pattern is that a stronger-than-expected GDP figure means a stronger currency. But over the longer term, it doesn’t always work like that. In fact for much of the time, the dollar was actually weaker against the DEM and then the EUR when US growth was above Eurozone growth, as the graph below shows. But there were also times when it wasn’t – and can you hold a losing position long enough to tell which regime we’re in now?
Growth is important now as an indicator of where monetary policy is headed – countries with weaker growth are going to use monetary policy to boost it, as few countries have room to implement fiscal boosts right now (although Australia just yesterday renounced austerity in its budget for the next FY). In this case, weak Eurozone growth is likely to feed in to weak Eurozone inflation and push the ECB towards taking more steps to boost growth, with yesterday’s yoy downward revision of the German CPI for April adding to the worryingly low inflation figures coming out of the currency bloc. On the other hand, stronger-than-expected growth and at least maybe a negative deposit rate moves off the table and EUR/USD rises somewhat.
In the UK, the release of the Bank of England’s Inflation Report will overshadow the unemployment figures. Sterling fell 0.8% when the February report said risks to the recovery were weighted to the downside; similarly dovish comments again could knock the pound after its recent rises vs USD and EUR (although from the looks of things, people are still positioned for a weaker GBP; the Commitment of Traders report shows net short positions of 63.1k contracts, not far off the record short position of 76.8k). As for the employment data, the market is expecting no change in the ILO unemployment rate for March (7.9%) while the jobless claims is forecast to decline by 3k, vs a 7k decline in March.
There’s a busy day in the US, too. The Empire Manufacturing Survey for May is expected to rise slightly to 4.0 from 3.05. Industrial production for April is expected to have fallen 0.2% mom after a 0.4% mom rise in March, with capacity utilization falling to 78.3 from 78.5. Core producer prices are seen rising 0.1% mom in April, down from 0.2% mom in March, which would leave the yoy rate unchanged at 1.7% -- not low enough for the Fed to start worrying about deflation. After all this, will anyone be watching the NAHB housing market index? It’s expected to rise to 43 from 42. And there’s also the Treasury International Capital (TIC) data, which will be analysed to see just how the US is paying for its trade deficit.
Overnight there’s a slew of Japanese data, including GDP, which is expected to be +0.7% qoq in Q1, up from 0.0% (no change). But the real point of interest will probably be the GDP deflator, which is forecast to fall further into deflationary territory (-0.9% yoy vs -0.7%). In addition to these weighty quarterly figures, investors will be watching the weekly international portfolio statistics that come out at the same time to see if Japanese investors, who just recently became net purchasers of overseas assets, continued buying.
The MarketEUR/USD
• The US dollar gained from yesterday morning against all 24 currencies we track. Versus the euro, the greenback managed to reverse the breakout to 1.3030 resistance following the bullish crossovers on the 1-hour chart and the break above the 200- and the 50-day MA. The better-than-expected Eurozone industrial production for March caused a retest of resistance but this was short-lived as the worse-than-estimated German and Eurozone economic sentiment for May were given a greater weighting, triggering a decline to 1.2930 support, briefly spiking to 1.2920. With the Eurozone states set to publish weak, yet improved, GDP figures, and with today’s indicators from the U.S. likely painting a mixed picture the pair is likely to experience volatility today as it lies in oversold levels as seen in the daily, 4-hour, and 1-hour charts. Initial resistance looks to come again around 1.2980, which sees its 200-day MA and the 23.6% retracement level of the February – March decline, with further resistance levels coming at 1.3030 and 1.3075. Very strong support comes in the 1.2855 – 1.2875 area that concentrates the 50% retracement level of the July – February bull market as well as the neckline of a head-and-shoulders pattern that has been forming since September 2012.
USD/JPY
• USD/JPY climbed to 102.4 on yesterday’s weak Eurozone figures, and the across-the-board dollar strengthening, as the unrelenting risk-on sentiment in the U.S. equities markets continued boosted all three major indices. Some profit-taking may be seen today as the overbought daily RSI and the Stochastics may signal a cap on the pair gains, similar to the two previous times this was the case. The flurry of Japanese data released overnight also adds to the risk, especially since the GDP deflator, an alternative to the CPI metric for inflation, may signal deteriorating deflation. Initial support may come at 101.95 with stronger support at 101.65 and weaker support at 101.35 and 100.80, with the next major resistance level coming at 103.90.
GBP/USD
• Cable had a sustained downtrend yesterday, trading within a downward channel for the greatest part of the day. The plunge to the 1.5200 – 1.5220 strong support area that sees three Fibonacci levels placed a halt to the decline. Resistance may come in the 1.5260 – 1.5270 area that sees a reversal level as well as the 50-day MA. A breakdown from the strong support, which is likely given the significance of the BoE’s inflation report today, may drive price to 1.5125 support, the 61.8% retracement level of the March – May rebound, with a breakdown from that level driving price towards 1.5040.
Gold
• Gold weakened despite the poor Eurozone sentiment, hinting yet again characteristics of a risky asset. Support came at $1423, the 38.2% retracement level of the rebound, with the bounce that followed failing to reach $1445 resistance, adding to the successively lower peaks for the asset during rebounds, which tend to take place during the Asian sessions when physical demand supports the price. Later in the trading session, the dollar gains on the risk-on sentiment caused a further test of support, with the asset losing the past 24-hours more than the dollar index gained (-0.93% vs. 0.71% respectively). A breakdown may see support at $1400, with $1385 being the 23.6% retracement level of the post-plunge rebound. Further resistance may come at the well-tested $1476 level.
Oil
• WTI was driven to $94.50 support following the release of the Eurozone figures yesterday, which boosted the USD dollar. A break of support was triggered as the dollar furthered its gains, with the likely further increase in U.S. crude stockpiles announced later today adding to the downward pressures. $94.50 and $95.50 are likely to act as resistance levels with strong trendline, Fibonacci, and 50-day MA support coming at $93.40, with $92.35 seeing the 200-day MA.
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