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Market Analysis 16-05-2013: Dollar gains on Eurozone remains
Daily Commentary 16.05.2013
The Big Picture Dollar gains on Eurozone remains: USD rallied during the European day yesterday as the GDP figures confirmed that the Eurozone is well and truly in recession, plus French prices showed disinflation. However enthusiasm for the US currency started to cool once the US data started arriving. The Empire State manufacturing survey and industrial production were both below estimates. The last indicator of the day, the National Association of Homebuilders housing market index, was better than expected and USD recovered somewhat.
I had been expecting inflows into the US stock market to power the USD higher, but on the contrary, yesterday’s TIC data showed that US investors purchased record amounts of foreign equities in March, while foreign purchases of US assets are tailing off. Nonetheless DXY was up about 4% during the first three months of the year. Now that risk on = buy USD, I would expect inflows to turn around and USD to move even higher. The one exception is US flows to Japan. The Japanese data out yesterday showed large foreign purchases of Japanese stocks, which seem likely to continue with the Japanese market still at only half its record level (set back on 29 Dec 1989! Just remember that when next someone tells you “stocks always go up in the long term.”) Foreign purchases of Japanese stocks could continue and be a moderating influence for USD/JPY, although I would expect these inflows to be overwhelmed over time by Japanese purchases of foreign assets.
Not much in the way of indicators out of Europe today, except for final Eurozone CPI, which is not likely to deviate much from the preliminary 1.2%. The US has a fairly busy day, though. CPI for April is expected to be down 0.3% mom, an acceleration from March’s 0.2% mom decline. There don’t seem to be a large number of people on the FOMC who are worried about inflation being too low any more however as inflation is still within the Fed’s comfort zone and the focus is on whether employment is getting back to normal. For initial jobless claims, the market is looking for a small rise to 330k from 323k. That would still bring the four-week moving average down to 331 from 337, so it’s an improvement and should be USD-positive. Housing starts are forecast to be down to 970k from 1,036k, which could counter some of the optimism caused by yesterday’s NAHB survey. But on the other hand, the Philadelphia Fed survey is expected to rise slightly to 2.0 from 1.3, which could counter some of the pessimism caused by yesterday’s Empire State survey. The two surveys only move in the same direction about half the time, and over the last year have had a negative correlation (-26%).
The Market EUR/USD
• EUR/USD was driven to head-and-shoulders neckline support at 1.28550 following the release of weaker than expected core Eurozone GDP figures, with France officially in a recession again and Germany narrowly avoiding a recession with a 0.1% expansion. The weighting attributed to these countries consequently led the Eurozone GDP figures to miss expectations for a second consecutive quarter. Resistance following the worse-than-anticipated mom PPI and the first negative NY Empire State Manufacturing Index reading since January came around 1.2880, with the better than forecasted NAHB Housing Market Index reversing the rebound. 1.2875, the 50% retracement level of the July 2012 – February 2013 up move looks to be interchanging as a support and resistance, with further resistance at 1.2920 and 1.2980.
Today we may see the completion of the 50-day/200-day MA “death cross”, with the 50-day MA moving under the 200-day MA. A 20-year backtest reveals that 57% of “death crosses” (8 out of 14) result in successful down moves with less than a 0.5% drawdown, generating a mean return of 3.3% within an average of 18 days, or a median return of 0.85% over six days. Should we have a breakdown from the support neckline, an initial support level comes at 1.2800, with a strong support at 1.2680, the 61.8% retracement level of the aforementioned bull market. The target set by the head-and-shoulders formation is around 950 pips, though it is important to note that only around 50% of these formations fulfill their target. A more conservative measure places a target of 1.2500, which coincides with the upward-sloping support trendline that holds since the start of the euro. The average of the two targets comes at around 1.2100, which sees the support trendline that holds since the end of 2005 and which coincides with the historic daily average for the pair.
USD/JPY
• USD/JPY formed a spinning top candlestick yesterday signaling uncertainty with regards to direction. The pair retraced from the 102.70 highs following the release of weak U.S. data, particularly the PPI, with support coming at 101.95. The rebound following the strong NAHB Housing Market Index was short-lived as there was some profit taking, with the worse-than-forecasted GDP deflator figure and the strong GDP growth figure retesting support. With the momentum on the pair apparently turning bearish, it seems that upside potential is limited, unless we see strong U.S. data today. That could move the pair towards 103.90 resistance, with the next support levels coming at 101.65 and 101.35.
GBP/USD
• Cable spent the day between 1.5200 strong support, which sees three notable Fibonacci levels, and 1.5270 resistance, the reversal of the June 2012 – January 2013 rally. Rebound from support followed the better than estimated U.K. employment data, with the ILO unemployment rate coming in at 7.8%, an improvement of the forecasted stable rate of 7.9%. Claims also decreased by more than forecasted adding to the rebound, with BoE Governor King’s speech with regard to 0.5% next quarter growth not impacting the pair in any substantial way. A breakdown from 1.5200 may see support at 1.5125, the 61.8% retracement level of the March – May rebound, with further support at 1.5040. Resistance above 1.5270 may come at 1.5310.
Gold
• Gold was a major loser yesterday, plunging as the U.S. PPI data reinforced the view that inflation is the least of concerns for the U.S., with the Eurozone CPI today due to go into deflationary territory again. The breakdown from $1423 support drove the pair to $1390 support, with resistance coming at $1400. A breakdown from the $1385 - $1390 area may move price towards $1370, with $1350 being another weak support.
WTI
• WTI had a volatile day, hitting $92.35, the 200-day MA support, following the weak Eurozone GDP figures and the generally weak U.S. data. A rebound however to $94.50 Fibonacci resistance was triggered as crude stockpiles saw an unexpected decrease, leading to a hammer candlestick, which may hint an end of the downtrend. Nonetheless, the RSI and the Stochastics are still downward sloping , and we would need some confirmation before going long. $93.40 and $92.35 are yet again support levels with trendline and Fibonacci resistance coming at $95.50, and further resistance at $96.60.
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 17-05-2013: Technicals on the driving seat
Daily Commentary17.05.2013
The Big Picture Technicals on the driving seat:With the initial jobless claims released yesterday in the U.S. climbing to a six week high, and with the continuous claims figure also missing estimates, one would have expected the dollar to have weakened yesterday, since the labour market weaknesses will likely postpone the Fed’s tapering off of QE. Dollar bearish news, though, came from other fronts as well, as April’s housing starts also missed forecasts, being the least since November, and the Philadelphia Fed Manufacturing Survey reinforced the negative picture painted by the Empire State Index on Wednesday, thus hinting to a disappointing future ISM Manufacturing reading. However, this burst of negative U.S. data left the dollar index virtually unchanged from yesterday morning. As a matter of fact it was up by 0.08%, greatly due to the euro’s and the yen’s inability to capitalise on the news, with both losing 0.06% versus the greenback since yesterday morning, with the commodity currencies plunging (NZD, AUD, and CAD down 1.73%, 1.23% and 0.54% respectively), despite the mixed picture on the commodities (crude, copper and palladium gain, with the other precious metals losing).
Indeed, not all news from the U.S. was dollar negative yesterday, as the continuous jobless claims showed the second lowest reading since April 2008, with April’s building permits, a leading indicator, being the most since the pre-Lehman era. The euro’s inability yesterday to effectively gain versus the dollar, though, adds to a similar phenomenon witnessed on Wednesday, with the euro underperforming versus the other majors on the announcement of dollar bearish news. The movement of the EUR/USD 50-day Moving Average below the 200-day MA, which signals a technical “death cross” that is bearish for the pair, and the pair’s inability to rebound off the neckline of a head-and-shoulders formation, which holds since September 2012, also add to the euro’s apparent difficulty to gain versus the dollar.
U.S. equity index traders may want to note that the indices closed slightly lower yesterday, with the SPX and the NYA indices closing lower for only the second time in more than two weeks. However, with the McClellan Oscillator, a breadth indicator based on a Moving Average of the number of shares rising with those falling, downward-sloping on the NYA since May 8th, it is on the verge of turning bearish lying slightly above zero. A negative reading usually signals a limit to the up move potential with a correction taking place.
In the US, the U of Michigan consumer confidence indicator is forecast to rise to 78.0 from 76.4. The leading indicators are forecast to be up 0.2% vs a -0.1% decline in March. Is this important? A 1998 study by the Fed found that the Conference Board’s indicators “have both economically and statistically significant explanatory power for several categories of consumer spending.” But they found that “by contrast, measures available from the University of Michigan generally exhibit weaker forecasting power for most categories of spending.”1 A 2003 study of the two indices by the Congressional Research Service found that “These indicators are not, apparently, insignificant. On their own and in concert with other economic variables they have been shown to contribute to forecasts of future consumer spending and hence of overall economic growth. But their contribution may be somewhat more modest than the attention they get would suggest.”2 Nonetheless, so long as the FX market pays attention to them, you do too.
Elsewhere today, Canada’s CPI for April is forecast to be unchanged mom (vs +0.2%) while the Bank of Canada’s core CPI is forecast to be up 0.2% mom, the same as in March.
The MarketEUR/USD
• The Eurozone’s CPI figures did not affect the pair as they came in line with expectations, as is usually the case. The weak U.S. data, however, caused a rebound from the 1.2855 head-and-shoulders neckline, with trendline resistance coming at 1.2920, with the pair shedding 45 pips soon after resistance was hit, with a rebound that followed failing to challenge resistance again driving the pair back to the 1.2855 – 1.2875 support area. A breakdown from the support neckline may have the pair finding brief support at 1.2795, with 1.2750 being the March low following the February plunge and with 1.2680, being a 6-month low and the 61.8% retracement level of the July 2012 – February 2013 bull run. Resistance today may come lower, around 1.2915, with further resistance at 1.2980.
USD/JPY
• USD/JPY formed a doji candlestick yesterday, reinforcing the view that there is a tug-of-war between bulls and bears, with resistance again coming around 102.70, though slightly lower than on Wednesday, with support yet again at 101.95, a level tested following the release of weak U.S. data. The technical rebound that followed looks to have found resistance at 102.30, with the 1-hour chart resembling a double-top. Support below, 101.95 comes at 101.65 and 101.35, with a breakout of 102.70 resistance seeing the next notable resistance at 103.90.
USD/CAD
• The loonie lost yesterday despite oil gaining, with USD/CAD finding resistance at 1.0217, the 23.6% retracement level of the January – March rally. A slightly downward-sloping trendline, which holds since February 2010, may act as resistance at 1.0240, with Fibonacci resistance at 1.0275. Support comes at 1.0180, near the 50-day MA and the 1.0140 – 1.0155 area, which sees the 38.2% retracement level of the aforementioned rally. RSI looks to be following an upward trendline with the Stochastics in overbought levels.
Gold
• Gold is having its worst weak in a month, having lost 5.5%, falling for a sixth consecutive day as the “smart money” reduce their holdings of gold ETFs, with Soros, BlackRock and Northern Trust added to the list. That said the “smart money” did not prove very smart in 2012, when close to 90% of hedge funds underperformed the SPX Index. Gold’s technical plunge following the breakdown from the $1400 and $1385 support levels drove the asset to $1370 support. $1385, the 23.6% retracement level of the April crash, looks to interchange as support and resistance, with support below the recent low coming in at $1350 and $1330. Notable resistance levels are the $1423 – 1431 area and $1445, the 38.2% retracement level of the post financial crisis bull run.
WTI
• WTI confirmed the hammer candlestick that formed on Wednesday, as it was a major gainer yesterday. It rebounded from $93.40 trendline support in spite of the poor U.S. fundamentals since the news weakened the dollar. However, the rally that followed was chiefly technical, driving price to $95.50 trendline resistance, despite the dollar gaining overall yesterday. $94.50 may act as an initial support, with $93.40 seeing trendline and Fibonacci support, while the 200-day MA lies at $92.35. A breakout may find initial resistance at $96.60 with strong trendline resistance at $97.30.
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
1 “Does Consumer Confidence Forecast Household Expenditure? A Sentiment Index Horse Race,” available on the web at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1023933
2 “Measures of Consumer Confidence: Are They Useful?,” available on the web at http://assets.opencrs.com/rpts/RL31942_20030602.pdf
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Market Analysis 20-05-2013: Technical sentiment on a high
Daily Commentary20.05.2013
The Big Picture Technical sentiment on a high: With the dollar breaking key support and resistance levels versus its major counterparts, and given the lack of economic calendar events, emphasis is shifted on the technicals again. On Friday, the best U. of Michigan consumer sentiment reading since July 2007 and the large beat by the Conference Board leading indicators caused across-the-board dollar gains, with the Dollar Index (DXY) breaking out from key resistance, closing at an almost three year high. The latest Commitment of Traders report for the week ending 14th May, in fact shows large increases in Euro, yen, Swisse and Aussie short contracts, with the first three having a 75% weighting on the DXY. U.S. equities also gained close to 1%, with the McClellan Oscillator on the NYSE rebounding before going into bearish territory.
The commodity currencies were the ones that performed the worst against the dollar this week. The Aussie, the Kiwi and the South African rand lost 3%, with AUS/USD and NZD/USD breaking down from key trendline support, whilst USD/ZAR rebounded from its two-year old upward-sloping support trendline. Versus the greenback the euro lost the least from the 7 majors, finding support at 1.2800, the historic moving average since the euro’s circulation in 2002. However, with the “death cross” between the 50-day and 200-day MA completing on Friday, history points to further EUR/USD losses, with the huge head-and-shoulders formation adding to the bearish outlook. A back-test we’ve conducted reveals that since the euro’s circulation, there have been 5 death crosses that generated for the shorts a mean (median) return of 5.57% (4.35%) within 45 (47) days, with only 1 of those 5 death crosses leading to a EUR/USD appreciation of more than 1% within that time period. To place the significance of the EUR/USD death cross in perspective, the “golden cross”, which is when the 50-day MA moves above the 200-day MA, has in 5 out of 6 occurrences (83%) moved more than 1% the opposite direction than the one anticipated. Of greater importance, however, is the head-and-shoulders formation, which started in September 2012, since these formations have shown to have statistical significance, being rather reliable despite their massive targets. Although the price target set by the current formation is below 1.20, 1.21 is a more probable target. It sees tested trendline support, being also a reversal level, is the target based on past death crosses, and is a more conservative target given that about half of head and shoulders meet their large target, with 94% making at least a 5% move. That said two-thirds of head and shoulders tops do test the neckline once penetrated, so patience is required.
Amazingly the only data out of the EU today are Italian industrial orders and sales for which there are no available forecasts. In the U.S., the Chicago Fed National Activity Survey is due, with no estimate released. Tuesday sees the release of the UK price data, with Wednesday having monetary policies at the centre of attention as the BoJ convenes, the FOMC and BoE release the minutes of their last meeting, and Bernanke testifies, with the markets waiting whether or not he will hint the tapering off of QE. Thursday is PMI day, with the U.S., China, France, Germany and the Eurozone as a whole all forecasted to see improvements in their flash PMIs. The week ends with the U.S. durable goods orders, and the German consumer and business confidence surveys.
The MarketEUR/USD
• EUR/USD was finding support for the greatest part of the Friday session at 1.2855, the neckline of its head-and-shoulders formation based on our closes, breaking down from that level on a technical move. Trendline support came at 1.2795, with a surprise 30 pip rebound occurring on the announcement of the strong U.S. consumer confidence data. The better-than-expected CB leading indicators released within minutes slightly corrected the rebound but the lows were not tested again, with resistance, however coming at 1.2840. Support is likely to come in the 1.2795 – 1.2770 area, with the latter figure being the head-and-shoulders neckline based on the spikes. A breakdown from that area is likely to penetrate the 1.2750 low seen in 2013, with stronger support, at least initially coming at 1.2680, the 6 month low which is also the 61.8% retracement level of the July – February rally. Resistance is likely to come at 1.2860, with a breakout from that level placing resistance at 1.2905.
USD/JPY
• Having found support at 102.30 for the first half of the day, USD/JPY broke out from 102.70 resistance on the better-than-expected U.S. data, thereafter preserving and building on those gains. The pair, however, opened the week with a downward gap at 102.70 following Sunday comments by Japan’s Finance Minister that “if the yen keeps on weakening a lot more, it will have a negative impact on peoples’ lives”. Initial support comes at 101.95, with support thereafter at 101.35. The 103.30 high is likely to act as resistance again with further resistance at 103.90. traders should note, however that RSI and the Stochastics are at overbought levels with both momentum indicators likely to form bearish crossovers, should we close lower.
USD/CAD
• The falling, worse-than-expected Canadian CPI readings did not move the pair, but the better-than-anticipated U.S. data caused USD/CAD to breakout from its 1.0240 converging pattern resistance that has been developing since February 2010. That said there have been whipsaws in the past so prudence should be exercised. Support for one of Friday’s biggest movers comes at 1.0275, the 23.6% retracement level of the massive plunge from March 2009 to July 2011, with resistance coming at 1.0310, near the one year highs. Trendline support is seen at 1.0240, with further resistance at 1.0340.
Gold
• Gold bears are in seventh heaven as the asset declined for a seventh consecutive day, losing more than 6% last week. The dollar-bullish U.S. data caused a breakdown from $1370 support, with the asset today breaking down from $1350 support. Strong support now comes at the recent lows of $1322 – 1330, with notable Fibonacci levels in the 1285 – 1300 area. Resistance is likely to be seen at $1350 and $1370.
WTI
• WTI was a major gainer on Friday, continuing with its rally on expectations of increased demand due to the driving season, spiking to $96.45 resistance, before retracing as the dollar gained on the release of positive U.S. data, with a late rebound finding resistance at $96.20. Strong trendline resistance comes at $97.30, with trendline support coming at $95.50, with further support levels at $94.50, $93.50, which sees the 50-day MA, and $92.35, which sees the 200-day MA. Should WTI close on the upside, it will be forming a bullish RSI-MA crossover, though traders should also note that the Stochastics oscillator is in overbought territory.
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
1 “Does Consumer Confidence Forecast Household Expenditure? A Sentiment Index Horse Race,” available on the web at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1023933
2 “Measures of Consumer Confidence: Are They Useful?,” available on the web at http://assets.opencrs.com/rpts/RL31942_20030602.pdf
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Market Analysis 21-05-2013: QE, or not to QE, that is the question
Daily Commentary21.05.2013
The Big Picture QE, or not to QE, that is the question:The dollar generally lost versus its peers following the speech of Chicago Fed President Evans, an outspoken dove who had pushed for the tying of monetary policy to the unemployment rate. In his speech yesterday Evans stated that the U.S. economy is performing “pretty well right now”, citing improvements in the labour market, consumer spending and housing, despite the economic data catching markets by surprise, as signaled by the Citigroup Surprise Index, which is at the lowest, negative levels since early February. He stressed that the “key issue” is to see the average 200k non-farm payroll increases witnessed the past 6 months “maintained over the next few months”. Despite his dovishness, however, with his comment about inflation being that he would like to see it higher towards the Fed’s 2% target, Evans stated that he thinks this is the year when they will “really turn things around” as the U.S. economy has improved “quite a lot”. This statement likely pushes the tapering off of QE to, at least, autumn, further away than the summer some dollar bulls were anticipating. However, with the FOMC minutes released tomorrow, after Bernanke testifies on the economy, the autumn scenario may simply turn out to be the timespan a dove feels comfortable with, thus making QE tapering off in 2013 likely, and in the summer possible.
Today, the UK announces the consumer and producer price indices for April. The CPI is forecast to be up +0.5% mom in April, an acceleration from +0.3% mom in March, but this would actually be a decline on a yoy basis to 2.7% from 2.8%. The output prices index is forecast to be up a bit at +0.4% mom, vs +0.3% mom in March. Does it matter? The Bank of England itself forecasts that inflation “is set to edge higher over coming months…. bolstered by external price pressures and administered and regulated prices.” Lower inflation this month would be nice, but I doubt they will embark on a more aggressive easing course right now when their own inflation expectations are so high. Wait until Mr. Carney arrives in July for any such change.
Germany’s PPI figures for April are likely to put in the spotlight again the disinflationary pressures witnessed in the Eurozone. The YoY figure is expected to show a 0.2% increase in prices, lower than March’s 0.4% increase, with the MoM data forecasted to exhibit a third consecutive month of deflation, an event last seen during the financial crisis bottom in the first half of 2009. Elsewhere, Mr. Carney, Bank of Canada governor for 10 more days, is scheduled to give a speech today before the Board of Trade of Metropolitan Montreal with another one scheduled by St. Louis Fed President James Bullard on “Monetary Policy in a Low-Rate Environment” in Frankfurt.
Overnight attention will be shifted to Japan, where the likely large increase in exports for April on the weaker yen, following the BoJ change in monetary policy, is due to decrease the adjusted merchandise trade deficit by a third. These indicators are released a few hours before we have the completion of the two-day BoJ policy meeting and Kuroda’s speech, with stimulus expected to remain steady, despite the recent increase in Japanese bond volatility.
The MarketEUR/USD
• EUR/USD began a rebound following the deteriorated, six-month low Chicago Fed National Activity Index for April, with the rebound continuing into Evans speech. Trendline resistance came at 1.2900, with 1.2905 seeing resistance today as well, whilst stronger Fibonacci resistance comes at 1.2980. Trendline support looks to come at 1.2855, with stronger support in the 1.2770 – 1.2795 area.
USD/JPY
• USD/JPY lost yesterday on the back of Japan’s Economy Minister Amari comments that further yen weakness may impact “people’s lives”, with the down move triggering bearish crossovers in the Stochastics and the RSI in overbought levels. However the pair gained overnight after Amari retraced on his Sunday comments, stating that he will not say whether or not the yen’s overly strength “has been corrected, or where it will finish”. Resistance came at 102.70, with likely further resistance coming at 103.30. Well-tested support is seen at 101.95, with further support at 101.35.
GBP/USD
• Cable rebounded from 1.5170, its 1 ½ month lows, following the highest increase in the YoY Rightmove House Price Index in more than a year, with the sterling furthering its gains as BoE Governor King cited “modest recovery”. Strong resistance came around 1.5270, which sees a reversal level and the 50-day MA. The former 1.5220 resistance level, which is the 50% retracement level of the March – April, is now acting as support with stronger support in the 1.5190 – 1.5200 area and Fibonacci support at 1.5130. Resistance above the 50-day MA is likely to come at 1.5310.
Gold
• Gold bulls managed to reverse yesterday’s morning picture as the precious metals, particularly silver and gold, had an exceptional 24-hours, with gold rebounding from its double-bottom at $1338, breaking out from $1370 and $1385 resistance, though finding twice resistance at $1400. The inability to break below the lows and the support found at $1385, with a bullish Stochastics crossover and the RSI on the verge of a bullish crossover, point to a technical rally initially to the $1423 – 1431 area should we breakout from $1400, with strong selling pressure likely coming at $1445.
WTI
• WTI was also a major gainer yesterday, rebounding from trendline support at $95.50, hitting strong trendline resistance at $97.10 on anticipation that U.S. crude stockpiles declined further as we head into the driving season. A continuation of the rally may find resistance at the 98.60 level with further support found at $94.50.
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 22-05-2013: Dovish comments dent dollar
Daily Commentary 22.05.2013
The Big Picture Dovish comments dent dollar: A mixed day for the dollar, with EUR and JPY gaining modestly while the commodity currencies and CHF lost ground against the USD. The biggest loser was GBP, while the Scandis --- SEK and NOK – were the biggest gainers. The main driver of the market was remarks by FOMC members Bullard, a noted hawk, and Dudley, a noted dove. Both were dovish, with Bullard in noting the risk of deflation and urging the ECB to consider quantitative easing, while Dudley said the Fed could adjust QE up or down. The focus will remain on Fed policy today too as the FOMC releases the minutes of the May meeting and Fed Chairman Bernanke testifies in Congress on the US economy. After yesterday’s adjustment in expectations, I expect that the risks are asymmetrical: expectations of imminent “tapering off” have diminished, hence further dovish comments (likely from Bernanke) would not have such a major impact, while signs in the minutes that a change in policy is being seriously considered could move the market significantly.
The pound lost ground as its inflation for April was much lower than expected (+0.2% mom vs. expected +0.4%, +2.4% yoy vs. +2.6%). The lower inflation gives the Bank of England more scope to cut rates if they choose, although the somewhat stronger-than-expected growth recently and the improving outlook means there is less pressure for them to cut rates, too. Nonetheless the pound weakened, perhaps in anticipation of today’s minutes of the May Bank of England meeting. The pound fell last month after the minutes continued to show a 6-to-3 split against further easing. With the same split likely to appear again this month, the same reaction is possible as well.
Other data out today include the EU current account figure for March, with the surplus forecast to move lower from €16.3bn to €15.0bn. Not usually that market affecting. Existing US home sales for April may get more-than-usual attention after the recent slew of disappointing housing data. Forecasts are for a 1.4% mom gain to a 4.99mn annualized pace, up from -0.6% and 4.92mn in March. It’s notable that these forecasts have been creeping up over the last few days despite the surprising decline in housing starts during the month. Those making the forecast must be quite confident. A number like that could swing sentiment back to the strong US economy/strong USD side, four hours before the FOMC minutes are due out.
The Market EUR/USD
• EUR/USD moved higher after breaking resistance at 1.2900, continuing its rebound. The next strong resistance comes at 1.2980 where there is a 23.6 % Fibonnacci retracement as well as the 50 Day Moving Average and 1.3030 in extension. The area near 1.2900 is expected to act as a support with 1.2855 to remain a lower trend line support.
USD/JPY
• USD/JPY moved marginally higher yesterday, while being unchanged from last night with resistance found at 102.90. Resistance lies in the 102.90-103.00 area, while a break of 103.30 will find the pair with no significant resistance till 104.00. Well-tested support remains at 101.95, with further support at 101.35.
GBP/USD
• GBP/USD continued to move lower after breaking the 1.5200 level, but found support at its bottom Bollinger level. The pair is likely to move lower today and support is to be found at the 1.5100 psychological level and also bottom Bollinger level, with a break leading to 1.5040. The 1.5200 level is likely to act as strong resistance today, followed by another strong resistance at 1.5270.
Gold
• Gold’s rebound yesterday found once again resistance at $1400 and ended up the day with losses. Resistance remains at $1400 with a breakout leading towards the $1423 – 1431area. Support comes at the previous lows of $1350 and $1340 with the Stochastic still remaining bullish.
Oil
• WTI gained yesterday but experienced massive losses overnight of nearly $5.50 a barrel after the American Petroleum Institute (API) statistics showed US crude stockpiles increased and WTI failed to break the $97.10 trendline resistance . Currently support is to be found at the bottom Bollinger level of $90.80 with a stronger support at the $89.90-$90.00 area. Should oil rebound, resistance levels may be found at $92.30 and $93.50.
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
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Market Analysis 23-05-2013: Bernanke delivers a jolt
Daily Commentary23.05.2013
The Big Picture Bernanke delivers a jolt: A quiet day in Europe but a lot of volatility once Fed Chairman Bernanke started to speak. His formal speech was dovish, as one would expect from him, and the dollar began to weaken, but there was interest in buying dollars and the decline was short-lived. Then during the Q&A session he suggested that the Fed could indeed taper off QE in the next several months if the data allowed, and things went wild. Ten-year Treasury yields soared (up 10 bps on the day), stocks moved lower and of course the dollar went right back up. There was less interest in the minutes from the last FOMC meeting, which occurred before the latest employment data and so were seen as somewhat dated. Policymakers did discuss the question of whether they would taper off QE if the economy significantly improved in Q2, although the discussion was somewhat academic as the economy has not yet shown such signs of improvement.
In sum, the tenor of Bernake’s comments and the FOMC minutes were totally different from what other central banks are discussing. Most everywhere else in the world, the problems central banks face are below-target inflation and too-strong currencies, which put central banks in a neutral to easing mode; the Fed is one of the few that is even considering tightening. This policy difference is likely to support the dollar going forward, in my view.
Overnight the China purchasing managers’ index (PMI) showed a surprise fall in May to 49.6 from 50.4 (50.4 expected). The news hit the AUD and NZD hard, as these economies are closely tied to China’s.
GBP fell after the BoE again voted 6-3 to maintain its current stance. The IMF warned that UK faces low growth and said that monetary policy should remain accommodative. As if to corroborate the IMF’s concerns, April retail sales fell more than expected, adding to the negative sentiment for GBP. Everyone is waiting to see whether Mr. Carney will be like Mr. Kuroda when he comes into office in July. As such I would think the “expectations channel” of monetary policy transmission can still provide further downside for GBP/USD.
EUR/CHF surged after Swiss National Bank president Jordan said the SNB could adjust the floor and/or impose negative interest rates to protect the country from deflation. Of course “could” does not mean “will,” but the uncertainty around the next SNB meeting on 20 June has clearly increased. The pair could go still higher, in my view.
The PMIs will be the focus today. The provisional manufacturing, services and composite Markit PMIs for May are announced for the EU, Germany and France. Later, the US Markit PMI will be announced (not the ISM index). Month-on-month rises are forecast across the board in the Eurozone, although only the German services PMI is expected to get back above 50. The US index, by contrast, is expected to fall but still remain above 50. An improvement in the European indicators could cause a rebound in EUR/USD, especially given the size of the USD movement overnight, but given the strength of dollar demand that we saw yesterday even in the wake of Bernanke’s dovish prepared comments I would not bank on any large decline in USD right now. Also, ECB President Draghi speaks this evening on “The Future of Europe in the Global Economy” and five of his Council colleagues speak throughout the day. We will probably get conflicting guidance on ECB policy from these speeches, adding to the volatility.
The MarketEUR/USD
• EUR/USD suffered losses yesterday after the pair found resistance at the 1.2980-1.3000 . It eventually broke both the 1.2900 psychological and 1.2855 trend line support and the next support now is at 1.2800 . A stronger support can be found close to that at 1.2780 where there is a November rising trendline support and the bottom Bollinger Bands level. Resistance can be found once again at 1.2900 and 1.2980.
USD/JPY
• USD/JPY continued higher and found resistance at 103.90-104.00 area. A break of the 104.00 resistance level could see the pair move another 100 pips towards 105.00 with an intermediate resistance at its top Bollinger Bands level at 104.70. Both the RSI and Stochastic are pointing overbought so some pullback is likely with supports to be found at 102.00 and 101.35.
AUD/USD
• AUD/USD collapsed yesterday and continued to do so overnight after breaking lower through the 0.9700 support level. The next support levels to be found are expected at 0.9600 psychological level and 0.9537 which is a 2 year low. The Average Directional Reading Indicator (ADX) is showing a reading above 50 indicating how strong the trend to the downside of AUD/USD is. If we see a bounce from the drop resistance is to be found at the 0.9700 and 0.9800 levels.
Gold
• Gold ended for a second day with marginal losses forming a spinning top indicating some indecision between buyers and sellers. Gold has been founding support over the last 2 days and continues to do so at its bottom Bollinger level and continues to do so at the $1350 level. A break of this level would find an immediate support at $1340 followed by $1320. Resistance now lies at $1385 followed by $1400.
Oil
• WTI got slammed yesterday for a second day and continues to do so after breaking several support levels. An immediate support can be found being tested $93.50, which is a 2½ year rising trendline as well as a previous low. Below this level there is significant resistance at the $92.30-$92.00 area where we have previous lows, the bottom Bollinger level as well as the $92.00 psychological level. With RSI and Stochastic far from being oversold we think it is quite likely to see further declines. Resistance is to be expected at the $94.50 previous high and $95.00.
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Market Analysis 24-05-2013: Bernanke: “I don’t want to make someone else’s mistakes”
Daily Commentary24.05.2013
The Big Picture Bernanke: “I don’t want to make someone else’s mistakes” Risk aversion – the “on-off” trade – remains the key theme. However now “risk on” means “buy USD,” and the switch between risk seeking on good US news and risk aversion on news coming out of Japan is whipsawing the market around. The DXY index has made three new 2013 highs over the past five days, but has not been able to sustain the gains.
Central banks continue to dominate the market. Early this morning for example we saw a sudden ¥1 drop in USD/JPY after BoJ Gov. Kuroda said that the BoJ had announced sufficient monetary easing. I tend to agree with him; they announced the largest QE program of any central bank less than two months ago. It would be premature to decide that it was insufficient.
The big debate is over the US, and there too I think the market is overreacting to speculation about what the Fed might do if the data cooperate. People should remember what Fed Chairman Bernanke said back in Dec. 2008: “I made my own mistakes, but I don’t want to make someone else’s mistakes.” He said this in reference to the Fed’s error in tightening policy too soon in the 1930s, an era that he is an expert on. He may also have in the back of his mind Japan’s too-early lifting of the zero interest rate policy in 2000 and its ending of its first attempt at QE, 2001-2006, before definitively defeating deflation. Of course the fact that the FOMC is even discussing “tapering off” removes the expectations channel of influence on the markets, but the actual impact – the continued support for bond markets – will remain. I expect that liquidity from Japan will take the place of liquidity from the US and that the net impact on financial markets globally should be very little, except that the dollar should rise (which indeed does have a global impact) and the yen should weaken.
In the current “risk off” mode, CHF has strengthened somewhat with both EUR/CHF and USD/CHF falling back. Investors with a longer time horizon might want to consider looking at these pairs. I think they represent good value now as I expect risk seeking to come back and investors to move out of the CHF over time. Plus with the Swiss National Bank still setting a floor, there’s a limit to how much downside there is in the trade.
The Ifo index is the big event of the morning. Forecasts are for the indices to remain unchanged after April’s sharp drop. Given the better-than-expected data in the Eurozone recently, such as yesterday’s PMIs, the odds are that the Ifo beats expectations too, and EUR/USD gains as a result. The only US indicator out is durable goods. The headline figure is forecast to be up 1.5% mom vs the 5.7% mom decline in March. Ex transportation orders, the figure is forecast to rise 0.5% vs the 6.9% (revised) decline in March. This would show that manufacturing is stabilizing after some wobbling in Q1.
The MarketEUR/USD
• EUR/USD reached higher after bouncing from the 1.2855 rising trendline support. Resistance is to be found at 1.2980, the 20 day moving average, followed by a strong support at 1.3075. Should the recent downtrend resume, support remains at 1.2855 followed by a stronger support at 1.2780 where there is a November rising trendline support and the bottom Bollinger Bands level.
USD/JPY
• USD/JPY collapsed 280 pips yesterday after finding resistance at 103.80 and failing to break above the 104.00 level. The drop found strong support at 100.80, a previous high, near the bottom Bollinger level and the 101.00 level. As the trend remains bullish however the pair was able to recuperate around half of its losses and it rose overnight before lurching lower again on Kuroda’s comments. Resistance is to be expected at the 103.00 psychological level followed by the 2 day high at 103.90. Should we see another drop like yesterday, then support comes strongly at 100.80 with a break of that making 100.00 highly possible.
GBP/USD
• GBP/USD made significant gains yesterday, recovering a bit from the continuous drop being experience over the past 3 weeks. The pair found support at 1.5040 ,its bottom Bollinger level and previous low. This level may be tested again today followed by 1.4920. A rising GBP/USD should find resistance at 1.5130 ,a level that was tested and held yesterday followed by 1.5200.
Gold
• Gold was able to gain yesterday as it continues to trade within the $1350-$1400 range. At the point of writing gold is very close to $1400 resistance level, which upon breakout should see a retest of the$1430 level and $1445 in succession. Support remains at $1350 -$1340 area followed by $1320.
Oil
• The 2-day drop in WTI was somehow paused yesterday as it found strong support and bounced at $92.20, its bottom Bollinger bands level and previous low. Nevertheless these gains were erased overnight. We think the drop is likely to continue if we see a breakout of the $93.50 level, a previous low and 3-year rising trendline support, which is being tested as at the point of writing. Further support will be found at yesterday’s low of $92.20 followed by $91.30.Resistance today can be found at the $94.50 level which was tested yesterday followed by $95.00.
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Market Analysis 27-05-2013: Risk off trade once again
Daily Commentary27.05.2013
The Big Picture Risk off trade once again The commodity currencies were the big losers last week, together with the pound, while the yen, Swiss franc and precious metals – the “safe haven” assets -- were the big winners These are all indications of a “risk off” trade, but which risks? The poor performance of the commodity currencies, together with lower energy prices and mixed prices of industrial metals, suggest fears about growth. That stems from concern about the Fed’s “tapering off” its support for the financial markets and what that might do to the real economy, plus worries about Chinese growth after last week’s purchasing managers’ index (PMI) signalled that manufacturing is contracting. Fears over Chinese growth heightened over the weekend, when Chinese President Xi Jinping said the country won’t sacrifice the environment to ensure short-term growth – in other words, that they would tolerate slower growth to improve the environment. AUD tends to be the most vulnerable currency in such an environment, particularly when China is involved.
Besides the Fed and China, the other main source of risk – and hence “risk off – is Japan, where quantitative easing isn’t working out exactly as planned. Bond yields have been moving higher on expectations of higher inflation, and higher yields are unnerving stocks. There was more cause for concern over the weekend after Bank of Japan Gov. Kuroda didn’t say he was going to do anything about this vicious circle and instead just cited a BoJ report indicating that rates could rise 1-3 ppt in an improving economy without causing instability. The reason for the decline in USD/JPY must have more to do with the use of JPY as a funding currency than an evaluation of the risks that the currency faces however, because it makes little sense to buy a currency specifically because of turmoil in that country’s financial markets. Nonetheless there is a positive (+0.55) correlation between Japanese stocks and USD/JPY, hence a lower stock market means a lower USD/JPY.
It’s significant that the dollar is weakening against most currencies during this period of “risk off” even though one of the main causes of the risk aversion is the likelihood of higher interest rates in the US. That idea was supporting the dollar in the immediate wake of Mr. Bernanke’s speech on Wednesday, as one might expect, but the turmoil in Japan seems to have changed the mood into one of general position-cutting that includes cutting long USD positions. I can’t see this period lasting too long however. Central banks accounting for some 27% of global GDP have either eased recently or have easing biases, meaning there should still be plenty of liquidity going forward. It only means carry trades should eventually shift out of USD and into JPY and CHF. I would particularly urge investors to consider a long-term position in EUR/CHF, where the Swiss National Bank is providing downside support.
Meanwhile, the weaker dollar and fears of financial instability are supporting the precious metals, but silver more than gold. In fact, all of last week’s move in gold occurred on Monday; this morning it’s still a few dollars lower than it was at the end of trading a week ago. It doesn’t make any sense for gold to rally on the possibility of an end to QE, since of course excess liquidity, negative real interest rates and the fear of hyperinflation caused by QE were among the factors pushing gold up. The gold/silver ratio, which bottomed last November, hit 61.9 on Friday, the highest level since Sep. 2010.
There are no major indicators or speeches scheduled for today and with the UK and US on holiday, I expect a quiet day driven largely by technical factors. For the week as a whole, the key data points are the German inflation figures on Wednesday and Eurozone inflation on Friday, which will prepare the way for next week’s ECB meeting. A slightly rise in Eurozone inflation may dampen expectations of another rate cut and support EUR/USD.
The MarketEUR/USD
• EUR/USD ended Friday slightly lower, forming a long-legged doji candle. This candle is a bearish signal which seems to be confirmed so far given the slight overnight losses. A support which should cause some movement upon breakout can be found at 1.2880 followed by 1.2780, the November rising trendline support and the bottom Bollinger Bands level. Resistance is to be found at 1.2980, the 20 day moving average, followed by a strong support at 1.3075.
USD/JPY
• USD/JPY suffered losses for a second consecutive day and continues to move lower this morning. On Friday the pair recovered somewhat in New York trading but was unable to break through the low set in the wake of Mr. Bernanke’s testimony last week. That failure caused a turnaround in sentiment. There is substantial support in the 100.70- 100.40 area, where there is a bottom Bollinger bands level, a 20 day moving average and 23.6% up move retracement level. A break of 100.40 could see the pair test previous resistance level of 99.70. Resistance levels can be found at 101.90 and 102.70.
AUD/USD
• AUD/USD continues its massive drop since the start of the month, having lost 750 pips, with the ADX index showing higher and higher reading confirming the strength in this down trend. At the time of writing the pair is finding support at 0.9630, Friday’s low and falling trendline support, while 0.9590, Thursday’s low being expected to be re-tested. A break of this level could see the pair drop to 0.9500 which is a 2 year low. Resistance can be found at 0.9700 and 0.9800.
Gold
• Gold fell slightly on Friday following a sluggish trading session, with the $1400 resistance level being tested and holding for a seventh trading day. Once again gold is very close to $1400 resistance level, which upon breakout should see gold test the$1430 level and $1445 in succession. The metal is finding support at $1485, Friday’s low and the 23.6% retracement of its down move. Further support remains at $1350 -$1340 area followed by $1320.
Oil
• WTI resumed its drop on Friday with the $93.50 level, a previous low and 3-year rising trendline support, holding once again and being tested this morning. A break of this level makes $92.20 support highly likely to be revisited followed by $91.30. Resistance levels remain the $94.50 level followed by $95.00.
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Market Analysis 28-05-2013: The last shall be first
Daily Commentary28.05.2013
The Big Picture The last shall be first:Trends don’t last so long any more. The action last week was risk aversion and the recovery of the “safe haven” currencies, but that all turned around yesterday and the dollar generally recovered. The big winner as risk appetite came back was the AUD, which was the biggest loser last week. Behind the rise was a fairly steady recovery in the Tokyo stock market Monday and this morning; the index is currently up around 2% from Monday’s opening levels. Higher Tokyo stocks means higher USD/JPY means risk on.
The Tokyo stock market has become much more volatile recently, which is affecting all markets around the world. I think the Japanese authorities will have no choice but to come to grips with their problems there and deal with them. They are in this too deep to back out. Having committed to large-scale quantitative easing, higher inflation and fiscal stimulus, they have to make it work, otherwise their increased debt and higher interest rates will bankrupt the government. So I expect they will do whatever is necessary (the mantra of central banks nowadays, perhaps?) and that should support stocks and push USD/JPY higher over the next several months. The alternative is too grim to think about.
This morning we have French consumer confidence, is expected to rise by 1 point in May to 85, but that would just be random motion in the same range it’s been in for some time. In the US, the Case/Shiller house price index for March is expected to be up 10.2% yoy, an acceleration from +9.3% in February. Later in the day the Richmond and Dallas Feds manufacturing indices are released. Both are expected to show some improvement, although the Empire State and Phili Fed indices earlier this month disappointed the market so we may be in for a disappointment here too. That could push EUR/USD a little higher. On the other hand, the Conference Board’s index of US consumer confidence for May is forecast to have risen to and the U of Michigan consumer confidence index rose more than expected, boosting the dollar, so this could counter some of the possible impact.
The MarketEUR/USD
• EUR/USD had a very quiet day yesterday, ending marginally lower. It declined further overnight with the 1.2880 support being tested and holding. This is an area of interest where there are previous lows, falling trendline support and a 50% retracement level. The 1.2780 November rising trendline support remains the next support. Resistance levels remain the 1.2980 followed by the stronger 1.3075.
USD/JPY
• USD/JPY spent the whole day yesterday testing the 100.80 support, but was unable to break it. We saw a bounce this morning with the pair moving higher and testing the 102.00 resistance. The next resistance is the 102.70 level followed by103.30 . Should we see another down move today, 100.80 support is the first level to be tested with a breakout leading towards 99.90, a previous support.
EUR/CHF
• EUR/CHF moved higher yesterday and continued to do so overnight after bouncing higher from the 1.2430 support level. This level is its 50% retracement level from a two week up move and also a previous low. The pair maintains in an uptrend and this morning is breaking 1.2480, its 38.2% retracement level. It appears to be on its way towards 1.2580. Support is the 1.2430 level followed by 1.2380.
Gold
• Gold continued its consolidation for another day, trading in the tight range of $1383-1400. Resistance levels remain the $1400 area. A breakout of that would probably see gold test the$1430 level and $1445 in succession. Current support is the $1383 level .Further support remains at $1350 -$1340 area followed by $1320.
Oil
• WTI moved around the same levels as Friday with no significant changes. For another session the $93.50 support level held strong and we saw a small overnight rise in the price of oil. The key levels for oil remain unchanged with supports coming at $93.50 and $92.20 in succession while resistance is at $94.50 level followed by $95.00.
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Market Analysis 29-05-2013: USD rallies on rising rates
Daily Commentary 29.05.2013
The Big Picture USD rallies on rising rates: Impressive US economic data (higher home prices and a cyclical high in consumer confidence) sent US interest rates soaring, which pushed the dollar higher against almost all currencies overnight. 10yr US Treasury yields jumped 17 bps while expectations for Fed funds in Jan. 2016 also rose 17 bps to 0.86%. It was noticeable that the stock market managed to gain nonetheless, which indicates that this was a “good” rise in rates – one caused by an expectation of a better economy, not expectations of Fed tightening to dampen the economy (as happened last week).
The next step will be to see how the Fed reacts to the higher rates. Will it see the move as an appropriate reflection of the signs of an improving economy, or will it think that the market is over-reacting? Chairman Bernanke gave a speech about interest rates in March in which he said, “(w)e anticipate that long-term rates will rise as the recovery progresses and expected short-term real rates and term premiums return to more normal levels.” But if the market is over-reacting, then “(a)djustments to the pace or timing of asset sales could be used, under some circumstances, to dampen excessively sharp adjustments in longer-term interest rates.” Perhaps when Boston Fed President Rosengren speaks in Minneapolis today he’ll address that issue in the Q&A afterwards.
In any event, the divergence in monetary policy between the Fed and almost all other central banks around the world is why we expect the dollar to rise overall this year. Rising house prices and strong consumer confidence as we saw overnight suggests that the US economy can withstand modestly higher interest rates. When almost all other countries are likely to keep their rates steady or lower them further, the rising interest rate differential should support USD, particularly against countries that will maintain a loosening bias, such as Japan or the UK (and perhaps the Eurozone?).
Today, German CPI for May (EU harmonized version) is forecast to rise to 1.4% yoy from 1.1%. This would probably be EUR-positive, because it implies less need for the ECB to cut rates next week. The German employment data is not expected to be particularly exciting. As for EU money supply, the continued decline in lending may be more important than the headline figure as pressure grows on the ECB to do more to help businesses. The European Commission will make its annual economic policy recommendations for each country today and European austerity programs will be under consideration. In the US, the weekly mortgage application figures are the only data out today. Elsewhere, today is Mark Carney’s last meeting as Governor of the Bank of Canada. No change in rates is expected; rather, the question is whether they will tinker with the last sentence of the statement, which promises that rates will be steady for some undefined “period of time” and then rise. Several other central banks around the world have shifted to an easing bias, and with the Canadian CPI now down to a mere +0.4% yoy (+0.5% yoy core), it’s possible that they shift their bias as well.
The Market EUR/USD
• After two days of crawling sideways, EUR/USD finally made a substantial move. The pair dropped until it found support at 1.2850, which is a 1.5 year rising trendline support and also a level that was tested 5 times over the past two weeks. This level is also being tested this morning. The next support lies at 1.2750-1.2780, which upon breakout would see the pair complete a head and shoulders formation. Resistance levels come at 1.2930 followed by the stronger 1.3000.
USD/JPY
• USD/JPY was a significant gainer yesterday after bouncing from the 100.80 resistance level and breaking the 102.00 level, showing that the decline of the previous three sessions was only a retracement. Resistance remains the 102.70 level followed by 103.30 . The 100.80 level remains a strong support with a breakout leading towards 99.90, a previous support.
AUD/USD
• AUD/USD suffered another substantial loss as it broke overnight the 0.9600 support level that is considered a key technical level. If this down move continues, the next support level is 0.9530, which is a two year low. A breakout of that would makeg 0.9400 very possible as there is an absence of any significant support in between. Resistance is now the 0.9630 level followed by 0.9700
Gold
• Gold had another quiet trading session trading at its usual $1383-1400 range. Though it was able to reach both higher and lower than that range, these breakouts were only marginal and hence no major movements. Resistance levels remain the $1400 and $1430 levels. Support level today has moved slightly lower to $1370 followed by the $1350 level.
Oil
• WTI was a major gainer yesterday after bouncing higher from the $93.50 support level. Following this rise WTI found resistance at the $95.00 psychological level and spiked towards $96.00. WTI is very close to the $95.00 level, as at the point of writing, with $96.30 being the next major resistance. Support levels remain at $93.50 and $92.20
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