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Market Analysis 04/10/2013: No progress on the talks
Daily Commentary04.10.2013, Time of writing: 03:30 GMT
The Big PictureNo progress on the talks: While there was some data out yesterday (jobless claims better than expected, service-sector ISM worse than expected), the US government shutdown continues to dominate the market. On the one hand, there was some hope from a meeting of House Republicans with Speaker Boehner, who reportedly reassured colleagues that he was determined to prevent a default even if it meant relying on Democrats to pass the measure. (Under the US political system, the majority party in the House of Representatives puts forward bills for a vote, and the Republican Party has an informal rule of not putting forward any bill that they could not pass by themselves without Democratic support.) On the other hand, there was the now-famous statement by conservative Republican Marlin Stutzman of Indiana who said recently, “We’re not going to be disrespected. We have to get something out of this. And I don’t know what that even is.” In other words, while the Republican leadership apparently wants to avoid a disaster, some of the rank-and-file are determined to continue fighting even though they don’t know what they are arguing about any more. Given that the Democratic leadership’s bargaining position is that they will not start negotiating until the Republicans agree to fund the government and raise the debt ceiling – in other words, until the Republicans give in completely – it looks like this stand-off may go on longer. Regardless of what Mr. Boehner says in private, some participants reportedly believe that their leverage will increase the closer they get to the debt ceiling, so it could even drag on for a couple more weeks. That’s likely to continue to drag the dollar down and boost CHF, JPY and EUR.
It was noticeable that although the problems in the US dominate the market and the safe-haven currencies CHF and JPY benefitted accordingly, growth-sensitive currencies such as AUD and SEK rose too. Perhaps they are being boosted by the rapid fall in interest-rate expectations in the US. If this farce ends sooner rather than later, the impact on US growth should be minor while the impact on US interest rates and rates expectation should be greater and longer-lasting. That depends on this ending soon, however. I think these currencies may benefit next week, but if it drags on past that and we start to approach the Oct. 17th debt ceiling limit, they are likely to fall back rapidly as the global growth picture fades into a financial Armageddon scenario.
The economic calendar is becoming less interesting as the US government shut-down means no government statistics. The US non-farm payrolls were supposed to be the highlight today but they will not be released. In their absence, the market is focusing even more on Fed speakers. Yesterday, Atlanta Fed President Lockhart said the absence of government data “would tend to make me somewhat more cautious” about tapering, although he didn’t “rule out” a move at the October FOMC meeting. This line – that the shutdown would have only modest effect on the Fed -- was echoed by San Francisco Fed President Williams, who said “I wouldn’t exaggerate the impact on monetary policy of not having a couple of data inputs.” Obviously though as the number of missing data inputs mounts, the clarity becomes less and the odds of tapering diminish. The Fed Funds futures out to the middle of next year are already back to where they were before the tapering talk began in May. Personally, I liked Dallas Fed President Fisher’s comment that “(w)e have a Three Stooges act taking place on Capitol Hill.” Not market-affecting, but at least honest. In the absence of any US data releases, the market is again likely to focus on the Fed speakers, especially New York Fed President Dudley. Dallas Fed President Fisher (again), Fed Governor Stein, Richmond Fed President Lacker and Minneapolis Fed President Kocherlakota speak as well.
During the European day we start with German PPI. The market expects no change in August vs a decline of 0.1% mom in July. Later in the day, Eurostat will release Eurozone PPI for August, which is expected to rise 0.1% mom vs 0.3% mom in July.
The Market EUR/USD
• EUR/USD continued moving higher yesterday. The pair is currently trading between the key support level of 1.3564 (S1) and resistance at 1.3654 (R1). If the longs continue their momentum and manage to overcome that ceiling, they will drive the rate towards new short-term highs. I expect them to challenge February’s highs at 1.3706 (R2). Our short-term studies confirm the notion, since the MACD oscillator lies in its bullish zone, above its trigger, while the rate is trading above both the 20- and the 200-period moving averages.
• Support is identified at 1.3564 (S1), 1.3461 (S2) and 1.3400 (S3) respectively.
• Resistance levels are the level of 1.3654 (R1), followed by 1.3706 (R2) and 1.3800 (R3). The latter two are found from the daily chart.
USD/JPY
• USD/JPY moved lower yesterday, reaching the critical 97.00 (S1) barrier as expected. In the early European trading the pair lies slightly above that support. Aclear downward violation should trigger extensions towards 96.38 (S2). The rate is trading below both the moving averages, while both the RSI and MACD continue following their downward sloping path, confirming the validity of the downtrend.
• Support levels are at 97.00 (S1), followed by 96.38 (S2) and 95.81 (S3).
• Resistance is identified at 97.73 (R1), followed by 98.50 (R2) and 99.16 (R3).
EUR/GBP
• EUR/GBP moved significantly higher yesterday, breaking above the 0.8388 level (yesterday’s resistance). The rate lost its momentum after hitting the ceiling at 0.8440 (R1). I consider this upward move as a pullback and a good opportunity for the bears to increase their positions, since the downtrend path remains in effect and the 20-period moving average lies below the 200-period moving average. I would start seeking for trend reversal signals as soon as the upper boundary of the channel and the 0.8503 (R2) level were penetrated. The RSI found resistance at its 70 level, enhancing my suspicions for a forthcoming downward wave.
• Support levels are at 0.8388 (S1), 0.8332 (S2) and 0.8273 (S3). The latter one is identified on the daily chart.
• Resistance levels are at 0.8440 (R1), followed by 0.8503 (R2) and 0.8552 (R3).
Gold
• Gold moved slightly higher to meet once more the barrier of 1316 (R1). In the early European morning the yellow metal is testing that level and a clear break above it should be a reason for some concern. Also, positive divergence is observed between our oscillators and the price action, indicating that the downtrend is losing momentum. However, the overall short-term trend remains to the downside as indicated by the the blue downtrend line and by the bearish crossover of the moving averages.
• Support levels are at 1291 (S1), followed by 1273 (S2) and 1242 (S3). The latter one is found from the daily chart.
• Resistance is identified at the 1316 (R1) level, followed by 1343 (R2) and 1368 (R3).
Oil
• WTI hit the 104.19 (R1) barrier and moved lower. During the early morning European time, the price is trading between the key support level of 102.23 (S1) and the aforementioned resistance. If the selling pressure continues driving the action lower, I expect the bears to challenge the 102.23 (S1) floor once more. WTI remains in its downward sloping channel and alongside with the bearish cross of the moving average, they shift the odds for further downward movement.
• Support levels are at 102.23 (S1), 101.02 (S2) and 99.18 (S3). The latter one is identified on the daily chart.
• Resistance levels are at 104.19 (R1), followed by 106.06 (R2) and 108.13 (R3).
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Market Analysis 07/10/2013
Daily Commentary07.10.2013, Time of writing: 03:30 GMT
The Big Picture Risk measures for the US have declined and the dollar is stronger against most currencies at the European opening Monday. US investors were apparently encouraged on Friday that the House voted to give back pay to US government workers who are furloughed by the government shut-down; that will greatly reduce the economic impact from lower incomes. Investors also took heart from private comments by House Majority Leader Boehner that he wouldn’t allow a debt default, although as US Treasury Secretary Lew pointed out over the weekend, Boehner didn’t want to shut down the government, either. Reports that the Democrats have been examining the House of Representatives rulebook to see if they can present a bill to fund the government without the cooperation of the majority party leadership sparked some optimism as well. As a result, US stocks closed 0.5% higher Friday, the VIX index fell from its three-month high, the yield on the T-bill maturing on Oct. 31st declined a bit and the US 1-year CDS rate fell to 45 from the high of 64 on Thursday. That caused some short-covering in USD against most G10 currencies.
While the decision to give back pay to government workers will reduce the economic impact of the shut-down, I’m not sure it’s a positive development. On the contrary, it seems to me to be part of the Republican strategy to fund enough of the government to take the pressure off them while they wait for the debt ceiling deadline. It should therefore be seen as a negative, in my view. On the Democrat side, while they may be looking for a way to go around the Republican leadership to end the government shut-down, the odds of success are slim and in any event don’t include the debt ceiling. I fear that today’s USD strength may not last that long. But with many assets near key levels – US 10yr bond close to 2.60%, USD/JPY at 97.00 and USD/CHF at 0.9000 – the market may have reached some equilibrium for now. It’s a positive that politicians have moved to ameliorate the economic impact of the shutdown and without any further negative news, we could be in for some range trading and even profit-taking on short USD positions until the next lurch downward.
Nonetheless, the outlook remains negative. The weekend press gave no reason for optimism. On the contrary, there were reports that the conservative Republicans who are driving the car off the cliff have been encouraged by the positive response from their constituents. Boehner Sunday insisted that the House would not vote to finance and reopen the government or raise debt ceiling without concessions from President Obama on the health care law, which of course the Democrats would not even consider. With the S&P 500 futures opening in Europe down 0.6%, I wonder just how long the dollar will remain stable.
The only economic indicator out in European time is the Eurozone Sentix investor confidence index for October, which is expected to rise to 8.5 from 6.5. In the US, consumer credit for August apparently will be released; the forecast is for a rise to USD 12.0bn from USD 10.4bn, but will anyone be watching the US indicators?
The Market EUR/USD
• EUR/USD moved lower as the partial US government shutdown enters its seventh day. During Monday’s early European morning the pair is trading slightly above the 1.3564 (S1) barrier. If the bulls manage to maintain the rate above the aforementioned level, I expect them to challenge once more the short-term ceiling at 1.3644 (R1). However, negative divergence is observed between both oscillators and the price action, indicating decreasing momentum.
• Support is identified at 1.3564 (S1), 1.3461 (S2) and 1.3400 (S3) respectively.
• Resistance levels are the level of 1.3644 (R1), followed by 1.3706 (R2) and 1.3800 (R3). The latter two are found from the daily chart.
EUR/JPY
• EUR/JPY moved lower reaching the 131.62 (S1) floor as safe-haven demand spurred yen buying. In my opinion the trend has reversed to a downtrend since the rate is trading below the blue uptrend line, forming lower lows and lower highs as indicated by the short-term purple channel. A decisive close below the 131.62 (S1) support will have larger bearish implication and would trigger extensions towards the 130.96 (S2) level next. The rate is trading below both the moving averages, while the MACD oscillator lies below its trigger line in its negative territory, confirming the bearish attitude of the price action.
• Support levels are at 131.62 (S1), followed by 130.96 (S2) and 129.89 (S3).
• Resistance is identified at 133.20 (R1), followed by 134.00 (R2) and 134.67(R3).
GBP/USD
• GBP/USD moved significantly lower on Friday after breaking below the 1.6160 level (today’s resistance). The rate’s downward bias was stopped by the psychological support of 1.6000 (S1) and during the early morning, European trading, the price is found lying slightly above it. As long as the 1.6000 (S1) barrier holds, I consider the uptrend to remain in force, since the pair is trading above the blue uptrend line and the 20-period moving average lies above the 200-period moving average.
• Support levels are at the psychological level of 1.6000 (S1), followed by 1.5890 (S2) and 1.5717 (S3).
• Resistance levels are at 1.6160 (R1), followed by 1.6260 (R2) and 1.6377 (R3). The latter one is found from the daily chart.
Gold
• Gold moved sideways, remaining below the barrier of 1316 (R1). A clear break above this resistance level followed by a violation of the trend line would be a reason for some concern. Also, positive divergence is observed between our oscillators and the price action, indicating that the downtrend is losing momentum. However, the overall short-term trend remains to the downside, as indicated by the the blue downtrend line and by the bearish crossover of the moving averages.
• Support levels are at 1291 (S1), followed by 1273 (S2) and 1242 (S3). The latter one is found from the daily chart.
• Resistance is identified at the 1316 (R1) level, followed by 1343 (R2) and 1368 (R3).
Oil
• WTI once more hit the 104.19 (R1) barrier and moved lower. Currently, the price is trading between the key support level of 102.23 (S1) and the aforementioned resistance. If the selling pressure continues to drive the price lower, I expect the bears to challenge the 102.23 (S1) floor once more. WTI remains in its downward sloping channel and alongside with the bearish cross of the moving averages, they shift the odds for further downward movement.
• Support levels are at 102.23 (S1), 101.02 (S2) and 99.18 (S3). The latter one is identified on the daily chart.
• Resistance levels are at 104.19 (R1), followed by 106.06 (R2) and 108.13 (R3).
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MARKETS SUMMARY
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Market Analysis 08/10/2013: Fear winning out over greed
Daily Commentary 08.10.2013, Time of writing: 03:30 GMT
The Big Picture Fear winning out over greed: The market continues to hang on every hope of a settlement, with the dollar rising as various stories come out about possible ways a settlement might be reached but subsequently falling back as the hopes are dashed. US stocks closed near their lows of the day and the VIX index closed at the highs, signifying that fear is dominating greed. At the end of the day there was no change in the Washington stand-off and little change in the dollar either, with the US currency opening in Europe more or less where it was Monday morning against most G10 currencies. The main exceptions were a further decline in USD/JPY in tandem with a decline in Tokyo equities and a stronger GBP as the RICS house price balance beat expectations and the British Chamber of Commerce said domestic and export demand strengthened in Q3. On the other hand, CAD weakened after building permits fell in August from a record high.
The news coming out of the US is uniformly depressing. Rather than finding possible solutions, most of the stories I read describe why many solutions that have been suggested are not really possible (such as President Obama unilaterally raising the debt ceiling, or the famous “$1tn platinum coin” idea) and why the Republicans have little incentive to compromise. Thus it seems more and more likely that this debacle will drag out. That’s likely to drag stocks down and damage those currencies that are most closely correlated with stocks: USD/CAD (-0.71), AUD/USD (0.67), NZD/USD (0.61). (Numbers in parenthesis are the weekly correlation between the currency pairs and S&P 500 index for the last three years.) JPY and CHF should be the likely beneficiaries, particularly JPY as CHF has the Swiss National Bank intervening to slow its ascension.
As the partial US government shutdown enters its seventh day US economic calendar is becoming thin with the release of most US economic indicators to be delayed. In Europe, German factory orders are expected to have risen by 1.1% mom in August, a turnaround from -2.7% mom in July. That could provide some support to EUR/USD. Germany’s trade surplus for August is expected to have fallen to EUR 15.0bn from EUR 16.1bn, but that indicator isn’t market moving. In Canada, housing starts are forecast to show a rise in September to 185.0K from a revised 180.2K, but that may not be enough of an increase to overcome the impact of yesterdays’ announcement of a steep fall in building permits in August. In the US, the NFIB small business optimism index for September is expected to remain unchanged at 94.0, if anyone is in fact watching US indicators nowadays. Overnight Bank of Japan will release the minutes from its monetary policy meeting of 4-5 Oct. Also, Bank of Japan Deputy Gov. Nakaso speaks at a meeting with business leaders. A press conference is scheduled after the meeting. Finally, we have three Fed and two ECB speakers on Tuesday. In Europe, ECB Governor Costa and ECB’s Weidmann will be speaking, while in the US, Dallas Fed President Fisher, Cleveland Fed President Pianalto and Philadelphia Fed President Plosser are speaking.
The Market EUR/USD
• EUR/USD moved slightly higher yesterday, but in early trading Tuesday morning in Europe, the pair moved slightly lower. Currently the rate is testing the 1.3564 (S1) support level, where a clear downward violation should confirm the momentum weakness, indicated by negative divergence between the oscillators and the price action. However, the 20-period moving average remains above the 200-moving average, thus, I would consider any downward wave as a correction of the 6th Sept. - 3rd Oct. upward move.
• Support: 1.3564 (S1), 1.3461 (S2), 1.3400 (S3)
• Resistance: 1.3644 (R1), 1.3706 (R2), 1.3800 (R3).
USD/JPY
• USD/JPY moved lower yesterday as the US government shutdown entered its second week, driving demand for JPY as a safe-haven. The pair broke below the critical level of 97.00 (yesterday’s support) and during early European trading the pair lies below it, heading towards 96.38 (S1). A clear downward penetration of the latter level could drive the battle towards the short term lows at 95.81 (S2). The rate is trading below both the moving averages, while both the RSI and MACD continue following their downward sloping path, confirming the validity of the downtrend.
• Support: 96.38 (S1), 95.81 (S2), 94.77 (S3).
• Resistance: 97.00 (R1), 97.86 (R2), 98.50 (R3).
EUR/GBP
• EUR/GBP moved lower after hitting the upper boundary of the blue downward sloping channel. Currently the pair is lying slightly above the 0.8420 (S1) support. A decisive break below it would confirm my suspicions that the previous week’s rally was a correcting wave into the channel. I would start looking for trend reversal signals as soon as the upper boundary of the channel and the 0.8475 (R1) level are penetrated. The MACD oscillator lies in a bullish territory but crossed below its trigger line, confirming the lack of impetus for the pair to continue moving upwards.
• Support: 0.8420 (S1), 0.8388 (S2), 0.8332 (S3).
• Resistance: 0.8475 (R1), 0.8503 (R2) and 0.8552 (R3).
Gold
• Gold moved higher, breaking the blue downtrend line and the resistance barrier of 1316 (today’s support). The aforementioned break confirmed our concerns in previous comments, as positive divergence between the oscillators and the price action did not give much room for the precious metal to continue its downward path. If the longs are strong enough to continue their momentum, they should target the 1343 (R1) resistance level and if they manage to win the battle at that level they will overcome the previous high and increase the probabilities for the establishment of a new uptrend.
• Support: 1316 (S1), 1291 (S2), 1273 (S3).
• Resistance: 1343 (R1), 1368 (R2), 1391 (R3).
Oil
• WTI continued moving lower as fears over the Washington stalemate cast doubts about the strength of the recovery. Tomorrow’s Department of Energy crude oil inventory report is also expected to show a rise for the third consecutive week, further dampening sentiment in the market. WTI reached the well-tested level of 102.23 (S1) as expected and once more found support near that level and moved higher. However, I believe that the bears will not give up and they will attempt another test of that floor. The price remains in its downward sloping channel and alongside with the bearish cross of the moving averages, shifts the odds towards further downward movement.
• Support: 102.23 (S1), 101.02 (S2), 99.18 (S3).
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Market Analysis 09/10/2013: Short-term effect on markets, long-term effect on economy
Daily Commentary 09.10.2013, Time of writing: 03:30 GMT
The Big Picture Short-term effect on markets, long-term effect on economy? The calm in some markets – notably the FX market – while the storm rages around it is remarkable. European equities closed lower across the continent yesterday and US stocks were off over 1%, while the new one-month T-bill came at a remarkably high yield of 0.35% -- the highest level since 2008 and an astonishing increase from 0% at last month’s auction. On the other hand, yesterday’s new three-year bond was auctioned at a yield below the market level, the 10-year Treasury has closed between 2.60-2.65% every day for nearly three weeks and the dollar remains remarkably stable. In fact the US currency held steady or gained against all its G10 counterparts yesterday. Apparently the markets are worried about the Treasury’s ability to pay its debts short-term but aren’t putting much weight on the possibility of a lasting disruption, as demonstrated by the strange yield curve in the money market: the 1-month yield is sharply higher than all other months and the curve is inverted out to four months (see graph of US T-bill yields out to 1 year).
Yet the sharp drop in the October IBD/TIPP index of economic optimism announced yesterday (38.4, down from 46.0 in September) suggests that the troubles in Washington are impacting US consumer sentiment and may have a dampening impact on the economy even if they are resolved soon. The problems in the US seem to be reflected more in the currencies of the US’ major trading partners rather than the US itself – CAD was the biggest loser in the G10 while MXN also fell. Are we seeing a surprising “safe haven trade” into the US, the source of the troubles?
I think investors basically remain optimistic about the likelihood of a last-minute resolution of the problems, which explains why only the shortest bonds maturing around the Oct. 17th deadline have been affected, but realize that the shenanigans in Washington can have a lasting impact on business and consumer confidence in the government, which explains why the impact is concentrated in the stock market. In that case, the problems in emerging markets might take a lot longer to heal, because US growth could take a hit for some time. Indeed the IMF yesterday downgraded its estimate for global growth for the sixth time in a row. At the same time, slower US growth also implies that US rates are likely to remain lower for longer than expected, which should be good in the long run for risky assets and the risk-sensitive currencies. That possibility gained a boost overnight from news that President Obama will nominate Janet Yellen later today as the new Fed Chairman to replace Mr. Bernanke. As one of the main supporters of the policy of quantitative easing and a confirmed dove, Yellen is likely to prefer to err on the side of caution in moving to a tightening policy. That bodes well for the high-beta G10 currencies once we are through with this debacle. But in the short term, the risks of a policy misstep in Washington are still high and I expect the flight-to-safety trade to dominate.
Today, we start our trading session with the UK’s industrial production for August, which is forecast to accelerate to +0.4% mom after a flat reading in July. Recently GBP has been volatile as investors wonder whether the good economic news can last; a figure along this line should reassure the market that the recovery is continuing and help GBP to firm further. German Industrial production for August is forecast to have risen by 1.0% mom, a turnaround from 1.7% decline in July. Yesterday’s disappointing factory orders for August had little impact on the market however so this might not, either. Later in the day, the Fed will release the minutes from the FOMC meeting of 17-18 Sep; it will be fascinating to read the details of why they decided not to taper at that meeting, but the decision has been overtaken by events. Overnight, Australia will release the September employment data: the unemployment rate is expected to remain unchanged at 5.8%, while the employment change is forecast to show a strong turnaround to +15.0k vs -10.8k in July. That could support AUD/USD. We have two ECB and one Fed speakers today. ECB’s Coeure speaks in Geneva, while ECB’s Draghi speaks later in the day in the US. Chicago Fed President Evans speaks on “Unconventional Monetary Policy and their Cross-Country Spillovers” in Washington.
The Market EUR/USD
• EUR/USD moved sideways yesterday, remaining slightly above the 1.3564 (S1) level. During the early European morning the rate is testing that level. A clear downward violation should confirm the momentum weakness, indicated by negative divergence between the oscillators and the price action. However, the 20-period moving average remains above the 200-moving average, thus, I would consider any downward wave as a correction of the 6th Sept. - 3rd Oct. upward move.
• Support: 1.3564 (S1), 1.3461 (S2), 1.3400 (S3)
• Resistance: 1.3644 (R1), 1.3706 (R2), 1.3800 (R3).
EUR/JPY
• EUR/JPY moved higher as the news about Yellen’s nomination improved risk sentiment somewhat. The pair reached the upper boundary of the short term downtrend channel. An upward break of that channel would be a reason for concern and we might see the bulls driving the battle towards the key barrier at 133.20 (R1). If they fail to achieve such a break, then I expect the price to move lower, completing a failure swing at the 130.96 (S2) level. At the moment, the short term trend remains a downtrend, since the rate still lies into the channel and the 20-period moving average achieved a cross below the 200-period moving.
• Support: 131.62 (S1), 130.96 (S2), 129.89 (S3).
• Resistance: 133.20 (R1), 134.00 (R2), 134.67 (R3).
GBP/USD
• GBP/USD moved higher ahead of Thursday’s Bank of England monetary policy decision for October. The pair rebounded from the psychological 1.6000 (S1) barrier on Monday and at the time of writing it remains between that key support level and the resistance at 1.6160 (R1). A violation of the latter would signal the end of the recent pullback and would turn the bias back to the upside. The MACD oscillator lies in a bearish territory but above its trigger line, suggesting that the bears are losing ground. On the daily chart, the overall trend of the pair is an uptrend, still in force since the 9th of July.
• Support: 1.6000 (S1), 1.5890 (S2), 1.5716 (S3).
• Resistance: 1.6160 (R1), 1.6260 (R2) and 1.6376 (R3).
Gold
• Gold moved slightly lower on Tuesday as investors assessed the deadlock between the US lawmakers. During early European morning trading the yellow metal is testing the 1316 (S1) support level, and a decisive downward violation might bring the price back below the blue downtrend line. Nonetheless, my opinion is that the bears are losing momentum, since the price remains outside of the previous downward path and positive divergence is identified between both oscillators and the price action.
• Support: 1316 (S1), 1291 (S2), 1273 (S3).
• Resistance: 1343 (R1), 1368 (R2), 1391 (R3).
Oil
• WTI swung between gains and losses as the market swung between hope and despair about the US budget crisis. The price moved lower after hitting the upper boundary of the blue downward sloping channel. At the time of writing the price lies below the 104.19 (R1) level ready to attempt another test of the well tested floor at 102.23 (S1). Both oscillators lie near their neutral levels, thus relying on them does not seem a solid strategy. The price remains in its downward sloping channel and alongside with the bearish cross of the moving averages, shifts the odds towards further downward movement.
• Support: 102.23 (S1), 101.02 (S2), 99.18 (S3).
• Resistance: 104.19 (R1), 106.06 (R2), 108.13 (R3).
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Market Analysis 10/10/2013: New hopes on the US government stalemate
Daily Commentary10.10.2013, Time of writing: 03:30 GMT
The Big Picture New hopes on the US government stalemate: The dollar continued its recovery overnight. The trauma in the US seems confined largely to the Treasury bill market, and even then, to the very short end. Yields on bills maturing in the next month or so soared on talk that participants in the repo market would refuse to accept them as collateral; for example, the yield on the T-bill maturing Oct. 17th rose from 0.28% to 0.48%. Yet yields elsewhere were fairly stable; the two-year note was up less than 1 bp, indicating that the market still believes the drama will be short-lived. Stocks closed little changed and the VIX fell slightly, indicating no increase in fear despite the heightened stress in the short end. The steady tone in stocks may be due to the nomination of Janet Yellen as Fed Chairman, owing to her reputation as a dove on monetary policy who is likely to keep rates low until the recovery is well established. It could also be due to reports that there have been more contacts between Democrats and Republicans and an increased likelihood of some agreement. One prominent reporter for a distinctly conservative publication tweeted that the “real debate” within the Republican leadership is “when” to bring a bill for a six-week extension to the debt ceiling (as opposed to “whether” to bring one). This would just buy time for more negotiations and who says these negotiations would be fruitful? It could just set us up for a re-run six weeks later. But in any event this solution would take the immediate pressure off the markets, and with some face-saving concessions by the Democrats we might be able to move on from this nonsense. That hope has boosted the dollar against all the G10 and most EM currencies this morning.
The major event today will be the Bank of England’s Monetary Policy Committee (MPC) meeting, and even that’s likely to be a non-event. I would expect a non-descript comment similar to that which followed the September meeting – almost as little as prevailed before Gov. Carney took over. With the economy clearly on the mend and most economic indicators exceeding expectations there’s little need for a further boost, and in any case even Gov. Carney has said he doesn’t see a case for further QE. On the other hand, they’ve already given forward guidance that they won’t raise rates until the unemployment rate is below 7%; it’s currently 7.7%, so there’s not much likelihood of a move there (nor are the inflation knockouts likely to be hit, with the inflation rate trending down.) At most we might see a statement that could incorporate something like what they said back in July about how they disagree with the market’s forecast for rates. But since they dropped that line in September and rates are pretty much where they were then, I see no reason for them to be more concerned now. The focus then will shift to the minutes coming out later in the month. As for the pound, I expect GBP/USD to move lower towards 1.5500 or lower as the pace of improvement in the UK economy slows and investors start to realize that the BoE is indeed serious about keeping rates low for longer than it would have under its previous monetary framework. At its core the UK recovery is led by consumers saving less and spending more, and there’s a limit to how long and far that trend can go. Also, once people have stopped focusing on the surprising recovery in the British economy they may start thinking more about the country’s worrisome current account deficit.
Other indicators out today are French and Italian industrial production for August. These are both expected to turn around to a rise mom after a dip in July, a forecast that gained some credence after yesterday’s announcement of a rise in German IP in August. In the US, weekly jobless claims are expected to rise slightly to 310k from 308k, which probably would not be market-affecting. BoJ Governor Kuroda and ECB President Draghi will both be speaking in New York. We have also three Fed speakers.
The Market EUR/USD
• EUR/USD fell sharply yesterday, confirming the weakness in momentum that was indicated by negative divergence. In early morning European trading, the rate is heading towards the 1.3461 (S1) support level, where a downward violation should trigger extensions towards the critical level of 1.3400 (S2). Short term studies support this idea since the MACD and RSI continue following their downward sloping path. However, the 20-period moving average remains above the 200-moving average, thus, for the time being I consider the downward wave as a correction of the 6th Sept. - 3rd Oct. upward move.
• Support: 1.3461 (S1), 1.3400 (S2), 1.3324(S3)
• Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
USD/JPY
• USD/JPY moved higher and is currently heading towards the resistance barrier of 97.86 (R1) and the blue downtrend line. I expect the pair to find strong resistance at those levels, but if the bulls manage to prevail, they should pave the way towards the next hurdle at 98.50 (R2). Both the RSI and the MACD oscillators violated their resistance lines, confirming the recent bullish attitude of the price. At the moment the short term trend remains a downtrend, since the rate still lies below the downtrend line and a bearish cross of the moving averages is still in effect.
• Support: 97.00 (S1), 96.54 (S2), 95.81 (S3).
• Resistance: 97.86 (R1), 98.50 (R2), 99.12 (R3).
EUR/GBP
• EUR/GBP managed to break above the upper boundary of the blue downtrend channel and the 0.8462 barrier (yesterday’s resistance), after yesterday’s weak UK production data. In the early European morning the rate is slightly above that barrier, and if the buying pressure manages to drive it higher, I would expect extensions towards the 0.8552 (R2) resistance, near the 161.8% Fibonacci extension level of the previous downward wave. A bullish cross of the moving average has occurred, while the MACD provides bullish indications, favoring further upward movement.
• Support: 0.8462(S1), 0.8428 (S2), 0.8388 (S3).
• Resistance: 0.8503 (R1), 0.8552 (R2) and 0.8631 (R3).
Gold
• Gold continued moving lower, breaking below the 1316 level, and returned back to its downward path. However, I will be more confident about the continuation of the downtrend as soon as a break below the previous low at 1277 (S2) occurs. Nonetheless, the bias remains to the downside, since the precious metal lies below both the 20- and the 200- moving averages, while the MACD oscillator lies below its trigger line in negative territory.
• Support: 1291 (S1), 1277 (S2), 1260 (S3).
• Resistance: 1316 (R1), 1343 (R2), 1368 (R3).
Oil
• WTI traded near the lowest levels for three months after a government report showed US crude inventories surged the most in a year. The price fell sharply after finding resistance at the upper boundary of the downward sloping channel and broke below the 102.23 (R1) barrier (yesterday’s support) as expected. If the negative momentum continues and WTI violates the 101.02 floor, it should challenge the next support at 99.26 (S2). The downward slope of both oscillators favors further downward movement.
• Support: 101.02 (S1), 99.26 (S2), 97.36 (S3).
• Resistance: 102.23 (R1), 104.19 (R2), 106.06 (R3).
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Market Analysis 11/10/2013: Is motion the same as change?
Daily Commentary 11.10.2013, Time of writing: 03:30 GMT
The Big Picture Is motion the same as change? The House Republicans proposed extending the debt ceiling by six week, which raised hopes about a possible solution, albeit only a temporary one and one that did not resolve the government shut-down. Although in the event no agreement was reached, stocks soared 2.2% and the VIX index collapsed over 3 points to 16.5, while in the T-bill market, yields plunged by 10 bps at one point (although they rose again later in the day and are now above yesterday morning’s levels in early European trading). The relief rally in FX was not in the dollar however as the US currency fell against most other currencies. The high-beta AUD and CAD were the biggest winners but GBP also continued to claw back some of its losses from Wednesday’s disappointing industrial production figures. SEK and NOK continued to weaken, but the main loser over the day was JPY as USD/JPY as usual moved higher in tandem with the TOPIX (a 65% correlation on a weekly basis over the last year). CHF, the other safe-haven currency, was slightly higher however.
As far as I can tell, the House Republican leadership is looking for some face-saving way of averting a debt crisis that will not give the right wing of their party ammunition for a challenge in the primaries that they “caved” or even “compromised.” I’m not sure any such solution is possible that will also meet the requirements of the Senate Democrats without employing √(-1) or other imaginary numbers. Thus I expect the drama to continue down to the wire next Thursday (at least) and for this strength in the commodity currencies to reverse as investors’ steady faith in the US political system starts to waver.
This morning in Europe the final figures for September German and Italy CPI will be released; no changes to the initial estimates are expected. In the US, U of Michigan preliminary consumer sentiment index for October is expected to fall to 75.9 from 77.5; given what’s going on in Washington, a fall in consumer sentiment would hardly surprise anyone. Canada’s September unemployment rate is expected to remain unchanged at 7.1%, while employment is forecast to rise by 10.0k, far below August’s 59.2k. A large number of central bankers will be speaking at the Institute of International Finance (IIF) annual meeting Friday and Saturday in Washington. Speakers include ECB’s Praet, Asmussen and Coeure, BoJ’s Kuroda (whose speech overnight broke no new ground in its explanations of Japanese monetary policy) Eurogroup’s Dijesselbloem, EU’s Olli Rehn, BoE Governor Tucker and RBI Governor Rajan.
The Market EUR/USD
• EUR/USD rebounded from the blue support line and moved higher. During the early European session, the pair is heading towards the key ceiling at 1.3564 (R1) and the upper boundary of the purple downward sloping channel. I expect the bears to give their battle near that level, and if they manage to resist, the price will continue moving in the purple channel, which is its short-term path. As long as the previous top holds, the purple channel is considered valid, since the rate is printing lower highs and lower lows. Both oscillators remain below their blue lines, confirming the negative momentum of the pair. However, the 50-period moving average remains above the 200-moving average, thus, for the time being I consider the downward slope as a correction of the 6th Sept. - 3rd Oct. upward move.
• Support: 1.3461 (S1), 1.3400 (S2), 1.3324(S3)
• Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
EUR/JPY
• EUR/JPY surged yesterday after finding support at the 50% Fibonacci retracement level of the previous uptrend. The rate escaped from the short-term, downward-sloping channel, and violated two resistance barriers in a row. At the time of writing the pair has poked its nose above 133.21 (yesterday’s resistance) and if the bullish bias continues, I expect it to challenge the strong hurdle at 134.00 (R1) next. The RSI penetrated its blue resistance line and the MACD entered its positive area, favoring further upside movement.
• Support: 133.21 (S1), 132.16 (S2), 131.45 (S3).
• Resistance: 134.00 (R1), 134.94 (R2), 135.63 (R3).
GBP/USD
• GBP/USD moved slightly higher, but is currently finding resistance at the blue uptrend line slightly below the psychological barrier of 1.6000 (R1). It seems the bears are waiting for the bulls near that barrier, not willing to allow them to overcome that level again. I consider the downward-sloping purple channel to be a valid short-term path since the price is forming lower highs and lower lows. The MACD oscillator completes the bearish picture, since it remains in its bearish zone.
• Support: 1.5890(S1), 1.5716 (S2), 1.5561(S3).
• Resistance: 1.6000 (R1), 1.6162 (R2) and 1.6260 (R3).
Gold
• Gold has turned downward on increased hopes that US lawmakers will reach a deal to avoid default and evidence that Asian demand for physical bullion is weakening. The precious metal violated the 1291 barrier (yesterday’s support). A break below the 1277 (S1) should bring the price below the previous low and confirm the continuation of the downtrend. However, such a break seems difficult, since the last time we saw gold below that level was back in July. The MACD oscillator indicates negative momentum, but a correcting wave in the near future should not be ruled out, since the RSI just escaped from its oversold area.
• Support: 1277 (S1), 1260(S2), 1242 (S3).
• Resistance: 1291 (R1), 1316 (R2), 1343 (R3).
Oil
• WTI surged on signs that lawmakers were getting closer to an agreement to increase the US debt ceiling. However, the bias was stopped by the upper boundary of the blue downward sloping channel. Once more the price is found above the 102.23 (S1) support and a continuation through the downward path should bring investors testing it again. Both oscillators continued their downward movement with the RSI finding resistance at its blue resistance line. However the bears’ inability to drive WTI below the 101.02 (S2) floor raises concerns that the downtrend’s momentum might have started weakening.
• Support: 102.23 (S1), 101.02 (S2), 96.04 (S3).
• Resistance: 104.19 (R1), 106.06 (R2), 108.13 (R3).
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Market Analysis 14/10/2013
Daily Commentary 14.10.2013, Time of writing: 03:30 GMT
The Big Picture Stocks higher, VIX index lower, dollar lower and gold sharply lower…it’s a familiar pattern recently. Stocks continued higher in Asia this morning too although S&P 500 futures were down 0.7% in early European trading. Apparently the markets don’t really believe that the US budget/debt ceiling talks are at an impasse. In the only market that’s taking this threat seriously, the T-bill market, one-month yields have come down a bit while 45-day yields have risen to be nearly the same as one-month yields, indicating that people may be thinking just that the problems will be pushed out further into the future as the two sides negotiate some agreement that will buy some time for more talks.
I see no indication that the two sides are any closer to an agreement. On the contrary, the Republicans seem shocked that the Democrats are not going to “compromise” with them and give them something face-saving to allow them to declare a “victory” in this fight that they were wrong to start to begin with. Nowadays it’s hard to sort out satire from fact – the satirical headline that ran in one magazine, “Boehner: Obama stubbornly refusing to end the crisis that I created,” seems like a fairly accurate portrayal of the Republican position. Senator John McCain said of the Democrats, “if they try to humiliate Republicans, things change in American politics.” This has become a matter of pride, not politics. I expect the situation to get noticeably worse over the next few days and for the risk-on trades to reverse as a result. Indeed AUD was weaker this morning, the only currency to fall vs USD, but that was because home loan approvals in Australia fell 3.9% mom in August, the first decline this year. JPY and CHF were also a touch stronger this morning, but not significantly.
There are no indicators out of UK and the US today, Japan and Canada are on holiday, so that leaves Eurozone industrial production for August as the only important indicator coming out today. It’s expected to rise by 0.8% mom, a turnaround from -1.5% mom the previous month. For the week as a whole, the focus will be on the monthly data dump from China. We had CPI and PPI for September out this morning (3.1% yoy and -1.3% yoy, respectively, both showing some acceleration from the previous month). On Friday we get 3Q GDP figures, industrial production, fixed assets investment and retail sales data, all for September. The other highlight will be the ZEW survey on Tuesday. In the US, we have two Fed surveys – Empire State and Phili Fed – along with housing starts and the leading indicator. In the UK, investors will be waiting for the all-important UK employment data Wednesday and retail sales on Thursday.
The Market EUR/USD
• EUR/USD moved higher after Democratic and Republican leaders failed to resolve the budget and debt standoff. The rate found resistance at the upper boundary of the purple downward sloping channel and during the early European session it is testing the resistance barrier of 1.3564 (R1). A clear violation of that hurdle would signal the exit of the short-term channel and should target the short-term highs at 1.3644 (R2). However, the rate remains in its downward path, while both the RSI and the MACD oscillators still lie below their blue resistance lines. As a result, I consider the correcting phase mentioned in previous comments to be still in effect.
• Support: 1.3461 (S1), 1.3400 (S2), 1.3324(S3)
• Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
USD/JPY
• USD/JPY opened the European session with a bearish gap as investors sought safe haven from US debt worries. The pair found resistance at the 50% Fibonacci retracement level of the 11th Sept. -8th Oct. downward move and at the time of writing it lies between the support of 97.86 (S1) and the 98.57 (R1) resistance level. If the selling pressure overcomes buying pressure, I expect the price to challenge the 97.86 (S1) barrier. The RSI just exited its overbought area and the MACD crossed below its trigger line in a bullish territory, favoring a wave to the downside.
• Support: 97.86 (S1), 97.00 (S2), 96.55 (S3).
• Resistance: 98.57 (R1), 99.05 (R2), 99.66 (R3).
EUR/GBP
• EUR/GBP moved slightly higher, remaining between the 0.8462 (S1) support and the resistance barrier at 0.8503 (R1). During the early European morning, the pair is trading slightly below that resistance level. If the bulls manage to drive the battle higher, I would expect extensions towards the 0.8552 (R2) resistance, near the 161.8% Fibonacci extension level of the previous downward wave. Nonetheless, we shouldn’t ignore the short-term negative divergence between both oscillators and the price action, which indicates decelerating bullish momentum.
• Support: 0.8462 (S1), 0.8428 (S2), 0.8388 (S3).
• Resistance: 0.8503 (R1), 0.8552 (R2) and 0.8631 (R3).
Gold
• Gold fell sharply despite the US debt stalemate, breaking below the 1277 barrier (Friday’s support). Soon afterwards the precious metal rebounded from the 1261 (S1) level and moved slightly higher. In my opinion the price moved away from the blue downtrend line and I would expect an upward pullback in the near future. The RSI oscillator corroborates this idea since it seems ready to exit its oversold zone. However the yellow metal remains below the blue downtrend line, while the 50-period moving average lies below the 200-period moving average, confirming that the downtrend is still in effect.
• Support: 1261 (S1), 1242(S2), 1221 (S3).
• Resistance: 1277 (R1), 1291 (R2), 1316 (R3).
Oil
• WTI moved lower on Friday, as US lawmakers struggled to find an agreement to increase the debt limit amid concern that a potential default my slow economic growth and sap fuel demand. The price broke below the 102.23 level and reached the 101.02 (S1) floor as expected. After touching that support level, the price moved higher and is found once more slightly below the 102.23 (R1) level. The downtrend remains in effect since WTI continues to follow its downward path, while both oscillators remain below their downward sloping blue lines. However the bears’ inability to drive WTI below the 101.02 (S1) floor suggests that the downtrend’s momentum might have started weakening.
• Support: 101.02 (S1), 99.26 (S2), 97.36 (S3).
• Resistance: 102.23 (R1), 104.19 (R2), 106.06 (R3).
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Market Analysis 15/10/2013: Markets sanguine in the face of debt impasse
Daily Commentary 15.10.2013, Time of writing: 03:30 GMT
The Big Picture Progress towards an agreement in the Senate :The US Senate Monday night neared the completion of a bipartisan deal to raise the debt ceiling and end the government shutdown. The plan reportedly would lift the debt limit through Feb. 7, finance the government through Jan. 15 and conclude formal discussions on a long-term tax and spending plan no later than Dec. 13. But it was already clear that the most conservative Republican members of the House of Representatives were not going to agree to the bill. Given their opposition, the leadership of the House of Representatives might not even bring the bill up for a vote, because so far they have pledged not to bring to a vote any bill that cannot be passed with a Republican majority. If they do decide to bring it to a vote and pass it with the support of the Democrats, it could be a defining moment in US politics that splits the Republican Party.
As for the FX market, the reaction was as one might expect: the safe-haven currencies, JPY and CHF, weakened vs USD while the high-beta currencies gained, AUD most of all followed by NZD, NOK and CAD. EUR, GBP and SEK were largely stable. Gold and silver were slightly higher than they were yesterday morning at this time, but well off their late European highs, which were hit when it looked doubtful whether an agreement could be reached.
Although the Senate is showing some progress, it’s by no means guaranteed that this plan gets through the recalcitrant House and hence the “risk on” trade remains risky. Perhaps in recognition of that fact, T-bill market is reopening this morning after yesterday’s Columbus Day holiday with yields unchanged to slightly higher. In other words, the market that would be most affected by the agreement isn’t celebrating yet. That may be because even if the Senate bill does pass, the market is just getting set up for a repeat showdown next January/February. I think the T-bill market is likely to retain a risk premium and hence the dollar is likely to remain under a cloud until then, while the safe haven currencies are likely to remain stronger than they would otherwise have been.
The focus in Europe will be on the ZEW survey for October. The current situation index is expected to rise to 31.3 from 30.6 in September, while the expectations index is expected to remain unchanged at 49.6. Last month the ZEW index was better than expected but it had no lasting impact on EUR/USD. In the UK, CPI as well as PPI for September will be released. CPI is expected to be slightly lower on a mom basis (0.3% mom from 0.4% mom), which would bring the yoy rate down slightly to 2.6% from 2.7%. This is still well above the Bank of England’s 2% target but certainly the direction is correct. The Output PPI is forecast to be up a modest 0.1% mom, the same rise as in August. In the US, Empire manufacturing for October is expected to rise slightly to 7.00 from 6.29, but who knows if anyone cares about US indicators for the time being. As for speakers, European Union finance ministers meet in Luxemburg for an EcoFin meeting. BoE’s Weale speaks at UK Parliament Treasury Committee while ECB’s Praet speaks in Munich. Finally, New York Fed President Dudley will be speaking at a Bank of Mexico conference in Mexico, while Federal Reserve Chairman Ben Bernanke will address the same conference by video.
The Market EUR/USD
• EUR/USD managed to break above the upper boundary of the short term purple channel during yesterday’s European day, but started moving lower as New York trading got under way and is currently testing the boundary as a support. A rebound at that level would probably extend the movement towards the short-term highs at 1.3644 (R2). However, our oscillators remain below their trend lines, with RSI testing its trend line and moving lower. A rebound should be accompanied with the break of the oscillators above their trend lines to confirm the upward trend. Without that confirmation, we remain neutral on the direction.
• Support: 1.3461 (S1), 1.3400 (S2), 1.3324 (S3)
• Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
EUR/JPY
• EUR/JPY moved higher on Monday after finding support at the 133.21 (S1) level. During the early European morning, the pair is trading between that barrier and key resistance at 134.00 (R1). If the longs are willing to continue their momentum and manage to overcome that level, bullish extensions may be triggered towards the recent highs at 134.94 (R2). The current price lies above both the moving averages, confirming the bullishness of the price action.
• Support: 133.21 (S1), 132.16 (S2), 131.45 (S3).
• Resistance: 134.00 (R1), 134.94 (R2), 135.63 (R3).
GBP/USD
• GBP/USD remained struggling at the 1.6000 (R1) psychological barrier. It seems that the battle right below the 1.6000 level, which we’ve mentioned in previous comments, continues. If the bears successfully resist a violation of that critical level, then the price is likely continue moving lower through the channel, printing lower highs and lower lows, in my view. A dip below the 1.5890 (S1) support should clear the picture, since it would signal the completion of a failure swing to the downside. Both the MACD and the RSI lie near their neutral levels, confirming the disagreement between investors.
• Support: 1.5890 (S1), 1.5716 (S2), 1.5561 (S3).
• Resistance: 1.6000(R1), 1.6162 (R2) and 1.6260 (R3).
Gold
• Gold moved higher and reached the resistance of 1291 (R2) confirming the expected correction. The yellow metal touched that barrier and moved lower, currently trading slightly below the 1277 (R1) resistance. A second upward penetration of the latter level should continue the correction towards next resistance levels and maybe near the blue downtrend line. However, gold remains below the blue downtrend line while the 50-period moving average lies below the 200-period moving average, confirming that the downtrend is still in effect.
• Support: 1261 (S1), 1242(S2), 1221 (S3).
• Resistance: 1277 (R1), 1291 (R2), 1316 (R3).
Oil
• WTI tested for the umpteenth time the floor at 101.02 (S1) and moved higher. Currently, the price lies slightly below the blue trend line and the resistance level at 102.57 (R1). My concern about the bears’ inability to drive WTI below that level is confirmed once more. However, the oscillators still hold below their blue resistance lines, and alongside with the bearish cross of the moving average, they keep the bias to the downside, for now.
• Support: 101.02 (S1), 99.26 (S2), 97.36 (S3).
• Resistance: 102.57 (R1), 104.19 (R2), 106.06 (R3).
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Market Analysis 16/10/2013: US debt talks in disarray, but not USD
Daily Commentary16.10.2013, Time of writing: 03:30 GMT
The Big Picture US debt talks in disarray, but not USDWith less than 48 hours left to go before the US runs out of money, the government is still unable to come to any agreement on how to avert default. “Debt Talks in Disarray as House Balks,” is the headline in the New York Times. The Senate is working on a plan, but the House Republicans couldn’t even agree on a deal that would be unacceptable to the Democrats and President Obama, much less one that would pass. “The House’s hard-core conservatives and some more pragmatic Republicans were nearing open revolt,” according to the Times. Short-term T-bill rates soared as the market prepared for a default. Yesterday’s auction of 3- and 6-month bills drew extremely weak demand as Fitch Ratings put the US on “rating watch negative” over its AAA rating, meaning it could decide to downgrade the US sometime before the end of next March. (S&P has already downgraded the US.)
Yet oddly enough, the dollar was higher against almost all G10 currencies and the majority of EM currencies that we follow, too. To add to the puzzle, the Empire State manufacturing survey fell -4.8 points to the lowest level since May, and Dallas Fed President Fisher said that it was “too tender a moment” to trim QE this month. But with the debt ceiling now just being pushed out to next February, that comment implies the Fed might not even be able to begin tapering before next March.
Much of the dollar’s gains occurred yesterday following the better-than-expected ZEW survey, which boosted thoughts of global growth and caused an outflow out of CHF. It was noticeable though that the drama in Washington failed to erode those gains entirely. That raises an interesting point: in case the US does default, will the dollar be the beneficiary? That is, while a US default certainly won’t be good for the US, it won’t be good for any other country, either. Swiss banks for example hold huge amounts of US bonds (equivalent to some 20% of Swiss GDP). So in case of financial Armageddon, where do you hide? If we look at the 2008 financial collapse, the US turned out to be the safe haven of last resort even though the US was also the source of the problems. The lack of any disruption to the long end of the US bond market – in contrast to the gyrations in the T-bill market – suggest that even in case of a default, the US Treasury market could still be the global bolt hole. That means the dollar could actually benefit (in the short term, at least) if the US government proves incapable of reaching an agreement today.
Moreover, some market participants are arguing that a technical default might not be a total disaster. Apparently if the Treasury declares ahead of time that it is delaying a payment date, the security can still trade. Nor are there cross-default clauses on Treasury bonds, so the default might only affect those specific bonds that were affected, not the Treasury market as a whole. But some people disagree, and in any event, nobody really wants to find out.
Today’s Treasury auction will be a big focus of interest, especially the $20bn in one-month T-bills. Will anyone want to buy bills that might not be redeemed on schedule? Also in the US, the National Association of Homebuilders’ housing market index is expected to have fallen 1 point to 57 in October, which would still be a relatively high level. Also, the Fed releases the Beige Book. Here in Europe, the focus of attention today will be on the UK employment data for August. The unemployment rate is expected to remain unchanged at 7.7%, while the jobless claims change for September is expected to fall by -25.0k from -32.6 the previous month and -36.30 in July. The figure will be closely watched as the Bank of England has made a decline in unemployment to 7.0% a prerequisite for raising interest rates. Later in the day, the final figure for the Eurozone CPI for September is coming out which no change is expected (1.1% yoy). As for speakers, ECB President Draghi speaks in Frankfurt while ECB’s Mersch speaks in Luxembourg.
The Market EUR/USD
• EUR/USD moved lower, breaking once more below the 1.3564 barrier. The pair seems to consolidate in a symmetrical triangle formation. A clear break outside the pattern should enforce the pair’s new directional movement. The picture is mixed since our oscillators indicate decreasing momentum, but the 50-period moving average remains above the 200- period moving average. As a result, I consider the bias of the pair to be neutral, until the clear escape of the triangle occurs.
• Support: 1.3461 (S1), 1.3400 (S2), 1.3323 (S3)
• Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
USD/JPY
• USD/JPY moved higher and is currently re-testing the 50% Fibonacci retracement level of the 11th Sept. -8th Oct. The rate seems to struggle near that level, providing indications that the bulls are not strong enough to overcome that hurdle. The weakness is also confirmed by our short-term studies, since the MACD crossed below its trigger in a bullish territory and the RSI is moving lower. However, as long as the previous low holds, I consider the bias to remain bullish and if the longs find the strength to violate the 98.57 (R1) level, they should target the next resistance at 99.05 (R2).
• Support: 97.86 (S1), 97.00 (S2), 96.55 (S3).
• Resistance: 98.57 (R1), 99.05 (R2), 99.66 (R3).
EUR/GBP
• EUR/GBP moved lower, confirming the weakness indicated by negative divergence between both oscillators and the price action. The pair found support at the 0.8443 (S1) level and subsequently moved slightly higher. Since the price didn’t manage to break below the previous low, I consider the uptrend to remain in effect as marked by the purple upward sloping channel. However, the MACD and the RSI continue following their downward path, thus we should reconsider our analysis if a break below the channel occurs.
• Support: 0.8443 (S1), 0.8387 (S2), 0.8332 (S3).
• Resistance: 0.8509 (R1), 0.8552 (R2) and 0.8631 (R3).
Gold
• Gold moved lower and after finding support at the 1254 (S2) level moved up again, breaking above the 1277 barrier (yesterday’s resistance). I believe that the yellow metal is correcting its downtrend and might move back up towards the 1302 (R1) resistance and the trend line. However, gold remains below the blue downtrend line while the 50-period moving average lies below the 200-period moving average, confirming that the downtrend is still in effect.
• Support: 1277 (S1), 1254 (S2), 1242 (S3).
• Resistance: 1302 (R1), 1330 (R2), 1352 (R3).
Oil
• WTI continued playing with the 101.02 (S1) floor. The price tested that level again and moved higher. I don’t know how long the longs can withstand the pressure at that barrier. If the longs manage to win the battle they would probably drive the price above the upper boundary of the blue channel and the 102.57 (R1). On the other hand, the bears’ victory would be likely to trigger extensions towards next support areas. Both oscillators touched their resistance lines and moved lower, keeping the bias to the downside, for now.
• Support: 101.02 (S1), 99.26 (S2), 97.36 (S3).
• Resistance: 102.57 (R1), 104.19 (R2), 106.06 (R3).
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Market Analysis 17/10/2013: The end of the war or just this battle?
Daily Commentary17.10.2013, Time of writing: 03:30 GMT
The Big Picture The end of the war or just this battle?The US Congress agreed to fund the government through Jan. 15 and raise the debt limit through Feb. 7, ending 16 days of government shut-down that almost culminated in default. Is this the end of the war over the debt limit – has the Republican Party learned that they can’t use it to achieve goals that they can’t attain through normal parliamentary procedures – or is this just a pause before the next battle in February, when government will hit up against the debt ceiling again? I hope we have seen the last of this issue and can go back to talking about growth, tapering, and other normal economic topics.
In that respect, the US government shut-down may have dealt a blow to the dollar. Estimates are that US 4Q growth has been dampened by 0.3 ppt-0.6 ppt. Consumer and business confidence is likely to decline, dampening growth going forward, especially because of the question just posed – nobody knows if this fight will break out again in a few months, so companies are likely to remain wary of investing. Against that uncertain background, the Fed may delay “tapering” its quantitative easing until March and to keep interest rates lower for longer than it might have otherwise. Meanwhile, growth elsewhere is recovering. Yesterday it was announced that auto sales in Europe rose 5.4% yoy, the fastest pace in two years, while the labor market in the UK is improving faster than anyone had expected. Thus the policy divergence between the US and other parts of the world is no longer looking as distinct as it was before. That is likely to slow the dollar’s rise over the next few months compared to what it would have been otherwise.
The US budget resolution brought on most of the trades that one would expect. Stocks rose back to within four points of a record high on the S&P 500, the VIX index collapsed, the T-bill yield curve normalized (pretty much) and longer-dated Treasury yields fell as well. In the FX market, the dollar was generally lower against both G10 and most EM currencies, the major exception being JPY as USD/JPY followed the TOPIX index higher. While it’s understandable that the high beta risk currencies such as CAD and SEK gained, it’s surprising that the dollar is lower vs CHF as well. USD/CHF was the main beneficiary of the higher-than-expected ZEW survey earlier in the week, when a surge of optimism about global growth boosted the dollar particularly vs CHF. I would expect to see the dollar regain some of its ground vs CHF as confidence in the US comes back.
The focus of attention today will be on UK retail sales for September. UK retail sales excluding auto are forecast to rise 0.3% mom, a substantial improvement from the -1.0% mom change we saw in August. That would bring the yoy rate to 2.2%, about the same as the 2.3% yoy rate in the previous month. Retail sales have been one of the bright spots driving the UK economy recently and so this indicator is likely to be closely watched. In the US, the weekly job claims are expected to fall to 335k from 374k. Finally, the Philadelphia Fed survey is forecast to fall to 15.0 in October from 22.3. There are four Fed speeches today: Dallas Fed President Fisher, Chicago Fed President Evans, Kansas City Fed President George and Minneapolis Fed President Kochelrakota. Overnight, RBA Governor Stevens will speak in Sydney, and then comes the China data dump: Q3 GDP and September industrial production, retail sales and urban investment.
The Market EUR/USD
• EUR/USD moved higher while remaining in the symmetrical triangle formation. A clear break outside the pattern would enforce the pair’s new directional movement. The picture is mixed since our oscillators indicate decreasing momentum, but the 50-period moving average remains above the 200- period moving average. As a result, I consider the bias of the pair to be neutral until a clear break of the triangle occurs.
• Support: 1.3461 (S1), 1.3400 (S2), 1.3323 (S3)
• Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
EUR/JPY
• EUR/JPY moved higher yesterday and during the early European session is finding resistance at the 133.83 (R1) barrier. A clear break above that hurdle might drive the battle towards the recent highs at 134.94 (R2). All our technical studies support a further rise, since the RSI is following an upward path and the MACD oscillator is ready to cross above its trigger line in the positive territory. Also, the rate remains above both the moving averages, confirming the bullish attitude of the price action.
• Support: 132.75 (S1), 132.16 (S2), 131.45 (S3).
• Resistance: 133.83 (R1), 134.94 (R2), 135.63 (R3).
GBP/USD
• GBP/USD managed to break above the 1.6000 psychological level, but the bulls did not have the last word. It seems that the bears were waiting for the neckline test of a head and shoulders formation before pushing the price lower. Currently the rate is trading once more slightly below the 1.6000 (R1) hurdle and if the bears are strong enough to push the price further down, I would expect extensions towards the 161.8% Fibonacci extension level of the pattern’s width. A break above the neckline would indicate that the formation wasn’t as valid as we thought. Both oscillators lie near their neutral levels, giving no clues for the next directional movement.
• Support: 1.5890 (S1), 1.5716 (S2), 1.5561 (S3).
• Resistance: 1.6000(R1), 1.6162 (R2) and 1.6260 (R3).
Gold
• Gold moved in a consolidative mood, struggling slightly above the 1277 (S1) support level. In my view the correcting phase is still in progress and we might see the precious metal moving towards the 1302 (R1) barrier and the blue downtrend line. However, gold remains below the trend line while the 50-period moving average lies below the 200-period moving average, confirming that the downtrend is still in effect.
• Support: 1277 (S1), 1254 (S2), 1242 (S3).
• Resistance: 1302 (R1), 1330 (R2), 1352 (R3).
Oil
• WTI moved higher and is currently trying to escape from the blue downtrend channel. It seems that the bears have run out of strength after several unsuccessful attempts to break the strong floor at 101.02 (S1). A clear violation of the resistance at 102.57 (R1) should have larger bullish implications and should target the 104.19 (R2) barrier next. Both oscillators managed to break their downward sloping blue lines, shifting the odds for further upward movement.
• Support: 101.02 (S1), 99.26 (S2), 97.36 (S3).
• Resistance: 102.57 (R1), 104.19 (R2), 106.06 (R3).
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