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Market Analysis 05/01/2015
Language English
EUR/USD salutes the new year by mimicking it EUR/USD saluted the New Year 2015 by mimicking it – hitting 1.2015 (and even a bit lower) and then gapping lower at the opening Monday. ECB President Draghi was quoted in the German paper Handelsblatt Friday as saying that the risk that the ECB doesn’t fulfill its mandate of price stability is higher than it was six months ago and that they are “in technical preparations” to institute quantitative easing early in 2015 if necessary. The first part of his statement is obviously true; all you have to do is wait for this Wednesday, when the Eurozone CPI for December is forecast to go into deflation (-0.1%) as opposed to +0.5% back in June. Even that figure was well below their 2% target, though. The second part though depends on getting agreement on the ECB board. As mentioned on Friday, not everyone on the board agrees (even though Draghi said the Board was “unanimous”) and furthermore, the Greek elections may prove a legal obstacle to instituting QE in January and perhaps later as well.
Draghi’s comments not only pushed EUR/USD down to right above the psychological line of 1.2000, but also pushed Eurozone bond yields, already at record lows, down further. German Bund yields for example are now negative out to 5 years and 10-year yields went below 50 bps for the first time. There’s now not so much difference overall between German yields and Japanese yields. Does this presage Japanese-style deflation and therefore Japanese-style monetary policy in the Eurozone? It might, eventually. In any case, if they do not institute QE, then there is likely to be a big sell-off in Eurozone bonds and repatriation of currency that would push EUR/USD even lower.
Commodities were pushed lower by the strong dollar as well, and with them the commodity currencies fell. USD/CAD hit a new high for this cycle. Lower commodity prices resulting from Draghi’s warning about the risks of low inflation seems like a self-fulfilling prophecy, even more so as the US 5yr/5yr forward inflation swap fell further. His concern that inflation expectations are becoming unanchored seems to be one of the reasons why inflation expectations are becoming unanchored. As inflation expectations fell, so too did expectations for the Fed funds rate, despite comments from Cleveland Fed President Loretta Mester that she “could imagine interest rates going up in the first half of the year.”
In fact the dollar gained against all the G10 currencies and most of the EM currencies that we track. The US currency regained parity vs CHF as the Swiss National Bank was apparently forced to intervene to defend the EUR/CHF floor. Swiss bond yields are now negative out to four years and the 10-year yield is about the same as in Japan.
One indication of where the currency markets may be headed this year: despite all the talk about the erosion of the dollar’s standing in the world financial system, the IMF Friday announced that the US currency’s share of global foreign exchange reserves rose to 62.3% in Q3 last year from 60.7% in Q2. This was the highest level since Q4 2011. The euro’s share on the other hand fell to 22.6% from 24.1%, its lowest level in over a decade. That means central banks chose not to rebalance their falling reserves as the euro fell during the quarter. These folks are the closest there are to having inside information in the FX market so we should take their views seriously. Talk of the dollar’s demise is premature.
Today’s highlights: On Monday, the main release will be the German preliminary CPI for December. As usual, several of the lander release their data before the national figure and the market looks at the larger ones for guidance. The consensus is for a fall in the national yoy rate to +0.2% from +0.5%, which could prove EUR-negative.
In the UK, the construction PMI is forecast is estimated to have declined in December.
As for the speakers, Minneapolis Fed President Kocherlakota spoke in Boston on Sunday and argued against requiring the Fed to use a mathematical rule to set policy. Republicans are considering introducing rules that would limit the Fed’s independence and room for discretion in setting monetary policy. Also Boston Fed President Rosengren released the text of a speech he will make later in the day in which he said low core inflation and wage growth “provide ample justification for patience,” but he doesn’t vote this year so what does it matter? During the European day, San Francisco Fed President John Williams participates at a panel on “Housing, Unemployment, and Monetary Policy”. Norges Bank Governor Oeystein Olsen and Swiss National Bank President Thomas Jordan will also speak.
Rest of the week: Tuesday we get the final PMIs for December. In the US, the ISM non-manufacturing index is forecast to have declined, following the disappointing manufacturing ISM on Friday. The US factory orders for November are also coming out.
On Wednesday, besides Eurozone’s CPI data, the Fed releases the minutes from its latest policy meeting, when officials dropped the “considerable period” phrase and instead said the Committee “can be patient in beginning to normalize the stance of monetary policy.” The market is likely to look into the minutes for more insights regarding the meaning of the new phrase. The ADP employment for December is also coming out two days ahead of the NFP release and is expected to show a faster rate of growth in jobs.
On Thursday, the Bank of England Monetary Policy Committee meets. It’s unlikely to change policy and therefore the impact on the market should be minimal as usual. The minutes of the meeting however should make interesting reading when they are released on 21st of January. Eurozone’s PPI and retail sales both for November are also coming out.
Finally, on Friday, the major event will be the US non-farm payrolls for December. The market consensus is for an increase in payrolls of 240k, down from the stunning print of 321k in November but still strong. That would show that the economy has added at least 200k jobs for 11 consecutive months and could result the biggest annual gain in employment since 1999. The unemployment rate is forecast to have declined to 5.7% from 5.8%, while average hourly earnings are expected to accelerate on a yoy basis. Such a strong employment report could push Fed funds rate expectations up and therefore support the dollar. Canada’s unemployment rate for December is also coming out.
Currency Titles:
EUR/USD tumbles below 1.2000
GBP/USD plunged after the disappointing UK manufacturing PMI
EUR/JPY slides below 144.75
Gold rebounds from near 1173
WTI getting closer to the 50.00 zone
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Currencies Text:
EUR/USD tumbled on Friday, breaking below the 1.2040 (R2) line and reaching the psychological zone of 1.2000 (R1). On Monday, the pair opened with a gap down and fell to hit support at 1.1860 (S1) before rebounding to trade near 1.1940. Given the dip below the 1.2000 (R1) area, the short-term picture remains to the downside and I would expect another test at the 1.1860 (S1) hurdle. Today, the German inflation rate for December is expected to have slowed, which could pull the trigger for the aforementioned move. Our short-term oscillators corroborate the negative bias of EUR/USD. The RSI fell deeper into its oversold territory, while the MACD, already negative, moved further below its signal line. These signs designate accelerating bearish momentum and amplify the case for further declines. As far as the broader trend is concerned, I still see a longer-term downtrend. On the daily chart, we still have lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1860 (S1), 1.1775 (S2), 1.1700 (S3)
• Resistance: 1.2000 (R1), 1.2040 (R2), 1.2130 (R3)
GBP/USD collapsed on Friday after the UK manufacturing PMI for December disappointed. The rate dipped below the psychological zone of 1.5500 (R2) and ignored our support (turned into resistance) obstacle of 1.5430 (R1), defined by the lows of the 14th and the 28th of August 2013. On Monday the pair continued its plunge to hit support below the 1.5200 (S1) area (the low of the 7th of August 2013) before rebounding to trade near 1.5285. If today’s UK construction PMI for December is disappointing, it could set the stage for another move down towards the support obstacles of 1.5200 (S1) or 1.5165 (S2). As for the broader trend, I still say that as long as Cable is trading below the 80-day exponential moving average, the overall path remains to the downside.
• Support: 1.5200 (S1), 1.5165 (S2), 1.5100 (S3)
• Resistance: 1.5430 (R1), 1.5500 (R2), 1.5585 (R3)
EUR/JPY declined and broke below the support (turned into resistance) barrier of 144.75 (R1). Today, this rate hit support slightly below the 143.40 line, where a clear violation could prompt extensions towards the 142.00 (S2) zone, defined by the low of the 10th of November. Taking a look at our near-term momentum studies, I see that the RSI is back within its oversold territory, while the MACD remains below both its zero and signal lines pointing south.
On the daily chart, I see a possible head and shoulders formation completed, something that increases the probabilities for further bearish extensions in the short term. Our daily momentum indicators support the notion. The 14-day RSI fell below its 50 line, while the MACD obtained a negative sign.
• Support: 143.40 (S1), 142.00 (S2), 141.40 (S3)
• Resistance: 144.75 (R1), 145.50 (R2), 147.15 (R3)
Gold declined but triggered buy orders slightly below the 1173 (S2) area which coincides with the 61.8% retracement level of the 7th of November – 9th of December advance. Given that the precious metal remains above that Fibonacci retracement level and below the resistance of 1210 (R2), and with no clear trending conditions in the near-term, I would prefer to maintain my “wait and see stance”, at least for now. A dip below the 1173 (S2) barrier would probably shift the near term bias to the downside. On the other hand, only a move above 1210 (R2) could confirm a forthcoming higher high on the daily chart. Once again our oscillators do not confirm each other, adding to the mixed picture for the yellow metal. The RSI crossed above its 50 line, but looks able to dip back below it, while the MACD has crossed above its trigger, is pointing up, and could become positive soon.
• Support: 1180 (S1), 1173 (S2), 1165 (S3)
• Resistance: 1197 (R1), 1210 (R2), 1222 (R3)
WTI moved lower on Friday, breaking below 52.00 (R1). This move confirmed a forthcoming lower low on the 1-hour chart and corroborates my view that the decline is likely to continue and challenge the psychological area of 50.00 (S1) in the not-too-distant future. As for our oscillators, the MACD remains below both its zero and signal lines, indicating strong bearish momentum, but the RSI rebounded somewhat after hitting its 30 line. As I result, I would be careful of a minor bounce before sellers pull the trigger again. In the bigger picture, as long as WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, the overall path stays to the downside.
• Support: 50.00 (S1), 48.00 (S2), 46.70 (S3)
• Resistance: 52.00 (R1), 53.70 (R2), 54.30 (R3)
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Market Analysis 06/01/15
Language English
Greek risk rises while oil, commodities fall:
The market has been quite blasé about the risk of Greece leaving the Eurozone (the “Grexit”) after the coming election, but that risk came into focus yesterday after the German magazine Der Spiegel said that “Chancellor Angela Merkel is willing to accept a "Grexit" should a new leftist government in Athens demand concessions.” The story was denied all around in the halls of power in Germany and Brussels, where it was argued that Greece is in the Eurozone to stay. However, the idea of a Grexit is getting a lot of boost from Greek PM Samaras, who is trying to scare people into voting for his party by warning that a vote for the opposition SYRIZA coalition would mean leaving the euro.
In any event, the election seems up in the air. Recent polls suggest neither Samaras’ New Democracy Party nor SYRIZA is likely to get a majority, meaning either a coalition or even another vote will be necessary. It seems to me that the uncertainty is likely to continue even past the Jan. 25th election and that this is likely to continue to put pressure on the euro. For example, it’s unclear whether the ECB can institute quantitative easing while the Greek government is negotiating over its debt. That could hit confidence in the Eurozone and a further exit from European assets. The Eurostoxx index was down 3.7% yesterday, with energy and mining shares the worst hit, while Eurozone bond yields, both core and peripheral, moved higher. Where did the money go to? Probably out of the euro, is my guess.
The market is clearly less concerned about a Grexit than it was last time the issue came up in 2012. That’s because most of Greek debt is now in official hands, not the private sector, and there are more programs in place to deal with such disruption, like the ECB’s Outright Monetary Transactions plans. On the other hand, the fact that the latest Greek crisis has occurred even while the Greek economy has finally started improving and the government has achieved a primary budget surplus is a warning that other troubled peripheral countries can’t be complacent. Finally, although there are more programs in place to deal with market disruption in case of Grexit, these plans have never been tested, nor is there enough money backing them if the crisis should spread to a large country like Italy. In short, the Greek crisis is likely to hurt sentiment towards the euro until and even after the election, in my view.
USD weakened yesterday nonethelesson what seems to have been profit-taking on the recent swift move. Further declines in Fed Funds rate expectations and falling bond yields as commodities fell (see below) may also have weakened the currency. I expect the dollar’s weakness will only be temporary though and I think if anything it simply sets up more attractive entry levels for long dollar positions.
GBP was the exception among G10 currencies as it weakened vs USD following a disappointing construction sector PMI. This strikes me as ridiculous. The PMI fell to 56.7 in December from 59.4, vs a consensus estimate of 59.0. But what is the PMI? Basically, it is the percent of people saying conditions are improving minus the percentage who say conditions are worsening. Conditions can’t improve indefinitely. Eventually conditions will be the same one month to the next, and the PMI will fall. But that doesn’t mean things are bad. In any event, 57.6 is far above the long-run average of 54.5 and still signals strong expansion. With oil prices falling and inflation nearing zero, UK growth looks likely to continue robust and I would expect GBP to gain vs EUR, although probably not vs USD.
Commodities were generally weaker yesterday, led by oil. Oil prices continued to fall as Russia production hit a post-Soviet record, Iraq's oil exports in December were the highest since 1980, and Saudi Aramco cut the official selling price for its Arab Light crude to Northwest Europe. No wonder then that RUB was off around 2%! One major oil sand producer in Canada noted that production in Dec was down 14% mom, another reason to be bearish CAD. China increased export tax rebates for some copper products in a move that’s expected to increase demand for copper. Nonetheless, copper prices fell 1.3%, which shows just how weak demand is. On the other hand, the Chinese government scrapped an export tax rebate on some steel products, which sent iron ore futures lower – a potentially AUD-negative development.
Despite the fall in commodity prices, AUD and NZD actually gained as China’s HSBC services PMI rose slightly in December and the composite PMI, incorporating both manufacturing and services, also rose to 51.4 from 51.1. I think though that the manufacturing PMI is more important, at least for AUD, and would expect to see AUD resume its decline. AUD/NZD has risen somewhat from the record lows hit on Dec. 30th, but I don’t expect this trend to last.
Today’s highlights: During the European day, we get the final service-sector PMIs for December from the countries we got the manufacturing data for last Friday. As usual, the final forecasts from France, Germany and Eurozone are the same as the initial estimates. The revisions in the final manufacturing PMIs on Friday increase the possibility that we could see revisions in the service-sector PMIs as well. The UK service-sector PMI is expected to have decreased slightly, which could be GBP-negative after Monday’s disappointing construction PMI.
In Norway, the manufacturing (not service) PMI for December is expected to fall, but to remain just above 50. Given the plunge in oil prices, any signs of weakness in the domestic economy is likely to weigh on NOK and keep it under increasing selling pressure.
In the US, we get the final Markit service-sector PMI and the ISM non-manufacturing index, both for December. Factory orders for November are also coming out.
No speakers are on the agenda today.
Currency Titles:
EUR/USD stays virtually unchanged
AUS/USD hits support above the round figure of 0.8000
Is GBP/JPY poised for deeper correction?
WTI knocked below the round figure of 50.00
Gold breaks again above 1200
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Currencies Text:
EUR/USD moved somewhat lower after hitting resistance at 1.1975 (R1), but then recovered to trade virtually unchanged. Our short-term momentum indicators detect a slowdown in the downside momentum and therefore I would be careful of a possible upside corrective move. The RSI bottomed within its oversold territory, turned up and now appears able to exit the extreme field. The MACD has bottomed as well and is likely to cross above its signal line soon. Nevertheless, given that Eurozone’s CPI data (Wednesday) are expected to show that the bloc has fallen into deflation in December, I would expect any upside attempt to be short lived, perhaps near the 1.2000 (R1) psychological area. As far as the broader trend is concerned, I still see a longer-term downtrend. On the daily chart, we still have lower peaks and lower troughs below the 50- and the 200-day moving averages. If and when the bears seize control, I would expect a dip below the support of 1.1860 (S1) to set the stage for extensions towards our next obstacle of 1.1775 (S2), defined by the low of the 30th of December 2005.
• Support: 1.1860 (S1), 1.1775 (S2), 1.1700 (S3)
• Resistance: 1.2000 (R1), 1.2040 (R2), 1.2130 (R3)
AUD/USD edged higher yesterday after triggering some buy orders above the round figure of 0.8000 (S2), specifically at 0.8035 (S1). The RSI rebounded from near its 30 line and has just poked its nose above its 50 barrier, while the MACD, although negative, has bottomed and crossed above its trigger. With these signs in mind, I would expect the rebound to continue and perhaps challenge once again the resistance area of 0.8200 (R1). Moreover, on the daily chart, I spot positive divergence between the 14-day RSI and the price action, while the MACD stands above its trigger and points north, supporting the continuation of the recent rebound. However, the pair is still trading below both the 50- and the 200- day moving averages and its structure still suggests a longer-term downtrend. As a result, I would treat the recent bullish wave or any extensions of it as a retracement before the next leg down.
• Support: 0.8035 (S1), 0.8000 (S2), 0.7865 (S3)
• Resistance: 0.8200 (R1), 0.8275 (R2), 0.8375 (R3)
GBP/JPY continued tumbling on Monday, breaking below our support (turned into resistance) line of 183.20 (R1). During the early European morning Tuesday, the rate appears ready to challenge the support hurdle of 181.50 (S1), determined by the low of the 16th of December. That line also happens to be the 38.2% retracement level of the 15th of October – 5th December advance. A move below that zone is likely to trigger the completion of a failure swing top on the daily chart and increase the probabilities for a deeper correction, perhaps even below the round number of 180.00 (S2). Our daily momentum studies corroborate my view. The 14-day RSI dipped below its 50 line and is pointing south, while the daily MACD touched its toe below its zero line. These signs confirm the recent negative sentiment towards the pair and strengthen the case for further declines if the 181.50 (S1) barrier is broken.
• Support: 181.50 (S1), 180.00 (S2), 178.00 (S3)
• Resistance: 183.20 (R1), 185.00 (R2), 188.00 (R3)
WTI continued sliding on Monday, reaching and breaking below the psychological barrier of 50.00. Nonetheless, the decline was halted at 49.65 (S1) and oil rebounded to trade back above 50.00. Having in mind the USD-bullish environment and the concerns over increasing oil supplies, I believe that it’s just a matter of time before we see sellers pull the trigger again. A clear violation of the 49.65 (S1) line could see scope for extensions towards our next support barrier at 48.00 (S2), marked by the low of the 27th of April 2009. In the bigger picture, as long as WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, the overall path stays to the downside.
• Support: 49.65 (S1), 48.00 (S2), 46.70 (S3)
• Resistance: 50.90 (R1), 52.00 (R2), 53.70 (R3)
Gold continued firming up on Monday and managed to break again above the 1200 figure. However, given that the metal remains between the key resistance hurdle of 1210 (R1) and the support of 1173 (S3) area, which coincides with the 61.8% retracement level of the 7th of November – 9th of December advance, I prefer to hold my flat approach and wait for clearer trending conditions. A clear move above 1210 (R1) could confirm a forthcoming higher high and perhaps pave the way for the next obstacle at 1222 (R2). On the other hand, a dip below the 1173 (S2) barrier is needed to probably shift the near term bias to the downside.
• Support: 1197 (S1), 1180 (S2), 1173(S3)
• Resistance: 1210 (R1), 1222 (R2), 1238 (R3)
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Market Analysis 07/01/15
Language English
Focus on fixed income The focus in the market continues to be on extraordinary moves in the fixed income world. European bonds are vacillating between discounting quantitative easing, on the one hand, and a Greek exit from the Eurozone on the other. Meanwhile, there seems to be a flight to safety or perhaps just capital flight into US Treasuries. Whatever the cause, German 30-year yields are now lower than Japanese 30-year yields, while US Treasury 10-year yields fell sharply below 2% yesterday.
There are probably two reasons why yields are coming down. First, the fall in oil prices has pushed down inflation expectations around the world. WTI is down almost 11% just since the last day of 2014, and that’s on top of falling about 47% from its peak during 2014. Secondly, there is a shortage of safe assets in the Eurozone, where the Bund market is relatively small and a lot of the bonds are already in the hands of hold-to-maturity investors. Expectations of quantitative easing, which will force a non-profit-seeking investor (the ECB) to buy at any price, has made investors almost indifferent to the price at which they buy because they know they will be able to unload the bonds in the future at a higher price. For this reason, yields in the US are likely to remain much higher than those in Europe. The free float of Treasuries is much higher than that of Bunds, and the Fed has ended its buying spree and in fact could become a seller.
So even though US interest rates have fallen, their spread against other major markets continues to be attractive, particularly on a real yield basis. That means the USD should remain supported, in my view, even if Fed funds rate expectations are declining. In any event, the euro has not been able to sustain any rallies this year and so looks chronically weak.
In the US, the ISM non-manufacturing index fell more than expected in December to its lowest level since June. Even though the figure missed estimates, it does show expansion in the non-manufacturing sector for the 59th consecutive month. Moreover, the average for the employment index in the non-manufacturing ISM in Q4 was the highest on record, and that’s what counts for the Fed. But added to the disappointing ISM manufacturing index last Friday, the below-consensus headline figure weakened the USD slightly at the release. However, we continue to view any USD setback as providing renewed buying opportunity.
The New Zealand milk auction went better yesterday and NZD gained slightly. However, it was not enough to turn around expectations for the commodity and so I don’t think it signals a turning point for NZD/USD.
Today’s highlights: During the European day, the main event will be the Eurozone’s preliminary CPI data for December. The forecast is for the bloc to fall into deflation. Recent CPI data from Germany also pointed to disinflationary forces gripping the bloc, helped mainly by the falling global oil prices. This adds pressure on the ECB to inject further stimulus when it meets on January 22. But given the fact that Greece will not have an official government in place at that time, the Bank may have to wait. Eurozone’s unemployment rate for November is also due out. From Germany, retail sales for November are expected to decelerate a bit while unemployment rate for December is forecast to remain unchanged from the previous month. Overall, the weaker economic data and the political uncertainty in Greece only reinforce my opinion that we still have plenty room to the downside for the euro.
From Canada, we get the Ivey PMI for December. This is the more important PMI for Canada.
In the US, Fed releases the minutes from its latest policy meeting, when officials removed the “considerable time” phrase from their guidance and instead said the Committee “can be patient in beginning to normalize the stance of monetary policy.” Fed Chair Janet Yellen clarified in her press conference that the new phrase meant they would not begin to raise rates “for at least the next couple of meetings,” which means the Fed will not start raising rates before April 2015. The market is likely to look into the minutes for more insights regarding the meaning of the new phrase. The ADP employment for December is also coming out two days ahead of the NFP release. The report is expected to show that the private sector gained more jobs in December that it did the previous month, which could be USD-supportive. Trade deficit for November is also due out.
We have no speakers on Wednesday’s agenda.
Currency Titles:
EUR/USD finds support near 1.1860 again
Are the GBP/USD bears targeting the barrier of 1.5000?
USD/JPY hits support marginally above 118.00
WTI trades around 48.00
Gold breaks above 1210
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Currencies Text:
EUR/USD slid yesterday and managed to hit again the support zone of 1.1860 (S1). Today, Eurozone CPI data are expected to show that the bloc fell into deflation in December and the US ADP report for the same month is forecast to come in strong. The combination of these releases could be the catalyst for a break below the 1.1860 (S1) zone and could set the stage for extensions towards our next obstacle of 1.1775 (S2), defined by the low of the 30th of December 2005. Our short-term momentum studies support further declines. The RSI turned down and stayed within its oversold territory after hitting resistance at its 30 line, while the MACD remains below both its zero and signal lines. As for the broader trend, we still have a longer-term downtrend, which I believe is poised to continue.
• Support: 1.1860 (S1), 1.1775 (S2), 1.1700 (S3)
• Resistance: 1.2000 (R1), 1.2040 (R2), 1.2130 (R3)
GBP/USD continued its plunge falling below the support (turned into resistance) hurdle of 1.5165 (R1) but hitting support 6 pips above our 1.5100 (S1) line. Even so, the intraday bias remains to the downside and I would expect a clear move below 1.5100 (S1) to pave the way for the round figure of 1.5000 (S2). The recent extremely negative sentiment towards the pound is also visible in our momentum technical indicators. The RSI stays within its below-30 extreme zone and is pointing south, while the MACD stands below its signal line, at extreme low levels, indicating strong downside speed. In the bigger picture, as long as Cable is printing lower peaks and lower troughs below the 80-day exponential moving average, the overall outlook remains negative.
• Support: 1.5100 (S1), 1.5000 (S2), 1.4810 (S3)
• Resistance: 1.5165 (R1), 1.5200 (R2), 1.5275 (R3)
USD/JPY moved lower on Tuesday, but hit support marginally above the 118.00 (S1) line and rebounded somewhat. In order to get more confident about further correction, I would like to see the rate breaking below the 118.00 (S1) line. Such a move could prompt extensions towards the next support at 117.00 (S2). Nonetheless, bearing in mind that the US ADP report for December is expected to come strong today and trigger a strong leg up, I would prefer to sit on the sidelines today. I would turn my eyes to the upside only if today’s possible up leg drives the rate above the resistance of 120.85 (R2). Zooming out on the daily chart, USD/JPY is still trading above both the 50- and the 200-day moving averages, but the failure of the latest top to overcome the 121.85 (R3) peak gives me enough reasons not to trust the longer-term uptrend at the moment.
• Support: 118.00 (S1), 117.00 (S2), 115.50 (S3)
• Resistance: 119.95 (R1), 120.85 (R2), 121.85 (R3)
WTI kept falling on Tuesday, reaching and breaking below the 48.00 level. Nevertheless the decline paused at 47.55 (S1) and oil rebounded to trade a few cents below 48.00. Another dip below the 47.55 (S1) line is likely to target the low of the 21st of April 2009 at 46.70 (S2) and then the psychological barrier of 45.00 (S3). On the daily chart, as long as WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, the overall path stays to the downside. Our daily oscillators point to strong accelerating bearish momentum and convince me that we are likely to see lower oil prices. The 14-day RSI hit resistance at its 30 line, stayed within its oversold zone, and points down, while the MACD, already at extreme low levels crossed again below signal line.
• Support: 47.55 (S1), 46.70 (S2), 45.00 (S3)
• Resistance: 49.65 (R1), 50.90 (R2), 52.00 (R3)
Gold continued its rally on Tuesday, breaking above the resistance (turned into support) barrier of 1210 (S1) and confirming a higher peak. The metal hit our next resistance hurdle at 1222 (R1) and retreated somewhat. Considering our short-term oscillators, I would be careful that the pullback may continue and perhaps challenge the 1210 (S1) line as a support this time. Nevertheless, I believe that the move above 1210 (S1) turned the near-term picture of the precious metal positive and that another break above 1222 (R1) is likely to target the next resistance zone, at 1238 (R2), determined by the highs of the 9th and 10th of December. On the daily chart, I see that a possible inverted head and shoulders pattern is probably being formed but not completed yet. If the pattern is completed, this could have larger bullish implications and perhaps encourage the bulls to drive the battle even above 1300.
• Support: 1210 (S1), 1197 (S2), 1180 (S3)
• Resistance: 1222 (R1), 1238 (R2), 1255 (R3)
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Market Analysis 08/01/2015
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Fed isn’t worried about stronger dollar as US trade balance improves The minutes of the recent FOMC meeting showed that the Fed isn’t concerned about the stronger dollar and was concerned about the tight labor market, showing that it remained on track to hike rates. “Although the projected path of the dollar was revised up, the staff revised down its estimate of how much the appreciation of the dollar since last summer would restrain projected growth in real GDP," the minutes said. There had been fears of a negative feedback loop whereby tightening rates would send the dollar up, which would dampen growth, which would reduce the need to tighten rates. They appear to be minimizing the impact of such a loop, which means that they can proceed to tighten rates without concern for its impact on the dollar.
Neither inflation nor the labor market was seen as an obstacle to tightening. The minutes specifically said that “the Committee might begin normalisation at a time when core inflation was near current levels” of 1.4% as measured by the core personal consumption expenditure deflator, even though that is below target, and that the Committee expects to see “further improvements in labor market indicators toward levels consistent with the Committee’s objective of maximum employment.” Yesterday’s ADP report confirms that; the report indicates private sector employment rose by 241k in November, which if true would be the 11th consecutive month of over-200k employment growth.
Yet Fed funds rate expectations fell back by a small 2.5 bps in the long end, indicating that the market interpreted the minutes as modestly dovish. That’s probably because the members stressed that the timing of the first rate rise was not fixed at mid-year but that “economic conditions might evolve in a way that could call for either an earlier or a later liftoff date.”
In any case, the FOMC is talking about a rate rise while the rest of the world talks about further quantitative easing. This monetary policy divergence should continue to support the dollar going forward, in my view.
Nonetheless, the dollar was mixed this morning. Over the last 24 hours it gained against JPY, SEK, EUR and GBP but fell vs NOK, NZD and AUD. AUD hit a cyclical low late yesterday but recovered after Australian building approvals unexpectedly increased in November.
The US trade data normally does not affect the market that much, but this month’s data was worth paying attention to. The trade deficit narrowed to USD 39.0bn in November from a deficit of USD 43.4bn in October. The non-oil trade balance deteriorated slightly, meaning that the improvement was entirely due to a narrower deficit in oil. In fact, the amount of oil the US imported was the lowest since 1994. This shows how shale oil is improving the outlook for the US current account deficit and should therefore improve the outlook for the dollar as well.
Some new polls from Greece showed a collapse in support for smaller parties. Due to the technicalities of the electoral law in Greece, this suggests that SYRIZA would be likely to get an outright majority in Parliament. Yet I read more and more reports about how SYRIZA’s position on debt restructuring is actually quite rational and that they are only saying in public what everyone else admits in private – Greece can’t repay its debt and so some debt relief is necessary. SYRIZA could actually start to fade as a market theme as some Germany lawmakers noted the possible easing of Greek repayment terms and said that they would talk to any Greek government.
Today’s highlights: From the Eurozone, we get the final consumer confidence for December and retail sales for November.
In the UK, the Bank of England meets to decide on its policy rate. The BoE is unlikely to change policy and therefore the impact on the market should be minimal as usual. The minutes of the meeting however should make interesting reading when they are released on 21st of January. Halifax house prices for December are also to be released.
In Sweden, Riksbank publishes the minutes of its latest policy meeting. At that meeting, the Swedish central bank kept its main interest rate at 0% and didn’t introduce any new easing measures. Governor Stefan Ingves said that the Bank is preparing further expansionary measures that can be used at the next meeting and seemed content to postpone the first rate hike by simply pushing back the repo-rate path. The focus will be on what new easing measures were discussed and whether they are sufficient enough to boost the Swedish economy especially after Eurozone’s new deflationary status.
From Norway, we get industrial production for November but no forecast is available.
In the US, initial jobless claims for the week ended Jan.3 is coming out.
From New Zealand, we get building permits for November.
As for the speakers, Boston Fed President Eric Rosengren speaks later in the day.
Currency Titles:
EUR/USD dips below 1.1860
GBP/JPY triggers some buy orders at 179.20
NZD/USD ready to challenge the resistance of 0.7800
WTI rebounds from marginally above 46.70
Gold continues pulling back
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Currencies Text:
EUR/USD continued its tumble on Wednesday as Eurozone CPI data showed that the bloc fell into deflation in December. The rate violated the support turned into resistance barrier of 1.1860 (R1) and thus I would expect it to continue lower and challenge our next obstacle of 1.1775 (S1) in the near future, a support defined by the low of the 30th of December 2005. But the positive divergence between the RSI and the price action shows decelerating downside momentum and therefor I would be careful of a possible minor bounce before the next leg down. Nevertheless, the short-term outlook stays negative as the rate is still trading within the black downside channel taken from back at the high of the 16th of December. A clear move below the 1.1775 (S1) in the not-too-distant future is likely to prompt extensions towards the 1.1700 (S2) line, the low of the 8th of December 2005. As for the bigger picture, the broader downtrend is still in force.
• Support: 1.1775 (S1), 1.1700 (S2), 1.1635 (S3)
• Resistance: 1.1860 (R1), 1.2000 (R2), 1.2040 (R3)
GBP/JPY traded higher yesterday after triggering some buy orders at 179.20 (S1). Our short-term oscillators support the continuation of this rebound, perhaps for a test at the 181.50 (R1) line as a resistance this time. The RSI bottomed within its oversold territory and firmed up to cross above its 30 line, while the MACD, although negative, has bottomed as well and moved above its trigger. A break above the 181.50 (R1) line is likely to extend the bullish wave towards the next resistance hurdle at 183.20 (R2), which happens to be the 50% retracement level of the 2nd – 6th of January fall. On the daily chart, the dip below the 181.50 (R1) line signaled the completion of a failure swing top and turned the medium-term bias to the downside. Thus I would treat the current up-leg or any extensions of it as an upside corrective wave.
• Support: 179.20 (S1), 178.00 (S2), 176.00 (S3)
• Resistance: 181.50 (R1), 183.20 (R2), 185.00 (R3)
NZD/USD moved higher after hitting support at 0.7715 (S1). During the early European morning Thursday, buyers appear ready to challenge the resistance area of 0.7800 (R1). If they manage to overcome it, I would expect them to target the resistance of 0.7850 (R2). Our near-term momentum studies support the notion. The RSI edged up after finding support at its 50 line, while the MACD, already above its trigger line, obtained a positive sign and is pointing north. Even though I see the potential for further upside, I would consider the near-term path of this pair to be sideways. NZD/USD has been oscillating between the support of 0.7625 (S3) and the resistance of 0.7850 (R2) since the beginnings of December.
• Support: 0.7715 (S1), 0.7680 (S2), 0.7625 (S3)
• Resistance: 0.7800 (R1), 0.7850 (R2), 0.7910 (R3)
WTI broke below the support line of 47.55 (S1), but after hitting support marginally above our next hurdle of 46.70 (S2), it rebounded to trade back above 47.55 (S1) and to hit our resistance barrier of 49.65 (R1). Although yesterday’s up leg may continue a bit higher, on the daily chart WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, which keeps the overall path to the downside. Therefore, I would expect any possible extensions of the current rebound to be short lived. Taking a look at our daily momentum indicators, there is positive divergence between the 14-day RSI and the price action, which gives me another reason to be cautious that the upside corrective wave may continue for a while. However, I would not bet on that and I would prefer to wait for actionable signals that the bears are back in control and go with the overall downtrend.
• Support: 47.55 (S1), 46.70 (S2), 45.00 (S3)
• Resistance: 49.65 (R1), 50.90 (R2), 52.00 (R3)
Gold continued pulling back on Wednesday, falling back below 1210. However, the possibility for a higher low is high in my view and thus I would see a mildly positive near-term picture. If the bulls manage to seize control above the support line of 1197 (S1), I would expect them to pull the trigger for another test of the resistance zone of 1222 (R1). On the daily chart, I see that a possible inverted head and shoulders pattern is probably being formed but not completed yet. If the pattern is completed, this could have larger bullish implications and perhaps encourage the bulls to drive the battle even above 1300.
• Support: 1197 (S1), 1180 (S2), 1173(S3)
• Resistance: 1222 (R1), 1238 (R2), 1255 (R3)
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Market Analysis 09/01/15
Language English
Back to where we started from According to Bloomberg, EUR/USD finished its first trading day in 1999 (4 January) at 1.1821. This morning we’re opening in Europe around 1.1807 – back to where we started from. Are we now headed back to the low of 0.8255 on 25 October 2000? At that time, Fed Funds were at the now-unimaginable level of 6.5% and the refi rate was 4.75%, a gap of 175 bps. That’s easily achievable. The 3-month eurodollar and euribor futures are telling us that the spread will be around 200 bps in three years. Looking at yesterday’s European news – German factory orders and Eurozone producer prices both falling more than expected in November – it looks like the ECB will have to make up for lost time.
Unfortunately the ECB board appears to be still divided and might need more time to make up its mind. Yesterday ECB President Draghi released the text of a letter he wrote in reply to a member of the European Parliament about ECB policy. The letter repeated Draghi’s usual statements and in addition, specifically held out the possibility of buying sovereign bonds. Yet on the same day, ECB Board Member Benoit Coeure said that the Eurozone hasn’t fallen into deflation yet and that it would be “too early to ask” for full-blown QE. So despite Draghi’s claims of unanimity on the board, it seems that there’s still disagreement. These comments appeared on the last day before the ECB board goes into blackout ahead of next week’s meeting, which suggests that both men are trying to stake out their positions ahead of what looks like a crucial meeting.
Adding to this disagreement the legal difficulties in launching QE while there is no elected government in Greece, we have to consider what the market reaction might be if they cannot agree to start QE at next week’s meeting. I believe it would cause a huge sell-off in Eurozone bonds and equities and a repatriation of capital, causing the euro to weaken further. On the other hand, the decision to launch QE is fairly well discounted so I don’t think that would have much impact on the markets.
China’s CPI rose 1.5% yoy in December, as expected, a small increase from 1.4% yoy in November, but PPI fell 3.3% yoy, a substantially faster rate of deflation than -2.7% yoy the previous month. It seems to me only a matter of time before falling PPI feeds into falling CPI and Chinese deflation begins to affect other countries as well. That’s likely to keep interest rates low around the world and help to fuel the “currency wars” that result from the spillover of domestic monetary policy into the international arena.
New Zealand building permits were up 10% mom in November, beating October’s upwardly revised 9.8% rise. NZD was the second-best performing currency overnight as a result (NOK was #1). I think NZD will be the best-performing of the three commodity currencies as its commodity export basket is over half foodstuffs, and demand for food is less volatile than demand for energy or building materials.
Today’s highlights: During the European day, we get industrial production for November from Germany, France, UK and Sweden. The UK and French figures are expected to rebound from the previous month, while German and Sweden data are forecast to accelerate from October.
In Norway, the CPI for December is expected to rise, which could further strengthen NOK. The currency was the best-performing G10 currency over the last 24 hours despite Norway’s disappointing industrial production on Thursday, which indicates good demand for NOK. Nonetheless, given falling oil prices and the fact that the CPI is still below Norges Bank’s 2.5% inflation target, I would view any USD setback as a renewed buying opportunity.
In Canada, the unemployment rate for December is expected to have remained unchanged at 6.6%. However, the net change in employment is expected to show a rise after November’s decline, something that could prove CAD-positive
The highlight of the day will be the US non-farm payrolls for December. The forecast is for an increase in payrolls of 240k, down from the extraordinarily high 321k in November. Despite the expectation of a slowdown in December payrolls, it still will show that the US economy has added at least 200k jobs for 11 consecutive months and could result the biggest annual gain in employment since 1999. At the same time the unemployment rate is forecast to have declined to 5.7% from 5.8%, while average hourly earnings are expected to accelerate on a yoy basis. Such a strong employment report is consistent with a firming labor market and could add to USD strength. Wholesale inventories for November are also to be released.
We have two Fed speakers on Friday’s agenda: Chicago Fed President Charles Evans and Richmond Fed President Jeffrey Lacker.
Currency Titles:
EUR/USD touches our support of 1.1775
USD/JPY capped by the 119.95 obstacle
EUR/GBP bears are stopped slightly above 0.7800
WTI hits again the resistance of 49.65
Gold rebounds from 1205
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EUR/USD continued its slide on Thursday to find support marginally below our barrier of 1.1775 (S1). Today, we get the US non-farm payrolls for December. Even if the figure isn’t up to November’s stunning print, the report is still expected to show that the US economy has added at least 200k jobs for 11 consecutive months. This could encourage the bears to push the rate below the support line of 1.1775 (S1) and perhaps target the next one at 1.1700 (S2), determined by the low of the 8th of December 2005. But, the positive divergence between the RSI and the price action shows decelerating downside momentum and therefore it is possible that we may see a minor bounce before the next leg down. Nonetheless, the rate is still trading within the black downside channel taken from back at the high of the 16th of December, and this keeps the short-term bias to the downside. As for the bigger picture, the broader downtrend is still in force.
• Support: 1.1775 (S1), 1.1700 (S2), 1.1635 (S3)
• Resistance: 1.1860 (R1), 1.2000 (R2), 1.2040 (R3)
USD/JPY raced higher yesterday, but the up leg was halted by the 119.95 (R1) obstacle. Today, during the Asian morning the pair started sliding, indicating the inability of the bulls to overcome the aforementioned resistance hurdle. Maybe they are waiting for the US employment data later in the day. If the data come in strong, we may see a break above the 119.95 (R1) line and perhaps extensions towards the next one at 120.85 (R2). However, our short-term oscillators support further pullback for now, at least until the time of the report. The RSI fell below its 50 line and is pointing down, while the MACD shows signs of topping marginally below its zero line, and could fall below its trigger soon.
• Support: 118.00 (S1), 117.00 (S2), 115.50 (S3)
• Resistance: 119.95 (R1), 120.85 (R2), 121.85 (R3)
EUR/GBP kept sliding on Thursday and hit support marginally above the 0.7800 (S1) barrier. Having in mind that on the 6th of January the rate tested as resistance the lower bound of a triangle formation that had been containing the price action since September, I would expect a possible fall below the 0.7800 (S1) line, to turn the bias back to the downside and pull the trigger for another test near the support of 0.7745 (S2), defined by the low of the 2nd of January. In the bigger picture, the downside exit of the triangle pattern signaled the continuation of the longer-term downtrend in my view, thus I will hold the view that the overall outlook stays negative.
• Support: 0.7800 (S1), 0.7745 (S2), 0.7700 (S3)
• Resistance: 0.7865 (R1), 0.7910 (R2), 0.7955 (R3)
WTI declined on Thursday, but after triggering some buy orders slightly above our support hurdle of 47.55 (S1), it rebounded to hit again our resistance barrier of 49.65 (R1). Although yesterday’s up leg may continue a bit higher, on the daily chart WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, which keeps the overall path to the downside. Therefore, I would expect any possible extensions of the current rebound to be short lived. Taking a look at our daily momentum indicators, there is positive divergence between the 14-day RSI and the price action, which gives me another reason to be cautious that the upside corrective wave may continue for a while. However, I would not bet on that and I would prefer to wait for actionable signals that the bears are back in control and go with the overall downtrend.
• Support: 47.55 (S1), 46.70 (S2), 45.00 (S3)
• Resistance: 49.65 (R1), 50.90 (R2), 52.00 (R3)
Gold continued pulling back for a while yesterday, but after hitting the 1205 (S1) line, it rebounded to trade near 1210. Since this rebound signals a higher low on the 4-hour chart, I would hold the view that the near-term picture of the precious metal remains mildly to the upside. If the bulls are strong enough to drive the battle higher and overcome the resistance zone of 1222 (R1), I would expect extensions towards the 1238 (R2) obstacle, marked by the highs of the 9th and 10th of December. On the daily chart, I see that a possible inverted head and shoulders pattern is probably being formed but not completed yet. If the pattern is completed, this could have larger bullish implications and perhaps encourage the bulls to drive the battle even above 1300.
• Support: 1205 (S1), 1197 (S2), 1180 (S3)
• Resistance: 1222 (R1), 1238 (R2), 1255 (R3)
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Market Analysis 12/01/15
Language English
The devil is in the details US nonfarm payrolls soared by 252k in December, more than expected, and the previous month was revised up to an incredible 353k (October was revised up, too). This was the 11th straight month above 200k. Unemployment fell more than expected and the average workweek held steady, too. Sounds great, no? Instead, the market focused on the 0.2% mom drop in average wages (November was revised down too). There was a lot of uncertainty about how to interpret the figures but at the end of the day, Fed funds rate expectations were down sharply. Investors apparently thought that the sluggish growth in average earnings coupled with falling oil prices would probably dampen any inflationary pressures and as a result they pushed out the time when they expect the Fed to start hiking rates.
Personally, I think the earnings figures may be an aberration as they don’t correlate with everything else that is going on in the labor market. I’m not sure that this will delay the Fed notably. This was the view of Atlanta Fed President Lockhart, who called the decline in average hourly earnings “potentially noise” and said it was inconsistent with other data on compensation. He said the strong rise in employment “confirms my sense of how the economy is progressing,” which would mean it’s still on track for a rate hike mid-year. Richmond Fed President Lacker said that the fall in oil prices was complicating the picture, but he still expects inflation to move back towards the Fed’s 2% target, which means he’s still envisioning raising rates. So as far as we know, the figures didn’t change the view of anyone on the Fed and so don’t change the outlook for the dollar. Of course if wages keep falling, then they may delay a hike – they all insist that there is no set schedule and everything depends on the data. But it would be odd for so many more people to be hired without wages rising.
In general the dollar is lower this morning, rising only against NOK, SEK and CAD. The G10 currency that performed the best was AUD even though home loans fell in November rather than rising as expected, although the ANZ job advertisements index rose more in December than it had in November.
In Canada, the unemployment rate remained unchanged at 6.6% in December, while the labor market lost 4.3k jobs. December was the second consecutive month for a drop in employment, consistent with the Bank of Canada’s concerns about significant slack in the labor market. Given falling oil prices and the slack in the job market, I would expect CAD to remain vulnerable.
Crude fell sharply, with the number of rigs drilling for oil in the US falling by 61 this week, the most in 24 years. On the other hand, estimates of Saudi Arabian production for December have been raised, adding to the glut of oil now on the market. It appears that the near-term outlook for oil is still bearish, but the long-term outlook – starting next year, perhaps – is more bullish.
Today’s schedule: During the European day, we have no major events or releases scheduled.
In the US, we get the labor market conditions index for December. This is a monthly index that draws on a range of data to give a better sense of the employment conditions in a single measure. In November, the index came 2.9, so a reading above that, following the strong nonfarm payrolls on Friday, should indicate an improving labor market.
Atlanta Fed President Dennis Lockart speaks again. It will be interesting to see if a weekend of reading changes his view from what it was when he was interviewed on Friday.
As for the rest of the week, on Tuesday, Japan’s current account surplus is expected to fall a bit, which could prove JPY negative. Sweden’s CPI is expected to show that the country fell deeper into deflation. The minutes of the Riksbank’s December meeting confirmed that unconventional measures are being prepared and could be used if inflation fails to pick up. Given the further decline in consumer prices we could see action at the February meeting. The UK CPI is expected to fall below 1% driven mainly by lower energy prices. The decline confirms the warning in the BoE’s November inflation report that inflation is likely to fall below 1% within 6 months. This could push further back the expectations for tightening and add to the negative sentiment towards GBP.
On Wednesday, the Fed releases the Beige book two weeks before its Jan. 27-28 policy meeting. Retail sales for December are also coming out.
On Thursday, Australia’s unemployment rate for December is expected to remain unchanged, while employment is forecast to grow by less than it did the previous month. This could prove AUD-negative. From the US, we get the Empire State manufacturing survey and the Philadelphia Fed business activity index, both for January.
Finally on Friday, Eurozone’s final CPI for December is expected to confirm the preliminary reading that showed the bloc in deflation. German final December CPI is also coming out. The US CPI for December is also coming out and the forecast is for the rate to decline below 1%, mainly because of the falling energy prices.
Currency Titles:
EUR/USD rebounds towards 1.1860
EUR/JPY ready to challenge the 140 line
GBP/USD hits resistance at 1.5200
WTI slides after hitting resistance at 49.65
Gold rebounds from 1205
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EUR/USD failed once again to close below our support of 1.1775 (S1) and rebounded to reach our resistance of 1.1860 (R1) and the upper bound of the short-term downside channel taken from back at the high of the 16th of December. Given that there is still positive divergence between the RSI and the price action and that both our momentum indicators raced higher, I see the possibility for a move above 1.1860 (S1), perhaps for a test of the resistance line of 1.1975 (R2). Nevertheless, since the rate is still within the channel, and since the longer-term trend of the pair is to the downside, I would prefer to sit on the sidelines for now and wait for more actionable signals that the bears are back in the game.
• Support: 1.1775 (S1), 1.1700 (S2), 1.1635 (S3).
• Resistance: 1.1860 (R1), 1.1975 (R2), 1.2000 (R3).
EUR/JPY continued its tumble on Friday, falling below the support (turned into resistance) barrier of 140.55 (R1). During the early European morning Monday, the rate appears ready to challenge the round figure of 140.00 (S1). A clear move below that line is likely to extend the bearish wave and perhaps target the support hurdle of 139.00 (S2). In the bigger picture, after the completion of a head and shoulders formation on the daily chart, the rate declined as expected and I would expect it to continue. Our daily momentum studies support the notion. The 14-day RSI fell below its 30 line and is pointing down, while the daily MACD stands below both its zero and signal lines, pointing south as well.
• Support: 140.00 (S1), 139.00 (S2), 138.00 (S3).
• Resistance: 140.55 (R1), 141.80 (R2), 143.40 (R3).
GBP/USD rebounded on Thursday after triggering some buy orders near the 1.5030 (S1) line. On Friday, the pair continued to race higher but hit resistance at the 1.5200 (R1) obstacle. Although the oscillators on the 4-hour chart point up, zooming on the 1-hour chart, the hourly studies combined with the strong resistance at 1.5200 (R1) give me reasons to believe that the forthcoming wave is likely to be to the downside. If so, I would expect another test at the 1.5030 (S1) area. In the bigger picture, as long as Cable is printing lower peaks and lower troughs below the 80-day exponential moving average, the overall outlook remains negative. Nevertheless, I would like to see a clear move below the psychological barrier of 1.5000 (S2) before getting more confident regarding the overall downtrend.
• Support: 1.5030 (S1), 1.5000 (S2), 1.4810 (S3).
• Resistance: 1.5200 (R1), 1.5275 (R2), 1.5315 (R3).
WTI declined after finding sellers near the 49.65 (R2) resistance hurdle. Today, during the early European morning, the price is heading towards the support zone of 47.00 (S1), where a clear dip is likely to set the stage for further bearish extensions, perhaps towards the psychological barrier of 45.00 (S2). Taking a look at our near-term momentum studies, I see that the RSI slid after hitting resistance marginally below its 50 line, while the MACD, already negative, shows signs of topping and could move below its signal line soon. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, which keeps the overall path to the downside.
• Support: 47.00 (S1), 45.00 (S2), 42.15 (S3).
• Resistance: 48.80 (R1), 49.65 (R2), 50.90 (R3) .
Gold firmed up on Friday, breaking above our resistance (turned into support) barrier of 1222 (S1). Currently, the precious metal is testing the neckline of a possible inverted head and shoulders pattern identified on the daily cart. A move above the neckline is likely to signal the completion of the pattern and perhaps have larger bullish implications. Nevertheless, I would prefer to see a break above the key resistance area of 1238, marked by the highs of the 9th and 10th of December, in order to trust the violation of the neckline and the completion of the pattern. The recent positive sentiment towards the yellow metal is visible in our daily momentum indicators as well. The 14-day RSI stands above its 50 line and is pointing up, while the daily MACD has a positive sign, lies above its signal line, and is pointing north as well.
• Support: 1222 (S1), 1205 (S2), 1197 (S3).
• Resistance: 1238 (R1), 1255 (R2), 1270 (R3).
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Market Analysis 13/01/15
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Dollar recovers but Fed expectations don’t The dollar generally recovered yesterday. It held steady against the pound and gained against all other G10 currencies even while the market continued to pare back its expectations for Fed tightening and US bond yields fell. The contradiction between the dollar’s performance and that of the interest rate market is a bit difficult to understand, but the key may be in oil: oil prices continued to collapse, leading the commodity-related currencies lower. The main theme in the market seems to be concerns about deflation. Copper hit a five-year low. In a situation of global deflation, all central banks will be hit with similar constraints, but the relative movement will remain the same: the US will be the first to tighten, even if the date is pared back. So some measure of dollar strength is compatible with diminishing Fed rate expectations as long as they go along with diminishing expectations for other central banks, too.
Politics is starting to impact the pound Polls in the UK about the election in May are showing an unpredictable result, which is likely to weaken the pound. The polls are contradictory: one poll released Monday had the Conservative Party ahead of Labor by 6 percentage points (34%-28%), another poll had Labour leading by 5 ppt (37%-32%). It does seem that Labour’s lead is diminishing, but the issue is whether either party will be able to get a large enough majority to govern by themselves. Otherwise there will be difficult coalition discussions and the result is likely to be a weak, fractious coalition or even a minority government. Either result would be a negative for the pound. Politics is an increasing risk for sterling.
CAD is a major victim of weaker oil prices Weak Canadian data out yesterday caused the market to price in some modest easing by the Bank of Canada, which pushed USD/CAD further towards 1.20. Canada’s Q4 business outlook DI for future sales optimism fell to 8 from 35 (expected: 29), while below-target inflation expectations rose. I expect CAD to be one of the weaker currencies nowadays. Although it could benefit from a relatively strong US economy, its dependence on oil (24% of exports) makes it the purest energy play in the G10. USD/CAD’s correlation with oil prices is even (slightly) higher than USD/NOK’s.
Japan’s current account surplus was higher than expected in November.On a seasonally adjusted basis it was basically stable from the previous month instead of falling by around one-third, as expected. The trade account continues to be in deficit. What’s happening seems to be that as the yen weakens, the yen value of income in other currencies rises and the income account rises. This effect may wane over time however as bonds mature and are replaced with new bonds carrying lower interest rates.
China’s trade surplus fell in December, in line with forecasts.
Today’s highlights:The UK CPI for December is expected to fall below 1%, driven mainly by lower energy prices. The decline confirms the warning in the BoE’s November inflation report that inflation is likely to fall below 1% within 6 months. This could push further back the expectations for tightening and add to the negative sentiment towards GBP.
Sweden’s CPI is expected to show that the country fell deeper into deflation. The minutes of the Riksbank’s December policy meeting confirmed that unconventional measures are being prepared and could be used if prices fail to recover. Given the further decline in consumer prices, this could prompt Riksbank to take further action at the February meeting. This is likely to increase selling pressure towards SEK. The country’s PES unemployment rate for December is also coming out.
In the US, only secondary importance data are coming out. The NFIB small business optimism for December is expected to have increased fractionally to its highest level since February 2007. While this indicator is not particularly market-affecting, it’s well worth watching because of the Fed’s emphasis on the labor market. Small businesses employ the majority of people in the US. The Job Opening and Labor Turnover Survey (JOLTS) report for November is forecast to show that the number of job openings has increased marginally. Following last week’s strong nonfarm payroll figure, this is likely to keep the dollar supported. Investors also pay attention to the number of people quitting jobs, because that’s an indication of confidence in the labor market – people normally don’t quit their job unless they’re confident they can get another one.
As for the speakers ECB Governing Council member Ewald Nowotny speaks again. Yesterday he said the ECB shouldn’t wait too long to fight deflation. “It is important that one takes deflation risks seriously and addresses them,” he said.
Currency Titles:
EUR/USD touches again the 1.860 line
GBP/JPY finds support near 179.00
AUD/USD rebounds somewhat from 0.8145
Gold is testing the 1238 area
WTI keeps falling
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EUR/USD moved somewhat lower yesterday, but after finding support marginally above our 1.1775 (S1) line, it rebounded to touch again the resistance line of 1.1860 (R1). Given that there is still positive divergence between the RSI and the price action and that both our momentum indicators continued to race higher, I see the possibility for a move above 1.1860 (R1), perhaps for a test of the resistance line of 1.1975 (R2). Nevertheless, given that the longer-term trend is to the downside, I would treat any possible bullish waves as corrective moves and wait for more actionable signs that the bears are back in control. I still believe that a decisive move below the 1.1775 (S1) zone is likely to pave the way towards the next support at 1.1700 (S2), determined by the low of the 8th of December 2005.
• Support: 1.1775 (S1), 1.1700 (S2), 1.1635 (S3)
• Resistance: 1.1860 (R1), 1.1975 (R2), 1.2000 (R3)
GBP/JPY moved in a consolidative manner, staying near the 179.00 (S1) line and the lower bound of the black downside channel. Today, the UK CPI is expected to fall below 1% yoy in December. Falling inflation, combined with the inability of the bulls to push the rate higher after hitting support at the lower line of the channel, could be the catalyst for a breakdown of the channel. A move below the 179.00 (S1) hurdle is likely to pull the trigger for the next support at 178.00 (S2). On the daily chart, the dip below the 181.00 (R1) signaled the completion of a failure swing top, something that gives me another reason to expect a weaker rate in the near future.
• Support: 179.00 (S1), 178.00 (S2), 176.00 (S3)
• Resistance: 181.00 (R1), 183.20 (R2), 185.00 (R3)
AUD/USD fell sharply yesterday after finding selling orders at 0.8255 (R1). Nevertheless, the fall was halted near the 0.8145 (S1) area and subsequently the rate rebounded somewhat. Even though I still see a longer-term downtrend on the daily chart, having in mind that the possibility for a higher low is still there, I would consider the pair to be in a corrective phase. I would stay cautious for another rebound and another test of the 0.8255 (R1) line. Our daily momentum indicators corroborate my view. The 14-day RSI edged up after finding support near its 30 line, while the daily MACD, although negative, stands above its trigger line and is pointing north.
• Support: 0.8145 (S1), 0.8035 (S2), 0.8000 (S3)
• Resistance: 0.8255 (R1), 0.8375 (R2), 0.8420 (R3)
Gold continued its surge on Monday after breaking above the neckline of a possible inverted head and shoulders pattern identified on the daily chart. During the early European morning Tuesday, the precious metal is testing the 1238 (R1) resistance hurdle, marked by the highs of the 9th and 10th of December. As I mentioned yesterday, a break above that key resistance area is the move I would like to see in order to trust the completion of the pattern and expect larger bullish extensions. Such a break is likely to challenge the 1255 (R2) hurdle at first stage. Our daily oscillators continue to detect positive momentum. Both of them, already within their bullish territories, are in a rising mode.
• Support: 1222 (S1), 1205 (S2), 1197 (S3)
• Resistance: 1238 (R1), 1255 (R2), 1270 (R3)
WTI continued tumbling on Monday, breaking below the support (turned into resistance) zone of 47.00 (R1) but the fall was halted fractionally above the psychological barrier of 45.00 (S1), at 45.15. The short-term bias stays to the downside and it won’t take long before we see the bears reaching the 45.00 (S1) line. If they are strong to drive the battle below that key level, I would expect them to set the stage for extensions towards the next support, at 42.15 (S2), defined by the low of the 11th of March 2009. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, which keeps the overall path to the downside.
• Support: 45.00 (S1), 42.15 (S2), 40.00 (S3)
• Resistance: 47.00 (R1), 48.80 (R2), 49.65 (R3)
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Market Analysis 14/01/2015
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Rate expectations keep getting cut yet dollar keeps rising It’s getting to be a familiar pattern: commodity prices fall, Fed Funds rate expectations fall, and yet the dollar rises. Copper was down almost 8% yesterday while corn futures fell some 4% -- more important than you might think, as corn is used in a surprising range of products (and foods through fructose and livestock feed of course but also plastics, pharmaceuticals, paper and over 4,000 other products). WTI actually bounced a little bit but Brent was lower as the UAE oil minister said that OPEC would stand firm on its decision to keep output unchanged. In this context of falling commodity prices, Fed Funds rate expectations retreated another 5 bps in the long end.
The news on jobs however was favorable, which raises the likelihood of the Fed tightening on schedule.Contrary to the disappointing average weekly earnings figures, the National Federation of Independent Businesses (NFIB) survey employment diffusion index rose by 4 points to the highest level since August 2007. The worker compensation DI also rose by 4 points to the highest level since Jan. 2008. These indices have a good correlation with the employment cost index (ECI), which makes sense as most Americans work in small businesses. Thus yesterday’s news corroborates what I said about the average earnings possibly being an aberration. The Job Offers and Labor Turnover Survey (JOLTS) job openings were up 0.1 ppt. The hiring rate fell 0.1 ppt but remains up 0.3 ppt from a year ago, while the quits rate was unchanged. These figures are consistent with an ECI of around 2.6%, which is relatively healthy and should not prevent the Fed from raising rates, in my view. Thus I see them as USD-positive.
The mood on CAD is turning bearish as USD/CAD approaches 1.20. Bank of Canada Deputy Gov. Timothy Land gave a dovish speech in which he said “Lower oil prices are also typically accompanied by a weaker Canadian dollar, and this time is no exception” and “…lower oil prices are likely, on the whole, to be bad for Canada.” He said BoC would watch closely for the impact of falling oil prices on growth “and the delay it may cause to the economy’s return to its production potential.” So falling oil prices will not only depress CAD through terms of trade but also through monetary policy. That means it’s doubly bad for CAD and the currency is likely to weaken further. (http://www.bankofcanada.ca/2015/01/drilling-down-understanding-oil-prices/)
JPY was the only currency gaining vs USDalthough it’s hard to see why besides the usual correlation between USD/JPY and Tokyo stocks as the Nikkei was down 1.1%. On the other hand, there’s talk in the market that the Bank of Japan may cut its core CPI forecast for the fiscal year beginning in April to 1.5% or lower, with the Nikkei newspaper suggesting they may cut it to the lower half of the 1% range in their statement following the Jan. 21st meeting because of falling oil prices. This would be a big blow as the coming FY was the deadline for the BoJ to hit its 2% inflation target. That could mean even more QE! With that possibility in mind, I expect that the current bout of JPY strength to be only temporary.
Today’s highlights: During the European time, the European Court of Justice is expected to give a non-binding opinion on the legality of the ECB’s Outright Monetary Transactions program. The OMT, introduced in 2012, is an earlier bond-purchase program created in order to allow the Bank to buy debt from distressed countries if necessary. If the court’s adviser expresses doubts about the OMT program, this could have an adverse impact on the effectiveness and the design of the broad-based ECB government bond purchases. The markets are likely to assume that this would reduce the flexibility on how the ECB may structure any QE program.
The most likely reaction to a negative result would be a “dead cat bounce” in the euro. After all, the possibility of QE is depressing the euro, so less QE should support the euro. There is a small chance though that it could cause the euro to fall even more if it makes people think that there is now no hope for the Eurozone economy and deflation is inevitable. In that case they could begin to sell their outrageously priced Eurozone bonds (Spain yielding less than Treasuries? Bund yields zero or negative out to five years?) and put the money into Treasuries. On the other hand, an opinion that supports the OMT would probably keep the common currency under selling pressure and perhaps accelerate its downtrend. The market is already pricing in the introduction of a QE program, but the structure of it will be important for the pace of euro’s decline. We believe that the most likely outcome is a compromise solution, perhaps implying a few limitations on OMT but not rejecting it. The reaction in that case is likely to be minimal and investors would stay focused on the ECB meeting next week.
As for the indicators, France CPI rate for December is expected to drop to 0% yoy, in line with the overall deflationary conditions in the Eurozone.
In the UK, Bank of England Governor Mark Carney and other MPC members testify at the Parliament’s Treasury Select Committee on the financial stability report published in December. At the press conference report, Gov. Carney stressed that the lower inflation boosts consumers spending power. He may repeat this view given the further decline in the CPI rate.
In the US, headline retail sales for December are forecast to drop, a turnaround from the previous month. However, usually the focus is on retail sales excluding auto and gasoline, which are forecast to remain unchanged. That could weaken the dollar a bit. The Fed releases the Beige book two weeks before its Jan. 27-28 policy meeting.
Currency Titles:
EUR/USD hits support near 1.1760
USD/JPY heading towards 117.00
GBP/USD in a consolidative mode
Gold back near the neckline
WTI dips below 45.00 but rebounds from slightly above 44.00
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EUR/USD moved lower after touching again the resistance line of 1.1860 (R1), but the decline was halted around 1.1760 (S1). Given that there is again positive divergence between the he RSI and the price action I would stay careful of another bounce towards the 1.1860 (R1) line. Nevertheless, given that the longer-term trend is to the downside, I would treat any possible bullish waves as corrective moves and wait for more actionable signs that the bears are back in control. I still believe that we are likely to see this pair touching 1.1700 (S2) in the close future, determined by the low of the 8th of December 2005.
• Support: 1.1760 (S1), 1.1700 (S2), 1.1635 (S3)
• Resistance: 1.1860 (R1), 1.1975 (R2), 1.2000 (R3)
USD/JPY tumbled on Tuesday, falling below the support (turned into resistance) area of 118.00 (R1). During the early European morning Wednesday, the rate is heading towards the 117.00 line and the lower bound of the black near-term downside channel. If the bears maintain their momentum and manage to drive the battle below that support territory, I would expect them to pull the trigger for the key barrier of 115.50 (S2), defined by the low of the 16th of December. This line also coincides with the 38.2% retracement level of the 15th of October – 8th of December up wave. Our momentum studies complete the negative near-term picture of USD/JPY. The RSI hit resistance near its 50 line and moved lower, while the MACD stands below both its zero and signal lines, pointing south.
• Support: 117.00 (S1), 115.50 (S2), 113.80 (S3)
• Resistance: 118.00 (R1), 119.95 (R2), 120.85 (R3)
GBP/USD fell following the decline in Britain’s CPI to its lowest rate since May 2000, but after hitting support at 1.5075 (S1), Cable rebounded to trade virtually unchanged. The pair has been oscillating between that level and the resistance of 1.5200 (R1) since Friday. The RSI oscillates around its 50 line confirming the recent consolidative mode, but the MACD is still in a rising mode approaching its zero line. However, even if we see a bounce, I would see it as a minor corrective move before the next leg down. In the bigger picture, as long as Cable is printing lower peaks and lower troughs below the 80-day exponential moving average, the overall outlook remains negative. Nevertheless, I would like to see a clear move below the psychological barrier of 1.5000 (S3) before getting more confident regarding the overall downtrend.
• Support: 1.5075 (S1), 1.5030 (S2), 1.5000 (S3)
• Resistance: 1.5200 (R1), 1.5275 (R2), 1.5315 (R3)
Gold moved slightly above the resistance line of 1238 (R1), marked by the highs of the 9th and 10th of December, but the longs were not strong enough to maintain the price above that level and subsequently the metal slid. During the early European morning, gold is trading near the neckline of a possible inverted head and shoulders pattern identified on the daily chart, slightly above the support area of 1222 (S1). Although I see signs that the pullback may continue a bit more, the possibility for a higher low still exists. Therefore, I would keep a cautiously positive stance. If and when the bulls manage to take the reins again, I would expect them to target again the 1238 (R1) resistance hurdle. I still believe that a decisive break above that area is likely to challenge the 1255 (R2) hurdle.
• Support: 1222 (S1), 1205 (S2), 1197 (S3)
• Resistance: 1238 (R1), 1255 (R2), 1270 (R3)
WTI continued its decline on Tuesday, falling below the 45.00 (S1) support line. However, the price triggered some buy orders near 44.15 (S2) and rebounded to hit resistance slightly below the 47.00 (R1) line. In my view, the rebound was just an upside corrective move and that the bears are ready to take control again. I would expect another move below 45.00 (S1) and another test of the 44.15 (S2) support. Our near-term momentum studies support the notion. The RSI did not hold above 50 and is back below it, pointing down, while the MACD topped marginally above its zero line, turned down and looks able to move below its trigger soon. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, which keeps the overall path to the downside.
• Support: 45.00 (S1), 44.15 (S2), 42.15 (S3)
• Resistance: 47.00 (R1), 48.80 (R2), 49.65 (R3)
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Market Analysis 15/01/15
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ECB gets the green light for the OMT programThe European Central Bank’s Outright Monetary Transaction program is compatible “in principle”, with the EU treaty as long as certain conditions are met. The non-binding opinion by the EU Court of Justice removed a major legal hurdle to purchases of government bonds, and cleared the way for the Bank to introduce a quantitative easing program to quell the risk of deflation. Under the OMT program, the ECB can buy the bonds of distressed countries in order to bring down their interest rates, in return for which the country has to meet various strict conditions. The final decision, which is expected in four to six months, is likely to confirm the advocate-general’s opinion.
Even though the reaction of the bloc’s single currency was limited during the court’s decision, it plunged after comments from President Draghi to a German newspaper that the ECB is ready to buy government bonds to revive the Eurozone’s inflation. The article, followed by the ECJ’s interim ruling, increased the possibility that a decision on bond buying may be taken at the Bank’s meeting next Thursday, despite the uncertainty about the Greek elections.
The British pound got a small boost after Bank of England Governor Mark Carney speaking to the Treasury Select Committee said that the halving of oil prices in the past six months is a “net positive” for the UK economy. Although the recent decline in the oil prices pushed the country’s inflation down to a 14-year low, he distanced it from the persistently low inflation in the Eurozone. EURGBP fell below 0.7740 at these comments, the lows of the 6th of October 2008, and could decline even more and challenge the next support of 0.7700 in the near future. A break below that level could push the rate even lower, perhaps towards 0.7620.
In the US, retail sales for December slumped to their biggest drop since January 2014. December’s decline came after downward revision in the previous month, which overall suggested that consumers reduced their spending in Q4. This could prompt a cut to the growth rate forecast for the final quarter. Although the dollar lost some of its strong momentum and weakened a bit against its major peers, we maintain our longer-term USD bullish view, especially as the alternatives within the G10 become less attractive.
Overnight, Australia’s unemployment rate dropped to 6.1% in December, from a downwardly revised 6.2% in November. The unexpected decline in the unemployment rate was followed by a surprising increase in the net change in employment, which showed that about 37.4k people found jobs in December. The figures were much better-than-expected and pushed AUD/USD up approximately 0.7% to settle around 0.82. The strong labor market figures are likely to take some pressure off from the RBA to cut rates in the next few minutes. However, the weaker-than-expected GDP figures released in December, the lower inflation and the falling commodity prices are likely to keep the case for a rate cut alive and the AUD under selling pressure.
Today’s highlights: Eurozone’s trade balance for November is due out. Norway’s trade balance for November is also coming out.
From Canada, we get the existing home sales for December.
In the US, the Empire manufacturing PMI for January is expected to show that business conditions for NY manufactures is expected to increase a bit. The Philadelphia Fed business activity index for the same month and initial jobless claims for the week ended Jan. 10 are also coming out.
Currency Titles:
EUR/USD rebounds from 1.1730
EUR/JPY rebounds from 137.00
Gold bulls rejected again
WTI surges towards the 49.65 area
NZD/USD finds support near the 0.7700
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EUR/USD slid on Wednesday but found support at 1.1730 (S1) and rebounded after the US retail sales for December fell the most since January 2014. Subsequently, the pair hit resistance slightly below our 1.1860 (R1) line and moved lower to trade more or less unchanged. Given that there is still positive divergence between the RSI and the price action, and that the MACD, although negative, is pointing sideways, I would prefer to stay on the sidelines for now. The longer-term trend stays to the downside and thus I would wait for more actionable signs that the bears are back in control. I still believe that we are likely to see this pair touching the 1.1700 (S2) line in the close future, determined by the low of the 8th of December 2005. A dip below that obstacle, is likely set the stage for extensions towards 1.1635 (S3), the low of 15th of November 2005
• Support: 1.1730 (S1), 1.1700 (S2), 1.1635 (S3)
• Resistance: 1.1860 (R1), 1.1975 (R2), 1.2000 (R3)
EUR/JPY continued its tumble, but after triggering some buy orders near the 137.00 (S1) line, it rebounded to trade marginally below the 139.00 (R1) hurdle. Shifting my attentions to our near-term oscillators, I see positive divergence between both of them and the price action. Moreover, the RSI exited its oversold territory and is pointing up, while the MACD has bottomed and crossed above its trigger line. Having these signs in mind, I would stay careful that the rebound may continue. On the daily chart, I see that the rate rebounded from near the 2nd price objective of the head and shoulders formation completed back on the 30th of December. But even if we experience the continuation of the current rebound, the price structure still suggests a negative medium term picture.
• Support: 137.00 (S1), 135.20 (S2), 134.15 (S3)
• Resistance: 139.00 (R1), 140.00 (R2), 141.80 (R3)
Gold rebounded from the neckline of the possible inverted head and shoulders formation, tried once more to move above the resistance line of 1238 (R1), but the longs failed again and subsequently the metal slid. Given the inability of buyers to drive the battle above that resistance territory, I would switch my stance to flat for now. Our short-term momentum studies support my choice to stand aside. The RSI moved lower after hitting resistance near its 70 line, while the MACD, already below tis trigger, declined further. I would like to see a clear daily close above the 1238 (R1) field before getting again confident about the upside.
• Support: 1222 (S1), 1205 (S2), 1197 (S3)
• Resistance: 1238 (R1), 1255 (R2), 1270 (R3)
WTI shot up on Wednesday, breaking above the resistance (turned into support) area of 47.00 (S1). The climb was halted marginally below our resistance line of 49.65 (R1) and the price retreated somewhat. Yesterday’s surge completed a failure swing bottom on the 1-hour chart and confirmed a higher high. However, taking a look at our momentum studies I would expect the forthcoming minor-term wave to be to the downside, perhaps to test the 47.00 (S1) area as a support this time. The RSI exited its overbought territory and is pointing down, while the MACD has topped and could move below its trigger line any time soon. But, even if the next move is negative, since the possibility for a higher low still exists, I would consider the short-term bias to have turned cautiously to the upside. As for the broader trend, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. Nevertheless, I see a possible morning star candle pattern on the daily chart, which supports my view that it is possible to see the price correcting higher in the close future.
• Support: 47.00 (S1), 45.00 (S2), 44.15 (S3)
• Resistance: 49.65 (R1), 50.30 (R2), 52.00 (R3)
NZD/USD declined to find support marginally above the 0.7700 (S1) line. Bearing in mind that the rate collapsed after hitting the key resistance of 0.7850 (R2) on Monday, I would expect the down wave to continue. A clear move below the 0.7700 (S1) area is likely to see scope for extensions towards the support of 0.7625 (S2). Even though I see the potential for further bearish extensions, I still consider the overall near-term path to be to the sideways, as the rate has been oscillating between the support of 0.7625 (S2) and the resistance of 0.7850 (R2) since the beginnings of December.
• Support: 0.7700 (S1), 0.7625 (S2), 0.7500 (S3)
• Resistance: 0.7785 (R1), 0.7850 (R2), 0.7910 (R3)
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Market Analysis 16/01/15
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SNB shocked financial markets The Swiss National Bank (SNB) unexpectedly discontinued the floor from EUR/CHF, and lowered the interest rate on sight deposit account balances by 50 bps to -0.75%, deepening a cut announced in December. The explanation that it gave is that it was “unsustainable.” They also said it didn’t make sense to keep the cap anymore, because the EUR’s depreciation had brought down the overvaluation of the CHF relative to other currencies. Moreover, the Swiss economy has adapted to current FX levels.
The Swiss franc soared approximately 30% against EUR and USD, an extraordinary move in the currency markets. While both pairs quickly recovered about half the losses, EUR/CHF is likely to remain under pressure for some time. Many investors were using CHF as a funding currency. Those positions are likely to be shifted into EUR now. Moreover, the market had very large EUR/CHF long positions as it was seen as a relatively cheap one-way bet.
On the other hand, EUR is likely to recover much more rapidly against the crosses, because when the SNB intervened in the market to buy EUR, it would later sell some of those funds for other currencies in order to diversify its reserves. Now that it will not be buying EUR/CHF, it will not be selling EUR crosses, thus EUR may gain vs other currencies.
Why change a policy started in 2011 now? In the SNB press release, the Bank concluded that the overvaluation has decreased as a whole due to EUR/USD depreciation, which in turn, caused the CHF also to weaken against USD. Therefore, enforcing the minimum floor was no longer justified. They also mentioned that “divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced”. The latter, raises the strong possibility that next week’s ECB meeting could bring a larger-than-expected QE program that will depress EUR even further, in our view. This notion is also supported by BoE Governor Mark Carney, who said on Wednesday during the testimony on financial stability that the ECB has the “tools” to carry out QE in order to reach their mandate and he has every expectation that they will do so. The further weakening of EUR, would have put downward pressure on EUR/CHF, hence increasing the need for the SNB to intervene. However, the SNB may have been reluctant or even unable to intervene further, so they decided to abandon the floor earlier.
The removal of the floor does not mean that the SNB thinks CHF is fairly valued or that it is abandoning the market. It said it still thinks CHF is overvalued, although the overvaluation has decreased. It will remain active in the FX market if necessary to influence monetary conditions. This could force the SNB to set a CHF cup against another currency (perhaps the dollar) or a broader basket of currencies than just the euro. So with a big buyer of EUR out of the market and potentially becoming a big buyer of USD, the implications are for a lower EUR/USD. As for USD/CHF, given the divergence between the Fed and SNB monetary policies, and the deflationary condition of the Switzerland’s economy, I would expect the USD/CHF to recover further in the near future.
The move came as a total surprise. Just two days ago the SNB vice-chairman Jean-Pierre Danthine said that they “are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy.” In the press conference, they said that the decision had to be a surprise. Nonetheless, as the trend is for more and more central bank transparency (e.g., the ECB will start publishing minutes of its meetings from this year), the shock to the market may be the biggest impact of the move. Central bank promises, such as the “forward guidance” of the Bank of England, were already seen as less than entirely trustworthy. Now the credibility of central banks has fallen as quickly as EUR/CHF. Any other central banks with quasi-pegged currencies, particularly the Czech central bank with its EUR peg, will be questioned from now. I would not bet on the Hong Kong peg going any time though as they have maintained the peg through very testing times before. The move is also negative for Poland, where a lot of people still have CHF mortgages.
Today’s highlights: During the European day, Eurozone final CPIs for December is expected to confirm that the bloc fell into deflation, for the first time since 2009.
In the US, we get the CPI for December. Following the poor US retail sales on Wednesday, the forecast of a decline in the US inflation rate below 1% could prove USD-negative, at least temporarily. Industrial production for December is expected to fall, a turnaround from the previous month. The preliminary University of Michigan consumer sentiment for January is forecast to show a modest rise, to its highest level since October 2007. The surveys 1-year and 5-to-10 year inflation expectation outlook are also coming out.
As for the speakers: ECB Governing Council member Carlos Costa, Minneapolis Fed President Narayana Kocherlakota, San Francisco Fed President John Williams and St. Louis Fed President Jim Bullard speak.
Currency Titles:
EUR/USD tumbles as SNB move increase bets on ECB action
GBP/JPY continues lower
Gold surges above 1238
AUD/USD near the 200-period moving average
WTI collapses after hitting resistance at 51.25
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Currencies Text:
EUR/USD tumbled yesterday after the Swiss National Bank suddenly abandoned the EUR/CHF floor, increasing bets that the ECB would introduce a large scale QE program at its policy meeting next Thursday. The rate fell below the support (turned into resistance) line of 1.1730 (R1) and hit support at 1.1565 (S1). The bias is back to the downside, therefore I would expect a move below 1.1565 (S1) to target the psychological figure of 1.1500 (S2). Our daily oscillators detect accelerating bearish momentum and amplify the case for further declines. The RSI continued declining within its oversold territory, while the MACD moved dipper into its negative field. As for the overall trend, on the daily chart, the price structure still suggests a downtrend. The pair is forming lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1565 (S1), 1.1500 (S2), 1.1370 (S3).
• Resistance: 1.1730 (R1), 1.1860 (R2), 1.1975 (R3).
GBP/JPY slide yesterday after finding resistance at 179.50 (R2), but the decline was halted near the 176.00 (S1) line. A clear break below the 176.00 (S1) could see scope for extensions towards our next support obstacle, at 174.60 (S2). Both our near-term oscillators lie within their bearish territories, with the MACD standing below its trigger line and pointing south. This indicates negative momentum and magnifies the case for further declines in the near future. On the daily chart, the dip below the 181.00 (R3) signaled the completion of a failure swing top, something that gives me another reason to expect a weaker rate.
• Support: 176.00 (S1), 174.60 (S2), 173.90 (S3).
• Resistance: 177.00 (R1), 179.50 (R2), 181.00 (R3).
Gold climbed on Thursday, breaking two resistance (turned into support) barriers in a row. During the early European morning, the precious metal is trading between the support line of 1255 (S1) and the resistance of 1270 (R1). The short-term bias is turned to the upside, but bearing in mind our momentum signs and that yesterday’s rally was too steep, I would stay mindful that a pullback would be in the works. The RSI has turned down and now appears willing to exit its overbought territory, while the MACD shows signs that it could start topping. On the daily chart, the metal edged higher after completing an inverted head and shoulders formation on the 12th of January, and this holds the picture positive. I would expect a decisive break above the 1270 (R1) obstacle to prompt extensions towards the round figure of 1300 (R2).
• Support: 1255 (S1), 1238 (S2), 1222 (S3).
• Resistance: 1270 (R1), 1300 (R2), 1325 (R3).
AUD/USD firmed up yesterday to reach the 200-period moving average, which currently coincides with the 0.8255 (R1) resistance hurdle. A clear move above that area is likely to pull the trigger for our next resistance at 0.8375 (R2), defined by the highs of the 9th and 10th of December. Our short-term oscillators support the notion. The RSI crossed above its 50 line, while the MACD stands above both its zero and signal lines, and is pointing up. As for the bigger picture, it’s too early to argue about a trend reversal, thus I would consider any possible future advances as a corrective phase for now. Our daily momentum indicators corroborate my view that a corrective phase may be looming. The 14-day RSI moved above its 50 line, while the daily MACD, although negative, stands above its trigger line and is heading towards its zero line.
• Support: 0.8130 (S1), 0.8035 (S2), 0.8000 (S3).
• Resistance: 0.8255 (R1), 0.8375 (R2), 0.8420 (R3).
WTI shot up yesterday, but after finding resistance at 51.25 (R3), it fell sharply to trade back below the 47.00 (R1) line. Given that I see negative divergence between both our short-term oscillators, and that they both entered their negative territories, I believe that the corrective bounce is over and that the bears are likely to take the reins again and force the price lower. A move below the 45.90 (S1) support is likely to aim for the key hurdle of 45.00 (S2) As for the broader trend, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact.
• Support: 45.90 (S1), 45.00 (S2), 44.15 (S3).
• Resistance: 47.00 (R1), 49.65 (R2), 51.25 (R3) .
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