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Market Analysis 30-05-2013: USD weakens as market mulls implications of tapering QE
Daily Commentary30.05.2013
The Big Picture USD weakens as market mulls implications of tapering QE: • Stocks fell around the globe yesterday and in the current “risk on = buy USD” environment, that meant USD weakened. A fall in Treasury yields also helped to undermine the dollar. On the other hand, the USD was generally stronger against most emerging market (EM) currencies as investors moved to safer havens such as CHF. Downgrades of the global growth outlook from the IMF and OECD may have helped the move out of EM currencies. Yet the overall move was not a global growth fear as AUD and the other commodity currencies also gained vs USD.
Markets all over the world seem to be trying to figure out just what the end of quantitative easing means. The QE regime has lasted some 4 ½ years now; even a gradual tapering off would be a big change. Just as QE was a massive global experiment, so too will its end. Last week, when Mr. Bernanke suggested that the Fed could begin reducing QE, the dollar gained on expectations of higher interest rates; yet yesterday, stock markets fell, apparently for the same reason, and the dollar fell with them. One implication of this change for the FX market may be that the impact of economic indicators may change. “Good” could be “bad” and vice-versa if people are focused on what the data means for QE rather than for growth. For example, a tapering off of QE is dependent on a solid recovery in the US labor market, which should be good for global trade and hence EM currencies; yet a reduction in liquidity was said to be one reason why EM currencies generally fell yesterday. Expect volatility to rise over the next several months as the market ponders this “regime change” and people disagree on whether to focus on the implications of indicators for the real economy or the financial markets (in other words, how many steps ahead they should be looking when trying to gauge the impact of news on markets).
EUR/USD is recovering somewhat as the outlook for further easing measures by the ECB wanes despite the downgrade to Eurozone growth forecasts. Yesterday’s pickup in German inflation (+1.5% yoy in May vs +1.2% in April) and the acceleration in Eurozone money supply growth makes a further easing next week less likely, even though the fall in lending to the private sector accelerated as well. German magazine Die Welt said that three ECB board members oppose ABS purchases, while Bank of France Gov. Noyer said yesterday that he’s not convinced of the merits of negative rates. Reconsideration of the likelihood of further moves at next week’s meeting may support EUR/USD over the next week.
Japanese capital flows out overnight showed another large (JPY 1.1tn) sale of foreign bonds, following last week’s JPY 804bn sale. Japan’s quantitative easing was supposed to push investors out of JGBs and into foreign bonds, but so far that doesn’t seem to be working (although these weekly figures can be distorted by the activity of the banks). Short term USD/JPY should be supported by the J-curve effect (price of imports goes up faster than the price of exports goes down, so the trade account deteriorates) but without that capital outflow, it may be hard for USD/JPY to rise long term.
Eurozone confidence surveys are out today. The flash consumer confidence figure already came out so the market interest, if any, will be on the business climate and industrial confidence. A slight positive change is expected, following the other recent positive business surveys (French, German, Belgian and Italian surveys all showed rises). That could support EUR/USD further in today’s climate. However, I wonder if businesses are being realistic. After seeing yesterday’s French consumer confidence fall out the bottom, I’m not sure whether we should have much confidence in European confidence.
The US data too is not that crucial; revised US Q1 GDP is expected to be unchanged from the original estimate at 2.5%. The focus will therefore be on the weekly US jobless claims, are forecast to be unchanged at 340k. That would push the four week moving average up to 343k from 340k, which could add to the negative USD tone.
The MarketEUR/USD
• EUR/USD was a major gainer yesterday after bouncing higher from the 1.2850 support level. There is a strong resistance level at 1.2930, a level that was tested and held yesterday. If we see a further up move today this level is likely to be re-tested with a breakout leading towards to 1.3030. Support comes at the 1.2850 rising trendline support followed by1.2780.
USD/JPY
• USD/JPY dropped yesterday, erasing the gains that were made on Tuesday. The drop found support once again at 100.80, which appears to be very strong as it has been tested every day since last week. A breakout of this support could lead towards 99.90. If 100.80 holds we could see the USD/JPY test 102.00 and 102.70 again.
GBP/USD
• GBP/USD was another gainer yesterday following the decline in the USD. There is a strong support at 1.5040. That level was tested a couple of times during the past week and after the pair failed to break through, it bounced higher. Resistance comes at 1.5200 followed by 1.5280. If we see cable drop today, support is expected at the 1.5040 level followed by 1.4920.
Gold
• Gold once again remained unchanged, trading within the $1383-1400 range. Resistance levels remain the $1400 and $1430 levels. Support levels are $1383 followed by the $1350 level.
Oil
• WTI dropped massively yesterday after the API report showed inventories rose for the fifth consecutive week to the highest they’ve been in more than 30 years. On a technical basis, the plunge came after oil failed to close above the $95.00 key level and broke below the $93.50 support level, a support level that had been holding for quite a while. Support now comes at $92.30, while the next level can be found at $90.60. Resistance is the $95.00 level followed by $96.00.
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Market Analysis 31-05-2013: EM position unwind sends EUR/USD higher
Daily Commentary 31.05.2013
The Big Picture EM position unwind sends EUR/USD higher: Position unwinding was the main theme overnight as many investors bailed out of long positions in emerging market currencies. The ZAR was the biggest loser, falling some 3% vs USD in one day! AUD and NZD, two of the commodity currencies, fell with them, with NZD/USD hitting a 2013 low. But tellingly, not all the EM currencies fell; some that have been weak recently, such as CZK, did well (+1.2%) as people got out of short positions. The position unwinding benefitted EUR more than USD as many investors were holding these positions against EUR.
It was noticeable overnight that jobless claims were higher than expected, which sent Treasury yields lower, which helped to support equities. So we have gone from last week’s positive correlation between stocks and bonds, when good economic news sent both stocks and bond yields higher, to a negative “bad news is good news” correlation, where bad economic news that implies no change in QE means bond yields lower and stock prices higher. It remains to be seen how long we will stay in this regime as the market considers the implications of a “tapering off” by the Fed, compounded by the troubles that Japan is having with its QE program. It’s also not clear what this state implies for the dollar; recently, risk on has meant buy USD, but that may not continue if the driver behind risk appetite is hopes for continued QE.
Eurozone CPI and unemployment are the big figures of the day. The market is looking for an acceleration in headline inflation in May (to 1.4% from 1.2% in April) and yet another small rise in unemployment in April (12.2% from 12.1%). The rise in inflation reduces the necessity for the ECB to cut rates or extend extraordinary measures at its meeting next week so could be EUR-positive. The UK money supply data is expected to show a modest improvement in real estate lending, but the general trend is sideways. In the US, personal income is expected to have risen 0.1% mom in April, down a bit from 0.2 in March, while personal spending is forecast to be unchanged month-on-month, vs +0.2% in March. The personal consumption expenditure deflator (PCE), the Fed’s favourite inflation indicator, is expected to be down 0.2% mom vs -0.1% in March. So far though such a low level of inflation has not raised alarms with the Fed. The Chicago Purchasing managerTs index is forecast to be right on the boom-or-bust line of 50.0, vs 49.0 in April.
The Market EUR/USD
• EUR/USD continued higher after breaking above the 1.3000 key level. New resistance now lies at 1.3075 and 1.3130 in extension, a level where we find a previous high, and the top Bollinger bands level. The pair as at the point of writing is at 1.3030 being supported by this former resistance point and its 200 days moving average. If this support does not hold then we may see the pair drop towards 1.2980 and 1.2900 if lower.
USD/JPY
• USD/JPY dropped further yesterday. Nevertheless for another session it was unable to break below 100.80 and is testing this level this morning. A breakout of this support could lead towards 99.80 and even 98.80 if we wait a bit longer. Resistance to the upside remains 102.00 and 102.70 again. Some weaker intermediate resistance is to be found at 101.35, the 20 day moving average
NZD/USD
• NZD/USD suffered major loses yesterday, reaching very near the 0.8000 psychological level. Over the past 10 sessions we have seen the pair finish the day near the 0.8060 area and yesterday was no exception. The 0.8000 is a 1 year low and if broken today, the pair should hit 0.7930. Resistance to the upside comes at 0.8170 and 0.8285 in extension.
Gold
• The lower dollar and higher jobless claims helped gold to break out of its trading range after breaking above the key $1400 resistance level and moved substantially higher. $1430 is now the next resistance to follow with the next one being at $1475, a previous peak and top Bollinger bands level. Support levels are now the $1400 psychological level followed by $1370.
Oil
• WTI was a gainer yesterday on technicals after the $92.30 support level held and bounced higher. WTI found resistance and this morning is at $93.50, a previous support level that has turned resistance now. If the up move continues, resistance is the $95.00 level followed by $96.00. Support remains at $92.30, while the next level can be found at $90.60.
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Market Analysis 03-06-2013: Rising bond yields causing risk-off reversal
Daily Commentary 03.06.2013
The Big Picture Rising bond yields causing risk-off reversal: The key theme in the markets recently has been higher interest rates as bond markets around the world start to discount the Fed’s “tapering off.” Rising yields are causing increased volatility, which is forcing investors to get out of many of their most popular trades. Hence the best-performing currencies over the last month have been the ones with the lowest interest rates, the funding currencies (JPY, CHF, EUR), while the worst performing ones have been the ones with the highest interest rates, which were the ones investors were long (MXN, AUD, NZD). EM currencies are getting particularly hit in this risk-off trend. How long it continues is anyone’s guess. The fact that speculators increased their net short position in JPY last week even while USD/JPY was strengthening suggests that investors believe the fundamentals will win out, but there’s likely to be more volatility -- and more pain in these popular trades – before it does.
After a couple of weeks without much data to chew on, we now get an onslaught. This week sees the release of the rest of the May purchasing managers’ surveys for the manufacturing and services industries around the world (and construction for a few). On Tuesday we have a Reserve Bank of Australia meeting and on Thursday we have a Bank of England meeting, the first under the direction of former Bank of Canada Gov. Mark Carney, and a European Central Bank meeting. The market is not expecting any change in stance from any of these, but there’s always a chance. Especially, Mr. Carney may want to make his mark on policy right at the start, as Bank of Japan Gov. Kuroda did. Friday we get the all-important US labor market report, which is the main driver of Fed policy and hence the main driver of markets in general nowadays.
Today’s indicators started off with China’s HSBC manufacturing PMI for May slipping below the 50 “boom-or-bust” line to 49.2 from 50.4 (expected: 49.6). That weighed on commodity prices and commodity currencies, with NZD in particular weakening further. Later today we get the manufacturing PMIs for the UK and Italy and the final manufacturing PMI for France, Germany and the EU. The forecast for the final PMIs is the same as the initial number, 47.8. In the US, the market expects the ISM index to be unchanged at 50.7. However the Fed’s regional surveys generally rebounded in May, so there is the possibility of an upside surprise that would boost the dollar.
The Market EUR/USD
• EUR/USD fell on Friday following the upward revision on the Michigan consumer sentiment index and the unanticipated jump in the Chicago PMI, which may paint a positive picture for the ISM Manufacturing PMI released today. Support came at 1.2940, with Fibonacci support currently lying at 1.2980. Initial resistance is likely to come at 1.3030, with further resistance found at 1.3075.
USD/JPY
• USD/JPY lost on Friday following the release of improved Japanese housing starts, vehicle production and construction orders, with yoy housing starts also beating expectations, driving the pair towards strong support marginally above the 100-level. The dollar gains following the release of the U.S. data did cause a rebound but resistance came at 101.30. 100.80 is likely to act as resistance and support today, with further resistance at 101.35.
NZD/USD
• NZD/USD broke down from the 0.8010 – 0.8020 area, finding strong support near 0.7930, the 61.8% retracement level of June 2012 – April 2013 rally. With the RSI and the Stochastics both in oversold level, and given the strength of this Fibonacci level, it is possible that we will see a rebound with 0.8010 and 0.8070 acting as resistance. A breakdown from the current level is likely to have the pair finding tested support at 0.7850, with support thereafter at 0.7790.
Gold
• Gold plunged from the $1423 resistance level as the dollar gained on Friday, finding support at $1385, the 23.6% retracement level of the April plunge. $1400 will probably act as a high hurdle again, despite the bullish Stochastics and RSI crossovers.
Oil
• WTI was a major loser on Friday, breaking down from $92.35, 200-day MA support before finding ultimate support at $91.30. Resistance today is likely to come in the $92.20 – 92.35 area, with further support at $90.70, as the RSI and Stochastics crossovers remain bearish, with the latter however in oversold territory.
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Market Analysis 04-06-2013: Reverse divergence
Daily Commentary04.06.2013
The Big Picture Reverse divergence: The picture in recent months has been one of European weakness and US strength, but that divergence was reversed yesterday when the final purchasing managers indices (PMIs) for Europe were revised upwards (although still showing contraction) while the Institute of Supply Management (ISM) index in the US came out surprisingly weak (indeed below the 50 “boom or bust” line that signifies expansion or contraction). The orders and production gauges fell sharply to levels consistent with moderate paces of decline in response to slower overseas and domestic demand, while the employment index was little changed at a sluggish level. The figure sent Treasury yields sharply lower, dragging the dollar down with them. Treasuries later lost most of the gains and stocks finished higher, indicating that investors didn’t think the data required any major rethinking of views, but the dollar remained lower against most currencies nonetheless.
While the ISM figures were not supportive of the dollar, comments from San Francisco Fed President Williams and Atlanta Fed President Lockhart were. These two placed slightly more importance than usual on inflation risks after the record low core PCE inflation number on Friday, but their main focus was on the impact that rising confidence would have in improving growth in jobs and the overall economy supporting a start to QE tapering soon. Lockhart indicated that he is confident enough in the recovery that a slowing in nonfarm payrolls growth below 160k a month would give him only “a little pause” rather than force a re-think. Note that these two are both generally moderate in their policy views, ranking two out of five on the Reuters “Dove/Hawk Scale.”
With even FOMC members like this thinking like this, US monetary policy is going to have a different bias than policy in other countries and USD should remain well supported. For example, the Reserve Bank of Australia today left its benchmark rate unchanged at a record low, as expected, and said that there is scope for further easing because of the benign inflation outlook. Here in Europe, analysts are looking for more easing measures from the ECB, if not this week then in coming months. Market participants may want to consider buying USD dips, bearing in mind that speculative investors probably have further to go towards reducing their extreme short positions in some currencies as shown in the weekly Commitment of Traders report from the US (see table on right).
After yesterday’s surprising PMIs, no such dramatic information is due today. Eurozone PPI for April is expected to come with another 0.2% mom decline, which would bring the yoy rate of change down to +0.2%, vs +0.7% in March. The absence of pipeline inflation pressures is not likely to change the ECB’s view, however. The US trade deficit is forecast to have widened back to a more usual level of $41.0bn in April after the sharply narrowed $38.8bn deficit in March.
In the US, Kansas City Fed President George speaks on the US economy and Dallas Fed President Fisher speaks on monetary policy. In contrast with yesterday’s Fed speakers, who had relatively low dove/hawk ratings, George rates a four and Fisher tops the league with a five. Hence today’s speeches are likely to be even more hawkish than yesterday’s, which could support the dollar by reaffirming the likelihood of some “tapering off” of QE.
The MarketEUR/USD
• EUR/USD found early morning resistance at 1.3030 following the across-the-board better-than-expected, improved, yet still contractionary Eurozone Manufacturing PMIs. A short-lived retracement to 1.2955 was the consequence of a strong US Markit Manufacturing PMI, but the more closely followed ISM reading was the lowest contractionary figure since July 2009, when the economy was recovering from its bottoming out. The negative surprise caused a breakout from 1.3030, with the pair breaking above its spike trendline that extended from its February high, finding spike resistance at 1.3110, the 38.2% retracement level of its February – March dive, before consolidating at 1.3075. The 200-day MA at 1.3030 is likely to act as an initial support today, with a disinflationary yoy Eurozone PPI weakening the euro, possibly causing the pair to find spike trendline support at 1.2985, which coincides with its 50-day MA. Resistance above 1.3075 and 1.3110 comes at 1.3160, with the RSI closing yesterday above its 1 ½ - month resistance trendline, while the Stochastic lies well into overbought territory.
USD/JPY
• USD/JPY broke down from the 100-level following the weak US ISM report, with the pair finding spike trendline support from its November rally at 98.80, before rebounding only to find yet again resistance just below the 100-mark. The pair then tracked the Nikkei down to 99.35 support. Some resistance above 100 may come at 100.35, with further resistance at 100.80. Spike trendline and lower Bollinger band support is likely to come at 99.00, with a breakdown from that level driving the pair towards 98.30 support.
AUD/USD
• AUD/USD has rebounded from 0.9540 2 ½ year low support, finding yesterday resistance at 0.9800. The expected unchanged rate announcement caused no significant movement in the pair, which experienced its major gains yesterday following the announcement of the U.S. ISM PMI. Support came at the 0.9700 reversal level with further support likely coming at 0.9650. Resistance above 0.9800 will likely come in the 0.9900 – 0.9940 area, with spike support below 0.9540 seen considerably lower at 0.9430.
Gold
• Gold continued with its uptrend as clearly seen on its 4-hour chart, breaking out from $1400 but failing to reach $1423, its 38.2% retracement level of its April crash. $1400 is a clear support level with the $1385 – 1390 acting as a likely spike support area. Resistance above the $1423 – 1431 area comes at the significant $1445 level, the 38.25% retracement level of the post Lehman Bros. gold rally.
Oil
• WTI was a major gainer yesterday, capitalising on the poor USD as the DXY lost 0.62% over the past 24-hours. The rebound from $91.30 support came following the improved Eurozone PMI figures, which weakened the dollar, with resistance coming at the 50-day MA at $93.60, after the release of the U.S. ISM reading, which caused severe downward pressures on the dollar on anticipation that the tapering off of QE may be moved into autumn, at best. Initial support comes at $92.35, the 200-day MA, with further support at $91.30, with resistance coming at $94.05 and $94.50.
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Market Analysis 05-06-2013: Mean Reversion
Daily Commentary05.06.2013
The Big Picture Mean Reversion: Yesterday was yet another day of reversing the trends of the previous day. The fear that the lower-than-expected ISM figure created on Tuesday faded and USD managed to recover against most currencies, lead by USD/JPY. That was despite a fall in US equities.
The debate over monetary policy continues. The relatively dovish (2 out of 5) Fed Gov. Sarah Raskin warned against an early tapering off, saying that the US economy needs to create many more jobs, while the relatively hawkish (4 out of 5) Kansas City Fed President Esther George said tapering off “would not constitute an outright tightening of monetary policy, but rather, it would slow policy easing" and warned against leaving policy too loose for too long. The disagreement on the pace of “tapering off” makes me more confident that if and when it does occur, the pace will be slow and its impact only gradual.
In the Eurozone, sentiment against further easing seems to be growing, which may help to keep EUR/USD in its recent range for longer. Finland's PM Katainen said that he did not think the ECB should ease policy further and that negative rates would not help credit growth in the Eurozone. The FT reports that the ECB is moving away from unconventional methods of channeling credit to SMEs and now believes that the best way to deal with the credit crunch is to ensure that the Eurozone banks are properly capitalised. Nor is there any agreement on the ECB board on where to set rates. One idea being considered is to allow the corridor between the marginal facility – the rate at which they will lend money to a bank in an emergency – and the deposit facility – the rate at which they accept excess money from a bank – to narrow. That spread narrowed last month to 100 bps, a level only equaled during the 2008 financial crash. Another possibility would be quite the contrary: to reaffirm that the corridor will not narrow any further. In that scenario, they cut the refi rate to 25 bps, a fairly meaningless move as long as Eonia is below that, and commit to keep the corridor steady in the future, which would imply that any additional rate cuts have to involve making the deposit rate negative. That would keep the threat of negative rates hanging over the market and be negative for EUR/USD.
Yesterday the Hindenburg Omen was signaled for a fourth consecutive day on the NYSE, based on the new highs and lows, the negative McClellan Oscillator and the fact we are still above the 50-day MA (new highs and lows have yet to be updated on the chart below, hence the missing red diamond). The NYSE has lost in the meantime 2.35%, shedding 4.35% from its high all-time high.
Today is a big day for data in both Europe and the US. In Europe it’s the service sector PMIs, with Markit announcing the final numbers for the EU and the EU composite final indicator. Given Monday’s surprise upward revision to the manufacturing PMIs, it would be reasonable to expect an upward revision to the composite PMI as well, which could boost EUR/USD. Then in the US we get the ADP employment report. This is closely watched despite its poor correlation with the nonfarm payrolls that come out two days later. Forecasts are for +165k vs +119k last month. For a fuller discussion of today’s indicators, please see our report at http://www.forexspace.com/forex-insights/3122/morning-forex-review-its-d
The MarketEUR/USD
• EUR/USD had a narrow trading range yesterday of less than 60 pips, oscillating around 1.3075, despite the deflationary Eurozone PPI figures. The narrower-than-expected trade deficit widened from the previous month greatly due to increased imports of consumer goods, easing fears that the rate of U.S. recovery may be slowing down and thus strengthening the dollar. The highest IBD Economic Optimism index reading in eight months also aided the dollar, with EUR/USD finding trendline support. Greater volatility is likely today in light of the Eurozone Services PMI and retail sales, with the revised GDP figures expected to remain unchanged. In the US the factory orders and non-manufacturing PMI will be followed by the ADP figures, which are closely watched in anticipation of Friday’s non-farm payrolls. Strong support for the day seems to come at 1.3030, which concentrates two intersecting trendlines and the 200-day MA, with further support coming at 1.2985, which sees the 50-day Maas well as a retracement level. There seems to be some trendline resistance at 1.3095 but stronger resistance is likely to be found at the upper Bollinger band at 1.3115 and 1.3160.
USD/JPY
• USD/JPY spent most of the past day trading within the 99.90 – 100.35 trading range. The pair is likely to experience volatility overnight as the Japanese Ministry of Finance releases data on capital flows from and to Japan, shedding light on the investment outcome of the BoJ’s policies. Strong trendline and 50-day MA support is likely to come in the 99.15 – 99.35 area, with 99.90, 100.35 and 100.80 acting as resistance. A breakdown from 99.15 may see the pair head considerably below its lower Bollinger band, towards 98.65.
AUD/USD
• AUD/USD was a major loser over the past 24-hours, breaking down from 0.9650, finding support at 0.9610 following the worse-than-expected slowdown in the Australian economy’s growth rate. Further support comes at 0.9560 with resistance above 0.9650 found at 0.9700 and 0.9750. A decrease in Australia’s trade surplus overnight may add to the downward pressures the aussie has been experiencing the past four weeks.
Gold
• Gold rebounded from its upward-slopping trendline as witnessed on the 4-hour chart. A short-lived spike to $1389 was followed by a breakout from the $1400 resistance during the Asian trading session. Spike support for the day is likely to come higher today, at the $1390 – 1395 area, with $1400 being the solid support level and $1423 the initial resistance. A breakout from the $1423 – 1431 area sees resistance at $1445 level, the 38.2% retracement level of the post financial crisis rally.
Oil
• WTI was a major gainer yesterday as well, rebounding from the strong 200-day MA support at $92.35, spiking to $94.40. Initial support for the day is likely to come at $93.50, with support below that at $92.35. Resistance levels are seen at $94.05, 94.40 and 95.50, with volatility being likely given the release of the EIA crude inventories, where the largest decrease in 8 weeks is expected.
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Market Analysis 06-06-2013: Bad news is good news?
Daily Commentary06.06.2013
The Big Picture Bad news is good news?The gyrations around the disappointing ADP report suggest that the market may be in a “bad news is good news” regime. A lower-than-expected ADP report gave rise to thoughts that the Fed might not taper off after all, which helped to reverse the “risk off” mood that had predominated before the figures because of disappointing Eurozone data and thoughts that the ECB may not offer anything to support growth today. But the cautious mood resumed shortly afterwards anyway as US stocks fell and bond yields came down. Commodity currencies were particularly hit as commodity prices fell.
The market will focus today on the Bank of England and the ECB. No change in policy (and hence no statement) is expected from the Bank of England. Yesterday’s May service sector PMI was significantly better than expected, rising for the fifth consecutive month to the highest level in a year. If it weren’t for the arrival of Mr. Carney next month, people might start thinking about a rate rise in the UK.
As for the ECB, virtually no one expects a change in either the refi rate or the deposit rate. There have been mixed messages coming from board members, many of whom appear opposed to negative rates and yet willing to consider them, perhaps as an effort not to appear doctrinaire. The comments opposing purchases of asset-backed securities have also been more vocal than those arguing in favor. Again then the focus will be on the press conference afterwards to see how the debate is going. Last month EUR/USD rose a bit after the announcement of a cut in the refi rate by 25 bps but then went sharply lower during the press conference. No change this month could push EUR/USD lower, but I would expect Draghi once again to hint that further moves are possible as they “monitor very closely all incoming information.”
Later in the day the new Bank of Canda Governor, Stephen Poloz, testifies at the House of Commons Finance Committee. It will be his first public comment since becoming BoC Governor.
The MarketEUR/USD
• EUR/USD moved lower during the European session as the Markit Services PMI, the retail sales and the revised Eurozone GDP figure came out slightly worse than expected. The pair rebounded however with the worse-than-expected ADP employment change figure, hitting resistance at 1.3115, the 38.2% retracement level of the February – March plunge. The pair shed two-thirds of those gains within four minutes, however, as the ADP figures the past year have been downward biased compared to the NFP figures, which are due tomorrow. The marginally better-than-anticipated ISM non-manufacturing PMI for the US was outweighed by the less-than forecasted, albeit improved, US factory orders, with the pair rebounding. 1.3075 is a key support level at the moment, with 1.3110 – 1.3115 being a first resistance area. Resistance thereafter comes higher at 1.3160 and 1.3200. Support below 1.3075 comes at 1.3030 and 1.3005, the 200- and 50-day MA respectively, with further support seen at 1.2980, 1.2955 and 1.2920, in a day when substantial volatility is likely in light of Draghi’s press conference following the ECB rate decision. The RSI is well and truly above its 8 week resistance trendline, but the Stochastic is at a common resistance level, although not at a record high.
USD/JPY
• USD/JPY declined throughout the day as the US released a stream of dollar-negative data. Lower Bollinger and spike trendline support came at 98.85, but resistance came early at 99.40. Support for the day looks to come in the 98.85 – 99.00 area with further support at 98.15. Resistance above 99.35 is seen typically just below the 100-mark, around 99.90.
AUD/USD
• AUD/USD was a major loser yet again as Australia’s trade surplus decreased by 95%, greatly missing expectations, with exports falling, partly due to a slowdown in China’s economic growth. Support came at 0.9430, with support thereafter seen substantially lower at 0.9350. Resistance comes at the well-tested levels of 0.9560 and 0.9610.
Gold
• Gold rebounded from $1395 support on the announcement of the poor US economic data, but yet again failed to test resistance, with resistance actually coming lower. $1400 is the clear support level for the day with a break possibly leading to a small breakdown from the upward-sloping trendline. The almost overbought Stochastics and the fact that a possible decline today will coincide with simultaneous bearish RSI and Stochastics crossovers is something that must be taken note of. Support below $1400 is likely to come at $1385, with further support at $1370. Resistance comes at $1420 and $1445, although yesterday’s high was at only $1410.
Oil
• WTI acted yet again more as a dollar-denominated asset than as a crucial commodity for the economy, gaining on the release of weak US data as the dollar depreciated. Crude shed those gains soon after however, before spiking to $94.45 resistance on the release of the largest decrease in inventories in 9 months. Support is seen at $93.50, which sees the 50-day MA and a well-tested Fibonacci level, with further support at the 200-day MA at $92.35. Resistance is likely to be seen again at $94.05 and $94.40, with further resistance at $95.50.
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
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Market Analysis 07-06-2013: Yin-yang yen
Daily Commentary 07.06.2013
The Big Picture Yin-yang yen: Using a Chinese concept to describe the Japanese currency may seem like cultural funambulism but the truth of the matter is that the yen has seen overstretching on either side. On the yang side we had a USD/JPY rally on expectations that Abenomics and the BoJ’s revamped stimulus package will consequently lead to yen depreciation in an attempt to spur inflation, driving the currency into prolonged overbought levels on both the RSI and the Stochastic Oscillator. On the yin side, we had disappointment this week about Abe’s timeline for tax cuts and deregulation reforms with Finance Minister Aso stating today that the government doesn’t have any “immediate intention” of intervening in the currency market, despite the biggest yen gain versus the dollar in three years, leading the pair to oversold levels. The decreasing speculation that the Fed will start tapering off QE over the next few months, the winding down of carry trades, and the recent plunge in stock indices globally, with the Nikkei plummeting more than 20% from the five year high it reached two-weeks ago, have weakened the dollar and boosted the yen. Yesterday’s technical breakdown from the significant spike support trendline which held since the start of the rally in November and the coinciding move below the 50-day MA and the 23.6% Fibonacci retracement level of the 6-month up move led to a series of margin calls and stop outs feeding the USD/JPY crash.
The UK visible trade deficit is expected to narrow slightly in April to GBP 8.8bn from GBP 9.06bn in March, with the total trade deficit (including invisibles) narrowing to GBP 3.0bn from GBP 3.13bn. Whether that will be enough improvement to boost sterling further remains to be seen. The simultaneous release of the BOE/GfK inflation expectations survey carries no forecast.
German industrial production for April is forecast to be unchanged mom, a decline from +1.2% in March, but this would bring the yoy rate of change up to -0.7% from -2.5%.
Undoubtedly, however, the biggest figure of the week, if not the month, is the US non-farm payrolls for May. The market is expecting similar data to last month, with surveys showing a median of +164k to +170k, with the unemployment rate holding steady at 7.5%, despite some improvement in jobless claims, which have not been matching up that well with NFP recently. The +165k NFP figure and the unemployment rate were considered good last month, especially the latter which saw a decline from 7.6% in March and the recent peak of 7.9% in January. Nonetheless some mutterings have been heard about the exceptionally low participation rate, which was in March and April at a 35-year low of 63.3%. Average hourly earnings are also expected to remain at 0.2% mom. Did people just re-submit the same forecasts for lack of any better ideas? No, average weekly hours are expected to rise a bit to 34.5 from 34.4 as the weather improved from the unseasonably cold April. Market impact from the figure can be considerable, as this is the key indicator for Fed policy; anyone with a position ahead of this number is betting that they are better at forecasting than Wall Street professionals, whose poor record at forecasting shows how difficult it is, not how bad they are at it. That said, risk seekers may want to note that the forecasts made the past 3 days are significantly different from the overall estimates. The consensus amongst 15 economists who were surveyed the past three days reveals a mean of +156k and a median of +145k, the former 5% less and the latter 11% less than the overall forecast made by all 90 economists surveyed by Bloomberg. It is left to be seen whether these more recent estimates will prove more accurate or subject to cognitive biases due to the recent stream of negative U.S. data.
The Market EUR/USD
• EUR/USD gained substantially yesterday as ECB President Mario Draghi did not announce a negative deposit rate, showing no intention to undertake such a measure in the immediate future. Moreover, he increased the Eurozone’s growth outlook for 2014 to 1.1% from 1.0%, but lowered the 2013 forecast from -0.5% to -0.6%. The improved, in-line with expectations U.S. jobless claims did not do much to help the U.S. dollar as focus at the time was on Draghi’s press conference. The breakout of key levels at 1.3160, 1.3200 and 1.3240 led the pair to major tested resistance at 1.3300, before retracing to 1.3235 support. A breakout from the 1.3300 -1.3320 resistance area sees next likely resistance at 1.3370 and thereafter at 1.3425.
USD/JPY
• USD/JPY crashed to 95.90 tested spike support, moving below its 3 standard deviation lower Bollinger band before rebounding to 97.50. Support levels below 95.90 are seen at 95.30, 94.90 and 94.40, which is the 38.2% retracement level of the November – May rally. Resistance is likely to be seen at 96.40, 97.00 and 97.70.
GBP/USD
• The pound was a major gainer versus the dollar yesterday, breaking out from 1.5410 resistance as the BoE did not go ahead with any further loosening of its monetary policy. A breakout from 1.5480 led to a rally to 1.5690 resistance, the 61.8% retracement level of the bull run that took place in the second half of 2012, which happens to coincide with the 200-day MA. Resistance now comes in the 1.5610 - 1.5620 area, which sees two coinciding Fibonacci retracement levels as well as resistance from the former channel support trendline.
Gold
• Gold gained yesterday on the volatility and the falling dollar although it is important to note that its gains were less than those of the yen, the pound and the Swiss franc versus the dollar, gaining 1.27% since yesterday morning when the DXY lost 1.31%. Resistance did come at the start of the tested $1423 - 1431 resistance area. Further notable resistance is seen at $1445, the 38.2% retracement level of the post-Lehman rally. Support comes at $1400.
Oil
• WTI was a major gainer yesterday capitalizing on the weakening dollar, breaking out from key resistance levels at $94.05 and $94.45 spiking to $95.30. Support now comes at $94.45, a tested Fibonacci level, with further support at $94.05 and $93.50, the 50-day MA.
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Market Analysis 10-06-2013: Rekindled reversal
Daily Commentary10.06.2013
The Big Picture Rekindled reversal: Friday’s 175K Nonfarm payroll gains rekindled Fed tapering off expectations, sparking a possible reversal to almost two weeks of dollar weakening. Markets were expecting around 163K to 170K gains but an increase in service sector jobs greater than the 6-month average led to a beat despite construction increases being far fewer than their 6-month average and manufacturing payrolls decreasing 8K, when a rise of 4K was expected. The negative news of an unanticipated increase in the unemployment rate from 7.5% to 7.6% was mollified as it was attributed to a surprise increase in the labour force, raising labour force participation from its 35-year low of 63.3% to 63.4%. On the negative side, however, average hourly earnings of employees came in lower than forecasted with last month’s 165k figure being revised downwards to 149k. The headline beat led to an initial overreaction, with the dollar experiencing substantial gains before retracing various portions of those gains versus the majors. The job gains kept on the table a possible Fed cut-down in its asset-buying programme but expectations place such a move late in October, reviving the stimulus-benefited U.S. stocks, with the three major stock indices gaining 1.3%.
The Commitment of Traders report for the week ending 4th of June showed significant reductions in gross short positions on the euro and the yen but given the U.S. employment report released in the meantime, the CFTC report may be seen as somewhat dated.
The French and Italian MoM industrial outputs for April are reported this morning. France is expected to show a 0.3% increase, substantially improved from the 0.9% contraction experienced in March. Italy is forecasted to see no change, halting the two consecutive months of decline, with March’s output decreasing 0.8%. The Italian public deficit to GDP ratio for Q1 is out with no forecast available.
Canadian housing starts and the UK’s RICS Housing Price Balance, both for May, are due out. Canadian starts are expected to show an increase from 174.9K to 179.1K, with UK house prices forecasted to show a second consecutive monthly increase, from 1.0% to 3.0%.
The centrist (3 out of 5 on Reuters’ Fed dove/hawk scale) St. Louis Fed President James Bullard is scheduled to give a speech in Montreal on the global economic outlook, the first speech by a Fed official since Friday’s nonfarm payrolls.
Overnight we have a series of Japanese figures. The large manufacturing business survey index for Q2, with an improvement anticipated relative to the previous quarter as fewer firms believe that domestic economic conditions are declining. The indicator is expected to move from -4.6 to -2.1. M2 money supply and certificates of deposits are due to increase YoY from 3.3% to 3.5%. The BoJ interest rate is set to remain fixed at 0.1% although there is some speculation the central bank will resort to new stimulus measures to spur growth in its attempt to generate inflation.
Overnight we also have the National Australia Bank’s business confidence and conditions for May as well as April’s home loans and investment lending for homes. Only MoM home loans come with a forecast, with a slowdown expected from 5.2% to 2.0%.
Major news this week: New Zealand’s interest rate decision is announced on Tuesday, with no one expecting a change from 2.5%. The U.K. and Australian unemployment rates, released on Wednesday and Thursday respectively are forecasted to show no change for the former and deterioration for the latter. U.S. retail sales are also reported on Thursday, with the Eurozone CPI announced on Friday; both are expected to show an increase.
The MarketEUR/USD
The mixed U.S. employment report caused substantial volatility on the pair minutes after the figures were released as the markets were absorbing the metrics trying to come to a directional conclusion. Resistance came just before the major 1.3300 level with support coming at 1.3200, and a rebound finding resistance at 1.3240.
• Resistance for the day comes at 1.3200 and 1.3230, the 50% retracement level of the February – March decline, with further strong resistance in the 1.3300 – 1.3320 area. The harami candlestick pattern, with a large white candlestick followed by a spinning top with its body within the first candle points to a possible reversal, with the bearish Stochastics crossover adding to that. Trendline support is found at 1.3160 with further support at 1.3115, the 38.2% retracement level of the aforementioned decline.
USD/JPY
USD/JPY rebounded from 94.90 support following the announcement of the NFP figure. Resistance came at 97.70 with an upward gap today driving the pair to 98.40 resistance before retracing to 97.70 following the release of a twice-than-expected Japanese current account surplus, and an upward revision in Japan’s annualized GDP from 3.5% to 4.1%, which strengthened the yen. Friday’s hammer candlestick points to a possible bottom with the RSI on the verge of moving above its 9-day MA for the first time in almost 4 weeks. That said, we need to note that the BoJ started today its two-day policy meeting, with the lack of further stimulus measure announcements tomorrow possibly placing some downward pressures on the pair.
• Support is seen at 97.70, 97.05 and 96.40 with resistance coming at 98.15, 98.85 and 99.35, the 50-day MA. Trendline resistance may be seen at 99.15, the former support trendline that held for 6 months.
AUD/USD
The plummeting of the Aussie has yet to come to an end, with the U.S. employment report retesting support at 0.9430. The higher-than-expected Chinese trade balance on account of a decrease in imports, lower-than-forecasted industrial production and the larger-than-estimated deflationary CPI (MoM) and PPI (YoY) indices for May released over the weekend led to a 90 pip downward gap.
• Resistance is likely to come at 0.9430 and 0.9485 with support found at 0.9350, 0.9290 and 0.9230, the 38.2% retracement level of the massive bull run from March 2009 to May 2011.
Gold
The precious metals plunged as the dollar strengthened, with gold losing 2% since Friday morning. The generally positive employment outlook in the U.S. leading to equity gains tainted gold’s shine.
• Support is seen at $1385, the 23.6% retracement level of the April crash, with further support at $1370. Solid resistance is likely to come at $1400 with further resistance at $1423.
Oil
WTI was a major gainer on Friday, having appreciated by 1.5% since Friday morning. The positive economic outlook generated by the more-than-forecasted U.S. job gains led to a breakout from $94.45 and $95.50 resistance with major trendline resistance, which extends from the 2008 peak, coming in at $96.40.
• A breakout from the significant resistance found at $96.40 may see 9-month long trendline resistance at $97.00, with further resistance at $97.75. Support is seen at the previous levels of $95.50, 94.45, and $94.05.
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Market Analysis 11-06-2013: Release dove
Daily Commentary11.06.2013
The Big Picture Release dove: Dovish statements by the otherwise centrist St. Louis Fed President James Bullard commemorated that all is not well with regard to the U.S. economy. His views led to an overall 0.06% decline on the DXY Index since yesterday morning, wiping out intraday dollar gains versus the euro, the pound and the franc, causing a 60 pip USD/JPY retracement, which was furthered this morning following the Bank of Japan’s decision to not loosen monetary policy further. The vote-casting FOMC member stressed that the low inflation rate experienced in the U.S. enables the Federal Reserve to maintain its asset-buying stimulus programme “over a longer time frame”, with tapering off not being warranted within a disinflationary environment that sees the inflation rate well below the Fed’s 2% target. Thus besides Bullard citing the need for improved labour market conditions, which have indeed improved over the past year, the inflation criterion was reiterated by him as a perquisite for scaling down asset purchases. Referring to the extent of the winding down, Bullard stated that the reduction in the $85 billion monthly bond buying would be of a “relatively small” amount, between $10 and $20 billion, with his preference being a cut down of mortgage-backed securities rather than Treasuries. Bullard’s dovish comments were overweighted by the markets given that this was the last scheduled public appearance by an FOMC member ahead of the monetary policy meeting on June 18th and 19th.
The day is rather light on data, with the most significant event being the German constitutional court ruling on the legality of the ECB’s Outright Monetary Transactions, which deprives German tax payers of funds for domestic purposes. An approval of the programme is largely factored in the market since this is not a first time event, however, a rejection of the ECB’s actions will likely cause major downward pressures on the euro, resurfacing comradeship issues in the Eurozone.
The U.K. today releases its April industrial and manufacturing production data. MoM industrial production is forecasted to remain unchanged with the YoY figure improving from -1.4% to -0.6%. Manufacturing production on a MoM basis is expected to contract by 0.2%, putting an end to the two consecutive months of expansion, with March’s figure coming in at 1.1%. An expected 0.3% decrease in manufacturing production is set to show a sixteenth consecutive month of contraction on a YoY basis, albeit the lowest contraction in fifteen months. The National Institute of Economic and Social Research will be releasing a GDP estimate with no forecast available.
In the U.S., the NFIB Small Business Optimism Index is forecasted to worsen for May, moving from 92.1 to 91.5. Wholesale inventories are also anticipated to show slowdown in April from 0.4% to 0.2%.
Finally, overnight in Japan machine orders for April are due to show a contraction, with the MoM figure contracting by 8.1% and the YoY by 4.3%. Interestingly the YoY domestic corporate goods price index is forecasted to show inflation for the first time in 14 months, increasing by 0.6%.
The MarketEUR/USD
The much-higher-than anticipated French industrial output yesterday caused some upward movement on EUR/USD, with the worse-than-expected, albeit three-month low, Eurozone Sentix investor confidence for June not obstructing the pair’s rally to 1.3230 resistance, which was followed by a retracement to 1.3185. Bullard’s dovish statements then led to a gain of 110 pips, causing a breakout from 1.3230, finding resistance just below the very significant resistance level of 1.3300.
• These levels still hold for the day, with very strong resistance found in the 1.3300 – 1.3320 area, with 1.3330 being former trendline support, which may have turned resistance. A breakout from this area sees next resistance levels at 1.3370 and 1.3425. Key support is at the 1.3230 Fibonacci level, with 1.3200 having acted as support and currently seeing trendline support.
USD/JPY
Early today the BoJ decided against further stimulus, sticking to its April pledge, on account of an improving economy, which yesterday showed a surprise annualised growth rate of 4.1%. The markets were to some extent expecting the BoJ to announce further purchases, particularly of real estate investment trusts, with the lack of action plummeting USD/JPY to 97.78 support.
• Resistance is seen at the similar level as yesterday, within the 99.15 – 99.35 area, with further resistance just below the 100 mark. Support will likely move higher with the 97.90 - 98.15, 23.6% Fibonacci support being followed by support at 97.05.
GBP/USD
The highest RICS housing price balance reading in almost three years had minimal effect on the pair overnight, which gained more than 100 pips following Bullard’s remarks. With the bulk of data today being U.K.-centric, on an otherwise quiet day on the indicator front, it is expected that the pound will receive overweighted attention by traders.
• Fibonacci resistance comes at 1.5610, with weak trendline resistance at 1.5650. Significant resistance is seen at 1.5690, the 61.8% retracement level of the bull run that took place in the second half of 2012, which coincides with the 200-day MA. Support comes at 1.5500, with trendline support at 1.5515.
Gold
Gold traded within a very narrow trading range, finding resistance at $1388 and support at $1375, failing to gain more than $10 following Bullard’s Wall Street Journal interview, despite the dollar losing more than 100 pips versus the euro, the pound, and the Swisse.
• Besides the $1378 - $1387 range, traders may want to note resistance in the $1400 – 1404 area, with further resistance at $1423. Support may be seen at the weak levels of $1363 and $1348.
Oil
WTI retraced from $96.40, its major trendline resistance, which extends from the 2008 all-time high, with its breakdown from $95.50 halted as the dollar started to weaken at the time Bullard commenced speaking.
• Support comes in the $95.50 – 95.70 area, which sees two Fibonacci retracement levels, with further support at $94.45, $94.05 and $93.50, the 50-day MA. Strong trendline resistances come at $96.40 and $97.00.
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Market Analysis 12-06-2013: The drawback of fungible stimuli
Daily Commentary 12.06.2013
The Big Picture The drawback of fungible stimuli:With the integration of financial markets the world of finance has moved into a state with relatively easy capital flows that are fungible. Monetary stimuli in the form of quantitative easing have increased money supply and liquidity, transforming country-specific central bank actions into global market events. The Bank of Japan’s decision to not engage in further loosening of its monetary policy, by for instance prolonging the duration of loan operations, has led to a steep decline of more than 4% on the Nikkei whilst driving the yen higher, marking its greatest gain versus the dollar since the 2011 earthquake and tsunami. The lack of further fungible stimulus, however, impacted equities around the globe with the U.S. indices shedding 1% as they are coming into terms with a possible Fed tapering off that would lift the foot off the equities accelerator. The prospect of an initial tightening of the U.S. monetary policy through a $10 to $20 billion reduction in monthly asset purchases is expected to initiate deleveraging as the action’s impact is equivalent to a 25bp increase in the benchmark rate, affecting interest rate sensitive equities, which were the most hard-hit yesterday. The markets look confused at the moment, being swung by volatility, with the JP Morgan G7 Volatility Index increasing 2.8% yesterday lying close to a 1-year high, with the VIX spiking higher by 11%, demonstrating inherent volatility in U.S. equity options as well.
Today sees the conclusion of the German constitutional court ruling on the legality of the ECB’s Outright Monetary Transactions. With the markets struggling to find direction it is likely that the news will have a bearing, with a surprise denouncement of the ECB’s actions leading most probably to euro weakness, likely causing a breakdown from resistance for EUR/USD.
The pound will receive yet again traders’ attention with the publication of the U.K.’s May employment report. The ILO unemployment rate is expected to remain steady at 7.8% with the claimant count expected to decrease by 5k, a decrease from the 7.3k reduction in April, but still a seventh consecutive month of falling claims.
The Eurozone figures for the day are the working days adjusted and seasonally adjusted industrial production for April, with both expected to contract. The former, a YoY figure, is expected to contract at a slower pace from -1.7% to -1.2%, and the latter, a MoM figure, is expected to relapse to contractionary territory, by shrinking by 0.2% when a 1% expansion was experienced in March.
In the U.S., the weekly MBA mortgage applications are due, with markets eager to see whether there will be a fifth consecutive week of falling applications. The indicator does not carry a forecast. The monthly budget statement will also be issued, with forecasts exhibiting large standard deviations. Surveys indicate a median deficit ranging from 110B to 136.5B.
Overnight sees the release of significant data. The Reserve Bank of New Zealand will make its interest rate decision, with none of the 15 economists surveyed forecasting a change from the current 2.5% benchmark rate. Moreover, the Japanese Ministry of Finance releases its weekly data of foreign capital flows, which may trigger more market movement than is usually the case given the volatility seen recently on the yen, the Nikkei and the Japanese government bonds. The BoJ Policy Board Member Sayuri Shirai is also expected to give a speech at a meeting with business leaders, which may serve as an opportunity to talk down the yen, reversing somewhat the market reaction triggered by the BoJ’s lack of further stimulus. Finally, Australia releases its employment report for May, with unemployment expected to increase from 5.5% to 5.6% as a reduction in the number of people employed is anticipated.
The Market EUR/USD
• EUR/USD gained yesterday despite Greece’s demotion to emerging country status by the MSCI, as this event was largely factored in the market by an earlier downward reclassification of Greece by Russell Investments.
• The pair currently lies within the significant 1.3300 – 1.3320 area, finding resistance at the latter, the 23.6% retracement level of the July 2012 – February 2013 rally. Significant resistance, though also comes at 1.3340, the 61.8% retracement level of the February – March plunge, which coincides with trendline and Bollinger band resistance. Weaker resistance thereafter comes at 1.3370 and 1.3425. Support is seen at 1.3300, 1.3230 and 1.3200.
USD/JPY
• The weaker than expected Japanese machine orders, which showed an 8.8% MoM reduction in this form of corporate investments for April, weakened the yen causing a rebound for USD/JPY.
• Resistance is likely to come at 96.40 and 97.05, with 97.90 being the 23.6% retracement level of the November – May rally. Support comes at 95.90, with spike support seen yesterday at 95.60. Further support levels are 95.30 and 94.90.
GBP/USD
• The better than expected U.K. industrial and manufacturing industrial production for April boosted cable, which was further assisted by the downward pressures the dollar was experiencing versus most majors.
• Resistance came yesterday at 1.5650, the former support line of the upward-sloping channel, which held from March to May. Very strong resistance comes next at 1.5690, the 61.8% retracement level of the rally that took place in the second half of 2012, with that level coinciding with the 200-day MA. Significant support is seen at 1.5610, with further support in the 1.5550 – 1.5570 area.
Gold
• Gold was unable to capitalise on the dollar’s depreciation, which saw the Dollar Index lose 0.70% since yesterday morning.
• Resistance is seen in the $1378 - $1387 former trading range with further resistance at $1400. Support comes yet again around $1363 and $1348.
Oil
• WTI plunged yesterday finding support at $94.05 before rebounding and currently retesting support at $94.45. With the release of crude inventories today the commodity is almost bound to see increased attention by traders.
• Resistance comes in the $95.50 – 95.70 area, which sees two Fibonacci retracement levels. Strong trendline resistances come at $96.35 and $97.00. Support is found at $94.45, $94.05 and $93.50, the 50-day MA.
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