04 March 2014 The Big Picture · Ukraine dominates markets The economic news yesterday was mostly positive, but the markets werent paying attention to economics – politics and the drama unfolding in Ukraine were the main focus of trading. Better-than-expected purchasing managers’ indices from Europe did nothing to support European stock markets, which were down a sharp 3% overall. Similar out performance in the US ISM index did not impress investors; 10-year Treasury yields fell 4 bps and Fed Funds expectations for 2016 were down 3.5 bps nonetheless. Yet the dollar gained against most currencies despite the lower rates, perhaps because European yields were down even more (10yr Bund yields -7 bps) as money flowed out of stocks and into bonds. · Looking at the last time there was such an event – Russia’s incursion into Georgia in 2008 – the dollar gained against most currencies then, too. It’s natural when military uncertainty arises that the strongest military power should be considered the safest of the safe havens. On the other hand, it’s notable how the safe-haven JPY and CHF are not rallying. USD/JPY was effectively unchanged during the European and US days yesterday, then actually moved higher in Tokyo trading this morning as Tokyo stocks gained modestly and Bank of Japan Gov. Kuroda said there is “momentum” spurring the yen carry trade. It could be that the Japanese authorities are getting uncomfortable as USD/JPY approaches 100 again and want to ensure that it stays above that level. As for CHF, that was even less likely; EUR/CHF actually moved higher on the day, which is not at all what one would expect with the market moving into risk aversion. Nonetheless, the action in CHF is also what happened when Russia went into Georgia in 2008. USD/JPY moved lower on safe-haven flows then but USD/CHF moved higher, in line with other currencies. We will have to wait for the data to see what role the Swiss National Bank might be playing in these moves. I expect the SNB’s intervention will make JPY a better safe-haven play than CHF, although USD may be the best of all in this case. · RUB was fairly steady after the central bank hiked interest rates “temporarily” by 1.5 percentage points. There was apparently considerable intervention, estimated at around USD 10bn. The other Eastern European currencies however lost very much, such as PLN and HUF. There is no doubt some contagion as investors pull out of Eastern European equity funds and EM equity funds in general, hitting other, smaller markets as well as Russia. This too is consistent with what happened in 2008, when the other Eastern European currencies fell by more than the RUB. They should rebound eventually as the decline is not due to any inherent problem of theirs, but for now they are hostage to events outside their control. · The turmoil in Ukraine seems to have stopped the upward momentum in EUR/USD, and with good reason: the troubles there have the capacity to affect the EU much more than the US. Europe depends on Russia for 30% of its gas supply. About half of these imports, or 15% of total EU gas supply, is transported through Ukraine. Any interruption would be quite disruptive, although so far there flows have not been reduced. Things could be worse; we are past the peak winter demand period and gas storage levels across Europe are unusually high thanks to the mild European winter. Nonetheless, it’s quite reasonable that EUR/USD should have more of a risk premium given what’s going on. I would expect the pair to move lower. · As for other markets, Ukraine is also a major agricultural producer and consequently any disruptions to the country’s exports could affect the global supply of crops such as corn (3rd largest exporter) and wheat (6th largest exporter). · Elsewhere, AUD gained modestly against the dollar on a higher-than-expected building approvals number, but lost some of the gains after the RBA statement said that the currency “remains high by historical standards.” I remain bearish on AUD. · During the European day, the UK construction PMI for February is expected to have fallen to 63.2 from 64.6 in January and Eurozone’s PPI is estimated to have fallen 0.1% mom in January from +0.2% in December. This will push the yoy rate lower to -1.3% from -0.8%. · In the US, the Senate Banking Committee holds confirmation hearing on Federal Reserve Board Nominees · We have five Speakers on Tuesday’s schedule. Former Federal Reserve Chairman Ben Bernanke, former US Treasury Secretary Lawrence Summers and South Koreas central bank Governor Kim Choong Soo speak to the Global Financial Markets Forum in Abu Dhabi. Richmond Fed President Jeffrey Lacker speaks at the Council for Economic Educations economic summit and Bank of England Deputy Governor Jon Cunliffe speaks on the euro-area crisis. EUR/USD · EUR/USD moved lower and is once again below the 1.3770 level. The possibility for a higher low near the 1.3715 (S1) support still exists, but considering the negative divergence between our momentum studies and the price action, also a bearish engulfing candlestick formation on the daily chart, I would keep a neutral stand for now. A clear dip below the previous low at 1.3650 (S2) is needed to confirm a reversal in the short-term uptrend. On the upside a rebound near 1.3715 (S1) would confirm a higher low and may target once again the 1.3810 (R2) hurdle. · Support: 1.3715 (S1), 1.3650 (S2), 1.3560 (S3). · Resistance: 1.3770 (R1), 1.3810 (R2), 1.3893 (R3). USD/JPY · USD/JPY moved higher yesterday after finding support at the 101.25 (S1) barrier. The rate is now trading slightly below the resistance of 101.75 (R1). Nonetheless, the structure of lower highs and lower lows upon the dip below the lower boundary of the triangle remains in progress. As a result, I would consider the recent advance as a corrective wave before the bears prevail again. The MACD, although in its bearish territory, seems ready to cross above its signal line, thus further retracement should not be ruled out. On the daily chart, a clear move below the 100.80 (S2) support may signal the completion of a failure swing to the downside and have larger bearish implications. · Support: 101.25 (S1), 100.80 (S2), 100.00 (S3) · Resistance: 101.75 (R1), 102.30 (R2), 102.70 (R3). EUR/GBP · EUR/GBP moved in a consolidative mode, remaining between the 200-period moving average and the support at 0.8220 (S1). Both our momentum studies follow upward paths, while the MACD lies above both its trigger and zero lines. However, I would expect any further advance to be limited near the longer term uptrend line (light-blue line). As long as, that trend line is not broken, the longer-term downward path remains intact, but only a clear dip below the strong support of 0.8167 (S2) would signal its continuation. · Support: 0.8220 (S1), 0.8167 (S2), 0.8080 (S3). · Resistance: 0.8285 (R1), 0.8340 (R2), 0.8390 (R3). Gold · Gold moved higher and managed to overcome the highs of 1345 (S1). I still expect the price to challenge the resistance of 1360 (R1), where a clear violation may trigger further extensions towards the next hurdle at 1376 (R2). Both our momentum studies crossed above their resistance lines, confirming the recent momentum of the precious metal. On the daily chart, the price remains above the 200-day moving averages, increasing the odds for the continuation of the uptrend. · Support: 1345 (S1), 1310 (S2), 1290 (S3). · Resistance: 1360 (R1), 1376 (R2), 1395 (R3) Oil · WTI moved higher but the advance was halted by the 105.00 (R1) resistance. The outlook of WTI remains to the upside since the price is still printing higher highs and higher lows above both the moving averages and the blue trend line. However, since the RSI lies within its overbought territory, ready to cross below its 70 barrier, I would expect a pullback, perhaps to test the 103.25 (S1) barrier as a support this time. On the daily chart, the subsequent advance upon the completion of a double bottom formation remains in effect. · Support: 103.25 (S1), 100.75 (S2), 98.85 (S3). · Resistance: 105.00 (R1), 108.15 (R2), 110.75 (R3). This morning’s comment mentions carry trades in relation to JPY. The JPY is a favourite funding currency for carry trades. Word for the day: “carry trade” · A carry trade is the purchase of an asset that pays a high interest rate financed by borrowing money at a lower interest rate. In currencies, it means buying a high-yielding currency against a low-yielding currency (such as buying the Turkish lira, TRY, which yields 11.5% a year and selling the Swiss Franc, CHF, which has a negative yield of -0.05% a year). · Carry trades are widely used in the FX markets, but they are not risk-free. See the attached sheet for more information Have a good day. Kind Regards, Lucky
Posted on: Tue, 04 Mar 2014 07:40:58 +0000
Trending Topics
Recently Viewed Topics
© 2015