14 March 2014 The Big Picture · Like a school of fish Have you ever watched a school of fish in an aquarium swimming along? Sometimes they swim along in one direction, then suddenly shift direction for no apparent reason (apparent to humans, at least). That’s sort of what the FX market has been like recently. On Wednesday the market shifted from risk-off to risk-on at about 10 AM New York time. Yesterday the market was in risk-on mode during European trading, then despite better-than-expected US indicators the mood suddenly shifted to risk-off at around 9:40 AM. Both times investors were left searching for an ex facto explanation. As I mentioned yesterday, I found it difficult to explain a shift to risk-on, but in today’s market, there’s no shortage of explanations for a shift to risk-off. Russia’s Defense Ministry announced new military operations near Ukraine while German Chancellor Merkel warned the Kremlin to change course or face retaliation. US Secretary of State Kerry said the US and EU would respond on Monday with a “serious series of steps” against Russia if the referendum in Crimea goes ahead on Sunday, as looks likely. To make matters worse, Reuters reported that many banks in China have cut loans to certain sectors with overcapacity, such as steel, shipbuilding and cement, by up to 20%. · So the “risk on” tone evaporated and the market turned to a flight to safety, which nowadays means a rush into USD. The dollar gained against nearly every currency we track, both G10 and EM, the only notable exception being JPY, which gained around 1% against the surging dollar. Oddly enough some other safe havens didn’t benefit that much; USD/CHF moved slightly higher and gold fell somewhat. This is the kind of movement I had been expecting to see. This makes sense to me in the current geopolitical and economic situation. I expect risk-off trades to dominate, with the strongest military power, the US, being the ultimate safe haven. The high-beta currencies of SEK, NOK, and AUD seem particularly vulnerable while JPY is likely to be the main beneficiary, given that CHF can only rise to the extent that EUR rises, and EUR isn’t likely to rise too much (see next paragraph). · EUR/USD was depressed somewhat by comments from ECB President Draghi, who seems to have become increasingly concerned about the level of the currency. Speaking in Vienna, he said that the currency’s strength was “becoming increasingly relevant in [the ECB’s] assessment of price stability”. He argued that the ECB’s forward guidance would push down real interest rates, presumably by raising the expected level of inflation. That would narrow the gap between real interest rates in the Eurozone and elsewhere and thereby depress the value of the euro. This echoed comments by ECB Executive Board Member Cœuré, who signalled earlier that the ECB would ease policy if real interest rates remained at current levels. Draghi perhaps is concerned that the market didn’t get the hint from last week’s ECB press conference, when he mentioned that the exchange rate is “very important for growth and price stability,” particularly in this case because a high euro puts downward pressure on prices. With such verbal intervention, I expect that it will be difficult for EUR/USD to break through 1.40 and see it moving somewhat lower, particularly if the action in Europe’s eastern backyard starts to heat up. · The calendar is relatively light during the European day. The UK trade deficit is forecast to have widened to GBP 2.2bn in January from GBP 1.0bn in December. Germany’s final CPI for February is also coming out. · In the US, the PPI excluding food and energy is forecast to have slowed to +0.1% mom in February from +0.2% mom in January. Nonetheless, this would bring the yoy rate up to +1.4% from +1.3%. The University of Michigan preliminary consumer sentiment for March is expected to be marginally up to 82.0 from 81.6. · Two speakers from the Riksbank are scheduled on Friday, the Governor and Deputy Governor. EUR/USD · EUR/USD fell after ECB President Mario Draghi said that the Bank is monitoring the euro gains for deflation risk. The pair fell back within the channel after trying to break the upper boundary, and is once again below December’s highs of 1.3893 (R1). The MACD is back below its signal line, while negative divergence is identified between the study and the price action. Thus we may experience further declines, perhaps a challenge of the 1.3810 (S1) support. Nonetheless, the structure of higher highs and higher lows remains in progress and since the rate is trading within the upward sloping channel, I consider the decline as a corrective wave, at the moment. · Support: 1.3810 (S1), 1.3770 (S2), 1.3715 (S3). · Resistance: 1.3893 (R1), 1.3965 (R2), 1.4000 (R3). EUR/JPY · EUR/JPY collapsed as tensions in Ukraine increased. The pair is back below the 141.25 barrier but the fall was halted by the 61.8% retracement level of the 3rd – 7th March advance and the 200-period moving average. I adopt a neutral stance · For now since the rate is above the blue trend line and a dip below the low of 139.15 (S1) is needed to turn the short-term outlook negative. · Support: 139.15 (S1), 137.55 (S2), 136.20 (S3) · Resistance: 141.25 (R1), 142.35 (R2), 143.80 (R3). GBP/USD · GBP/USD moved significantly lower after failing to overcome the 1.6700 (R1) bar. The pair is back near the key support of 1.6600 (S1), which coincides with the 38.2% retracement level of the 5th – 17th Feb. rally, and the 200-period moving average. A fall below 1.6600 (S1) may extend the correction towards the 50% retracement, near the 1.6520 (S2) support. In the bigger picture, as long as the rate is trading above the long-term uptrend (light blue line), I consider the major upward path to remain intact. However, a decisive break above the highs at 1.6820 (R3) is needed to confirm the resumption of the larger uptrend. · Support: 1.6600 (S1), 1.6520 (S2), 1.6465 (S3). · Resistance: 1.6700 (R1), 1.6760 (R2), 1.6820 (R3). Gold · Gold moved in a consolidative mode, remaining below the 1375 (R1) resistance barrier. A clear close above that hurdle may pave the way towards the next bar at 1395 (R2). Nonetheless, since the RSI exited its overbought territory, further consolidation or a pullback cannot be ruled out before the longs take control again. On the daily chart, the precious metal remains supported by the 200-day moving average, increasing the possibilities for further advance. · Support: 1360 (S1), 1354 (S2), 1332 (S3). · Resistance: 1375 (R1), 1395 (R2), 1415 (R3) Oil · WTI moved in a narrow range, remaining near the near the 98.00 (S1) support, the 50% retracement of the 9th Jan. – 3rd Mar. uptrend and the 161.8% extension of the width of the failure swing mentioned in previous comments. A clear dip below that support area may target the 61.8% retracement of the 9th Jan. – 3rd Mar. uptrend which coincides with the 200% extension of the pattern’s width, near the support of 96.50 (S2). The RSI exited its oversold conditions, while the MACD, even though in its negative zone, crossed above its trigger line. As a result, an upward corrective wave before the bears prevail again is possible. · Support: 98.00 (S1), 96.50 (S2), 95.00 (S3) · Resistance: 100.75 (R1), 103.25 (R2), 105.00 (R3). Have a good day,
Posted on: Fri, 14 Mar 2014 08:15:23 +0000
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