Markets are trading in a lethargic manner as participants continue to nervously take on risk-correlated trades. The move toward risk is logical because without the massive sovereign crisis fear hovering over the market like the Sword of Damocles, one needs to consider the fundamentals - particularly monetary policy, as the core driver. Overall, the rate at which central banks are mopping up excess liquidity has been slower-than-expected with the BoE and Fed still discussing the potential for further QE.
In this era of ultra-low policy rates, risk taking will be encouraged. In the past few days, we’ve seen Eurozone sovereign spreads narrow considerably, the VIX index is trending lower along with decreased FX volatilities and global equity markets have demonstrated a resilience to bearish news. If corporate earnings come out strong, this could be the start of a summer rally, however we’re not so sure. Our view is that the fears surrounding sovereign risk may have subsided for the time being, but will most likely return this fall.
Even with the recent stint of positive news, foreboding signs are on the horizon. The Fed’s Beige book released yesterday reported that the US recovery remained on track but has begun to actively slow. The notion of a US slowdown was reinforced by recent US data, including yesterday’s durable goods figures.
In New Zealand, the RBNZ raised its policy rate 25 bps to 3.00% as we had predicted and the accompanying statement asserted that future growth prospects had deteriorated considerably. Traders rapidly paired down their interest rate expectations which in turn weighed on the NZD.
Governor King’s comment seemed to slam into the sterling market, which was curious because his remarks were really nothing new or original. He recommended caution over reading too much into the strong Q2 GDP figures and reaffirmed that inflation remained finely in check. Paul Fisher stated that the global outlook had weakened and David Miles resonated with the most dovish view of all – that inflation would taper off and the current ultra-loose policy was correct.
The combination of all these comments hit the GBP value like a sledge hammer. It wasn’t until Sentance’s hawkish comments that the “current policy setting was extreme” that some sanity was regained in the FX market.
We are convinced that the market is now underestimating the strength of the UK recovery and that the current downtrend in inflation will flat line and then begin to move higher. The BoE interest rate path should give GBP a boost in the mid-term.
Otherwise, there’s a frenzy of data to be released during the European session today and after that it’s onto corporate earnings. We will continue to use equity market activity as a compass for FX directions. Correlation remains particularly high between the EURUSD and S&P and should thus be traded accordingly.
Today's Key Issues (time in GMT): 07:30 SEK Jun retail sales, +0.6% m/m EXP; prior +1.6% m/m, +2.7% y/y. 08:00 EUR GER Jul unemployment rate, 7.6% sa EXP; prior 7.7%. 08:00 EUR GER Jul unemployment, nsa and sa; prior 3.153 mln, 3.23 mln. 08:00 EUR GER Jul unemployment - change, -10k sa EXP; prior -21.0k. 08:00 EUR ITA Jun wages, +2.6% y/y EXP; prior +0.1% m/m, +2.5% y/y. 08:30 GBP Jun consumer credit, GBP300 mln EXP; prior GBP331 mln. 08:30 GBP Jun mortgage appl/loans, 49k/GBP1 bln EXP; prior 49.81k/GBP1.184 bln. 08:30 GBP Jun money supply; prior unch. 09:00 EUR Jul business climate index, 0.39 EXP; prior 0.37. 09:00 EUR Jul consumer sentiment index, -14.0 EXP; prior -17.0. 09:00 EUR Jul economic sentiment index, 99.1 EXP; prior 98.7. 09:00 EUR Jul industrial sentiment index, -5.0 EXP; prior -6.0. 09:00 EUR Jul services sentiment index; prior 4.0. 12:30 USD Initial jobless claims, thous (4wma) 24-Jul 23:01 GBP GfK consumer confidence survey, bal Jul
EurUsd We’ve had another day of tight range trading in EURUSD, and for the time being there is a ceiling of resistance at 1.3046 that is blocking the path higher. We are still playing the bullish break out of a symmetrical triangle pattern on the hourly chart, and based on the projected path of that triangle we are expecting a move to 1.3290 in the coming days. Once we clear 1.3046, the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support just below at 1.2940 –should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then eye technical levels below at 1.2793 (23 Jul low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd There were a few hairy moments yesterday for GBPUSD as BoE’s King hit the newswires to downplay the significance of the latest GDP reading, but tellingly the temporary sell-off was met with eager buyers clambering to get in on this impressive GBPUSD recovery, and the pair has since pushed to fresh highs of 1.5655. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5385 to get long. The way things have gone so far, we may not even get a correction that deep as decent support is also anticipated around the 200-day moving average at 1.5545, 1.5525 pivot, then again at 1.5443 (yesterday’s low). Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, and beyond there we open up the possibility of re-testing the top of the 8-week uptrend channel (currently at 1.5950) before the psychologically significant 1.6000.
UsdJpy USDJPY may have slumped in a rather ungainly fashion back below 87.50 in the past few sessions, but the pair is at the very least continued carve out successively higher highs and higher lows since the double bottom around 86.25 levels. The last rally (which topped out at 88.11) was thwarted by a pretty formidable confluence of resistance levels (8-week downtrend resistance, top of 1-week uptrend channel and 88.00 pivot), but we still believe the bulls can overcome these barriers on a subsequent re-test now they are more comfortably spaced out. The 8-week downtrend has now crept down to 87.90 while the top of the current uptrend channel has climbed to 88.25; however thereafter few levels are discernible ahead of our triangle target 88.85. Should the rally have the momentum to continue beyond there, look for sellers at 89.15 (12 Jul high) and 89.50 (28-29 Jun high). The most convincing support level to try getting in on the long trade appears to be the lower edge of the 1-week uptrend which is now seen at 87.10-15 (already had one test of that area this morning), then further supports anticipated at 86.82 (Tuesday’s low) and 86.25 (recent range floor).
UsdChf Despite the bullish engulfing candlestick on Monday/Tuesday of this week AND the important break of the 1-month downtrend channel, the bulls have looked lacklustre in the past 24 hours and have sloppily allowed the 1-week uptrend to break down around 1.0560. This conclusively negates the bullish flag pattern we had proposed yesterday, and seems compelling argument to move to the sidelines for the time being on this one and wait for more favourable risk-reward trades to present themselves. Buyers should be able to catch the fall if it extends to 1.0450, and an extremely important support still remains at 1.0400 so we would look to resume buying down at those levels. Strong selling interest may once again cap rallies at 1.0640-47 (13 Jul & 27 Jul highs and 200-day moving average), and given the propensity of July/August markets to be directionless and range bound, we would actually look to sell at those levels rather than look for a continuation higher. IF the bulls manage to pull their fingers out and effect that break higher, a powerful resistance level around 1.0700 is backed up but the top of the 1-week uptrend at 1.0710.
(Reuters) - The economy kept growing overall in recent weeks, but unevenly and it actually slowed in a few regions as housing markets softened after the end of a popular tax break, the Federal Reserve said on Wednesday.
The U.S. central bank's latest Beige Book summary of national conditions, based on information before July 19, said activity "continued to increase, on balance" though Cleveland and Kansas City said business held steady.
"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently," the Fed said.
The Beige Book reports on conditions in all 12 districts that are part of the Federal Reserve system and carries a high degree of credibility because it is based on interviews and anecdotal information from coast to coast.
The latest report, compiled by the St. Louis Fed Bank, covers seven weeks from the previous Beige Book in early June and painted a picture of less-than-robust recovery.
While manufacturing continued to expand in most districts, activity had slowed or leveled off in New York, Cleveland, Kansas City, Chicago, Atlanta and Richmond.
That fit with a report issued earlier on Wednesday by the government showing that new orders for costly manufactured goods unexpectedly dropped in June -- a second straight monthly fall that pointed to waning momentum in the factory sector.
Retail sales -- a gauge of consumers' economic participation -- were generally higher but modestly so.
"Several districts cited apparel, food and other necessities as recent strong sellers, while big-ticket items were weak sellers," the Fed said.
Most districts said new-car sales were declining and housing markets were sagging.
"Activity in residential real estate markets was sluggish in most districts after the expiration of the April 30 deadline for the homebuyer tax credit," the Fed said, referring to a now-expired $8,000 credit offered as an encouragement for first-time home buyers.
There was a modest improvement in labor markets, with several reports of temporary hiring. Consumer prices held steady in most parts of the country while wage pressures were described as "contained."
(Reporting by Glenn Somerville; editing by Andrew Hay and Jan Paschal)
Risk correlated trades had a strong showing yesterday as banking stocks rallied and concerns over the inadequacies of the Stress Test dissipated. The USD lost ground to both the GBP and EUR while longs in JPY and CHF were equally cut. Risky trades continued to benefit throughout the trading day in spite of US Consumer confidence data coming in negative. We especially like the appreciation we saw in sterling. We suspect there has been a fundamental shift in GBP prospects due to the sturdy GDP reading last Friday and we anticipate further upside to sterling in the near-to-mid term.
Asian equity markets are having a roaring day and the positive effects are spilling over into European indexes. We are seeing other encouraging signs as VIX dropped below its 200-day moving average and Gold continues to come under heavy selling pressure. There has been a noticeable lack of 1st tier economic data and we are cautious in accumulating too much risk just yet. These are the dog days of the trading summer – as such, low liquidly and inconsistent participants will continue to be as important as real data.
During the Asian session, the big news was the disappointing Australian Q2 CPI reading which came in well below markets expectations. The market was quick to shift rate hike expectations from August to later in the fall (ACM expects a November hike). The AUDUSD dropped like a rock to .8923 from .9020 in response to the release. With the inflation rate now within the RBA’s 2-3% target, markets now pricing in a late fall hike. The large AUD interest rate differential will further erode, which in turn will lend added support to currencies like CAD and NOK. Look for CAD & NOK to gain in the near term.
We are still highly constructive on the global economy and suspect commodities prices to trend higher which should give AUD a boost against the USD. With all the excitement around AUD, the CPI watchers will now be turning their gaze toward New Zealand.
In NZ, July business confidence and activity outlook surveys showed a significant deterioration from the June results. Analysts are in unanimous agreement that the RBNZ will raise the OCR 25 bps to 3.00% at its policy meeting tonight. Market and media interest will be focused on the accompanying statement released with the rate hike. Although recent NZ CPI readings have come in lower-than-expected, the markets are still pricing in roughly 75 bps worth of hikes between now and the year’s end.
We believe that the RBNZ statement will sound slightly more dovish, signaling a minor shift in interest rate trajectory as policy makers prepare for a global economic slowdown later this year. The sudden adjustment in rate path should translate into short-term NZD weakness, especially against the AUD.
As for today, US Durable Goods data is due to be released as investors continue to look for directional signals for the US recovery. The Fed’s Beige Book will likely reflect recent data softness.
Today's Key Issues (time in GMT): 00:00 EUR GER Jul HICP - prelim, +0.2% m/m, +1.1% y/y exp; prior unch, +0.8%. 07:00 EUR ESP Jun retail sales; prior -1.9% y/y. 08:45 GBP BoE Gov King, other MPC member testimony before Parliament. 10:00 GBP Jun Land Registry house prices. 12:30 USD Jun durable goods orders, +2.9% m/m exp; prior -0.6%. 12:30 USD Jun - ex-transport, +1.0% m/m exp; prior +1.6%. 18:00 USD Fed Beige Book release. 18:30 USD Senate vote on Fed nominees 21:00 NZD RBNZ interest rate announcement, % 3.00% exp, 2.75% prior
EurUsd The symmetrical triangle pattern on the hourly chart is still very much in play, and thus far we have seen a couple of nudges through the 20 Jul high at 1.3028. We are long from the original break above 1.2950 (there was even the re-test of that level yesterday which we suggested as a chance to add to longs) and expect the triangle to yield a target in the region of 1.3290. At present the bulls are steadying themselves above 1.3000 so further progress has been somewhat laboured; the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support at 1.2905 –but should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then expect technical levels below at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd GBPUSD continues to march unwaveringly higher, making easy work of the tangle of technical resistance levels between 1.5525-75 (15 April high, 200-day moving average and 23 Feb high) and going on to touch 1.5627 this morning. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5350 (coinciding with a recent pivot level) to get long, and set a stop through 1.5300. Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, then only uptrend resistance (currently at 1.5905) before the psychological significant 1.6000. Supports now seen below at 1.5525, 1.5450 and 1.5350.
UsdJpy Finally, a breakout from the 86.25 –87.75 range; and as expected, this has occurred on the topside –in the process activating a double bottom pattern we proposed earlier in the week. Given the depth of the two troughs we should therefore anticipate a target around 88.85, and after this morning’s break above the significant 88.00 pivot level, that now seems an extremely attainable goal. Sellers may still hinder progress up through the remaining trendline resistance around 88.45 but then the next discernable levels are all beyond our target; 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Adding conviction to our view is the bullish engulfing candlestick carved out on the daily chart which suggests the bears have become overwhelmed and further upside is likely. Dips back towards the 87.75 breakout level will likely meet good bids, with the supports below there at 86.82 (yesterday’s low) and 86.25 (recent range floor).
UsdChf The bulls finally got a better grip on USDCHF yesterday, and not only managed to take out the stubborn 1.0565 resistance level, but then to print a bullish engulfing candlestick on the daily chart. We now see a fresh bullish flag pattern possible on the hourly chart which would suggest that on a break above 1.0620 we should go long and aim for a target around 1.0770. Standing in our way before that would be yesterday’s high 1.0640 (roughly coinciding with the 200-day moving average at 1.0644), the top of the 1-week uptrend channel at 1.0685, then the major 1.0700 level. Bidders are very likely to lurk around 1.0565 where the old resistance level once stood, then 1.0450and 1.0400.
Just as the stress test advocates were getting ready to declare Friday’s results a success due to a selloff in USD and rally in equity markets, we then ran right into a summer whipsaw.
The broad majority of G10 currencies sharply reversed their brief trends with today’s European open. Yesterday’s wave of risky asset investing lacked any solid drivers, so the momentum was bound to falter. Commodities continue to trade well (the exception being Gold) as Crude Oil continues to test the top part of its ranged resistance at 79.50. Commodity currencies should continue to be supported and could even receive a decent push in the near-term. AUDUSD traded about its 200 day moving average for the first time since May, while EURUSD traded about 1.3000. However given the frivolous nature of the current low-liquidity trading environment, we suspect the tide will change again.
The markets did view the stress tests as a minor positive, as slightly increased transparency is always good, sovereign bond spreads only tightened slightly. The tests failed to truly address the concerns of the market, especially because some EU banks refused to disclose their sovereign debt holdings. Due to several German banks refusing disclosure, German yields were pushed higher.
On a side note, Basel III announced yesterday that the members had come to a historic agreement to tighten capital requirements and start worldwide liquidity & leverage rules. Most likely, they’ll reduce some of their proposals while postponing others.
FX markets should settle into a period of consolidation this week as a lack of economic data will hinder any large decision making processes.
EurUsd The symmetrical triangle pattern we highlighted in yesterday’s report now appears to have become activated by the break above 1.2950, so we have gone long and now set our sights on a target above at 1.3290. The market is being somewhat choppy and directionless this morning, so should we pare back some gains and get a re-test of the 1.2950 break-out area we feel it would be a great opportunity to add to longs (or for those who missed the initial break-out to jump onboard). Next resistance is expected to exert its effect at 1.3028 (20 Jul high) and 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). With the 1-month uptrend very much still in play we expect buyers to step in ahead of trendline support at 1.2965 with more technical levels seen at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd GBPUSD’s revival has continued in the past 24 hours, with the 15 Jul high of 1.5473 becoming the latest technical landmark to be conquered by the bulls as the pair has marched on to the heady heights of 1.5530 not seen since February. For now, the quick peek above 1.5525 (15 Apr high) has only been brief, and indeed the pair has tumbled rather ungracefully back down to 1.5470 levels this morning. But we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel (now seen at 1.5315) to get long. The 1.5350 pivot does come in just ahead of the trendline today so we set a limit order around 1.5360 with a stop through 1.5300 (the back side of last week’s downtrend). For now we feel the cluttered net of technical resistance above will cap this leg of the rally between 1.5525-75; this zone contains not only the 15 April high as previously discussed, but also the 200-day moving average at 1.5554 and 23 Feb high 1.5575. Should we be wrong and the pair instead capitulate through uptrend support, next levels eyed below are at 1.5125 (last Wednesday’s low), followed by 1.5080. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080.
UsdJpy Although USDJPY and JPY-crosses have been broadly supported since the release of the bank stress tests and the much better than expected US housing data yesterday, we remain locked in the same range between 86.25 –87.75. Our bias is certainly for USDJPY to go higher in the medium term so focus on the price action approaching the range ceiling at 87.75, and for now there is still a possibility that a break above there could signal a double bottom pattern on the hourly chart. Should this be the case, we would be looking at a target above at 88.85. Before that destination, sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Obviously, until the break-out higher materializes we should still respect the range-trading environment that prevails, where 82.80 currently provides an intra range support and the range floor around 86.25 still looks robust having caught two previous sell-offs on 16 & 22 Jul.
UsdChf The bias on USDCHF in the short-term is bullish, but barely! The potential bullish flag pattern we noted on the hourly chart yesterday did not even activate (due to the failure to break above 1.0560) and now the slump back towards 1.0460 seems to have written off the possibility of this pattern being valid later on. Support should be readily forthcoming around 1.0450, with added buying interest below at 1.0425 (where the back side of the former downtrend now comes in). For now, 1.0565 is growing into a major ceiling of resistance limiting the upside, but should we manage to break above there, next levels expected at the 14 Jul highs 1.0618 and the 200-day moving average at 1.0641.
The substance and meaning of Friday’s Stress test results are still be hotly debated. Financial pundits are putting enormous emphasis on the European open as the barometer of the market’s sudden confidence in the results. We are still unconvinced about the stress tests and doubt that a single market open/trading day will create the directional rush some participants are looking for. FX markets initially took on risk in Asia but the gains were quickly eroded.
Seven of the EU banks, out of a total of 91, failed the stress test. The test did not find any troubled institutions in countries such as Italy and Portugal and just one in Greece. Of the banks that did fail, they only needed to 3 million Euros to meet their Tier-1 capital ratio of 6%, quite a low figure for major banks. The EU’s widespread denial of the possibility of a sovereign default is vexing to analysts, but it’s understandable from a political and market stability standpoint.
Overall, if the purpose of this test was to gauge the probability of a sudden bank collapse in the EU, than it misses the mark. We maintain the view that Europe’s problems are largely structural and thus no test will address these problems. The macroeconomic assumptions used in the adverse scenarios were not very difficult nor believable. Ireland’s GDP growing 1% is not an emergency scenario.
Markets will continue to watch LIBOR and credit-default swap spreads carefully as well as the equity markets’ reactions – especially to see which banks come under heavy selling pressure.
The Euro’s strength is limited as domestic growth prospects will diminish as the austerity measures kick in. Global growth is still decelerating and the credibility of the single currency has been damaged in recent years. In addition, we have our eye on the Swiss Franc to outperform across the board. The Swiss version of the stress test, released Friday prior to the EU test, was more rigorous and comprehensive. With the added scrutiny, market participants can be confident in Switzerland’s banking sector. We suspect capital will continue to flow from Europe, into Switzerland, as investors seek out a safe haven for their assets.
We are still very impressed with the UK growth figures released last Friday. Q2 GDP figures came in well ahead of expectations at 1.1% q/q and 1.6% y/y, ahead of the 0.6% q/q & 1.1% y/y expectations. While PMC member Posen has raised the question of further QE to prevent the UK’s economy from taking another dip, we are leaning more to the views of Sentence that inflationary pressure needs to be tackled now. We will be watching for the opportunity to go Long sterling, especially in the EURGBP.
Today’s final thought is on the Yen. There has been a noticeable lack of rhetoric surrounding its recent strength. The current government coalition believes that markets themselves should set prices, even though there has been no noticeable erosion in exports (June exports increased a whopping 27.7% y/y). This week’s June CPI will be in negative territory and we believe it’s only a matter of time until Japanese rhetoric begins and we see the Yen lose ground.
Today's Key Issues (time in GMT): 07:30 SEK Jun trade balance; last SEK2.7 bln surplus. 07:30 GBP Details of UK financial supervision reform. 14:00 USD Jun new home sales, 335k AR eyed; last 300k. 00:00 PLN Interest rate announcement, % 3.50 exp/prior
EurUsd Well, the European stress tests were just as underwhelming as expected, so for now EURUSD’s short-term uptrend remains intact and the markets look pretty directionless this Monday morning. Our gut instinct is that the medium-term direction for this pair will be lower, but in the short-term we would be willing to play this one either way depending on the outcome of a potential symmetrical triangle pattern now visible on the hourly chart. The lower edge of the triangle coincides with the short-term uptrend line, so a break below that support (currently 1.2825) would be the signal to go short with a target below around 1.2480. Given that target is some distance away, supports on the downside are a potential hazard at 1.2793 (Friday’s low),1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). Should the bullish triangle scenario play out instead then we need a break above 1.2950 to trigger long entry, and eye a target above at 1.3300. Next resistance is expected at the 100-day moving average 1.2874, 1.3028 (20 Jul high) and 1.3093 (10 May high).
GbpUsd After the false break of the 6-week uptrend last week GBPUSD has bounced emphatically higher, and impressive UK GDP figures on Friday has catalysed the rally further to highs of 1.5501. In doing so, the pair has now surpassed the 15 Jul highs at 1.5472 and is now expected to make a move on the more significant 1.5525 (15 Apr high). Above there lies yet more technical resistance (namely the 200-day moving average 1.5558 and 23 Feb high 1.5575) which should stall the rally on the first visit, but beyond there the skies are clear for a run on 1.6000. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080.
UsdJpy The bearish flag pattern we had been tracking last week has now decisively been dead and buried by the move back above 87.50, and if anything we look to be carving out a range between 86.25 –87.75. At current levels towards the upper end of the range, the most attractive strategy is to sell some and await a return to 86.50ish levels, but ensuring we keep a tight stop on the topside to keep the risk/reward ratio manageable. There is a possibility that from here, a break above that range ceiling (87.75) could indicate a double bottom chart pattern has been activated, and if so, we should be getting long there and aiming for a target above of 88.85.Sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf Finally, someone told the bulls about the break of the 3-week downtrend channel and we managed to get a bullish engulfing candlestick pattern on the daily chart to finish the week; it only took about 3 days... The decisive burst higher on Friday afternoon hit a peak of 1.0564 but progress has been halted by resistance coinciding with the 19 Jul highs, so for now the pair is now consolidating above 1.0500. We see a potential bullish flag pattern on the hourly chart that suggests a break above 1.0560 should be taken as the signal to go long, with a target on the topside around 1.0715; however we think buying on a dip to 1.0500 (the lower edge of the flag) also represents decent value with 1.0450 likely to offer some protection below. Only resistance levels above to be wary of are the 14 Jul highs at 1.0618 and the 200-day moving average at 1.0640.
The amount of nervous energy in today’s FX market has already translated into some choppy, range-bound trading. The source is obviously the impending release of the EU bank stress test due to be issued at 16:00 GMT.
Today, German IFO data came in much stronger than expected spiking the EURUSD 40 pips rallying up to 1.2965. In the back of our minds, we remember that torrent of support risk-correlated trades gained on the release of the US stress test despite the market’s criticism then. Nevertheless, we remain unconvinced that today’s risk appetite will receive the same boost.
The EU stress test lacks the rigor of the US test and has lost enormous credibility based on the handling of the assignment. Swiss regulators highlighted this fact when the FT reported that they had conducted their own bank stress tests which were twice as stringent. The FT reported that the Swiss regulators conducted 13 different mega-risk scenarios including the collapse of the credit market and a drastic fall in GDP. I would suspect that investors will look at the Swiss test and feel kind of slighted when the actual EU tests & methodology are released.
As we have yet to see the actual report, the assumptions we’re making are based solely off official statements and newswires, thus we may be proved incorrect. The most important factors for the release will be the credibility of the results, the transparency of information and the explanation of all assumptions made during the research.
According to the most recent reports, all vital banks (read: too big to fail) will pass including Germany’s Landesbanken and all Greek banks. If all Greek banks are set to pass this test, something must be awry somewhere. To create the illusion of authenticity, the EU may throw a few minor banks under the bus. There are still significant EURUSD shorts lingering in the market and if the report is truly first-rate, we could see some heavy short covering and quickly.
In the UK this morning, the Office for National Statistics released their first estimate for Q2 GDP. The numbers came in much stronger than expected at +1.6%, exceeding the +1.1% consensus among economists and a -0.2% previous reading. The surprise number significantly decreases the probability of further QE by the BoE. Although an entire strategy cannot be based off one data point, the BoE’s MPC will most likely focus more on inflation and less on growth in future meetings. Perhaps Mr. Sentence, the lone dissenter in the last meeting, may not have been too far off base after all.
Finally, the ECB’s Trichet suggested that fiscal tighten was necessary around the globe and should not be delayed. The comment is in direct contrast to the Fed’s view that some level of stimulus was still required, a point just reiterated by Bernanke this week. We don’t expect any reaction in the USD, but it will be interesting to monitor because strict fiscal policy compounded by loose monetary policy should be extremely supportive for the underlying currency.
Today's Key Issues (time in GMT): 07:30 EUR ITA Jul consumer confidence index, 103.9 exp; last 104.4. 08:00 EUR GER Jul Ifo sentiment index, 101.6 exp; last 101.8. 08:00 EUR GER Jul Ifo current conditions index, 101.7 exp; last 101.1. 08:00 EUR GER Jul Ifo expectations index, 101.6 exp; last 102.4. 08:00 EUR ITA May retail sales; last -0.3% m/m, -0.5% y/y. 08:30 GBP Q2 GDP - prelim, +0.6% q/q, +1.1% y/y exp; last +0.3%, -0.2%. 08:30 GBP Jun BBA mortgage lending data 16:00 EUR Stress Test results for individual banks expected start 17:00 EUR CEBS press conference regarding Stress Test results
EurUsd We may have written EURUSD off prematurely yesterday as our short trade at 1.2790 was thwarted by the bulls managing to break back within the 4-week uptrend channel. Fortunately, leaving a tight stop just above the trendline around 1.2830 shielded us from being dragged all the way back up to 1.2933 highs, but it has somewhat dented conviction in our short-term bearish view (the medium-term bearish view still prevails). Not only does the break back inside the uptrend signal that the bulls are not quite done, but there is also a bullish engulfing candlestick on the daily chart which also suggests the bears are lacking the energy to do much about it at the moment. We are currently toying with the 100-day moving average at 1.2881 but next resistance levels on the topside are expected at 1.2933 (yesterday’s peak), 1.3028 (20 Jul high) and 1.3093 (10 May high). The lower edge of the 4-week uptrend now comes in at 1.2830, but should there be another break below there we would once again attempt a short with a view to re-visiting 1.2733 (yesterday’s low), and 1.2683 (14 Jul low) in extension.
GbpUsd Yet another currency pair to give us the head-fake this week, GBPUSD’s break below its 6-week uptrend touched a low of 1.5125 before rebounding sharply back up towards 1.5350 resistance (19 Jul high). This 1.5350 level still poses a difficult challenge for the bulls to overcome, especially as 1-week downtrend channel resistance comes in just ahead of there at 1.5340; but should they manage to push it higher then look for next resistance up at 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Next support is that lower edge of the 6-week uptrend at 1.5250; but if the trend breaks lower once more then first stop on the downside will be 1.5125 (Wednesday’s low), followed by 1.5080. Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949.
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past few sessions, but the bulls failed to capitalize on the upside break and the pair is has since tumbled back towards major support at 1.0400. Until we get a decisive break out one way or another –either below 1.0400 or above the downtrend resistance 1.0470 –we are likely to be confined to achingly tight ranges. Those who favour buying on dips should only do so around 1.0400, as the landscape below 1.0400 is dotted only with stale support levels at 1.0365 and 1.0230. Sellers are likely to step in back up towards 1.0450 former pivot, aforementioned downtrend channel resistance at 1.0470, then 1.0560 (19 Jul ) highs.
Risk appetite was pared down during the Asian session as investors chose to focus on Fed Chairman Bernanke’s dovish comments. Bernanke's semiannual report to Congress basically reiterated the position reported in the FOMC minutes and policy speeches. However, the markets seemed to have latched on the words “we recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed." That statement sent a rush of capital back to recent safe havens in the US dollar, Swiss Franc and Japanese Yen. Just as USD, CHF and JPY all received their boost, US yields & equities dropped like a stone with 10y yields falling 10bp as the chairman spoke.
As Europeans sat down at their collective desks this morning, the merits of the stress test are now being hotly debated. The chasm emerging between proponents and opponents is considerable. On one side are EU officials who believe everything will be repaired by this magical report and on the other side is the real market, which remains overall skeptical and unconvinced. For those that have been reading our reports for the last two weeks, we firmly remain in the skeptical camp. One of the CNBC anchors summed up our opinion best when speaking to a Greek finance official declaring that “if Greek banks pass, the stress test fails.” The increased dialog surrounding this issue is obviously due to the proximity of the data release, further amplified by the Wall Street Journal’s report that EU officials are looking to publish the results before tomorrow’s European open rather than at its close.
This begs the question, if the regulators haven’t even cemented questions regarding the distribution of their report, how confident can we feel in their thoroughness in analyzing complex balance sheets? The uncertainty and debate still surrounding this report is caustically eroding confidence. We still hold that the stress test will not provide the transparency needed, will not build nor shore up confidence in the EU and will leave us with more questions than answers.
In the UK, BoE MPC minutes revealed a 7-1 vote in favor of an unchanged policy rate with Andrew Sentance being the lone dissenter…again. The committee further voted unanimously to hold the QE program unchanged at £200 bn. There was a discussion of increasing QE easing, however no member actually voted for the move. BoE Governor Mervyn King still believes that inflation will continue to ease as growth is expected to deteriorate a bit further. Given these developments, we suspect the sterling will continue to come under selling pressure as the risk is now skewed towards policymakers opting to hold rates steady longer than the market currently expects.
Over the past few days, CAD remains the relative outperformer in the FX market. Canadian retail sales and their Monetary Policy Report are due out today and we believe that growth expectations will continue to be adjusted to the upside - giving the CAD even further support.
Today's Key Issues (time in GMT): 08:30 GBP Jun retail sales, +0.5% m/m, +1.0% exp; last +0.6%, +2.2%. 09:00 EUR May ind new orders, unch m/m, +20.2% y/y exp; last +0.9%, +22.1%. 13:30 USD FOMC Chair Bernanke semi-annual House testimony 14:00 EUR Jul consumer confidence index; last -17. 14:00 USD Existing home sales, mn saar 5.20 exp 14:00 USD Leading indicators index, % m/m Jun -0.3 exp 15:00 ZAR South Africa: Interest rate announcement, % Jul 6.50% 14:30 CAD BoC Monetary Policy Report.
EurUsd As the credibility of the European bank stress tests is put up to increasing scrutiny, the bears continue to pile the pressure on EURUSD; and in the last 24 hours we have seen the 3-week uptrend channel break down, leading to a low of 1.2733. From here the risk-reward profile strongly favours short positions, so we would look to use the back side of that 3-week uptrend as a good entry level for shorts; that trendline resistance is seen at 1.2790 currently, so we’d be happy getting in around there and setting a stop just above 1.2830 (yesterday’s US session high). First destination on the downside will be the 14 Jul low 1.2683, although it’s worth noting that today that level coincides with a very short-term downtrend support so the pair will likely bounce off there on the first attempt. Ultimately we see this bearish trend eventually taking another look at 1.2522 (13 Jul low) and 1.2483 (2 & 6 Jul lows), and very possibly a further extension back towards 1.2000. Should the bears relent enough for the pair to break back within the uptrend channel at 1.2790, expect further selling interest to lie around 1.2840 (support-turned-resistance from earlier this week), the 100-day moving average 1.2887, and 1.2925.
GbpUsd After a choppy and indecisive few days trading, we feel GBPUSD is gathering momentum for a move lower –a view based on yesterday’s break below the significant 6-week uptrend and reinforced by a bearish engulfing candlestick on the daily chart over the last 2 days of this week. We now look to sell around 1.5200 levels –the back side of the 6-week downtrend seen at 1.5210 –and await a return to 1.5125 (yesterday’s low). Further downside is highly possible but likely to become laboured below 1.5125 as trendline support is currently seen around 1.5110 and a significant former pivot level remains at 1.5080.Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949. The risk-reward profile does look a little edgy should we break back above the uptrend at 1.5210, with next resistance not seen until 1.5350 (19 Jul high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high).
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past 24 hours, but as of yet the bulls have failed to capitalize on the upside break and the pair is continuing to stutter around the trendline resistance. We are still short at 1.0530 from yesterday’s trade recommendation (taking the view that a lack of directional impetus from either the bulls or the bears made it a prime range-trading environment) and are looking at a first target of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
(Reuters) - Japan's Nikkei average inched down 0.2 percent on Wednesday, weighed down by worries about a stronger yen and doubts over the U.S. economic recovery as the market awaited events later this week, including the results of European bank "stress tests."
While charts suggest recent falls in the Nikkei may be coming to an end, a number of lackluster U.S. indicators including Tuesday's housing starts are keeping investors wary, with few willing to actively buy before Japanese earnings pick up steam next week.
New U.S. home construction hit its lowest level in eight months in June, further evidence that the U.S. economy lost momentum in the second quarter, but a rise in building permits offered hope of a pickup in homebuilding.
"We still can't rule out the possibility that some speculative moves ahead of events -- the bank 'stress tests' this week and U.S. jobs data -- will shrink risk-money, leading to a stronger yen," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
"Given doubts over the U.S. economic recovery, if something like that were to happen the Nikkei could fall to just above 9,000."
The results of the stress tests, both the aggregate outcome and those of individual banks, will be released on Friday.
The market is also waiting for Fed Chairman Ben Bernanke's twice-yearly testimony before Congress on Wednesday and Thursday, with investors looking for any comments that could boost speculation about more monetary accommodation -- speculation that helped boost Wall Street on Tuesday.
The benchmark Nikkei fell 21.63 points to 9,278.83, after eking out small gains in early trade. The broader Topix slipped 0.4 percent to 829.35.
The dollar fell 0.5 percent to 87.10 yen, staying near a 7-month trough of 86.27 yen struck on EBS last week, as fears about a slowing U.S. recovery prompted investors to cut long positions in the greenback.
Market players say support for the Nikkei likely stands firm at 9,200, just under its July 1 close, which was a seven-month closing low. After that, support lies around 9,091, a low hit this month, and 9,076, a low posted in November 2009.
Orders placed through foreign brokers prior to the open showed that foreign investors were net sellers for the second day in a row, with some saying selling by foreign investors of financial shares weighed on the market.
Shares of Nomura Holdings Inc, Japan's top brokerage, were down nearly 4 percent after the Nikkei business daily reported on Monday that smaller rival Daiwa Securities Group likely suffered a loss in April-June, as financial market turmoil stemming from the Greek debt crisis took its toll.
Daiwa shares were down 3.5 percent on Wednesday.
On the technical front, in a sign that recent drops, which saw the Nikkei lose 1.8 percent last week, may be coming to an end, the Nikkei's MACD has narrowly avoided a bearish cross and appears to be leveling out.
Its slow stochastic -- a measure of how oversold the market is and whether it is in a short-term up or down trend -- continues to fall, but now is deep within oversold territory.
Resistance is strengthening at the level of the Nikkei's 25-day moving average around 9,600. The 25-day moving average is a proxy for a one-month moving average and closely watched in Japan.
Trade picked up on the Tokyo exchange's first section, with 2 billion shares changing hands, its highest volume in a week.
Declining shares outnumbered advancing ones by nearly 3 to 1.
EARNINGS IN FOCUS
Expectations toward earnings were a main driver in the market.
Shares of Nomura lost 3.8 percent to 455 yen and Daiwa fell to 363 yen.
The brokerages will report their results next week.
Shares in Pasona Group lost 5.8 percent to 53,900 yen after the staffing service firm forecast a drop in annual profit on Tuesday, citing tough employment conditions and an expected decline in orders in its outplacement services segment.
Earlier the stock fell to 53,000 yen, its lowest in nearly 14 months.
But Sapporo Holdings climbed 2.3 percent to 393 yen after the Nikkei business daily said the brewer is likely to report an operating profit of more than 1 billion yen ($11.4 million) for the January-June half, beating previous expectations of a loss of 500 million yen.
That compares with a 1.3 billion yen profit posted in the same period the year before.
Shares of electronics firm Omron sped up its decline to end the day 3 percent lower after news that workers at its southern Chinese factory have gone on strike, demanding a 40 percent pay increase.
* Risk rally stalls, more downside likely * EU bank stress test results are keenly awaited * UK Inflation debate may be fuelled * Bank of Canada Rate hike expected * Key data and events to watch next week
Risk rally stalls, more downside likely
Risk assets (stocks, commodities, JPY-crosses) started out the past week on solid gains, but ultimately failed to overcome key resistance levels. In stocks, the fact that 20 out of 23 US earnings reports beat expectations and shares could not advance should be alarming. In reality, though, it should also have been expected--as the outlook for the US recovery continued to slide, the future outlook for stocks was undermined (and earnings are mostly backward looking indicators anyway). The market is still in the process of adjusting to a more sluggish 2H 2010, with US assets bearing the brunt at the moment, but we also think there is more to go in re-pricing for a slower global recovery.
In terms of price levels, the S&P 500 failed below the key 1100 psychological level and the bottom of the Daily Ichimoku Cloud around 1095, keeping the downside focus intact. A bearish engulfing line on the daily S&P candlesticks also highlights downside risk ahead. WTI crude oil prices never even managed to test the recent highs just below the $80/bbl area, and finished down on the week. EUR/USD topped out at the 61.8% retracement of the April-June decline, which came in at the psychologically significant 1.3000 level. The USD index extended losses below the daily cloud, but may have found a base above the key 82.00 level, just above the weekly cloud top at 81.90. AUD/JPY, the closest correlated FX pair to stocks, was rejected from the daily cloud up in the 77.30/78.30 area, mirroring the same S&P failure. Lastly, the commodity currencies have shown renewed signs of weakness against the USD, and they are frequently a leading indicator for broader USD-based moves, suggesting USD weakness may be set to reverse.
Over the course of the past week, several key correlations broke down in the short run, but other more meaningful correlations persisted. The major anomalies were in outsized EUR gains, followed closely by GBP, and extreme USD weakness. We look at EUR and GBP strength as mainly the result of another wave of short-covering, similar to what occurred in the middle of May. In this respect, we would note the outsized gains in EUR/AUD, EUR/CAD, GBP/AUD, and GBP/CAD. If it were a case of pure USD weakness, those crosses would not have seen such gains, reinforcing our view that this was a position-driven adjustment. Anecdotally, the break above the 1.2750/2800 area was heavily stop loss driven. Also, according to recent correlations, a weaker USD should have boosted stocks, oil and gold, but clearly that didn't happen either.
Taking a step back and looking at the bigger picture, US weakness undermines the prospects for the global recovery overall. From that view, many of the market moves in the past week make more sense: oil and stocks lower on slowing global outlooks; JPY-crosses lower on heightened risk aversion over the deteriorating outlook; and JPY and CHF strength on safe haven flows. We think the bulk of EUR and GBP short-covering has likely occurred and we are leery of chasing those currencies higher. Anticipating that increased risk aversion may eventually lead to the USD rebounding on safe haven demand, we would prefer to be sellers on remaining strength in EUR/USD between 1.3000-1.3150 and in GBP/USD between 1.5400/5530. The likely more reliable way to trade expected further risk pullbacks would be to sell JPY-crosses, especially AUD/JPY, CAD/JPY and NZD/JPY on remaining strength.
EU bank stress test results are keenly awaited
The first results of the EU bank stress tests are due on July 23. Credit analysts have been busy drawing up lists of which banks are likely to have failed; if the tests are to be perceived as credible then failures are considered to be inevitable. In contrast, the tone of many European officials has been confident. The Deputy Spanish Finance Minister Campa has said that Spain “can only win” from the publication of the tests, Bank of Italy Governor Draghi has stated that the stress tests will demonstrate that the capitalization of Italian banks is well above minimum levels and Bank of Ireland Governor Honohan has stated that Irish banks have already been through more severe tests. The IMF’s Strauss-Kahn has concluded that there will be some small institutions that will have to be refinanced. The official rhetoric along with a decent result to the Spanish bond auction and Greek bill sale this week has supported the EUR. Clearly the EUR may come under pressure if the stress tests bring many casualties. It could also be sold if the stress tests produce too few failures, as the tests will be seen as providing insufficient transparency to the interbank market. There could be a thin line where the results appear to be relatively agreeable and the EUR can derive support. However, having reached EUR/USD 1.300 already, upside potential for the EUR could be running dry.
UK Inflation debate may be fuelled
The debate on whether inflation pressures are building in the UK intensified a month ago when it was revealed that MPC member Sentance had voted for a rate hike at the June policy meeting. Since then Sentance has maintained his hawkish view although the CPI release has shown a fall in the headline rate and labour data has brought a moderation in the growth rate of earnings. The publication of the FOMC minutes this week re-opened the possibility that the Fed may ease policy again before it hikes. While this prospect cannot yet be dismissed in the UK, market expectations are favoring a policy tightening in the UK ahead of the US and this possibility has allowed for a better tone in cable in recent sessions. Sterling could find additional support on the back of the Q2 advance GDP report in the week ahead, which is expected to show relatively good growth. The impact, however, is likely to be short-lived given prevailing concerns that the UK growth rate will stutter in H2 on the back of the government’s austerity measures. The old range high of cable at USD.15525 is likely to offer decent resistance, a break below the USD1.5230 level may suggest additional losses are in store. Bank of Canada Rate hike expected
On Tuesday July 20, the Bank of Canada meets to decide on interest rates. We agree with the market consensus for a second consecutive rate hike of 25bps to 0.75% as recent economic data out of Canada supports policy tightening. A look at the jobs report underscores this as 93.2k jobs were added in June, more than 4 times analysts’ expectations. To put this in perspective, a proportionate number in the U.S. (whose economy is about 10 times larger) would be the creation of roughly 930,000 jobs. That is an impressive number and keep in mind that higher employment propels the economy forward. There has been some discussion that the BOC may tighten more aggressively, however we do not agree with this view. As inflation remains subdued there is no apparent need for more aggressive tightening. Year over year CPI is currently 1.4% which is below the 2% target inflation rate and the bank recently projected core inflation at or below 2% through 2012. In their forward looking guidance, policy makers are likely to take a cautious tone given the concerns over the Euro zone and slow down in global growth highlighted by a softening demand in commodities. More detailed thinking can be expected in Thursday’s Monetary Policy Report. Key data and events to watch next week
The calendar in the US is modestly light in the week ahead. Housing numbers kick off the week with the July NAHB Housing Market Index and continues into Tuesday with June Housing Starts and Building Permits. The data slate for Thursday sees weekly Jobless Claims, June Existing Home Sales, and June Leading Indicators. Fed Chairman Bernanke will deliver the semi-annual monetary policy out look to the Senate Banking Committee on Wednesday.
Eurozone data is relatively light but significant with a heavy emphasis on the aggregate EZ results of the bank stress tests on Friday. May Euro-Zone Current Account data is scheduled for Monday as is May Construction Output. No further data is scheduled until Thursday when PMI Composite, Services, and Manufacturing Output Indexes are to be released. Thursday wraps up eurozone data releases for the week with May Industrial New Orders and Euro-Zone Consumer Confidence. In Germany, Tuesday sees June Producer Prices with July PMI Manufacturing and PMI Services surveys to follow on Thursday. Friday closes out the data week with the July IFO Business Climate Index.
A moderate week of data lies ahead in the UK with June Public Sector Net Borrowing, June Mortgage Approvals, and the July CBI Optimism Index on Tuesday. Wednesday will have the Bank of England Minutes followed by June Retail Sales figures on Thursday. Friday wraps up the UK data session with the advance estimate for Q2 GDP.
Data out of Tokyo is light with May Leading and Coincident Indexes to be released on Tuesday. There is significant event risk though as BOJ intervention cannot be completely dismissed with USDJPY trading at current levels.
Canada begins a significant week of data with the Bank of Canada Rate announcement on Tuesday. Expectations are for an increase of +0.25% to 0.75%. Up next are May Wholesale Sales and May Retail Sales due out on Wednesday and Thursday. Friday wraps up the week with June CPI and Bank of Canada Core CPI set to be released.
The calendar down under begins with the release of the RBA minutes from the July meeting on Monday and continues with the Q2 NAB Business Confidence survey on Wednesday. Thursday wraps up the week with Q2 Import and Export Price Indexes.
Yesterday, the Euro was able to shrug-off Moody’s downgrade of Portugal with the buttress of a well-received Greek debt auction – the positive move was even further resistant to yesterday’s positive run in US equity earnings. As a result, EURUSD climbed quickly and was able to break the 1.2700 threshold. Nevertheless, we are not convinced that this rally has any real legs, as liquidity has been poor and leveraged buyers seem to be the core participants driving the EURUSD higher. We suspect the thaw in investor concern will not be as quick or smooth as many talking-heads posit. We do anticipate a sudden reversal in risk appetite but suspect the catalyst will likely be an inconsequential figure such as the underperformance of a bank’s earnings or some other, otherwise minor event.
In Asia, regional indexes grabbed onto the positive sentiment and charged higher with the Nikkei up 2.71%, aided by Intel's earnings and Singapore's strong GDP growth. The BoJ’s two-day policy meeting began today with analysts universally expecting the central bank to hold rates steady. We are still interested to see if the BoJ will release details pertaining to its stated desire to see bolstered lending from banks to the broader economy. The Yen continues to be influenced by the finicky nature of global risk appetite – yet should rating agencies shift their focus onto Japanese fiscal imbalances, we could see JPY strength quickly unwind. It’s our core belief that the sovereign rate crisis radar will eventually target Japan in the mid-term. Mid-to-long term, we are looking for opportunities to the sell the JPY.
In the United Kingdom, the BoE’s MPC Sentance continues to rattle his inflationary saber. Today in an interview with the Reading Post, he stressed and affirmed that “a gradual withdrawal of some of the stimulus" is necessary for future UK economic health. Market participants are re-evaluating whether or not there is some merit to the lone dissenter’s arguments as English CPI came in higher-than-expected at 3.2%.
Today’s key events are US retail sales and the release of the FOMC minutes. For retail sales, we suspect that the data will disappoint to the downside as fiscal stimulus wears thin and US labor markets fail to convincingly recover in the right places. The minutes should contain some fresh Fed forecasts for the US/global economy. Given the adjustment in recent statements, we believe that the Fed will lower 2010 growth expectations and give recognition to the elevated and resistant unemployment rate. Both events would be significantly negative for risk-correlated trades – something which just could be the EURUSD catalyst we’re looking for (and if not we always have China's data tomorrow, including CPI).
Today's Key Issues (time in GMT): 00:00 JPY BoJ Policy Board begins meeting (to July 15). 00:00 Basel Committee to discuss global bank capital rules. 00:00 France: Bank holiday 08:30 GBP Jun claimant count, -20k exp; prior-30.9k. 08:30 GBP May avge weekly earnings, +3.0% exp; prior +4.2%. 08:30 GBP May ILO unemployment, 7.9% exp; prior 7.9%. 09:00 EUR May ind production, 09:00 EUR Jun HICP, unch m/m, 09:00 EUR Jun ex-F/E, unch m/m, 12:30 USD Retail sales/ex-autos -0.1% exp; -1.1% prior 14:00 USD Business inventories, % m/m 0.2% exp; 0.4% prior 18:00 USD FOMC June 22-23 meeting minutes.
EurUsd Yesterday’s better than expected Greek debt sale and ensuing risk rally was the kiss of death for our short EURUSD positions, and after ripping through our stop just above the Monday night highs of 1.2615, the pair then went on to take out the week’s high of 1.2650 and then to a peak of 1.2739. This price action now conclusively negates the potential head and shoulders pattern on the hourly chart that we discussed yesterday, and instead lays the foundation for a possible bullish flag pattern in the very short-term. Should this new pattern be confirmed by a break above 1.2735, we can expect an upside target in the region of 1.2950. We are however wary that some residual selling pressure may lurk around 1.2750 and these July markets can be notoriously rangey, so ideally we’d like to see a breakout hold above 1.2750 to bolster our conviction. Once 1.2750 is conclusively overcome, the skies above are very clear for a move higher, with very little resistance before 1.3000 (perhaps the only anticipated level being the 100-day moving average 1.2930). Until that break-out however, the bias seems skewed to a fresh visit to the downside; next supports seen around 1.2690, 1.2600 and 1.2522.
GbpUsd After initial joy that GBPUSD was squeezing back up towards its 1.5080 break-out level yesterday morning (thereby giving the latecomers a second chance to get in on the short trade), the higher than expected UK CPI soon turned that joy to pain by ramping the pair up past the 1.5230 resistance, even tickling a high of 1.5259. Thus far, the brief nudges at the former 1-month uptrend have failed to break above there, but should the sellers eventually step aside, next resistance is not expected until 1.5390 (30 Apr high) and 1.5525. Next support is eyed at today’s European low 1.5190, 1.5080 former neckline, then the 12 Jul low 1.4949.
UsdJpy We’re still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since Monday morning’s promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering between 88.00 –89.00 for much of the last few sessions. As we foresaw on Monday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.20, so we may end up having to settle for a slightly lower take-profit level should this latest attempt at the highs fail to overcome considerable resistance around 89.00-10. Should the move have the momentum to burst through the 1-month downtrend, next resistance beyond lies at 89.50 (28-29 Jun high), 90.50 (50-day moving average), and 90.75 (25 Jun highs and 200-day moving average). Nearest supports expected at 88.00 then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this week the 1-/2-week downtrend finally broke to the topside with a surge up to 1.0676. Thus far, the broad USD sell-off has failed to push USDCHF back within that downtrend channel (trendline support now 1.0520), so we retain a cautiously bullish stance. Buying on dips towards 1.0550 now looks to be the smartest choice this week, targeting a revisit of 1.0700 levels, with resistance ahead at 1.0650 (yesterday’s high) and once again at the 1.0676 high. Down below, support lies at 1.0628 (200-day moving average), 1.0515-20 (13 Jul low and trendline support), then 1.0480 (8-9 Jul lows).
Markets continue to trade at their unhurried summer pace with no signs that we’ll encounter any directional momentum today. The highlight of yesterday’s trading day was the BoE MPC Posen addressing comments advanced by S&P regarding the UK’s cherished AAA sovereign rating. S&P asserted that UK debt levels were approaching levels incompatible with their AAA rating. Posen later addressed fears that the UK could fall back into economic recession and further warned that recent austerity measures across the EU could weigh on the UK’s fragile recovery.
Should the UK government fail to develop a concrete strategy, the nation’s risk-free rating could be in jeopardy – something we’ve seen quite a bit of in the EU. As can be expected, the GBP has come under noticeable selling pressure. Sterling continues to struggle with the market’s shifting views on the inflationary path set by the BoE holding rates low and steady for an extended period of time. The ill-timed comments by S&P just exacerbated GBP selling mostly due to apprehension already present in the marketplace.
In the near term, we expect GBPUSD to be sold on any rallies as MPC members fail to follow Sentence’s call to raise rates and the fact that sovereign debt fears will likely cloud any positive developments.
In the Eurozone, recent ECB data demonstrated that the central bank only purchased €1 billion worth of Eurozone bonds as part of its Securities Market program. The figure represents a significant deceleration in bond intervention and potentially signals a quazi-return to normalcy. Portugal was downgraded today by Moody’s to the A1 level with a “stable” outlook for the future.
Fitches holds Portugal 1 notch above A1 while the S&P relegates the small nation 2 levels below. While the “stable” outlook should calm markets, the initial knee-jerk reaction sent the EURUSD down 25 points. Portugal’s growth is likely to remain weak until structural reforms are implemented and effective.
Lastly, Greece is due to auction off €1.25bn of its own debt today on the open market. Should the rate close below 5%, this would be a positive sign of returning investor confidence and broadly Euro positive.
EurUsd We are still short EURUSD after the rising wedge formation was activated last week (around 1.2650), and thus far the sell-off has played out nicely to touch a low of 1.2543 (albeit a brief touch). As discussed in yesterday’s report, we set a target for this break out at 1.2510-20 (to give some cushion ahead of the 1.2483 support where the pair bounced on 2 & 6 Jul), but there is now good cause to expect further downside is possible. Looking at the hourly chart, there is a head and shoulders pattern being carved out with a neckline approximately 1.2550 (7 Jul low 1.2553), so we would actually look to add to longs on an hourly break below there. The target for this pattern (measured as the height of the head applied to the point of the breakout) should be 1.2390, however given this is only a few pips shy of the 50-day moving average (1.2387) and behind the psychological support 1.2400, not to mention the scene of some previous highs in the last week of June, we would happily take profits early around 1.2420. Should the pair bounce off the neckline on the first attempt, resistance is eyed at 1.2614 overnight highs, 1.2650, 1.2722 (Friday’s high), then 1.2937 (100-day moving average).
GbpUsd After plunging to lows of 1.4949 early in yesterday’s European session (9 pips short of the bearish break-out target), GBPUSD squeezed all the way back up towards its former range floor of 1.5080 –fantastic news for those who left for the weekend early on Friday and missed the break-out first time around. We have added to shorts back up there, and thus far the bearish strategy is paying off well. As noted yesterday 1.4930-40 is a very manageable first target, with further downside easily possible.Next support is eyed at yesterday’s low 1.4949, 1.4874 (1 Jul low), with another cluster of support around 1.4850-55 (23 & 25 Jun lows), and the 100-day moving average 1.4983. Sellers will almost certainly appear again back towards the old range floor of 1.5080, and once again at the back side of the former uptrend 1.5170.
UsdJpy We’re still long USDJPY from the double bottom break-out that took place around 88.20, but there has been frustratingly slow progress since yesterday morning’s promising JPY weakness. The high this week remains 89.15 (a mere 25 pips from our 89.40 target), but the pair has been meandering around the mid-88s for much of the last few sessions, with 88.35-40 acting as a supporting area of buying interest in the interim. As we foresaw yesterday, the delay in reaching our target at 89.40 has now allowed the 5-week downtrend to creep onto the horizon at 89.35, so we may end up having to settle for a slightly lower take-profit level depending on how the price action plays out. Should the move have the momentum to burst through the 1-month downtrend next resistance beyond lies at 89.50 (28-29 Jun high), and 90.61-76 (resistance zone containing the 25 Jun highs, 50-day and 200-day moving averages). Nearest supports expected at 88.20 neckline, 88.00, then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this morning’s rally looks to threaten the 1-week downtrend channel. Significantly we have managed to take out resistance clustered around 1.0580 that represented the neckline of a possible double bottom, and now the skies are clear for a revisit of 1.0700 levels. Buying on dips towards 1.0580-1.0600 now looks to be the smartest choice this week, but watch for progress to slow in the upper echelons of the 1.06-handle. It is unlikely the pair is going to break above 1.0700 on the first go so bears will look to sell more back up there, knowing that further protection lies just behind at 1.0750-70.
It seems like market participants are sleeping in this morning along with all of Spain. Markets opened with a yawn as low liquidity and directional USD buying set the morning FX trend. With no real market-moving data today, prices appear to moving counter to the little new information we did receive this weekend -- we suspect this intraday trend to reverse mid-day. Asian regional indexes are broadly higher while European markets opened flat following Friday’s positive close compounded by the anticipation of a strong US earning’s season.
In Japan this past weekend, the ruling DPJ party couldn’t hold onto their micro-thin coalition majority in the upper house but were able to secure their strong control over the more dominant lower house. Credit agencies Moody and S&P were quick to issue statements that election results in Japan would have no direct effects on Japanese sovereign ratings, but both did mention that Japan’s lack of a concrete fiscal strategy could threaten future ratings. Currently the JPY is operating under its safe-haven status and has a strong correlation to US yields. We suspect that mid-term market participants will soon turn their sovereign debt crisis crosshairs on Japan and some heavy Yen selling will ensue.
The Bank of Japan will hold their two day policy meeting this week. Although no change in the current 0.10% rate is expected, we’re anticipating the central bank to release information pertaining to a lending scheme aimed at stimulating bank loans to commercial enterprises.
China kicked off the week by releasing a stronger-than-expect trade surplus, hitting a monthly all-time high record. Chinese June exports rose by a stronger-than-expected 43.9% y/y to USD 137.4 bn and imports came in at the softer-than-expected but respectable 34.1%. The trade surplus will likely contribute to mounting pressure to further allow the CNY to appreciate. In addition, the strong Chinese report will alleviate market concerns about the pace of the export recovery while demand from developed and emerging economies continues to recover at a steady rate. The Chinese numbers help to take the wind out of the double-dip recession-apocalypse conspiracy theories currently permeating the market.
Today’s ultra-light economic calendar will further allow markets to give extra attention to the EU finance minister’s probable comments pertaining to the EU bank stress tests. The German newspaper Handelsblatt reported that the stress tests will be more robust than originally chartered and cited the ECB’s Stark that “the assumptions will be made in a way that the test results will be credible.” Barring any glaring failures or obvious mis-assumptions, the reports should be broadly positive for the Euro in the near term.
Today's Key Issues (time in GMT): 08:30 GBP GDP - final, % q/q (y/y) Q1
EurUsd The bearish wedge on the hourly chart has finally kicked into play for EURUSD (after the break below 1.2650 on Friday afternoon), and since then the pair has drifted lower to 1.2577 lows. We have gone short on the break out (as explained in Friday’s report) but for the time being, the pair is being held up by support from the back side of an old uptrend channel around 1.2590. We believe the downside does look vulnerable to a re-visit of 1.2483, so set a downside target for shorts around 1.2510-20, and leave a stop just above 1.2650 post-breakout resistance. This short trade is in contrast to our medium term view that EURUSD goes higher (after the recent break of the 6-month downtrend), but ultimately, the slow summer holidays are prime conditions for range-trading so feel that this strategy is an extremely realistic and achievable bet in the meantime. Immediate support is expected at 1.2553 (7 Jul low), 1.2468 (former resistance from 20 Jun), and 1.2396 (50-day moving average). Next resistance is eyed at 1.2650, 1.2722 (Friday’s high), then 1.2946 (100-day moving average).
GbpUsd The bears climbed all over GBPUSD at the end of last week, and eventually the 1-month uptrend could hold on no more. Soon after the break lower at 1.5135, the pair plunged through the floor of the formerly lucrative 1.5080 –1.5230 range, and since then the sell-off has extended all the way to a low of 1.4960. Without much imagination it is possible to see a triple top formation on the hourly chart, and given the width of the old range we would expect a very manageable first target of 1.4930-40, with further downside easily possible. Next support is eyed at 1.4874 (1 Jul low), with another cluster of support around 1.4850-55 (23 & 25 Jun lows), and the 100-day moving average 1.4986. Sellers will almost certainly precipitate in numbers back towards the old range floor of 1.5080, and once again at the back side of the former uptrend 1.5170.
UsdJpy The Japanese upper house elections over the weekend were a disaster for Naoto Kan’s ruling DPJ, but a welcome shot of adrenaline for our long USDJPY trade which has come within 25 pips of hitting its target. Recall that we are still long from the double bottom break out at 88.20, and are aiming for a target above at 89.40. It is worth noting that the 1-month downtrend channel resistance has crept onto the horizon at 89.50 above and may start to lure in sellers ahead of our target, so we remain open to using some discretion on when to take profits off the table, but ideally, the 89.40 target can be achieved before the downtrend starts to complicate matters. Should the move have the momentum to burst through the 1-month downtrend next resistance beyond lies at 89.50 (28-29 Jun high), and 90.73-8 (coinciding with the 25 Jun highs, 50-day and 200-day moving averages). Nearest supports expected at 88.20 neckline, 88.00, then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this morning’s rally looks to threaten the 1-week downtrend channel. Significantly we have managed to take out resistance clustered around 1.0580 that represented the neckline of a possible double bottom, and now the skies are clear for a revisit of 1.0700 levels. Buying on dips towards 1.0580-1.0600 now looks to be the mood of the day, but watch for progress to slow as we approach the area of resistance above 1.0660. It is unlikely the pair is going to break above 1.0700 on the first go so bears will look to sell more back up there, knowing that further protection lies just behind at 1.0750-70.
(Reuters) - China's stock market has slid 26 percent this year, making it one of the world's worst performing markets and raising questions whether authorities may take action to prevent the market from tumbling much more sharply.
A crackdown on the country's red-hot real estate sector combined with a money market squeeze due to a flood of share issuances -- including Agricultural Bank of China's ABC.UL record $22 billion offer -- have driven the Shanghai Composite Index .SSEC to 15-month lows.
The government, already facing rising worker unrest, high property prices and inflation concerns, will likely want to avoid drawing the ire of Chinese investors watching their savings dwindle in the country's volatile market. But so far the market drop is not severe enough to prompt action.
Below are some scenarios on how officials may intervene against a further market drop. Chinese officials have historically taken measures in the stock market, both to limit big surges and slides.
NO INTERVENTION - very likely
Unless the index falls below 2,200 points from the 2,413 level at midday on Thursday, Chinese authorities are unlikely to do anything to stop the market from falling, analysts said.
Officials may also be happy to have taken the steam out of the stock market in the past year by unleashing IPOs and cracking down on the money going into the stock market, especially from bank lending. In the first half of 2009, the Shanghai market soared more than 60 percent.
After the property market restrictions prompted household investors -- the biggest force in the market -- to shed shares, tight money market conditions have only made things worse.
The benchmark money market rates have soared as banks have had trouble raising funds due to the squeeze, limiting the ability of investors to borrow and forcing them to dump shares to raise cash.
But analysts are confident for now that the market can absorb the incoming rights issues without sliding to levels that would make officials nervous.
Now that AgBank's blockbuster issue is just over, some of the money that failed to win in the subscription process is expected to go back into stocks. AgBank has also given confidence to the other major state-owned banks about raising funds now.
In the past few days Bank of China (601988.SS) and Industrial and Commercial Bank of China (601398.SS) are both reported to be preparing rights issues, but the news has made few waves in the shares -- suggesting investors have expected these funding needs.
LIGHT INTERVENTION - likely
A drop in the Shanghai Composite below the 15-month low of 2,319 hit this week and toward 2,200 points may prompt authorities to consider taking modest steps to boost the market.
Possible steps include a slowing of IPO approvals to ease liquidity pressures and potentially spreading them out so the market can more easily absorb new share listings.
Chinese firms siphoned off around 450 billion yuan ($66 billion) from the stock market via initial public offerings, rights issues and new share issues in the first half of the year.
About 60 to 70 firms are now on a waiting list to issue shares, with the total amount of money to be drained from the market by corporate fundraising via stocks expected to reach 800 billion yuan this year, analysts estimate.
"If the market starts to get out of control the authorities will start to examine the situation," said an equity analyst at a Chinese brokerage in Shanghai.
Another option is the People's Bank of China injecting more liquidity into the money markets via its open market operations.
The Chinese central bank has injected a hefty nearly 900 billion yuan ($133 billion) into money markets over the past seven weeks to help ease the cash crunch, caused mainly by the AgBank IPO and indirectly hitting shares.
Raising the stamp duty for stock sellers is another method, but analysts say this would be largely symbolic and not result in swift gains for stocks.
Beijing exempts share purchases from the stamp tax but levies a duty of 0.1 percent on stock sale transactions.
HEAVY INTERVENTION - very unlikely
Analysts say authorities are unlikely to take more severe measures like suspending IPOs or directly buying up stakes in large state-owned banks and companies. They may instead use state funds, such as Central Huijin, to purchase shares indirectly.
A suspension of IPOs would also be detrimental to strong fund demand from major Chinese companies and official efforts to push companies to rely more on markets for fundraising.
At the same time, analysts say the government does not wish to project the impression that it is directly intervening in market activities.
Beijing is pushing on many different fronts to modernize the country's markets and has even backed away from direct day-to-day intervention on the yuan after ditching the currency's peg to the dollar last month.
Risk trades are under threat one again after the few sparse economic releases of the week have so far managed to disappoint and the momentum of the recent rebound rallies starts to fade. This morning’s Eurozone final GDP reading confirmed a 0.2% QoQ pace of growth in Q1, but German factory orders in May significantly undershot estimates at -0.5% MoM (compared to consensus estimates of 0.3%). Admittedly, the latest figures were sweetened by decent upward revisions to the print last month (to 3.2% from 2.8%), but the net of these figures was still much softer than anticipated, and as such EURUSD has found itself struggling to hold its head above 1.2550.
EurUsd Risk appetite definitely feeling a bit more vulnerable today, but with the bullish engulfing candlestick carved out on the daily chart at the start of this week, we do still feel that EURUSD can progress further to the upside on this corrective rally. The 6-month downtrend channel (1.2485) now looks unquestionably broken by yesterday’s price action, so we aim to try and get long on a re-test of that trendline back towards 1.2500, and eye a first target above at 1.2650. We anticipate decent sellers will be lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high), but given the enormity of EUR-shorts that have accumulated in the market it seems highly plausible that once one gives way, there should be an accelerated liquidation of other shorts. Supports expected 1.2550, 1.2468 (former resistance from 20 Jun), 1.2432 (50-day moving average), 1.2400, then 1.2300.
GbpUsd GBPUSD remains in a consolidation range between 1.5080 and 1.5210, but the slump in risk appetite over the past session has brought us back down towards the lower edge of the current uptrend channel. With 1.5080 still intact, we remain buyers on dips in this pair, so aim to go long around 1.5080-90 with a stop a little way below the trendline support (seen at 1.5050), looking for a test of 1.5200 in due course. Should we be completely wrong-footed and get a continued move to the downside, we are wary that the 1.5080 level may also represent the neckline of a double-top in GBPUSD which would suggest a collapse back towards 1.4930 levels is plausible. In the meantime, buyers are likely to step in on dips back towards the 100-day moving average 1.4999, and the major support at 1.4855 remains intact. Should the uptrend resume, expect supply at 1.5227-9 (2 & 6 Jul high), followed by the upper edge of the 4-week uptrend at 1.5395, then the 30 April high 1.5390 and 15 April high 1.5525.
UsdJpy Having twice failed to overcome supply at 88.00, USDJPY has plunged through 87.33 support (reaction low seen post-payrolls), and is now headed straight for a test of last Thursday’s critical support 86.97. According to the symmetrical triangle pattern we have been using as a guide, the eventual target for this move is around 86.20, but arguably, any break below 86.97 would open up a vast area down to 84.82 (2009’s low) with little discernible support expected in between. The somewhat flakey 3-week downtrend suggests some trendline support may come into play around 85.60, but given how easily that channel was violated on the topside yesterday, we don’t hold much conviction in its predictive power on the downside. Resistance above still remains at 88.00, 88.95 (20 May low), then 89.50 (28-29 Jun high).
UsdChf An altogether uninspiring few sessions for USDCHF – with the break above the 1-month downtrend being more of a sluggish continuation of range-trading rather than an impulsively bullish push higher. The bearish engulfing candlestick on the daily chart makes the breakout look even less compelling, so we are in no hurry to relinquish our view that this pair goes lower in the short-medium term. If anything, we’d look to buy off the bottom of the range (1.0578) and try to go for another test of 1.0700. Supports below 1.0580 are eyed at 1.0500 and 1.0435, whilst resistance above 1.0700 is seen at 1.0780 and 1.0910.
(Reuters) - Gold dropped to a six-week low on Wednesday after China said bullion would not become a major investment home for its foreign exchange reserves, but physical buying helped cushion the fall.
The State Administration of Foreign Exchange said U.S. Treasury securities would remain an important market for the managers of China's official currency reserves, but gold would not become a major component of the central bank's portfolio.
Gold dropped to $1,186.95 an ounce, its weakest since May 25, before bouncing to $1,189.60 by 0744 GMT (3:44 a.m. EDT), still down $1.90 from New York's notional close.
But lower prices were likely to further stimulate buying in the physical sector, with dealers reporting interest from top consumer India and other buyers in Asia such as China, Indonesia, Japan and Thailand.
"Gold falls because of the news from China, and there's also selling in Japanese gold futures," said a dealer in Tokyo. "But we've seen good buying interest from the general public," said the dealer, referring to purchases from retail investors.
Bullion has dropped 6 percent since striking a record above $1,264 an ounce in late June, but turmoil in the financial markets could offer investors a safe haven.
Gold had struck a lifetime high on worries the euro debt crisis was spreading and the U.S. economy was slowing.
"I wouldn't be surprised to see gold recover above $1,200 an ounce or may be move even higher in the near term," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney.
"At the end of the day, I think the uncertainties in the international economic environment remain significant and they will be supportive for the gold price in the near term."
U.S. gold futures for August delivery fell $5.2 to $1,189.9 an ounce.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P), said its holdings slipped to 1,316.481 tonnes by July 6 from 1,318.915 on July 2. The holdings hit a record at 1,320.436 tonnes on June 29.
"At this stage, I wouldn't read too much into that," said Moore, referring to the decline in ETF holdings. "I don't think it's inconsistent with what we're just talking about... may be some profit taking and things like that."
The Nikkei edged down on Wednesday as shares of exporters that rose the day before gave back some gains, even after Wall Street's Tuesday rebound that ended a five-day string of losses. .T .N
The physical sector was active in Singapore and Hong Kong, and steady demand from jewelers and other physical buyers across Asia led to supply tightness.
"We've been selling gold since last week, but it's difficult to get hold of materials within a short period," said another physical dealer in Singapore, who trades gold bars. "The market may also turn around too quickly. That's why it's difficult for both customers and sellers," he added.
The euro dipped on Wednesday but was still hovering near a recent seven-week high, with traders saying it could rise further in the near term due to doubts about a recovery in the U.S. economy and positive technical signals.
Another day sparse of economic releases presents itself, with this afternoon’s ISM non-manufacturing as the sole focus left ahead of this evening’s World Cup semi-final. The earlier release of Switzerland’s CPI print has provided some food for thought however; with the June reading coming in at a much lower than estimated 0.5% YoY (consensus 0.9%), down from last month’s 1.1% print. The significance of this, as we have previously asserted, is that all forecasts for continued CHF gains going into the end of the year (on the back of comparative fundamental strength and perceived safe-haven status) are contingent on the SNB allowing those gains to take place. Very recently, the SNB committee appeared to give the green light for the market to dictate where EURCHF should trade – independent of aggressive interventions from the central bank – but based on the view that deflation was no longer a threat to the Swiss economy. A mild downtick in annual inflation had already been expected from today’s release, but a reading that goes quite so far below the prior month’s level is bound to raise a few eyebrows and cause traders with extensive EURCHF shorts to start squirming.
Today's Key Issues (time in GMT): 14:00 USD ISM Non-manufacturing (Jun); exp: 55.0, prev: 55.4
EurUsd Unfortunately the risk sell-off on the Asian open today was enough to trigger our stop at 1.2500 from yesterday’s trade recommendation, but the pair has since boomeranged back upwards to tickle the underside of 1.2600. Despite our disappointment about the failed long yesterday, this does still feel like the start of a corrective bullish phase for EURUSD in our view, and taking a look at the daily chart we can see that the 6-month downtrend channel is at significant risk of capitulating should the pair remain above the trendline at 1.2500. We still therefore like to buy EURUSD on dips back towards 1.2500, and eye a first target above at 1.2650. We anticipate decent sellers will be lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high), but given the enormity of EUR-shorts that have accumulated in the market it seems highly plausible that once one gives way, there should be an accelerated liquidation of other shorts. Supports expected 1.2480 (overnight low), 1.2443-68 (50-day moving average and former resistance from 20 Jun), 1.2400, then 1.2300.
GbpUsd GBPUSD remains in a consolidation range between 1.5080 and 1.5210, and meandering along the middle of its 1-month uptrend channel. We are certainly still buyers on dips in this pair, but ideally prefer to see cheaper entry levels towards the lower bound of the current uptrend before getting in. That lower edge is today seen at 1.5030, so we set a limit order just above 1.5050 and expect another test of 1.5200 in due course. Should the squeeze out of short-risk positions continue beyond that target, the next levels of supply anticipated on the topside are the 1.5229 highs seen Friday, followed by the upper edge of the 4-week uptrend at 1.5355, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the 1.5080 overnight lows, the 100-day moving average 1.5005, and the major support at 1.4855 remains intact.
UsdJpy Despite the USD sell-off post-payrolls, USDJPY managed to stabilize on Friday, and thus far, 86.97 (seen last Thursday) remains the low watermark in this downtrend. The doji candlestick carved out on the daily chart on Friday could suggest that the overwhelming bearishness that has driven the market for the past couple of weeks may be due for an imminent correction, however resistance at 88.00 has thus far kept a lid on gains. The potential symmetrical triangle pattern we highlighted on the hourly chart yesterday was eventually broken to the downside, but the follow-through has been far from compelling. We have taken half our short off the table already as the price has drifted back above the 87.75 break-out level, and now leave the remaining half-position to either play out according to the planned target of 86.20, or for us to stop out on a break above 88.00. Working in our favour is the fact that supports on the downside are disparate; 87.33 is the reaction low seen post-payrolls, 86.97 last Thursday’s low, then the 2009 low of 84.82. in contrast, stumbling blocks of resistance on the topside still remain at 88.20 (back side of week downtrend), 88.95 (20 May low), then 89.50 (28-29 Jun high).
UsdChf This is another pair that has been trading sideways since the end of last week, but there has been a nervous dip below 1.0580 at the start of today’s session which suggests the equilibrium is starting to bubble over towards a break-out. We still think this pair goes lower in the short-medium term so keep an eye on whether 1.0578 support gets violated again, then view next support at 1.0500. Should the reverse scenario play out (as portended by the inverse hammer on the daily chart on Friday), there is a good likelihood of sellers expected at 1.0625 coinciding with the 4-week downtrend, 1.0700 (psychological level and Friday highs), then 1.0800.
(Reuters) - Bearish bets in the equity options market, coupled with an increasingly sour view from a technical perspective, suggest stocks will struggle to break from a vicious two-month downtrend this week.
With few catalysts on tap, it could be difficult for investors to find a reason to buy even as recent declines and a jobs report that did not confirm investors' worst fears present the opportunity for a short-term boost.
U.S. markets will be closed on Monday for Independence Day, and the holiday is expected to depress volume during the week, making equities more vulnerable to large swings following the worst week for the S&P 500 in two months.
"Only about 30 percent of stocks are above their 200-day moving averages, so the vast majority are on a downtrend," said Frank Gretz, a market analyst at Shields & Co in New York.
"The market needs to prove itself with a rally on strong volume, and that's going to be hard to get with the holiday and the bad news we've seen creating more pessimism."
Last week, the Dow fell 4.5 percent, the S&P lost 5 percent and the Nasdaq shed 5.9 percent.
Over the past couple of months, markets have been beset with a string of negative data showing weaker-than-expected retail sales, consumer confidence and plunging home sales. The data was capped by Friday's weak payrolls report.
BETTING ON DECLINES
Options activity on exchange-traded funds (ETF) that tracks the S&P 500 benchmark and the Nasdaq suggest that investors are betting on more declines.
"The most actively traded options on the SPDR S&P 500 ETF are the July $100 puts, suggesting traders are hedging for potential losses," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio. The ETF (SPY.P) slid 0.6 percent to $102.20.
Similar activity was spotted on the PowerShares QQQ Trust ETF (QQQQ.P) which tracks the performance of the Nasdaq 100. The most active trades were on July $41, $40 puts. The ETF closed 0.3 percent lower at $42.47.
"We are in a tremendously oversold situation, but that doesn't mean we can't sell further. Options activity shows that the bears are in control and that the trend will continue," Detrick said.
As of late Friday, 133.94 million shares traded on the SPDR S&P 500 fund, and on Thursday 382.92 million shares exchanged hands, the highest volume since May 21. The three-month average trading volume is 266.34 million shares.
"When the volume is high on a down day like yesterday (Thursday) and (Friday), it confirms that this is a bear market and that the sellers will be in control."
The QQQ Trust ETF traded 46.19 million shares as of late Friday, but the volume reached 158.69 million on Thursday, compared to a three-month moving average of 103.50 million.
The June U.S. nonfarm payrolls report showed a fall in overall employment while private payrolls rose only slightly, a sign the recovery continues to struggle to gain traction.
But some analysts say the market's recent sharp declines and positive elements in Friday's unemployment report could give stocks a short-term boost.
STOCK BOUNCE POSSIBLE
"Investors were worried that the report would show the economy melting down, and clearly that didn't happen," said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey.
"The psychology was just too negative about the labor market and the economy in general, so we could be due for a bounce."
The S&P's 14-day relative strength index fell below 30 on Friday, indicating it could be oversold in the near-term. The Standard & Poor's 500 Index .SPX fell to 1,022.58 on Friday. The benchmark could find technical support near the 1,008-1,010 level, this year's low and also the 38.2 percent Fibonacci retracement of the advance from the low in early March 2009 to the high in April 2010.
One of the few indicators on tap for this week is June same-store sales, which many retailers will report on Thursday, giving insight into the state of consumer spending.
"Consumers are very cautious right now, and we're not looking for much incremental growth at all," said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. in Greenville, Delaware.
Nyheim added that discount retailers could be among the few sectors to see improved sales as consumers "trade down" to lower-priced merchandise.
Discount retailer Family Dollar Stores Inc (FDO.N) is scheduled to report quarterly results on Wednesday, the sole S&P 500 company to report this week. The third-quarter earnings reporting season begins in earnest with Alcoa Inc (AA.N) on July 12.
"Family Dollar has seen some positive trends of late, and they've been picking up market share from other retailers," said John Massey, portfolio manager at SunAmerica Asset Management in Jersey City, New Jersey.
Despite the lack of scheduled reports, a number of companies could give guidance about earnings this week. John Butters, the director of U.S. earnings for Thomson Reuters, said that the week before the start of earnings season "will be the time companies will come out and say, 'This is what we're going to do.'"
As the earnings season nears, Butters noted that there were 1.2 negative company preannouncements for every one positive. Historically, the ratio has been two negatives for each positive.
Also on tap for this week is the Institute of Supply Management's services sector survey for June, which is expected to contract slightly from the previous month but still show expansion.
(Reporting by Ryan Vlastelica and Angela Moon; Additional reporting by Caroline Valetkevitch and Matthew Lynley; Editing by Kenneth Barry and Maureen Bavdek)
Currency markets are relatively quiet at the start of the week; US desks are likely to remain empty as the Independence Day holiday is observed, and the morning’s data releases already done and dusted which leaves us predominantly at the whim of headline risk and equity market moves. This morning’s Swiss retail sales posted an extremely robust 3.8% YoY increase (albeit in a volatile series) compared to consensus estimates looking for 1.8% (and a prior month print of 1.3%. Of course a good number like this release can only bolster our view that the Swiss economy is going to be one of the strongest in Europe in the coming year, but more important this week for CHF-watchers will be tomorrow’s CPI reading. One of the key developments in the past month that has allowed the CHF to strengthen so impressively is the removal of SNB rhetoric warning about the potential for deflation – and thereby the tacit understanding that the central bank is stepping aside from currency intervention for the time being. From a fundamental perspective, the relative strength of the Swiss economy (which should bode well from the franc in periods of risk appetite), coupled with the perception of the currency as a safe-haven (which should also insulate and perhaps boost it during times of risk-aversion), means we believe that EURCHF can extend its journey to 1.25 levels in the remainder of the year without much difficulty. This however, is acutely reliant on inflation remaining stable; and if tomorrow’s reading suggests another lurch lower in inflation is on the cards then there is little doubt the SNB will step in to counter these CHF gains with force.
EurUsd EURUSD continues to benefit from the liquidation of short positions, managing to top out at 1.2611 on Friday after the US non-farm payrolls release – an impressive level considering that the pair had languished below 1.2200 just a day prior. Rather than considering this a near-term top, we actually believe further topside gains may be attainable given the bullish flag pattern that has been activated on the hourly chart. We have gone long around 1.2540, setting a stop at 1.2500, and eye a first target above at 1.2650 (to take off half our position). Admittedly, using the traditional method for inferring flag targets, we should really be aiming for 1.2860 above, but given our expectation that decent sellers are lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high) – added to the belief that July tends to lead to slower, sideways markets, we feel that taking half the position off early may give us the opportunity to reload a second time later on. Supports expected 1.2456068 (50-day moving average and former resistance from 20 Jun), 1.2400, then 1.2300.
GbpUsd GBPUSD largely consolidated on Friday after Thursday’s thundering rally higher, and for the time being the pair remains locked between 1.5150 support and 1.5210 resistance. From a broader perspective, the 4-week uptrend looks extremely healthy (in spite of last week’s false break), and the pair is presently meandering roughly in the middle of that channel. Should the squeeze out of short-risk positions continue, the next levels of supply anticipated on the topside are the 1.5229 highs seen Friday, followed by the upper edge of the 4-week uptrend at 1.5320, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the 1.5150 level, the 100-day moving average 1.5012 (also the neckline of our old head and shoulders pattern), and the major support at 1.4855 remains intact.
UsdJpy Despite the USD sell-off post-payrolls, USDJPY managed to stabilize on Friday, and thus far, 86.97 (seen last Thursday) remains the low watermark in this downtrend. The doji candlestick carved out on the daily chart on Friday could suggest that the overwhelming bearishness that has driven the market for the past couple of weeks may be due for an imminent correction, however we prefer to wait for further confirmation before attempting a long. The most obvious place to find that confirmation seems to be the potential symmetrical triangle pattern on the hourly chart which estimates an upside target of 89.50 should we get a break above the upper trendline around 88.00. If the inverse scenario plays out, we would also be willing to go short on a break below 87.70, in which case the bearish target of the triangle lies around 86.20. Potential stumbling blocks of resistance on the topside still remain at 88.35 (back side of 3-month downtrend), 88.95 (20 May low and recent pivot), then 89.50 (28-29 Jun high), while on the downside the technical levels are far more disparate; 87 33 is the reaction low seen post-payrolls, 86.97 Thursday’s low, then the 2009 low of 84.82.
UsdChf This is another pair that has been trading sideways since the end of last week, and this in spite of weekend comments from the SNB’s Hildebrand about the franc’s volatility of late. We still think this pair goes lower in the short-medium term so eye supports at 1.0600, Thursday’s low of 1.0578, then 1.0500. The potential threats to this scenario in the short term however include the inverted hammer candlestick on the daily chart which may be the signal to bulls that a near-term reversal of the downtrend is brewing. Should this be the case, there is a good likelihood of sellers expected at 1.0685 coinciding with the 4-week downtrend, 1.0700 (psychological level and Friday highs), then 1.0800.
The ripping rally higher in EURUSD and a host of other EUR-crosses has had many market participants asking what on earth could have prompted such a reversal – and in the backdrop of yet another slump in global equity indices which has traditionally been the fuel for EUR-weakness. A simple and easy scapegoat would be to point the finger at the often treacherous trend-reversals effected by month-end and quarter end flows – but undermining that explanation is the fact that the month end happened a day earlier. Instead, we feel that yesterday’s rally was simply a long overdue cleansing of short positioning that has become more and more stifling as the bear trend has matured; and the trigger for that reversal coming now is simply the fact that the EUR has actually fared pretty well against some significant risk events of late. In a week that’s seen the expiry of the ECB's 12m liquidity operation, bond auctions in Spain and France, a German Presidential Election and Moody’s announcement that Spain’s credit rating is under review, EURUSD has not (as it once might have done) reacted with a withering retreat lower. Instead, the worst case scenarios many had priced in have not precipitated, and in fact, the US data this week has been utterly dismal which has no doubt dampened at least some of the blind conviction that buying USD is the right thing to do during periods of economic uncertainty and risk-aversion.
EurUsd Despite equities remaining heavy yesterday, the simple fact that the EUR has navigated a treacherous week of risk events without capitulating (and the fact US data has been lousy), has triggered a massive squeeze in EURUSD and EUR-crosses, including a morning star candlestick pattern on the daily chart suggesting that more upside may be on the cards. On the topside now we watch for first resistance to come in at 1.2545-55 where two different trendlines are expected to lure sellers, but above that junction we have a lot of fresh air until 1.2685 (highs from 13 & 21 May) and 1.2750 (11 May high). Supports expected 1.2470 (50-day moving average), 1.2400 former resistance-turned-support, then 1.2300.
GbpUsd Yesterday we noted that the completion of our head and shoulders chart pattern looked to have broken the 3-4 week uptrend channel which suggested the downside was vulnerable; however in tandem with EURUSD, GBPUSD has instead roared higher to highs of 1.5205 – just a stone’s throw from the major 1.5210 resistance. Should the squeeze continue, the next levels seen on the topside are the upper edge of the 4-week uptrend at 1.5285, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the session lows 1.5150, the 100-day moving average 1.5017 (recall the neckline of our old head and shoulders pattern was also in that vicinity at 1.5012), and the major support at 1.4855 remains intact.
UsdJpy After putting up a brave fight all week, the 87.99 support finally gave way yesterday (and who could blame it given the glut of awful US data), and a cascade of stops took us all the way to lows of 86.97. The rebound back up towards 88.25 former support has found bears waiting to pounce, and we now feel that another slump is likely to ensue in due course. How far that might be is anyone’s guess, but the only technical levels we note on the downside are yesterday’s 86.97 low, then the 2009 low of 84.82. Further resistance above 88.25 is seen at 88.45 (back side of 3-month downtrend), 88.95 (20 May low and recent pivot), then 89.50 (28-29 Jun high).
UsdChf EURCHF has once again been the dominant driver of USDCHF and after a searing rally higher for most EUR-crosses, we have seen USDCHF tugged higher with it (despite the market’s urge to sell USD). Thus far the rally has not managed to break back above the ceiling of sellers expected at 1.0700, but if it does, more resistance levels litter the skies at 1.0750 (yesterday’s US high), 1.0790 (ultra short-term pivot level), and 1.0800. Further resistance above there due at 1.0924 (the low from 10 May) and the 100-day moving average 1.0946. We still think this pair goes lower in the short-medium term so eye supports at 1.0600, yesterday’s low of 1.0578, then 1.0500.
The Riksbank convened today for the first rate decision since April, and in line with forecasts, the central bank raised the repo rate 25bps to 0.50%. In the last statement from the April meeting, some members had argued for keeping the repo rate unchanged at 0.25% for the rest of 2010, but attitudes have thawed as the Swedish data in the interim has largely been very encouraging. Q1 GDP smashed estimates with a 1.4% QoQ pace of growth, CPI is continuing to tick higher, and unemployment has dipped back below 9% (8.8% last). Furthermore, Swedish retail sales released on Tuesday came out at an impressive 1.6% MoM (May data), equating to 2.7% YoY growth – well above the expected 1.0% MoM, 0.3% YoY predicted by analysts. The accompanying statement acknowledged that the economy was developing strongly, and forecast CPI at 1.2% this year, 2.0% in 2011, with GDP at 3.8% this year, 3.6% in 2011. Unsurprisingly the effects of the Eurozone debt crisis have had an impact on the future projected path of rates, with the statement asserting there may not be the need for as big a rise, and indeed one member, Ekholm, voting against this month’s hike.
EurUsd With yesterday’s price action influenced by significant month-/quarter-/half-year- end flows, EURUSD and the EUR-crosses have enjoyed a squeeze higher off their lows. Despite EURUSD’s 1.2170 major support (15 Jun lows and 50.0% fibonacci retracement of 1.1827 - 1.2468) having been breached once on Tuesday, the pair managed to rip higher back through 1.2260 resistance, coming to a halt only once it had touched 1.2305. Equity markets however remain weak so downside definitely looking like the more vulnerable from here; supports expected 1.2152 (Tuesday’s low), 1.2130 (downtrend support), then 11 Jun low 1.2045. On the topside now we watch for first resistance to come in at 1.2305 (yesterday’s highs), 1.2345 (2-week downtrend resistance), 1.2398 highs from this week’s Asian open and 1.2468 (18 Jun and 21 Jun highs).
GbpUsd Flexibility has been rewarded in GBPUSD over the past 24 hours. The 1.5012 support gave way mid-way through the European session, activating a head and shoulders pattern on the hourly chart so despite starting yesterday long, we quickly flipped to a short position to ride out the downside – and the bet has paid off handsomely. The 1.4895 target was achieved this morning, with the pair overshooting only as far as 1.4874 before rebounding higher. In achieving our target, the pair also looks to have broken its 3-week uptrend, so we would be wary that further downside may yet be on the cards. Expect rallies to meet sellers back at that trendline around 1.4930, then further resistance at 1.5012 (head and shoulders neckline), 1.5129 (Monday’s high) and 1.5210 last seen 4 May. On the downside the major support at 1.4855 remains intact, but only weak support at 1.4800 below that before a nasty plunge to 1.4690.
UsdJpy USDJPY has actually held up rather well considering the enormous sell-orders rumoured to be going through in yesterday’s month-end fixes. Admittedly the pair has touched new lows on the week at 88.08, but not a bad effort considering that the pair also had to contend with a bearish engulfing candlestick on the daily chart from the beginning of the week. The lack of more extensive downside price action has not yet however equated to much momentum on the upside either, with the pair still struggling to muster up much fight against the back side of the old three month downtrend. We still expect sellers to linger around there at 88.55, with further pockets of supply at 88.98 (20 May low), 89.50 (28 Jun high) and 89.75. Below us little standing in the way of further declines towards the 6 May low 87.99, with some further support expected at 87.55.
UsdChf A different day but the pattern remains the same; EURCHF has once again cracked open new lows of 1.3047 and down with it, USDCHF has managed to edge its way to 1.0710. The downside now looks extremely vulnerable; with only weak support at 1.0700 and 1.0600 below. Resistance levels litter the skies at 1.0760 (today’s European session high), 1.0790 (ultra short-term pivot level), and 1.0800. Further resistance above there due at 1.0924 (the low from 10 May) and the 100-day moving average 1.0948.
