The Big Picture

Risk premium falls, dragging USD down The story on Friday was all about risk, or rather disappearing risk. The US bombing in Iraq was seen as increasing the chances for the Kurds to regain the upper hand, while headlines saying that Russia is ready to mediate between Ukraine and the separatist rebels, plus reports that Russian warplanes had ended drills, brought hope that the turmoil there could be winding down as well. As a result, the safe-haven yen, gold and Brent oil prices fell, while stocks rose. The dollar generally weakened, which perhaps reflects its safe-haven aspects in the face of global turmoil.

As confidence returned to carry trades, EM currencies came roaring back, with the dollar weakening against all the EM currencies that we track. The dollar is still higher over the last week against BRL, RUB and the Eastern European currencies, plus MXN and TRY, which suggests that those currencies might be worth looking at if the rebound in risk appetite continues.

NZD was the worst-performing G10 currency over the last week. All of its decline came on Wednesday, when dairy prices collapsed to the lowest level since 2012 along with slowing employment growth sent the currency down sharply. It’s been recovering slowly since then and could gain further this week as there are no major indicators due out to derail its progress.

CAD was the second-worst G10 currency. Most of the decline came on Friday and followed disappointing employment figures: net employment in July rose only by around 300 people as a 60k increase in part-time employment offset a 59.7k decline in full-time employment. The labor force also shrank sharply. Canada’s employment data usually beats expectations in August, so there may be some rebound when those figures are released on Sep. 5th, but until then I would expect CAD to remain weak. S & P Friday cut its rating outlook for several of the major Canadian banks to negative on new rules limiting government support for banks if they get into trouble.

On the other hand, NOK was the best-performing G10 currency, but that could be in for a change today. Norway’s CPI for July is due out today, and both the headline and underlying figures are expected to decelerate on a yoy basis. That could be NOK-negative. Norway has been one of the few European countries where the central bank is not confronting below-target inflation, but July’s expected slowdown in inflation may cause some concern at the Norges Bank. This figure could therefore be the occasion for some profit-taking.

There is a very light calendar of events today. We have no major data or events coming from the Eurozone, UK or US. During the European morning, US Fed Vice Chair Fischer will speak on the economy and monetary policy in Stockholm. He will be taking questions so we could get some important insights into Fed policy.

From Canada, housing starts for July are expected to decrease.

As for the rest of the week, the main event will be Wednesday’s Bank of England quarterly inflation report release, including new economic forecasts. On Tuesday, the main point of interest will be the German ZEW survey for August. The current and the expectation situation are expected to decline reflecting somehow the worries of the Ukraine tensions impact. On Wednesday, besides the BoE inflation report, during the Asian morning we have China’s retail sales and industrial production, both for July. During the European day, Eurozone’s industrial production for June is coming out, while in the UK, we have the unemployment rate for June. From the US we get retail sales for July. On Thursday, we have Japan’s machinery orders for June. In Europe, we get preliminary GDP data from France, Germany and Eurozone as a whole. Eurozone’s final CPI for July is also coming out. Finally on Friday, UK’s preliminary GDP for Q2 is coming out, while from the US, we have industrial production for July, the Empire State manufacturing survey for August and the preliminary UoM consumer sentiment for August.

The Market

EUR/USD confirms the positive divergence

EUR/USD edged higher on Friday but the advance was halted below the resistance bar of 1.3445 (R1). The up move confirmed the positive divergence between the rate and both our momentum studies, as well as corroborating my choice to remain to the sidelines. In my view, the overall picture of the pair remains negative, since the rate is trading within the long-term blue downside channel, connecting the highs and the lows on the daily chart. Nonetheless, taking into account that both our oscillators designate bullish momentum, I will maintain my flat stance as far as the short-term picture is concerned. I would like to see a clear dip below 1.3300 (S3) before regaining confidence on the downtrend.

• Support: 1.3390 (S1), 1.3330 (S2), 1.3300 (S3).

• Resistance: 1.3445 (R1), 1.3500 (R2), 1.3540 (R3).

USD/JPY rebounds from 101.60

USD/JPY moved significantly higher after finding support near the 76.4% retracement level of the 18th -30th July advance, which coincides with the upper boundary of the prevailing downside channel and lies slightly below the support level of 101.60. This confirms my view that the recent plunge of the pair was not the start of a new downtrend. The RSI rebounded from its 30 line and moved higher, while the MACD, bottomed and crossed above its signal line. Thus we may experience further upside in the near future. On the daily chart, I see a hammer candle formation, magnifying the case for the continuation of the up move. However, we need a close above the 103.00 zone to have a forthcoming higher high on the daily chart and a possible newborn long-term uptrend.

• Support: 101.80 (S1), 101.60 (S2), 101.30 (S3).

• Resistance: 102.35 (R1), 102.75 (R2), 103.00 (R3).

EUR/GBP finds resistance marginally below 0.8000

EUR/GBP rallied on Friday and found resistance marginally below the upper boundary of the purple upside channel and the psychological line of 0.8000 (R1), which coincides with the 23.6% retracement level of the 18th March – 27th July down-trend. Zooming on the 1-hour chart, the 14-hour RSI exited its overbought zone and moved lower, while the MACD fell below its trigger line. Bearing in mind the near-term momentum signs and the fact that the rate is trading near a strong resistance zone, I would expect the forthcoming wave to be to the downside, perhaps for a test near the lower bound of the channel. Nevertheless, as long as the rate remains within the channel, the path is still to the upside and I would see any declines within the channel as corrective waves.

• Support: 0.7980 (S1), 0.7950 (S2), 0.7920 (S3).

• Resistance: 0.8000 (R1), 0.8030 (R2), 0.8080 (R3).

Gold declines after finding resistance below 1325

Gold moved slightly higher, but the metal found some sell orders slightly below out resistance of 1325 (R1). The RSI moved lower after leaving its overbought territory and that the MACD, although positive, crossed below its trigger line. Also, on the daily chart, I see a shooting star candle, amplifying the case for further declines. A dip below 1305 (S1) would target the next support at 1295 (S2). However, both the 50- and 200-day moving averages are still pointing sideways, painting a trendless overall picture.

• Support: 1305 (S1), 1295 (S2), 1280 (S3).

• Resistance: 1325 (R1), 1345 (R2), 1355 (R3) .

WTI remains below 98.65

WTI traded virtually unchanged, remaining below our resistance line of 98.65 (R1). A decisive move above that barrier would signal a forthcoming higher high and could bring a near-term trend reversal. However, as long as the price lies between that barrier and the support of 96.50 (S2), I would consider the current path to be to the sideways and I would prefer to stay neutral until we have a clear trending situation. On the downside, only a dip below 96.50 (S2) could signal the continuation of the prevailing downtrend. I would not rely on the momentum indicators, since the MACD is heading towards its zero line, pointing up, but the RSI, although above its 50 line, has turned down.

• Support: 97.00 (S1), 96.50 (S2), 95.85 (S3).

• Resistance: 98.65 (R1), 99.45 (R2), 100.45 (R3).

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY