The Big Picture

The world was looking better for a few minutes The question for the markets recently has been whether we face disaster or catastrophe. In the last couple of days however things have started to look a little better. The US CPI released on Wednesday for example came in slightly higher than expected, reassuring the markets that the US is not slipping towards deflation. Then yesterday’s Eurozone PMIs generally came higher than expected, with German manufacturing returning to growth and even France showing some improvement. The news has bolstered the markets’ spirits. Stocks rose in Europe and almost around the world (with a few exceptions, of course). Industrial commodities, even oil, rallied significantly (more on oil in a moment). It was noticeable though that AUD and NZD, normally sensitive to growth expectations, failed to gain. NZD may have been weighed down by the announcement of a record trade deficit in September.

JPY was the worst-performing G10 currency yesterday after the Ministry of Finance sold 3-month T-bills at an average yield of -0.0037%, the first time that a government auction in Japan has resulted in a negative yield. This comes as a result of the massive easing program by the BoJ, which has created a shortage of paper in the market. Negative rates make JPY an attractive funding currency, while also making it unattractive for investing. However, the currency recovered a bit in Asian trading on news that a New York doctor tested positive for Ebola, the first confirmed case of the deadly disease in the city. The news has pushed equity prices off their highs and sparked some demand for safe haven assets. It remains to be seen whether the fear level will rise further or will be quelled once the US day starts and more news is available. My guess is that the markets are reacting out of a lack of information, and once the situation becomes clearer, sentiment should recover.

Oil jumped on news that Saudi Arabia’s supply to the market fell in September, but in subsequent trading the price began to fall back. The question is, is the Kingdom limiting the amount it supplies to the market in an effort to bring supply and demand better into balance, or is it simply unable to sell as much oil as it wanted to? Or is it simply diverting some production to domestic use for its own needs? In any event, my view is that the 328k reduction in supply is hardly enough to support prices – as mentioned yesterday, Libya’s OPEC representative is calling for a 500k b/d reduction in supply and OPEC itself has estimated it would take 2mn b/d. I think this bounce offers a good opportunity for those who’ve been waiting for a chance to participate in the downtrend in oil.

Today’s indicators: In the UK, the first estimate of Q3 GDP is expected to show a slowing in the pace of growth from Q2. The slowdown is consistent with the recent weak data coming from the country and could push rate expectations back even further. GBP/USD failed to dip below the psychological area of 1.6000 during the European Thursday, despite the disappointing retail sales data. If the forecast of a decline in growth is met, this could push the pair to break that level.

In the US, we get new home sales for September. So far, data show that housing sector in September has regained its strength after stalling in the summer. Contrary to the consensus forecast, existing home sales, building permits and housing starts all rose in September, suggesting that the housing market is getting back on track. It remains to be seen whether new home sales will follow the recovery path; the market forecast is for a decline in the pace of sales.

ECB Executive Board member Peter Praet speaks.

The Market

EUR/USD finds support slightly above 1.2600

EUR/USD moved slightly higher after finding support marginally above our 1.2600 (S1) support line. However, as long as the pair remains below the 1.2700 (R1) barrier and the lower bound of the black near-term upside channel, I still believe that EUR/USD may be resuming the prior downtrend and that the recovery from 1.2500 (S2) probably ended near the 200-period moving average and the 23.6% retracement level of the 8th of May - 3rd of October downtrend. A clear and decisive move below the 1.2600 (S1) hurdle is likely to reaffirm the case and could open the way for another test of the psychological barrier of 1.2500 (S2), which happens to be the 76.4% retracement level of the July 2012- May 2014 major advance.

Support: 1.2600 (S1), 1.2500 (S2), 1.2465 (S3)
Resistance: 1.2700 (R1), 1.2840 (R2), 1.2900 (R3)

USD/JPY confirms a higher high

USD/JPY surged on Thursday, breaking above the resistance (turned into support) barrier of 107.40 (S1). For a short- period it traded above 108.00. The move above 107.40 (S1) signaled a forthcoming higher high and turned the short-term outlook positive, in my view. An upside violation of yesterday’s high at 108.35 (R1) is likely pull the trigger for a run at the next resistance at 109.25 (R2). Nevertheless, bearing in mind that the RSI crossed below its 70 line and is now pointing down, I would be careful about a possible pullback before buyers take the reins again. Such a pullback could test the 107.40 (S1) line as a support this time. On the daily chart, the 14-day RSI moved above its 50-line, while the MACD bottomed, turned positive and could cross above its trigger in the close future. These momentum signs support the scenario that the retracement from the 110.00 zone finished near 105.20 and that further upside is expected.

Support: 107.40 (S1), 106.25 (S2), 105.75 (S3)
Resistance: 108.35 (R1), 109.25 (R2), 110.00 (R3)

AUD/USD still ranging

AUD/USD moved lower yesterday, but maintained its ranging mode. The rate remains within a sideways range between the 0.8640 (S2) support obstacle and the resistance of 0.8900 (R2). The trendless mode of the pair is also supported by our short-term oscillators. The MACD remains near its zero line, while the RSI lies near its 50 level. On the daily chart, although the rate remains below both the 50- and the 200-day moving averages, the 14-day RSI moved higher and is close to its 50 line, while the MACD lies above its trigger and is pointing up. These momentum signs give me extra reasons to stay flat and wait for the pair to exit the sideways path.

Support: 0.8700 (S1), 0.8640 (S2), 0.8565 (S3)
Resistance: 0.8830 (R1), 0.8900 (R2), 0.9000 (R3)

Gold dips below 1235

Gold fell below the 1235 barrier on Thursday, signaling a forthcoming lower low on the 4-hour chart. In my view, that dip flips the short-term bias of the metal to the downside. I would now expect sellers to challenge our support hurdle of 1222 as the first stage. A fall below that line is likely to trigger extensions towards 1205 (S2), the low of the 8th of October. The RSI moved below its 50 line and is now approaching its oversold field, while the MACD lies below both its zero and signal lines. These momentum indicators confirm yesterday’s accelerating negative momentum and amplify the case for further declines.

Support: 1222 (S1), 1205 (S2), 1183 (S3)
Resistance: 1235 (R1), 1255 (R2), 1260 (R3)

WTI rebounds from 80.00

WTI rebounded from the psychological barrier of 80.00 (S1) on Thursday, but remained way below the resistance of 83.50 (R1). I still believe that as long as the price structure on the daily chart suggests a downtrend, I consider the downward path to remain intact. Nonetheless, I also still would like to see a decisive dip below 79.40 (S2) before getting confident on the downside. Moreover, the 14-day RSI exited its oversold territory and moved higher, while the daily MACD has bottomed and appears willing to cross above its trigger any time soon. The rebound from the psychological line of 80.00 (S1) together with these momentum signs give me enough reasons to take the sidelines for now.

Support: 80.00 (S1), 79.40 (S2), 79.00 (S3)
Resistance: 83.50 (R1), 85.00 (R2), 86.30 (R3)