The Big Picture

New Zealand returns to tightening path The Reserve Bank of New Zealand (RBNZ) kept its benchmark interest rate unchanged overnight, as was universally expected, but surprised the market by stating that the next move in rates was likely to be up. “Some further increase in the official cash rate is expected to be required at a later stage,” according to the statement that accompanied the decision. The RBNZ had moved to a neutral stance at its Oct. 30th meeting, when it said, “A period of assessment remains appropriate before considering further policy adjustment,” which left open the possibility that the next move would be a cut in rates. The change to a tightening bias sent NZD soaring. The move reaffirms my belief that NZD is likely to be the strongest of the commodity currencies, although it may still lose ground over time against the resurgent USD if milk prices fall further.

Oil continued to decline after the US Energy Information Administration said that supplies in the US rose unexpectedly last week and OPEC forecast that demand for its oil would fall in 2015. (Note however that OPEC still expects global demand for oil to increase next year, although it also cut its forecast for that slightly too.) To make matters worse, Saudi Arabia’s oil minister rejected the idea of cutting production. His comment – “Why should I cut production?” – makes a decisive dip in WTI below the round number of 60 in the near future all the more likely, in my view.

Australia’s unemployment rate rose to 6.3% in November from 6.2% in October as expected, but this was good news as it indicates discouraged workers are returning to an improving labor market. Employment jumped by 42.7k, almost double last month’s 24k. Nonetheless AUD was only slightly stronger against the USD, perhaps because of the continued decline in commodity prices and global stocks. I remain much more enthusiastic about NZD than AUD, which seems to be at the mercy of global risk appetite.

Today’s events: There are two central bank meetings today: the Norges Bank and the Swiss National Bank (SNB). At its last meeting in October, Norges Bank left its key policy rate unchanged at 1.5% while Governor Olsen noted that the outlook of inflation and output were broadly in line with their September projections. Yesterday it was announced that Norway’s CPI rate declined to +1.9% yoy in November from 2.0% yoy in October. Although the small decline in the inflation rate seems harmless, bearing in mind that the low oil prices have given rise to uncertainty over its growth outlook, Norges Bank could signal a rate cut early next year. This could prove negative for the Krone today.

As for the SNB, after Swiss voters rejected the “Save our Swiss Gold” referendum, the bank is most likely to reaffirm the EUR/CHF floor of 1.20 and to keep its benchmark interest rate close to zero. A press conference will follow the decision. The main question about Swiss monetary policy is whether they will institute negative interest rates. So far the market has not challenged the EUR/CHF floor significantly and so I believe they will hold fire on such a move until it’s absolutely necessary.

Also, the ECB will carry out its second targeted long-term refinancing operation (TLTRO) today. The total available for banks in the September and December TLTROs is EUR 400bn. Only EUR 83bn was allotted in September, meaning that up to EUR 317bn is available today. However, nobody expects the full amount to be taken up. The low end of expectations is around EUR 120bn and the high end around EUR 180bn. A lower-than-expected allotment will increase the likelihood that the ECB will have to embark on a full-fledged quantitative easing program and thus could be somewhat EUR-negative. Market expectations are not very high for the operation, however, so a higher-than-expected result would probably be a bigger surprise. That would cause some doubt about the likelihood of a QE program and thus would probably cause a sharp rise in EUR/USD.

In Europe, it’s CPI day. Germany’s final CPI for November is coming out but as usual the forecast is the same as the initial estimate. The French CPI for the same month is forecast to have decelerated. Sweden’s CPI is the inflation figure that will attract most of the attention. The country is expected to have fallen deeper into deflation in November. This could really hurt the Krona. The big question now is: what aces do the Riksbank have hidden in its sleeve for its meeting next week, since at their last meeting, policy makers cut rates to zero? Sweden’s unemployment rate for November is also coming out and is estimated to have declined by a percentage point.

In the US, headline retail sales are forecast to have accelerated. However, usually the focus is on retail sales excluding auto and gasoline, which is forecast to show a slowdown. That could weaken the dollar a bit. Initial jobless claims are expected at 297k, the same as the previous week. This will leave the 4wk moving average more or less unchanged.

During the European day, Bank of England Governor Mark Carney speaks at a news conference in London and Bank of Canada Governor Poloz will give a speech at the Economic Club of New York.

The Market

EUR/USD breaks the short-term downtrend line

EUR/USD continue firming up on Wednesday, breaking above the black downtrend line and confirming the morning star candle formation identified on the daily chart. However, the advance was halted slightly below our resistance of 1.2515 (R1), near the 200-period moving average. Given that the rate stays above the aforementioned trend line, I would expect further upside and a test of 1.2515 (R1). A clear move above that barrier is likely to pull the trigger for the 1.2600 (R2) area. Our short-term momentum studies maintain a positive tone as well. The RSI continued higher and now appears able to enter its overbought field, while the MACD stands above both its zero and signal lines. On the daily chart, the 14-day RSI is pointing north and could move above its 50 line any time soon, while the MACD, although negative, stands above its trigger. These signs reinforce the case that we are likely to see further upside corrective moves in the near future. Also, I can spot positive divergence between both these daily indicators and the price action, which indicates that the longer-term downturn is losing momentum.

• Support: 1.2450 (S1), 1.2400 (S2), 1.2360 (S3)

• Resistance: 1.2515 (R1), 1.2600 (R2), 1.2665 (R3)

GBP/JPY falls below 186.00

GBP/JPY continued its slide, falling below the 186.00 (R1) support (turned into resistance line). On the daily chart, I can spot an evening star candle pattern, which favors the continuation of the pullback. Our daily momentum studies support the notion. The 14-day RSI continued lower after exiting its oversold territory, while the MACD, although at extremely high levels, crossed below its trigger line. However, since the rate is still trading above both the 50- and the 200-day moving averages, I still believe that the broader trend is to the upside, thus I would consider the recent setback or any extensions of it as a retracement of the longer-term uptrend.

• Support: 184.00 (S1), 181.00 (S2), 178.00 (S3)

• Resistance: 186.00 (R1), 188.00 (R2), 190.00 (R3)

NZD/USD shoots up as RBNZ signals future rate hikes

NZD/USD surged yesterday after RBNZ Governor Graeme Wheeler said that more rate increases will eventually be needed. The pair rallied back above the 0.7700 (S2) to hit resistance at 0.7870 (R1). Both our near-term momentum studies entered their positive territories, but the RSI topped marginally below its 70 line and is now pointing down. As a result, I would be mindful of a possible pullback perhaps towards the 0.7760 (S1) support barrier. As for the bigger picture, the rate is back within the sideways channel between the 0.7700 (S2) and 0.7980 (R3) zones, and this keeps the overall outlook of this pair neutral in my view.

• Support: 0.7760 (S1), 0.7700(S2), 0.7660 (S3)

• Resistance: 0.7870 (R1), 0.7915 (R2), 0.7980 (R3)

Gold consolidates below the 1235 area

Gold moved in a consolidative manner yesterday, staying between the support line of 1222 (S1) and the resistance of 1235 (R1). A clear move above the 1235 (R1) barrier could prompt bullish extensions towards our next resistance barrier at 1255 (R2), determined by the high of the 21st of October. It is worth noting that the 1255 (R2) obstacle currently coincides with the 200-day moving average. In the bigger picture, the move above the trend line taken from back the high of the 10th of July flips the picture of the precious metal mildly to the upside in my view. Our daily momentum indicators corroborate that view. Both of them are in a rising mode and the both lie within their positive territories.

• Support: 1222 (S1), 1210 (S2), 1186 (S3)

• Resistance: 1235 (R1), 1255 (R2), 1270 (R3)

WTI finds support marginally above 60.00

WTI continued lower yesterday, breaking below the support (turned-into-resistance) line of 62.00 (R1). Nevertheless, the decline hit support marginally above the round number of 60.00 (S1). Taking a look at our near-term momentum studies, I would be cautious as we may see an upside corrective wave before sellers pull the trigger again. The RSI seems ready to exit its oversold field, while the MACD, although negative, could move above its signal line any time soon. However, our daily technical studies support a negative overall outlook. Both the 50- and the 200-day moving averages stand above the price curve and their slope is to the downside. The 14-day RSI lies within its oversold territory pointing down, while the daily MACD, already at extreme low levels, stands below its trigger. These momentum signs designate strong downside momentum and reinforce the case that we are likely to see lower oil prices in the close future. A decisive dip below the round number of 60.00 (S1) is likely to challenge as a first support the low of the 10th of July 2009, at 58.60 (S2).

• Support: 60.00 (S1), 58.60 (S2), 56.65 (S3)

• Resistance: 62.00 (R1), 64.00 (R2), 66.70 (R3)

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