Game may be up for Greece; UK CPI, US retail sales, China data ahead

The dollar is opening generally weaker in Europe Tuesday morning with no real news that I can find behind the move. Fed funds rate expectations retreated modestly, the first fall in a week, even though San Francisco Fed President Williams said he saw less risk that the US economy might fall back into recession once the Fed starts raising interest rates. Among the G10 currencies, the dollar was higher only vs EUR, while JPY was the biggest gainer (see below).

FT says Greece preparing for default Today’s Financial Times says that Greece is preparing to declare a debt default unless it can reach a deal with its international creditors by the end of April. It says the government has decided to withhold €2.5bn of payments due to the IMF in May and June if no agreement is struck. The paper cautioned that the warning could just be a negotiating tactic, but said it nevertheless underlines the reality that the country is rapidly running out of money. “We have come to the end of the road . . . If the Europeans won’t release bailout cash, there is no alternative [to a default],” the paper quoted one government official as saying. Another Greek official denied the story, however. A default would almost certainly lead to the suspension of emergency ECB liquidity assistance for the Greek financial sector, the closure of Greek banks, capital controls and wider economic instability. The German newspaper Frankfurter Allgemeine Sonntagszeitung (FAS) said that the Euro Working Group of deputy finance ministers last Thursday gave Athens a six working day deadline (apparently until Monday, April 20th) to present a revised economic reform plan before euro zone finance ministers meet on April 24 to decide whether to unlock emergency funding to keep Greece afloat. So it seems that the moment of crisis may be at hand. If the country cannot produce an acceptable plan by next Monday, then it looks like the game may be up. Of course, “acceptable” is a flexible term. The likeliest course of events, I believe, is that the Greeks come up with something a bit more to the EU’s liking and the EU deems it sufficient in order to prevent a crisis. However, nothing is ever certain in human events.

JPY jumps on comments by Abe advisor Koichi Hamada, an advisor to Japanese PM Abe, yesterday said that “selling of the yen is coming closer to its limit bit by bit.” He said that based on purchasing power parity (PPP), 105 might be a more appropriate level for USD/JPY. That largely agrees with what the OECD calculates for Japan. Nonetheless, PPP has never been a major constraint for JPY. USD/JPY was overvalued on PPP for years, so why can’t it be undervalued for years, too? There does seem to be some political resistance nowadays in Japan to further weakening of the yen. However, the fact that the Bank of Japan has failed so completely in its attempt to reach a 2% inflation target, plus the need for Japanese exports to remain competitive, makes me believe that they will probably not only resist appreciation of the currency but also encourage further depreciation. I remain bearish on the yen.

Today’s highlights: During the European day, Sweden’s PES unemployment rate for March fell to 4.0% from 4.2%, a deeper decline than the expected 4.1%. Sweden’s CPI for March is forecast to have accelerated to +0.3% yoy from +0.1% yoy previously. On the 18th of March, the Riksbank took further steps to combat low consumer price growth. The Bank cut interest rates to -0.25% and expanded its government-bond purchase plan outside of its schedule for policy decisions. With the inflation rate moving in the right direction, I would expect the bank to remain on hold at its next policy meeting on the 29th of April, and wait to see if the positive effects of the aforementioned easing measures continue. Although the Bank does not like a strong Krona, the CPI numbers are likely to support the currency at least temporarily. Having in mind the Bank’s stance against SEK and that USD is the most attractive currency among its major counterparts, I would expect a possible decline in USD/SEK tomorrow following the CPI figures to provide renewed buying opportunities.

The ECB publishes its Bank Lending Survey for Q1 2015. This will be the first survey after the Bank initiated its QE program, so it may show whether the ECB’s efforts have boosted banks’ willingness to lend. Lending in January was down only 0.1% yoy and looks poised to move into positive territory. It’s fallen on a yoy basis every month since May 2012.

In the UK, we get the CPI for March. Both the headline and core inflation rates are forecast to have remained unchanged at 0.0% yoy and +1.2% yoy respectively. Bearing in mind the warning the Bank of England’s Inflation Report that the CPI will most likely turn negative, a dip into deflation would not be much of a surprise. This could push further back expectations of a rate hike and increase the selling pressure on sterling. As the graph shows, prices in stores are falling considerably faster than the overall inflation rate, meaning downward pressure on prices remains. I still expect GBP/USD to continue its slide and to challenge the psychological zone of 1.4500 in the near term. The UK PPI for March is also coming out.

In the US, retail sales for March are due out. Headline retail sales are forecast to have risen +1.0% mom in March, a turnaround from -0.6% mom in February. The core rate (excluding the volatile items of auto and gasoline) is expected to rebound as well to +0.6% mom from -0.2% mom. A positive figure would support the theory that the weakness in the preceding two months was mainly due to the harsh weather, and could add to the dollar’s strength. The US PPI data for the same month are also to be released.

Riksbank Governor Stefan Ingves and Norges Bank Governor Oeystein Olsen speak today.

Tomorrow morning, before the European day begins, a lot of China data for March is released: retail sales, industrial production, fixed asset investment and the all-important Q1 GDP. This is important as the January and February data is distorted by the Chinese New Year, so March is really the first month that we get to see the underlying picture clearly. Retail sales, IP and FIA are expected to grow at about the same pace as they did during the first three months of last year, showing no acceleration but no slowdown either. GDP on the other hand is expected to slow to 7.0% yoy from 7.3%. This is the government’s target so it wouldn’t necessarily set off any alarm bells. However, there may be some doubts about whether they can maintain that growth rate in the future. Bloomberg calculates an estimated GDP figure based on frequently released data and their estimate has fallen to 6.3%. So the risk to that figure, and the AUD and NZD, is probably on the downside. 

The Market

EUR/USD hits support slightly above 1.0500

EUR/USD continued trading lower on Monday, but hit support slightly above 1.0500 (S1) and rebounded somewhat. Taking a look at our momentum studies, I would be watchful that the bounce may continue for a while before the next leg down. The RSI exited its oversold territory, while the MACD has bottomed and crossed above its trigger. Today, US retail sales for March are forecast to have rebounded. This could be the trigger for the next leg down and perhaps a test at the psychological zone of 1.0500 (S1). Having I mind that the break below 1.0715 (R3) signaled the completion of a double top, I would consider the short-term bias to stay negative. In the bigger picture, EUR/USD is still trading below both the 50- and the 200-day moving averages. A clear close below 1.0460 (S2) will confirm a forthcoming lower low and trigger the resumption of the larger downtrend.

• Support: 1.0500 (S1), 1.0460 (S2), 1.0360 (S3).

• Resistance: 1.0600 (R1), 1.0650 (R2), 1.0715 (R3).

EUR/GBP completes a double top formation

EUR/GBP traded lower yesterday and broke below the support (now turned into resistance) hurdle of 0.7220 (R1) to complete a double top formation. The short-term bias is therefore to the downside and I would expect the rate to challenge our support line of 0.7160 (S1). A break below that obstacle is likely to pave the way for our next support at 0.7100 (S2). Nevertheless, today we get the UK CPI for March, and there is a chance for the headline rate to turn negative. Having that in mind, I would stay cautious of a possible corrective bounce above 0.7220 (R1) before the bears seize control again. On the daily chart, the completion of the aforementioned double top confirms that the 11th of March – 3rd of April recovery was just a 38.2% retracement of the 16th December – 11th of March decline, and that the overall downtrend is gaining momentum again.

• Support: 0.7160 (S1), 0.7100 (S2), 0.7030 (S3).

• Resistance: 0.7220 (R1), 0.7275 (R2), 0.7315 (R3).

GBP/JPY appears ready to move below 175.50

GBP/JPY slid after hitting resistance at 176.50 (R1). During the early European morning Tuesday, the rate is heading towards the support line of 175.50 (S1), where a clear break could open the way for a test at our next support territory of 174.00 (S2). A negative UK CPI rate could be the catalyst for such a breach. Our daily momentum studies detect strong downside momentum and magnify the case for another leg down. The 14-day RSI hit resistance slightly below its 50 line and turned down, while the daily MACD, already negative, has crossed again below its signal line. As for the bigger picture, the rate has moved well below the 200-day moving average. Moreover, a daily close below the 175.50 (S1) line could complete a 5-month failure swing top and perhaps turn the overall outlook negative.

• Support: 175.50 (S1), 174.00 (S2), 173.00 (S3).

• Resistance: 176.50 (R1), 177.55 (R2), 178.40 (R3).

Gold trades near the 200-period EMA

Gold slid on Monday, but the decline was stopped near the 50- and the 200-period moving averages. The precious metal is still trading within a possible short-term downside channel, thus I would consider the short-term picture to be cautiously negative. I still expect another test at 1192 (S1), where a clear break could open the way for our next support zone at 1180 (S2). Switching to the daily chart, I see that on the 6th of April, gold formed a shooting star candle after hitting the 50% retracement level of the 22nd of January - 17th of March decline. This makes me believe that the 17th of March – 06th of April recovery was just a corrective move and that the bias is back to the downside.

• Support: 1192 (S1), 1180 (S2), 1165 (S3).

• Resistance: 1210 (R1), 1220 (R2), 1235 (R3).

WTI hits resistance at 53.00

WTI raced higher on Monday, hit resistance at 53.00 (R1), pulled back and rebounded from near the 51.80 (S1) zone. Having in mind that on Friday, WTI broke above the upper line of a falling wedge formation, I would expect the price to trade higher at least in the short run. A clear move above the 53.00 (R1) hurdle is likely to pull the trigger for the 54.00 (R2) zone, defined by the highs of the 7th of April. Our daily oscillators indicate bullish momentum and support the notion. The 14-day RSI stands above its 50 line and up, while the daily MACD lies above both its trigger and zero lines, pointing north as well. Although I would expect WTI to move higher in the short run, I would adopt a flat stance as far as the overall picture is concerned. The reason is because the price has been oscillating between 44.00 and 55.00 since the beginning of the year with no clear trending structure.

• Support: 51.80 (S1), 51.00 (S2), 50.30 (S3).

• Resistance: 53.00 (R1) 54.00 (R2), 55.00 (R3).

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