Commodities, commodity currencies continue to fall

The dollar is mixed this morning vs the G10 currencies, up vs the commodity currencies as commodity prices fell further but down vs the safe-haven JPY and CHF. On the other hand, it’s up against almost all the EM currencies, the only notable exception being MXN, which recovered after the Mexican central bank announced that it would intervene to shore up the peso. So is this a general bout of risk aversion? Commodities resumed their decline; all the metals, both industrial and precious, are lower, as are most energy futures, while agricultural commodities are mixed. But stock markets were generally higher yesterday and are mostly up in Asia today too. Chinese stocks are the exception, but a 1% decline in the Shanghai Composite is nothing to get excited about nowadays.
US GDP disappoints, but inflation rises = lift-off more likely Yesterday’s first estimate of US GDP was notable for the mixed picture it presented. Q2 GDP missed estimates, but Q1 was revised up sharply and now shows an expansion, instead of the contraction that was initially estimated. The revisions to earlier data weren’t so kind, however; 2012 and 2013 were revised down, as were two of the four quarters in 2014 (Q2 was unchanged and Q1 was revised up). The revisions suggest that trend GDP growth in the US isn’t as strong as had been thought. On the other hand, the core personal consumption expenditure (PCE) index for Q2 rose to +1.8% qoq SAAR from +0.8% qoq SAAR, bringing the Fed’s preferred inflation gauge quite near its 2% target. Fed fund rate expectations were up about 4 bps, but it was notable that the 2017 expectations rose a bit more than the 2018 expectations
Perhaps the view is that with inflation getting closer to the target, the Fed may start tightening earlier than expected, but with trend growth apparently somewhat lower than people had thought, their terminal rate is not likely to be as high. The impact on the dollar should be supportive however as the market probably isn’t as concerned with terminal rates in the far distant future as it is with the expected timing of lift-off. Wednesday’s FOMC statement seemed much more confident about the labor market than about the inflation outlook, so the inflation outlook is now the limiting factor for a rate hike.

Japan remains out of deflation, just barely Japan’s national CPI excluding fresh foods rose 0.1% yoy in June, the same pace of increase as in May and keeping Japan just barely out of inflation. Excluding energy as well it was up 0.6% yoy, which did show some acceleration in price increases from May’s +0.4% pace. On the other hand, household spending in the month was down 2% yoy, the 14th decline out of the last 15 months. Moreover the unemployment rate rose while the job-offers-to-applicants ratio fell, calling into question for the moment BoJ Gov. Kuroda’s thesis that the tight labor market would cause inflation to accelerate. All told not an encouraging report. The only really good news we’ve had out of Japan recently was the higher-than-expected industrial production figures for June, which may have something to do with recent strong increases in exports. That makes me think that it’s external demand, not domestic demand, that’s keeping the Japanese economy going. In that case, there’s going to be pressure for the BoJ to keep the yen weak. I remain bearish on the currency.

Today’s highlights: During the European day, Eurozone’s flash CPI for July is coming out. The forecast is for the rate to remain at +0.2% yoy, same as in June. Following the steady German inflation rate on Thursday, the likelihood that the bloc’s CPI will meet the forecast is high. We should keep in mind however that any disappointment could add to expectations that the ECB will have to keep QE in place for longer, which could put EUR under selling pressure. The bloc’s unemployment rate for June is also due out.
In Norway, the unemployment rate for July is expected to increase a bit, which could prove NOK-negative.
From Canada, the monthly GDP for May is expected to be unchanged mom and this is expected to cause the annual growth rate to decelerate. This may weaken CAD somewhat.
In the US, the employment cost index (ECI) for Q2, a closely followed gauge that reflects how much firms and government pay their employees in wages and benefits, is coming out. It is expected to decelerate a bit from Q1, which could weaken USD, at least temporarily. The final University of Michigan consumer sentiment for July is coming out along with the surveys of 1-year and 5-to-10 year inflation expectations. The Chicago Purchasing managers’ index for July is also due to be released.

The Market

EUR/USD continues its tumble and hits the 1.0900 zone

EUR/USD continued trading lower on Thursday and managed to hit support at the 1.0900 (S1) territory before rebounding. Since the rate is trading below the short-term downtrend line taken from back at the peak of the 27th of July, I would consider the short-term picture to stay negative. A break below 1.0900 (S1) is likely to bring into play the 1.0870 (S2) hurdle, while a dip below 1.0870 (S2) is the move that could trigger extensions towards 1.0810 (S3). Nevertheless, taking a look at our short-term oscillators, I see signs that the corrective bounce may continue for a while before the bears seize control again. Perhaps to challenge the resistance line of 1.0985 (R1). As for the broader trend, as long as the pair is trading between 1.0800 and 1.1500, I would see a neutral longer-term picture. I believe that a move above the psychological zone of 1.1500 is the move that could carry larger bullish implications, while a break below 1.0800 is needed to confirm a forthcoming lower low on the daily chart and perhaps turn the overall bias back to the downside.
Support: 1.0900 (S1), 1.0870 (S2), 1.0810 (S3)
Resistance: 1.0985 (R1), 1.1020 (R2), 1.1085 (R3)

GBP/USD hits support at 1.5560

GBP/USD traded somewhat lower yesterday, but hit support at 1.5560 (S1) and then rebounded. I still believe that the short-term picture is cautiously positive, and therefore I would expect the rate to trade higher for another test at around 1.5670 (R1). A break above that resistance would confirm a forthcoming higher high on the 4-hour chart and perhaps open the way for the 1.5735 (R2) line. The RSI hit support at its 50 line and turned up, while the MACD, already positive, looks ready to cross again above its trigger line. These signs reveal positive momentum and support that the pair could trade higher, at least in the short run. On the daily chart, Cable is still trading above the 80-day exponential moving average. This makes me believe that the overall picture remains somewhat positive as well, and that there is still the likelihood for the rate to trade higher in the not-to-distant future.
Support: 1.5560 (S1), 1.5465 (S2), 1.5410 (S3)
Resistance: 1.5670 (R1), 1.5735 (R2), 1.5780 (R3)

AUD/USD trades in a consolidative manner

AUD/USD has been trading in a sideways mode between 0.7250 (S1) and 0.7350 (R1) since the 24th of July. Having that in mind I would consider the near-term picture to be neutral. Taking a look at our short-term oscillators though, I see signs that the forthcoming wave could be positive. The RSI turned up and could move above 50 soon, while the MACD, although negative, looks ready to cross above its trigger line. What is more, there is positive divergence between both these indicators and the price action. A break above 0.7350 (R1) would confirm the case and perhaps target our next resistance at 0.7420 (R2). On the daily chart, the completion of a head and shoulders formation and the move below the psychological zone of 0.7500 (R3) signaled the continuation of the prevailing long-term downtrend, in my opinion. Therefore, I would consider any possible future advances as a corrective move of that major down path. I would expect a clear move below 0.7250 (S1) in the future to open the way for the psychological zone of 0.7000 (S2)
Support: 0.7250 (S1), 0.7000 (S2), 0.6900 (S3)
Resistance: 0.7350 (R1), 0.7420 (R2), 0.7500 (R3)

Gold continues lower and falls below 1090

Gold continued to trade lower yesterday, falling below the 1090 (R1) level. As long as the metal is printing lower peaks and lower troughs below the lower line of the short-term downside channel that had been containing the price action from the 18th of June until the 20th of July, I would consider the short-term outlook to remain negative. I still expect sellers to eventually take control again and aim for another test at the 1077 (S1) hurdle. Looking at our short-term oscillators, I see that the RSI edged lower after hitting resistance at its 50 line, while the MACD, already negative, has topped and fallen below its trigger line. In the bigger picture, the plunge on the 20th of July triggered the continuation of the longer-term downtrend and kept the overall bias of the yellow metal to the downside in my view.
Support: 1077 (S1), 1072 (S2), 1060 (S3)
Resistance: 1090 (R1), 1100 (R2), 1110 (R3)

WTI looks south again

WTI tumbled after hitting resistance at the 49.50 (R2) barrier, which happens to be the 38.2% retracement level of the 15th – 28th of July decline. Subsequently, the price fell below the support (now turned into resistance) of 48.60 (R1), and is now headed towards the 48.00 (S1) line. In my view, the intraday bias is back to the downside and I would expect a clear break below 48.00 (S1) to open the way for the next support at 47.30 (S2). Our hourly oscillators detect downside speed and support the notion. The 14-hour RSI edged lower after falling below 50, while the hourly MACD, already below its trigger line, has turned negative. On the daily chart, I see that the medium-term trend is negative as well.
Support: 48.00 (S1), 47.30 (S2), 46.75 (S3)
Resistance: 48.60 (R1) 49.50 (R2), 50.00 (R3)