US IP could further pressure USD

US retail sales have fallen for the last three months in a row, so with the market recently thinking that the US economy was gradually recovering, expectations were for a recovery in retail sales. However the figures, while higher, missed expectations and the previous two months’ figures were revised down. Small business confidence also fell. On top of which, the IMF revised down its US growth estimates for this year and revised up its estimates for the Eurozone. As a result, Fed funds rate expectations fell back and USD bulls threw in the towel, at least temporarily. The only G10 currency to weaken vs USD was AUD, owing to the weak Chinese data (see next). The oil-related currencies (NOK, CAD, RUB and BRL) were the strongest ones as WTI jumped more than 2%. Our technical analysis suggests oil is likely to move still higher (see below), so these currencies may well have further to go.

China data misses expectations, except GDP The slew of Chinese data out this morning showed continued growth, albeit weaker than expected. Industrial production in particular was below expectations, in fact weaker than all 40 estimates in the Bloomberg survey, while retail sales and fixed asset investment missed slightly. GDP however was spot on the market consensus at 7.0% yoy, exactly at the government’s target. However, if GDP is 7.0% in Q1, then it has to be at least 7.0% every other quarter in order to meet the target for the year. With output, consumption and exports weak, is that likely to happen? Significantly, Chinese stocks fell sharply on the news, in contrast to the good response to Monday’s weaker-than-expected export data. With the weak export data, hopes of government stimulus gave rise to a “bad news is good news” response, but the reaction was different today – perhaps an acknowledgement that the slowdown is more than can be rectified through yet another round of fiscal stimulus? While I expect the government to step in to some degree, officials are determined to restructure the economy and to reduce pollution, and that will require a change in the growth model. Some slowdown seems inevitable. That’s likely to weaken AUD and, to a lesser degree, NZD.

Hamada: I didn’t say what I said Koichi Hamada, an advisor to Japan PM Abe, Monday said JPY was too weak and USD/JPY at 105 would be “appropriate.” Or did he? Tuesday he “clarified” that 120 was “acceptable” and that he would not object to further easing by the BoJ. Looks like someone got on the phone to him and told him what the party line is! As I said yesterday, I still think the Japanese authorities will encourage further yen depreciation. Hamada’s quick backpedalling is a good indication of what they’re really thinking. We’ll learn more when PM Abe addresses the US Congress on April 29th.

Today’s highlights: During the European day, the main events will be the ECB and the Bank of Canada policy meetings.

The ECB meetings last year were the big days for EUR/USD. EUR/USD was usually much more volatile than average on ECB meeting days. Note from the graph how volatile the market was in January, when they announced the details of the QE program, but it was just business as usual for the FX market during the March meeting. With no changes in the Bank’s policy likely for the time being, I would expect the FX market’s performance to be more like it was in March rather than January.

The big question last month was whether the ECB would be able to find EUR 60bn of bonds to buy each month, but the first month of the QE program has been successful. Expectations for new measures are limited. It’s been discussed whether the ECB might cut the deposit rate further, since it will not purchase bond yielding less than the deposit rate. I believe that something like that is unlikely, at least at this early stage. Another cut would just lead to bond yields declining towards the new rate, meaning that the ECB would simply have to buy bonds at higher prices without necessary having more to purchase.

There could be questions about whether the ECB might begin tapering its QE program earlier than scheduled if, as it now projects, inflation rises back above 1.0% at the beginning of 2016 as the effects of low energy prices drop out of the annual rate of change. I expect Draghi to emphasize that the ECB is planning to continue its easing programs as scheduled. He has argued that “the Governing Council will take a holistic perspective when assessing the path of inflation. It will evaluate the likelihood for inflation not only to converge to levels that are closer to 2%, but also to stabilize around those levels with sufficient confidence thereafter”. The “taper tantrum” in the US showed that even talking about tapering can send rates up, which could halt the recovery as it is getting started.

It is likely that we will hear again questions about Greece. Greece did not get much attention last time, as the focus was on the QE details. This time I expect questions about the appropriate conditions for the ECB to re-start financing the Greek economy and the limits to ELA. Finally, there could be some questions about the sharp drop in the euro, but the ECB’s view has always been that they do not target the euro and so it is not for them to discuss.

The Bank of Canada surprised the market in March by keeping rates unchanged and saying that “the risks around the inflation profile are now more balanced.” Accordingly, the market looks for no move at today’s meeting. The Canadian dollar and oil prices have been fairly stable since the last meeting. The BoC said it expects that that “most of the negative impact from lower oil prices will appear in the first half of 2015,” but several recent statistics (employment, housing starts, trade) have surprised on the upside. I too expect them to keep rates steady. With no change in rates, the market impact will depend on the tone of the statement and the Bank’s inflation and growth projections. I expect an optimistic statement. Moreover, some people could be positioned for a cut. I would therefore expect a further decline in USD/CAD (i.e., CAD to firm). CAD may well be more volatile today than EUR.

As for today’s economic indicators, the final figure of Germany’s CPI for March is coming out, and as usual is expected to confirm the preliminary release. The French CPI rate is expected to exit deflationary conditions and to show no changes in consumer prices. Eurozone’s trade balance is also coming out.

In the US, the Empire State manufacturing index is expected to show that business conditions for NY manufactures have improved in April, while the US industrial production for March is expected to have declined after ticking up in February. That could put further pressure on USD after yesterday’s disappointing retail sales numbers. The NAHB housing market index is for April is also coming out, while the Federal Reserve releases the Beige Book.

Besides Draghi and Poloz, BoJ Governor Haruhiko Kuroda and St. Louis Fed President James Bullard speak.

The Market

EUR/USD firms up and hits resistance near 1.0715

EUR/USD raced higher yesterday after the US retail sales rose by less than anticipated in March, while the US PPI fell 0.8% yoy following a 0.6% yoy decline in the preceding month. Nevertheless, the shoot up stopped fractionally below the 1.0715 (R1) resistance hurdle, which is the 38.2% retracement level of the 6th - 13th of April decline. I believe that yesterday’s move was just a corrective move for a test at the neckline of the double top, and that we are likely to see the pair trading lower in the near future. A clear dip below the 1.0600 (S1) line could set the stage for extensions towards the psychological zone of 1.0500 (S2). Today’s movement will depend largely on ECB President Draghi’s comments at the press conference following the ECB policy decision. 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 (S3) will confirm a forthcoming lower low and trigger the resumption of the larger downtrend.

Support: 1.0600 (S1), 1.0500 (S2), 1.0460 (S3).
Resistance: 1.0715 (R1), 1.0800 (R2), 1.0890 (R3).

USD/JPY rebounds from 119.00

USD/JPY edged up yesterday after hitting support at 119.00 (S1), near the lower bound of an upward sloping channel that had been containing the price action since the 26th of March. I believe that the short-term bias is positive and I would expect the bulls to challenge the psychological zone of 120.00 (R1) soon. A break above that key barrier is likely to extend the bullish wave, perhaps towards the next resistance at 120.80 (R2), defined by the high of the 13th of April. On the daily chart, the rate is trading near the 50-day moving average, well above the 200-day one, also above the upper line of the triangle formation that had been containing the price action since November. This keeps the overall uptrend intact, but given that there is still negative divergence between the daily oscillators and the price action, I would prefer to stand aside for now as far as the overall picture is concerned.

Support: 119.00 (S1), 118.35 (S2), 118.00 (S3).
Resistance: 120.00 (R1), 120.80 (R2), 121.20 (R3).

USD/CAD trades lower ahead of the BoC policy meeting

USD/CAD fell sharply yesterday after the disappointing US data and hit support at 1.2440 (S1) before rebounding somewhat. Today the BoC meets to decide on its benchmark interest rate. While no change in policy is expected, the recent good data coming out from Canada could bring a more optimistic statement. This could cause the bears to pull the trigger for another test of 1.2440 (S1). A downside break is likely to extend the bearish wave, perhaps towards 1.2385 (S2), defined by the lows of the 26th of February and the 8th of April. Zooming out to the daily chart, I see that the rate has been oscillating between the 1.2385 (S2) and 1.2800 barriers since the 26th of January. Moreover, there is negative divergence between both our daily oscillators and the price action. Therefore, I prefer to take to the sidelines as far as the overall picture of this pair is concerned.

Support: 1.2440 (S1), 1.2385 (S2), 1.2300 (S3).
Resistance: 1.2520 (R1), 1.2565 (R2), 1.2650 (R3).

Gold find support near the lower line of a downside channel

Gold traded lower on Tuesday, but after finding support near the lower line of the short-term downside channel, it rebounded somewhat. As long as the precious metal is still trading within the aforementioned channel, I would consider the short-term picture to stay negative. I believe that we are likely to see another test of the lower bound of the channel and the 1180 (S1) support area. Our short-term oscillators support the notion. The RSI, already below its 50 line, has turned down, while the MACD stands below both its signal and zero lines. 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: 1180 (S1), 1165 (S2), 1150 (S3).
Resistance: 1200 (R1), 1210 (R2), 1220 (R3).

WTI breaks above 53.00

WTI continued to trade higher on Tuesday, and managed to break above our resistance (now turned into support) of 53.00 (S1). Having in mind that on Friday, WTI broke above the upper line of a falling wedge formation, I would expect the price to continue to trade higher at least in the short run. I would expect a test at the 54.00 (R1) area, a resistance zone defined by the highs of the 7th of April. An upside break above that resistance could aim for the psychological zone of 55.00 (R2). Our daily oscillators indicate bullish momentum and support the notion. The 14-day RSI stands above its 50 line and points 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 hold my 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: 53.00 (S1), 51.80 (S2), 51.00 (S3).
Resistance: 54.00 (R1) 55.00 (R2), 55.70 (R3).