Euro Resilient in the Face of Greek Tragedy, but for How Long??

Highlights

• Market Movers: Weekly Technical Outlook
• EUR: Resilient in the Face of Greek Tragedy, but for How Long?
• Look Ahead: Equities
• Look Ahead: Commodities
• Global Data Highlights
  

Market Movers: Weekly Technical Outlook

Technical Developments to Watch:

• EUR/USD volatile as rates oscillate around 1.1400
• GBP/USD pressing top of established bearish channel
• USD/JPY testing top of symmetrical triangle pattern at 119.00
• AUD/USD in play, further bounce possible within bearish channel
  

EUR/USD

EURUSD took traders on a rollercoaster ride last week, moving over 200 pips on each of the last four trading days (up, down, up, then down again respectively). As we head into the weekend, the pair is trading near 1.1300, roughly where it opened last week despite all the excitement. The secondary indicators are looking better though, with the MACD crossing above its signal line and the Slow Stochastics solidly neutral. For this week, the bias will remain lower as long as EURUSD holds below its 20-day EMA near 1.1500.

GBP/USD

Unlike its mainland neighbor, GBPUSD actually made some progress last week, with rates rallying to a four-week high near 1.5300 before stalling out on Friday. From a technical perspective, the rally was foreshadowed by Tuesday’s clear Bullish Engulfing Candle*, though Friday’s strong NFP report eventually took the wind out of the bulls’ sails. The MACD has turned higher, but prudent traders will treat last week’s rally with skepticism unless rates can break above last week’s high in the lower-1.5300s.

*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.

USD/JPY

The first four trading days of the week were snore-inducing, but volatility in USDJPY finally picked up following Friday’s stellar NFP report. As we head into the weekend, rates are testing the top of the recent symmetrical triangle in the lower 119.00s, though the secondary indicators are not suggesting a breakout yet. That said, if we do see a bullish breakout this week, buyers may look to target round handle resistance at 120.00 or 121.00 next.

AUD/USD

AUDUSD is our currency pair in play this week due to a number of high-impact economic reports out of Australia and the US (see “Data Highlights” below for more). Last week, the pair held up surprisingly well despite the RBA’s hotly debated decision to cut interest rates by 25bps. After Tuesday’s intraday dip to the lower .7600s, rates recovered to trade back around .7800, meaning that AUDUSD actually finished higher on the week. Both the MACD and Slow Stochastics are showing signs of turning higher, so a continued bounce is possible, but as long as rates remain within the established bearish channel, any gains will be limited over the medium term.

EUR: Resilient in the Face of Greek Tragedy, but for How Long?

A momentous event occurred in the bond markets last week: German 10-year yields fell below those in Japan for the first time, as you can see below. This is significant for a couple of reasons. Firstly, it suggests that the market believes Japan is more resilient to the threat of deflation compared to the Eurozone. Since Japan has been fighting deflation for the past 20 years, the ECB’s new QE program might just be a drop in the ocean, and loose monetary policy in the currency bloc could become a long-term feature. Secondly, German debt has become the safe haven of choice as the market deals with another act in the latest Greek tragedy.

Greece in no-man’s land

After a frenetic week of travelling around Europe, the new Greek PM and finance minister start their third week in office having achieved very little. German officials have rejected a plan put forward by the new Greek finance minister that would swap Greek debt held by the ECB and EU into new bonds that are tied to the growth rate of the Greek economy. Essentially this would mean that debt repayments would fall when growth was weak, which would avoid the need for write-downs and haircuts. While this may seem like a sensible plan, Greece’s creditors rejected it out of hand and do not seem willing to negotiate reducing Greece’s debt burden. This may prove shortsighted as Greece’s debts, at over EUR 200bn, are unlikely to be paid back in full and even the Greek finance minister said Greece was an insolvent country.

Athens isn’t getting much love from the ECB either. Europe’s central bank stopped accepting Greek collateral in return for cheap loans last Wednesday, which sent the share prices of its beleaguered banks into freefall. The problem for Greece is that its bailout comes to an end this month, and without a new program its banks could find themselves in a precarious position without access to emergency funding when deposits are dwindling. In addition, Greece still has a hefty loan repayment schedule for the first half of this year.

Syriza: More bark than bite?

While European stock markets are in panic mode, the currency market is taking a more sanguine approach. EURUSD is set to close the week higher, although at the time of writing is was not able to sustain gains above 1.15; it looked comfortable above 1.14, well above the sub-1.11 lows from last month. This resilience could be driven by fresh hope that Greece will avoid bankruptcy and reach a deal with its creditors this week.

There were some signs that the new Syriza government in Greece may be willing to soften its stance towards bailout terms and agree a bridging program to tide it through until all parties could agree to a new deal. Greek politicians have a tough task this week as they try to buy some much-needed time to avoid a bailout. If they can do so in the coming days, then we may find that Syriza has more bark than bite, and its position of power in Greece may not be that scary a prospect. This could trigger a recovery rally, particularly in European stocks and maybe the euro.

The outlook for the EUR:

Our outlook for EURUSD is fairly constructive as we start a new week. Aside from expectations about a Greek deal, which are likely to build this week as we are only days away from the end of Greece’s bailout program, the EUR is also able to fly under the radar as FX bears start to focus on currencies where central banks have the ability to cut rates. This means that the JPY and EUR may be safe from a fresh wave of selling pressure in the short term, as the market instead focuses on the CAD, AUD and even the pound, if politics come to the forefront.

Overall, EURUSD could trade in a 1.11- 1.15 range for the next few days. The risk is to the upside if Greece does manage to get a bridging deal to cover its financial needs and those of its banks when its bailout ends later this month. However, in the longer term we are still EUR bears. As you can see in the chart below, with German yields below Japanese yields, this suggests to us that the EUR could become the new funding currency of choice in the coming months.

(We would like to thank James Brown, strategist for our institutional brand GTX, for his help with this article and the chart below)

Look Ahead: Equities

Investors have piled into equities over the past five days, causing the major US indices to turn higher for the year after a downbeat start. There was no single stand-out catalyst behind this turnaround. After all, the US fourth quarter earnings season has so far been a poor one, especially if you exclude the likes of Apple and Twitter from the list. On top of this, the political situation in Greece has deteriorated while there is no end in sight for the troubles in Ukraine or across the Middle East. Against these backdrops, one would have expected equities to underperform. But these are not normal times, with central banks continuing drive down yields by means of cutting interest rates or by using unconventional policy tolls such as QE. As the FT reported on Thursday, some 542 rate cuts have now been recorded since the collapse of Lehman Brothers in 2007 and this number may get even larger as the global economy fights threats of deflation. Therefore,  it looks like yield-seeking investors are simply left with little choice but to continue what they have been doing ever since the central banks’ “race to the bottom” started: pile into equities. Admittedly, the Eurozone economy is showing signs of growth and things are looking bright in the UK, too. In the US, the macro picture was beginning to look not-so-strong following the release of mixed-bag data. But on Friday we had a stellar jobs report that showed among other things a surprisingly large 0.5% jump in earnings growth. So the equity bull market is not totally unjustified. But are we climbing a wall of worry? Despite all the austerity measures across many European countries, the level of global debt has continued to outpace economic growth. According to research from McKinsey & Co, global debt has increased by $57 trillion since 2007 to almost $200 trillion today. This translates to 286% of GDP compared to 270% then, and more worryingly China’s debt relative to its economic size is now higher than that of the US.

Nevertheless, stocks are continuing to push higher and the technical outlook for US equities all of a sudden looks a lot brighter. Just at the start of the week, the S&P was threatening to break the neckline of a Head and Shoulders reversal pattern. However this pattern has now been invalidated after the buyers managed to defend the key 1980/90 support area successfully. As a reminder, this 1980/90 area corresponds with the 200-day moving average and also the 38.2% Fibonacci level of the last upswing. As the 38.2% represents a shallow retracement, it suggests that the next leg of the potential rally could be quite significant as the market is still evidently controlled by the bulls rather than the bears. The S&P has now broken out of the pennant consolidation pattern to the upside, as can be seen on the chart. Short-term speculators should watch the area around 2070 closely going forwards because this is where the previous couple of rallies had stalled. If the S&P goes on to break through this area then it would clear the way for a move towards the previous record high of just under 2093. Beyond this, the next bullish targets would be the 127.2 and 161.8 percent Fibonacci extension levels of the last downswing, at 2125 and 2165 respectively. The near-term bias remains bullish unless the index goes on to break back below the 2025 support level. Should this happen then the way towards the above-mentioned 1980/90 support area would be cleared.

Look Ahead: Commodities

On Thursday crude oil made back almost all the losses from the day before and both contracts are up again on Friday, hovering near the highs from earlier in the week as we go to press. Despite the release of strong US jobs data, the oil market has barely reacted, suggesting that prices are still driven by supply-side factors rather than demand. This trend is likely to remain in place for some time yet, unless we see a marked improvement in the economy over the coming months. The large daily price swings we saw this week clearly suggest that emotionally charged speculators are not too sure about oil's direction. On the one hand, there have been signs that suggest oil output in the US is about to decline meaningfully, with oil producers abandoning some exploration projects as highlighted by the significant falls in rig counts lately. On the other hand, the oil market is still excessively oversupplied and there is no guarantee that the falls in rig counts will necessarily translate into lower crude production. So far, most of the falls have been in the less-efficient vertical and directional rigs as opposed to the horizontal ones. The latter are extensively used in shale oil production and are much more efficient. Until and unless these types of rigs also start falling significantly then the risks are that the oil surplus will remain in place for a lot longer than some currently expect. Specifically, there needs to be evidence of a generous drop in rig counts at the leading US shale regions of Bakken, Eagle Ford and Permian before one could conclude that the oil market will be more balanced this year. In the longer-term, prices are unlikely to rise significantly and remain elevated for if they did there is nothing to stop shale producers from ramping up drilling activity and production once again.

Nevertheless, oil prices appear to have formed a base for the time being. As they have now recovered more than 20% off their lows they are, at least technically speaking, in a bull market. However, despite the recent upsurge, oil prices have not even retraced to their extremely-shallow 23.6% Fibonacci levels yet. For Brent, this Fibonacci level comes in around $61.80 while for WTI it is at $58.70. Thus the longer-term bearish trend for oil is by no means over just yet. Brent is currently holding above its 50-day moving average ($57.20) and trying to break above resistance at $58.50. A potential closing break above here could pave the way for that Fibonacci level or even the next key resistance at $63.00. There are several short-term support levels to watch but the key support is way down at $52.40, which was formerly resistance. Meanwhile WTI is testing resistance around $52.50. A closing break above here may pave the way for a move towards the Fibonacci levels shown on the chart. Failure here could mean more sideways action next week.

Global Data Highlights

Monday, February 9, 2015

0:15 GMT             Reserve Bank of Australia’s Governor Glenn Stevens Speech

Following the RBA’s interest rate cut last week, the AUD floundered for about a day, but then took part in a furious short squeeze that returned it back to pre-RBA cut levels. Subsequent reports have shown that the RBA isn’t finished loosening monetary policy, and Governor Stevens may try to hammer that point home in this speech. He has been known to jawbone the AUD lower in the past, and it may serve his nation well if he were to do it again.

Tuesday, February 10, 2015

1:30 GMT             Chinese Consumer Price Index (January)

Along with many other major nations in the world, China is concerned about the lack of inflation it has been experiencing of late. The People’s Bank of China made a preemptive strike this past week by loosening monetary policy, which may indicate that this CPI report is weaker than many pundits expect. If that is the case, tangential currencies like the AUD and NZD could suffer the most.

15:00 GMT          IBD/TIPP Economic Optimism Index (February)

According to last month’s read on this report, optimism finally outweighed pessimism for the first time in over two years as broad confidence in the US recovery and low oil prices supported those happy thoughts. This month’s report is anticipating more of the same, and after the string of employment reports we have witnessed, don’t be surprised to see a better than expected result.

Wednesday, February 11, 2015

All Day                  Eurogroup Meetings

With all the goings on around the Eurozone lately (ECB QE, Greek elections, etc.) there could be A LOT to talk about between the political and financial leaders of the nations that make it up. European leaders have been known to drop hints of discontent to the press in the past which has caused upheaval in the EUR, and considering the defiant “teenage boy” attitude of Greek Prime Minister Alexis Tsipras, things could get very interesting. If there are signs of strife, watch for the EUR to suffer as uncertainty breeds desire to seek safety in the USD.

23:50 GMT          Business New Zealand PMI (January)

Now that milk prices have started to make a turnaround, things are looking up for the Kiwi nation. Last month’s 57.7 result was a welcome increase from the previous month’s 55.2, and the momentum could continue with this release.

23:50 GMT          Japanese Machinery Orders (December)

This report is considered a strong leading indicator of Japanese business trends as it tracks orders at major manufacturers and the goods they produce. Since the increased consumption tax, this figure has been hit or miss with last month showing a woeful 14.6% decline. Simply based on typical business fluctuations, it may rise with this release, but only 5.9% is expected. If it misses once again, the JPY currency crosses could find even more reason to rally higher.

Thursday, February 12, 2015

0:30 GMT             Australian Employment Change and Unemployment Rate (January)

Employment in Australia has been on a hot streak lately as four out of the last five releases have been better than anticipations. The bar is set extremely low this time around as well with a -4.7k being the consensus. This is the first time consensus has been below zero since mid-2013, and in that instance, a positive number was reported. Could history repeat itself?

10:30 GMT          Bank of England Quarterly Inflation Report

Anyone who follows this report can likely guess that inflation expectations are going to be depressed as virtually the entire world is having trouble boosting their inflationary figures. Since everyone is anticipating that result, there is a possibility that they may not be as pessimistic as we think, giving the GBP a little strength in the process.

10:30 GMT          Bank of England Governor Mark Carney Speech

This will be Governor Carney’s opportunity to explain the forecasts they made in the QIR and clarify certain points for the press. This speech has been known to move the market in the past as Carney could drop hints about future policy decisions in line with what the QIR suggests.

13:30 GMT          US Retail Sales (January)

Everyone loves the USD lately as a nearly flawless NFP report restrengthened support for the Federal Reserve to raise interest rates near the mid-point of this year. Retail Sales is a whole different animal altogether though as it can’t seem to get out of its own way. Last month’s 0.9% decline was a surprise as most expected lower gas prices to boost spending on other products, but Americans utilized the extra spending money to pay down debt. The market is prepared for a fail this time around though as consensus is near -0.3%, so any sign of a positive result could boost the USD even more.

Friday, February 13, 2015

10:00 GMT          Eurozone Preliminary Gross Domestic Product (Q4)

Growth in the Eurozone has been stagnant for virtually the last four years as there hasn’t been a result in GDP above 0.3% since Q1 2011. Not much is expected with this release either with consensus at 0.2%. Now that the ECB has announced QE and set the wheels in motion, GDP becomes less important as it will have no bearing on future actions from the ECB. Regardless, if it is worse than anticipated, the EUR could suffer further.

13:30 GMT          Canadian Manufacturing Sales (December)

Canada surprised the masses this past week with a strong employment report despite the doom and gloom presented by the Bank of Canada and their interest rate cut. The strong result may also change attitudes toward future Canadian releases, but this report is from December, when things weren’t all that great for the US’ northern neighbor. Oil prices were falling and employment for that month wasn’t strong and if consensus is close (-0.9%), this report may not pass muster.

14:55 GMT          US Preliminary UM/Reuters Consumer Sentiment Index (February)

As indicated above, US consumer confidence is soaring as Americans are paying less at the gas pump than they have become accustomed. Last month’s 98.2 result on this report was the highest level in the past decade as we had to go all the way back to January 2004 to beat it with a 103.8. Considering gas prices have stayed low and employment has gotten better, the decadal beats may not be through quite yet. If this can get above the 100 level, King Dollar could rule for the foreseeable future.