The Big Picture

Cautiousness ahead of Fed The dollar tried to rally yesterday but weak data from China and below-forecast industrial production from the US caused investors to question what the FOMC would do on Wednesday. The mood was compounded by new growth forecasts from the OECD that were substantially lower than they were back in May. With questions about the Fed creeping in, EUR/USD failed to make a new low for the year and USD/JPY failed to make a new high. The question is whether the FOMC meeting brings forward the expected time of tightening or not. I would argue that it is likely to, as the weighted average of the “dot plot” forecasts for the Fed funds rate are likely to move higher. Some people are even looking for the FOMC to drop calendar-based guidance from its statement, that is, to remove the line about rates remaining low for “a considerable time” after the end of QE (although I wouldn’t expect such a change until it’s absolutely necessary, which will be next month). But any impact from such changes could be offset by dovish comments from Chair Yellen in the subsequent press conference. In any case, there’s plenty of room for volatility tomorrow.

Scotland: I said yesterday that I thought it would be a mistake for Scotland to declare independence. That view is based solely on economics, primarily currency economics. The problem is that the UK has ruled out a currency union with Scotland. That means if the new country keeps the pound, as its leaders have said it would, it would simply be a passive taker of UK monetary policy. So if everything goes right, they would find their monetary policy determined for them in London without their having any say in the matter. And as we’ve learned from the Eurozone crisis, countries with similar monetary policies have to have similar fiscal policies. In sum, they would cede control of the major levers of their economy in return for..what? A flag? A seat at the UN? And if things didn’t go well for them, if for example Spain vetoed their joining the EU: disaster.

A “yes” vote would also have grave implications for the Eurozone. It would make it more likely that Britain withdraws from the EU after the referendum in 2017. It would also encourage other independence-minded areas, such as Catalonia in Spain, to pursue their dream. And if Scottish voters can decide to leave a 300-year-old union, then disgruntled voters throughout the region may be encouraged to leave the much-younger Eurozone. Just look at the increased votes that anti-establishment parties got over the weekend in both Sweden and Germany. Indeed, it may not be too much to say that a “yes” vote could start people around the world reconsidering just what the role of the nation-state is nowadays and whether they are best served as part of a larger group or whether they should rely more on their tribal group. Calling Kerala?

Australia: The Reserve Bank of Australia (RBA) released the minutes of its September policy meeting. There was no change in its assessment of the currency (”above most estimates of its fundamental value, particularly given the declines in key commodity prices”) and so there was little impact on AUD.

Today: The German ZEW survey for September is the main indicator due out during the European day. The current situation and the expectations indices are both expected to decline, reflecting the impact of the Russian tit-for-tat sanctions and the high degree of uncertainty and geopolitical risks faced by the region. That could put downward pressure on EUR/USD.

In the UK, the forecast for the August CPI is for the inflation rate to slow to 1.5% yoy from 1.6% yoy, a low level last seen in May and before that, in 2009. The slowdown in inflation would likely keep the GBP under selling pressure before the Sept. 18 Scotland’s independence referendum as it makes a rate hike somewhat less likely.

From the US, we get PPI for August and from Canada, manufacturing sales for July are coming out.

We have three speakers on Tuesday’s agenda. Bank of Japan Governor Haruhiko Kuroda, ECB Governing Council member Erkki Liikanen and Bank of Canada Governor Stephen Poloz speak. Poloz’s speech could be market-affecting. His topic is “The role of a floating exchange rate in the Canadian economy and in the Bank’s policy framework” and the speech is followed by a press conference.

The Market

EUR/USD waits for the ZEW survey

EUR/USD traded virtually unchanged on Monday, remaining below the psychological barrier of 1.3000 (R1) and the lower boundary of the blue downside channel, connecting the highs and the lows on the daily chart. The MACD remains near its zero line and could become positive in the near future, while the RSI crossed again above its 50 line. These momentums signs favor more upside, perhaps a test at the psychological line of 1.3000 (R1) as a resistance this time. Nevertheless, taking into account that the German ZEW indices for September are expected to decline, we may see the pair lower. A bad release could probably open the way for another test near the support of 1.2860 (S1) in the near future. A clear break below 1.2860 (S1) is likely to trigger extensions towards the key support zone of 1.2760 (S2), defined by the lows of March and July 2013.

• Support: 1.2860 (S1), 1.2760 (S2), 1.2660 (S3)

• Resistance: 1.3000 (R1), 1.3100 (R2), 1.3160 (R3)

GBP/JPY pulls back

GBP/JPY moved lower after finding resistance at 174.65 (R2). Today we get the UK CPI for August, which is expected to have slowed. As a result, I would expect the pullback to continue, perhaps for a test near the support line of 173.25 (S1). Our momentum studies also support the notion. The RSI moved lower after exiting its overbought field, while the MACD has topped and fell below its signal line. As for the bigger picture, under normal circumstances I would see a cautiously positive overall outlook, since last week’s rally signaled the exit of a broadening formation on the daily chart. However, I would prefer to wait for the results of the Scottish independence referendum before taking a more confident view regarding the overall picture of this currency pair.

• Support: 173.25 (S1), 172.75 (S2), 171.60 (S3)

• Resistance: 173.95 (R1), 174.65 (R2), 175.30 (R3)

AUD/USD rebounds from near 0.9000

AUD/USD reached the psychological line of 0.9000 (S1) as expected, but after finding some buy orders below that line, the pair rebounded. The price structure remains lower highs and lower lows below both the 50- and the 200-period moving averages, thus I would consider the rebound as a corrective move for now. However, taking a look on our momentum studies I see a possibility that the retracement may continue. The MACD lies above its trigger and is pointing up, while the RSI exited its oversold field. I would wait for a dip below the psychological hurdle of 0.9000 (S1) to pull the trigger for extensions towards our next support line of 0.8920 (S2), the low of the 12th of March. In the bigger picture, the dip below 0.9240 signaled the downside exit of the sideways path (marked by the blue horizontal lines) and turned the picture negative.

• Support: 0.9000 (S1), 0.8920 (S2), 0.8890 (S3)

• Resistance: 0.9130 (R1), 0.9200 (R2), 0.9240 (R3)

Gold approaches 1240

Gold moved higher during the Asian morning Tuesday, and in early European trading is slightly below the resistance line of 1240 (R1) and the lower line of the purple downside channel, connecting the highs and the lows on the daily chart. Bearing in mind that the RSI moved higher after exiting overbought conditions and that the MACD crossed above its signal line, I would expect the metal to continue its advance and at least challenge the 1240 (R1) zone as a resistance. Nevertheless, as long as the yellow metal is printing lower highs and lower lows below the prior black support line, I see a negative overall picture and I would consider the recent rebound as a bounce before the bears prevail again.

• Support: 1225 (S1), 1220 (S2), 1200 (S3)

• Resistance: 1240 (R1), 1250 (R2), 1260 (R3)

WTI remains trendless

WTI moved higher yesterday after finding support at 90.70 (S1). This confirms my choice to maintain my neutral stance despite Friday’s fall. As long as the price is trading between the aforementioned support and the resistance of 93.95 (R1), I would consider the path of WTI to be to the sideways. I would wait for a move below the psychological level of 90.00 (S2) before shifting my attention to the downside. Such a break is likely to trigger extensions to the 85.75 (S3) area, defined by the lows of the 18th of April 2013. On the other hand, I believe that only a clear move above 93.95 (R1) could flip the bias to the upside, perhaps towards our next resistance at 96.00 (R2).

• Support: 90.70 (S1), 90.00 (S2), 85.75 (S3)

• Resistance: 93.95 (R1), 96.00 (R2), 96.70 (R3)

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