The Big Picture

By doing nothing, everything is done OPEC simply kept its production ceiling unchanged at its meeting yesterday, as expected, setting off a further decline in oil prices. As I said yesterday, I expect oil prices to continue to fall as Saudi Arabia pursues its strategy of pushing US shale producers out of the market and punishing Russia for its support of Syrian President Assad.

Which currencies are likely to be hit by lower oil prices? The table here shows some of the major currency pairs’ correlation with oil prices. Clearly, the currency pairs that are most likely to be hit by falling oil prices are USD/CAD, AUD/USD, AUD/JPY, USD/NOK and USD/RUB. It’s noticeable that although AUD/JPY is very high up the list, USD/JPY is virtually uncorrelated.

Lower oil prices means lower inflation around the world and bond yields fell further in Europe yesterday, with German and French 10-year yields hitting record lows (0.70% and 0.99%, respectively). ECB President Draghi yesterday reiterated that he is open to expanding asset purchases to prevent deflation, which is now occurring in only two of the Eurozone countries but may be coming closer anyway – German headline inflation slowed to only 0.5% yoy in November, according to yesterday’s figures. While low inflation may delay the Fed and the Bank of England from starting the process of normalizing interest rates, the ECB is clearly worried about falling into deflation. Although the euro has fallen, oil prices have fallen even faster, leaving energy prices a big negative for European inflation. Lower oil prices should be good for the Eurozone economy, although probably not as helpful as in the US, where energy taxes are lower. But it will make managing monetary policy more difficult.

Japan’s inflation slowed again in October for the third month in a row while retail sales fell from the previous month, demonstrating the difficulty that the government is having in producing the virtuous circle of higher inflation leading to higher consumption and a more vigorous economy in Japan. However, industrial production unexpectedly rose from the previous month, hinting that perhaps the strategy of yen depreciation is finally starting to have an effect on exports. If so, look for the government to continue to emphasize what’s working. While I can’t see the Bank of Japan taking any further steps in the near future, I can see the government quietly encouraging the yen lower. I remain bearish JPY.

Lower inflation also means less need for gold as a hedge against inflation and indeed gold prices fell yesterday. This weekend Switzerland holds its gold referendum and the indications from the latest poll are that it will not pass. A recent poll had 47% voting “no” and only 38% “yes,” with 15% no answer or undecided. This makes it quite unlikely that the measure will pass. Without the promise of large-scale buying from Switzerland, gold investors have little to look forward to in the immediate future. I would expect the price to fall further on disappointment if and when the measure does fail.

Today’s data: During the European day, the main event will be the Eurozone’s estimate CPI for November. With just a week ahead of the ECB’s crucial December meeting, the low inflation confirms President Draghi’s concerns that a stronger recovery is unlikely in the coming months and reinforces my opinion that the euro has plenty of room on the downside.

From Canada, GDP for September is expected to have accelerated from the previous month. Nonetheless, the forecast for September is not enough to cause GDP for Q3 as a whole to accelerate. That could eat into some of the Canadian dollar’s recent gains. CAD has been strengthening against the dollar since early November and a GDP figure as forecast may prove CAD-negative. On top of which, OPEC’s decision to leave its ceiling unchanged is likely to keep CAD under selling pressure.

As for speakers, ECB Governing Council members Carlos Costa and Jens Weidmann speak. The Bundesbank President spoke on Thursday as well and said that solid state finances are needed to assist the Bank to concentrate on its mandate of price stability.

The Market

EUR/USD slides after finding resistance at 1.2530

EUR/USD tumbled after finding resistance at 1.2530 (R1). During the early European morning Friday, the pair is heading towards our support line of 1.2440 (S1), where a dip is likely to challenge the 1.2400 (S2) line once again. Both our near-term momentum studies have turned negative, confirming yesterday’s bearish momentum. The RSI fell below 50 and is pointing down, while the MACD crossed below its trigger and looks ready to obtain a negative sign. On the daily chart, the overall trend of EUR/USD stays to the downside, but given the positive divergence between our daily oscillators and the price action, I would prefer to see a decisive dip below 1.2360 (S3) before getting more confident on longer-term downtrend. Such a break is likely to pave the way for the 1.2250 area, defined by the lows of August 2012.

Support: 1.2440 (S1), 1.2400 (S2), 1.2360 (S3)
Resistance: 1.2530 (R1), 1.2575 (R2), 1.2620 (R3)

GBP/JPY struggles near 186.00

GBP/JPY moved slightly higher on Thursday. During the early European morning Friday it looks willing to challenge the 186.00 (R1) resistance line for the fourth time in eight days. If the bulls are strong enough to overcome that strong resistance zone this time, I would expect them to pull the trigger towards the 189.00 (R2) hurdle. However, although the overall trend of this pair is to the upside, our daily momentum indicators still indicate the possibility of a retracement before the longs take the reins again. I see negative divergence between the 14-day RSI and the price action, while the daily MACD has topped and just crossed below its signal line.

Support: 184.00 (S1), 181.00 (S2), 180.00 (S3)
Resistance: 186.00 (R1), 189.00 (R2), 190.00 (R3)

AUD/USD slightly below 0.8500

AUD/USD moved lower after finding resistance near the 0.8600 (R1) line. Now it’s back below 0.8500 and is heading towards the support obstacle of 0.8480 (S1), determined by the low of Wednesday. As long as the rate is printing lower peaks and lower troughs within the near-term downside channel, I consider the short-term picture to be negative. A break below 0.8480 (S1) is likely to open the way for the 0.8300 (S3) area, defined by the lows of July 2010. Our oscillators support the notion. Both of them stand within their negative territories and below their black downside resistance lines. On the daily chart, since the rate remains below both the 50- and 200- day moving averages, I still see a longer-term downtrend. Moreover, the 14-day RSI and the daily MACD fell below their upside support lines, designating that the downtrend is gaining back momentum.

Support: 0.8480 (S1), 0.8300 (S2), 0.8100 (S3)
Resistance: 0.8600 (R1), 0.8700 (R2), 0.8800 (R3)

Gold ready to challenge the 1180 area again

Gold continued its tumble on Thursday but the decline was halted marginally above the 1180 (S1) support zone. I still expect the metal to challenge that zone or the lower boundary of the black upside channel. If the yellow metal continues its slide below the lower bound of the channel, this would be a first sign that the recovery from 1132 was indeed a corrective phase of the longer-term downtrend. I would expect such a move to trigger extensions towards our next support line of 1160(S2). Both our oscillators stand within their negative fields and stand below their black downside resistance lines, designating bearish momentum.

Support: 1180 (S1), 1160 (S2), 1146 (S3)
Resistance: 1205 (R1), 1222 (R2), 1235 (R3)

WTI plummets below 70 on OPEC decision

WTI extended its decline yesterday after the OPEC decided to keep its official production ceiling unchanged at 30 million barrels a day. The plummet ignored our support line of 71.00 and the round number of 70.00 and stopped at 67.65 (S1). A clear break below that line is likely to target our next support line of 65.00 (S2), marked by the lows of September 2009. On the daily chart, the price structure is still lower highs and lower lows below both the 50- and the 200-day moving averages, and this keeps the overall path of WTI to the downside.

Support: 67.65 (S1), 65.00 (S2), 62.70 (S3)
Resistance: 70.00 (R1), 71.00 (R2), 73.20 (R3)