IronFX Daily Commentary | 23/04/15

23.04.2015, 9am

• Dollar firms as bond markets reverse It may have been comments by star bond market investor Bill Gross that shorting Bunds was the trade of a lifetime that sent bond yields higher yesterday. Bund 10-year yields duly rose 7 bps, as did 10-year Treasury yields. Eurozone peripherals were not affected however and spreads over Bunds narrowed. Apparently some investors fear that the rally in core markets was overdone and used Gross’ comments as an excuse to take profits. Yesterday’s strong US existing home sales figure may also have helped to cement the view that rates were too low. Higher yields in these markets would be normal, in my view, but would not be healthy for the struggling EM currencies, which are likely to suffer in any case from the slowdown in China (see below). Gold also had a bad day because of higher rates and is likely to come under further pressure if core market rates continue to head higher (see technical comment for more details).

• CHF worst-performing currency on extension of negative rates CHF, so far this year the best-performing G10 currency, was the worst performing currency over the last 24 hours after the Swiss National Bank said it would extend negative interest rates to all public entities. When the SNB instituted a negative deposit rate of 75 bps in January, it exempted some public entities (including the SNB’s own pension fund!), but this led to complaints about unequal treatment. It’s a mystery why this had such a big effect on the currency, as the move applies just to a few tiny accounts and has no policy implications. Probably it just served as an occasion for profit-taking and the currency is likely to resume its gradual appreciating trend in the near future.

• NZD second-worst performer on monetary policy comments NZD was also weaker, partly because of the disappointing Chinese PMI (see below) but more likely because of the comments from Assistant Gov. Dr. John McDermott, who said that monetary policy would remain stimulatory to support output growth above potential. I inferred from what he said that the bias to rates was on the downside, although he did not state this outright and the market’s forecast of the likelihood of a future rate cut barely budged. He also complained about the value of NZD, presumably against AUD: “The fact that the exchange rate has appreciated while our key export prices, such as dairy, have been falling, is unwelcome,” he said. AUD/NZD almost hit parity on Tuesday; I expect it to do so at some point.

• GBP outperforms on BoE minutes On the other hand, the pound was the best performing G10 currency after the minutes of the latest BoE meeting showed that all MPC members agreed that the next move in rates is more likely to be an increase. Ten-year Gilts yields soared 14 bps. I had been bearish GBP based on the view that the rising political uncertainty as the election approaches would scare off investors, but apparently people are focusing on the strong economic fundamentals. A gridlocked Parliament might not be so bad if they can’t accomplish anything and therefore let the economy alone. Nonetheless I would expect to see GBP weaken after the election, once the reality of the political difficulties sink in.

• Chinese stock market rally truly scary I mentioned in an early post how I thought the rally in Chinese stocks, fuelled by new, inexperienced traders, was likely to come to grief much like it did in 2007. For those who want further evidence, I present this graph that the Wall Street Journal got from Macquarie Securities. Not only are there millions of new accounts opening (average of 1.5mn a week for the last month), but they are buying on margin. People often misjudge the size of the Chinese stock market, because the market capitalization figures are much larger than the free float figures – a lot of stock is held by the government, which will never sell. According to this graph, margin lending is now an incredible 8% of the value of the free float of stock. That’s OK when prices are going up, but what happens when prices start coming down and all these buyers get a margin call? That’s when AUD really starts to suffer. I don’t know when that might be, but if 2007 is any guide, it could be in the next six months. Until then, trading in these exchanges is dominating the world. Turnover in Shanghai and Shenzhen during March was the largest of any stock exchange in the world that month, eclipsing even the NYSE. Turnover exceeded RMB 1tn on Monday, but unfortunately the exchange’s software is not designed to display numbers that big so it couldn’t show the number properly!

• Today’s highlights: Today is PMI day. This is of course the first data for the current month every month and so sets the tone. China’s preliminary HSBC manufacturing PMI started out badly – it had been expected to be unchanged at slightly below the 50 boom-or-bust line, but instead fell further to 49.2. Following the disappointing industrial production for March, that indicates a serious slowdown. There was some speculation that March was still distorted by the Chinese New Year, but nobody is talking about April being distorted by it too. Japan too fell into contractionary territory for the first time in almost a year. The weakness in manufacturing in these two major exporting countries augers ill for the EM currencies and the commodity currencies. I would expect to see AUD, CAD and NZD underperforming today, as well as some of the EM countries with balance of payments problems, such as Turkey and South Africa.

• During the European day, the preliminary manufacturing and service-sector PMI data for April from several European countries and the Eurozone as a whole are coming out. The market is likely to look for additional signs that the Eurozone economies have started to gain momentum. This could strengthen EUR, at least temporarily. One could play this either through the currency or the DAX index. Later in the day we get the Markit manufacturing PMI for the US.

• In the UK, retail sales excluding volatile items for March are forecast to decelerate a bit. This could prove GBP-negative as it could cause some profit-taking after yesterday’s good run.

• In the US, new home sales for March are due out. Following the better-than-expected existing home sales released on Wednesday, if the new home sales are also in line with a firming housing sector, this could strengthen USD. Initial jobless claims for the week ended April 18 are also to be released.

• As for the speakers, ECB Executive board member Peter Praet speaks during the European day.


EUR/USD hits 1.0800 and tumbles

EUR/USD traded higher on Wednesday, but hit resistance at 1.0800 (R1) and slid back down. I will maintain the flat stance I adopted yesterday, since a break below 1.0660 (S1) would be necessary to confirm a forthcoming lower low on the 4-hour chart and perhaps turn the short-term outlook negative. Such a move would be likely to target our next support line of 1.0575 (S2). Our short-term oscillators support a somewhat negative picture. The RSI just fell below its 50 line, while the MACD just obtained a negative sign. Also, they both stand below their respective downside resistance lines. In the bigger picture, EUR/USD is still trading below both the 50- and the 200-day moving averages. However, a clear close below 1.0460 is needed to confirm a forthcoming lower low and trigger the resumption of the larger downtrend. On the other hand, a close above 1.1045 could signal the completion of a double bottom and perhaps set the stage for larger bullish extensions.

• Support: 1.0660 (S1), 1.0575 (S2), 1.0500 (S3).

• Resistance: 1.0800 (R1), 1.0860 (R2), 1.0965 (R3).


USD/JPY struggles around 120.00

USD/JPY continued to trade higher on Wednesday but the advance was halted fractionally below our resistance of 120.15. The short-term bias remains to the upside, thus a break above 120.15 (R1) is likely to see scope for extensions towards the next hurdle at 120.80 (R2). Our short-term oscillators detect bullish momentum and amplify the case for the occurrence of the aforementioned scenario. The RSI continues in a rising mode as marked by the upside support line, while the MACD stands above both its zero and signal lines, pointing north. On the daily chart, the rate is back above 50-day moving average, also stays above the upper line of the triangle formation that had been containing the price action since November. This keeps the major 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: 119.75 (S1), 119.30 (S2), 118.70 (S3).

• Resistance: 120.15 (R1), 120.80 (R2), 121.20 (R3).


EUR/GBP tumbles below 0.7160

EUR/GBP fell sharply yesterday after the minutes of the latest BoE meeting revealed that policy makers see an improved chance that inflation could bounce back strongly later this year. The rate broke below the key support (now turned into resistance) of 0.7160 (R1), and this opens the way for a test at 0.7100 (S1), in my view. A move below 0.7100 (S1), is likely to set the stage for larger bearish extensions, maybe to challenge the low of the 12th of March, at 0.7030 (S2). Taking a look at the RSI, I see that, since the 31st of March, it rebounded from its 30 line 5 times, without falling within its oversold territory. Now the indicator is testing again the 30 barrier and this makes me cautious that a corrective bounce could be looming before the next leg down. On the daily chart, the completion of a double top on the 13th of April confirms that the 11th of March – 3rd of April recovery was just a 38.2% retracement of the 16th December – 11th of March decline, and that the overall downtrend is gaining momentum again.

• Support: 0.7100 (S1), 0.7030 (S2), 0.7000 (S3).

• Resistance: 0.7160 (R1), 0.7220 (R2), 0.7275 (R3).


Gold breaks below 1190

Gold slid yesterday and violated the lower bound of the sideways range it had been trading since the beginning of the month. This shifts the short-term bias to the downside in my view, and magnifies the case that we are likely to see a test at 1180 (S1) in the near future. However, taking a look at our short-term momentum studies, I see that we may experience a minor corrective bounce, perhaps back above 1190 (R1), before the bears shoot again. The RSI rebounded from slightly above its 30 line and is now pointing north, while the MACD shows signs that it could start bottoming. As for the bigger picture, the price is still trading below the 50% retracement level of the 22nd of January - 17th of March decline. This still makes me believe that the 17th of March – 06th of April recovery was just a corrective move and that we will see gold trading lower in the not-too-distant future.

• Support: 1180 (S1), 1165 (S2), 1150 (S3).

• Resistance: 1190 (R1), 1210 (R2), 1220 (R3).


WTI finds resistance at 57.20 and slides

WTI hit resistance at 57.20 (R2) and then tumbled somewhat yesterday. WTI seems to be trading within a short-term downside channel and this prints a negative intraday picture. A move below 55.75 (S1) could trigger more declines, perhaps for another test at the psychological barrier of 55.00 (S2). Nevertheless, on the daily chart, I still see a positive medium term outlook. The break above 55.00 (S2) signalled the completion of a double bottom formation, something that could carry larger bullish implications in the not-too-distant future. A possible move above 58.80, a resistance defined by the peak of the 16th of April, could open the way for the round figure of 60.00.

• Support: 55.75 (S1), 55.00 (S2), 54.55 (S3).

• Resistance: 56.55 (R1) 57.20 (R2), 58.05 (R3).




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