IronFX Daily Commentary 25/03/15

25.03.2015, 10am

1.10 seems the limit EUR/USD moved higher once again, confounding those of us who expected to see parity within a matter of days. But once again, 1.10 seems to be the new upper limit for the pair. It broke through there briefly on 19 March and again several times yesterday, but seems unable to hold above that level. The euro’s peak yesterday came after the US CPI data came slightly stronger than expected, which should have been USD-positive: the headline figure (just) escaped from deflation and the core figure showed some acceleration to +0.2% mom. Moreover, US new home sales were better than expected and the Markit PMI surprised on the upside. This indicator is less closely watched than the US ISM index, but it showed that US manufacturing is doing fine despite the higher dollar: new orders were up as was employment. Nonetheless Fed funds rate expectations continued to decline. It looks to me like the better-than-expected data, if it continues, should change attitudes towards the Fed and start supporting the dollar.

USD retreat is fundamentally based I have to admit that though there are some good reasons why the dollar has retreated from its recent peak. The recent low for EUR/USD was in the early hours of Monday, March 16th. Since then, the implied yield on the end-2016 Fed funds rate contract has fallen from 1.37% to 1.13% (the recent peak was 1.46%), taking out one implied rate hike, and the US Treasury-Bunds spread has come in considerably, mostly due to US rates declining: from 89 bps to 78 bps in the two years (it’s widening out to 80 bps this morning) and from186 bps to 164 bps in the 10 years (unchanged today). So US rate expectations and rates have come off considerably as the market unwinds some of its expectations of Fed tightening. Nonetheless, I still assume that the US rate advantage over Europe is going to draw in investors over time. As QE proceeds, Eurozone rates are only going lower, while US rates seem likely to drift higher as US inflation edges up. PriceStats, a firm that gathers prices off the internet to produce daily inflation estimates, has shown a considerable uptick in US inflation recently. If it continues, higher US inflation would tend to bolster the dollar.

CHF rallies despite IMF recommendations CHF was the big winner yesterday without any major news to send the currency higher. EUR/CHF fell below the 1.05-1.08 trading range it had been in since mid-February. It seems that market participants are beginning to think that with 3-month CHF LIBOR already at -0.80%, the Swiss National Bank (SNB) has little room to lower interest rates further, something that Kevin Fletcher, the IMF’s mission chief to Switzerland, recently confirmed. “It’s hard to say where the effective lower bound (of Swiss interest rates) is – in the current framework, it’s probably close to that,” he was quoted as saying. Swiss bond yields are negative out to 10 years, and anyway the country doesn’t have that much in the way of government bonds outstanding – only CHF 96.6bn, of which one-quarter come due by end-2016 (compared to CHF 585.5bn in foreign reserves). That’s why the IMF recommended in its annual review of the Swiss economy that the country should do a form of foreign-currency quantitative easing by buying foreign-currency assets. A member of the SNB’s Governing Board Monday said that the SNB was considering this suggestion, although from my point of view it’s not that different from what they were doing before – just that they would be announcing the amount they would buy and letting the market determine the price, rather than announcing the price and letting the market determine the amount. The sight deposit data shows that SNB hasn’t been intervening in the market much despite its pledge to do so if necessary. That may indicate their acceptance of a lower range for EUR/CHF than the market estimates. I expect the market to continue to test the downside for EUR/CHF, which in today’s context probably means also testing the downside for USD/CHF, too.

WTI up even though API stats show another big build Yesterday’s inventory statistics from the American Petroleum Institute (API) apparently showed yet another big rise in oil stocks, yet WTI was up slightly on the day, perhaps because of the all-round positive PMI figures (except for China). Oil seems like it could be vulnerable to tonight’s release of the US Department of Energy’s more comprehensive inventory figures.

Cleveland Fed says don’t worry about dollar’s impact on inflation One of the reasons why investors have assumed that a stronger dollar would delay Fed tightening is the idea that the stronger dollar would lower import prices and therefore push down US inflation, which as mentioned above is already bordering on deflation. But the Cleveland Fed published a research paper yesterday that said “the threat is real, but certainly overblown.” It explained that “most of the change in import prices reflects declines in petroleum products, which have not been driven by exchange-rate movements.” It concluded that “the overall impact is fairly small.” A 1% rise in the dollar’s broad value raises non-oil import prices by 0.3% over six months – and of course import prices are not the main determinant of the headline CPI by any means. So that channel of feedback is “overblown,” as they mentioned.

Today’s highlights: We have a relatively quiet schedule today.

During the European day, the spotlight will be on the German Ifo survey for March. All three indices are expected to have risen. Following the encouraging ZEW survey released last week and the strong German PMI data released on Tuesday, this could support the growing confidence that Europe’s largest economy is gathering steam again.

In Sweden, we get the economic tendency survey for March. A strong figure could prove SEK-positive.

In the US, durable goods for February are coming out. The headline figure is expected to decelerate from the previous month, while durable goods excluding transportation equipment is estimated to accelerate a bit. The market may pay more attention on the core figure, thus USD could strengthen somewhat.

As for the speakers, ECB Governing council member Erkki Liikanen, Chicago Fed President Charles Evans and Bank of Canada Deputy Governor Timothy Lane speak.


EUR/USD finds resistance slightly below 1.1045

EUR/USD continued trading higher on Tuesday but hit resistance at the 61.8% retracement level of the 26th of February – 16th of March down move, which stands slightly below the resistance hurdle of 1.1045 (R1) and the 200-period moving average. Thereafter the rate pulled back to meet the support line of 1.0885 (S1). Having a look at our short-term oscillators, I would be careful that the retreat may continue for a while. The RSI hit resistance at its 70 line and slid, while the MACD has topped and fallen below its trigger line. Nevertheless, the rate is still trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the low of the 13th of March, therefore I would consider the short-term bias to remain positive. A move above 1.1045 (R1), could see scope for extensions towards the 76.4% retracement of the 26th of February – 16th of March decline, at 1.1160 (R2). As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.

• Support: 1.0885 (S1), 1.0765 (S2), 1.0700 (S3).

• Resistance: 1.1045 (R1), 1.1160 (R2), 1.1260 (R3).


AUD/USD struggles near 0.7900

AUD/USD continued to trade higher, hit resistance above the 0.7900 (R1) line and returned to settle just below it. I believe that the near-term picture is positive and that a close above 0.7900 (R1) is likely to open the way for the psychological barrier of 0.8000 (R2). However, our momentum indicators reveal signs of weakness, therefore I would be cautious that a minor pullback could be in the works before buyers seize control again. The RSI turned down near its 70 line, while the MACD topped and could move below its trigger any time soon. As for the bigger picture, on Friday, the rate surged above the downtrend line taken from back the peak of the 5th of September, confirming my view that the pair could continue correcting higher. On the daily chart, it is also visible that the psychological zone of 0.8000 (R2) coincides with the 23.6% retracement level of the 5th of September – 11th of March downtrend.

• Support: 0.7840 (S1), 0.7760 (S2), 0.7700 (S3).

• Resistance: 0.7900 (R1), 0.8000 (R2), 0.8035 (R3).


USD/JPY trades back below 120.00

USD/JPY trades back below the 120.00 (R1) barrier and yesterday the bears showed willingness to drive it lower, below the support of 119.35 (S1). Bearing that in mind, I believe that the short-term bias stays negative and that we are likely to see the rate challenging the 119.00 (S2) in the near future. As for the broader trend, the rate is still trading above both the 50- and the 200-day moving averages, and above the upper bound of the triangle that had been containing the price action since November. This keeps the overall picture of USD/JPY positive. Nevertheless, our daily momentum studies support my view that we may see the rate correcting lower. The 14-day RSI fell below its 50 barrier, while the MACD has topped and fallen below its trigger.

• Support: 119.35 (S1), 119.00 (S2), 118.60 (S3).

• Resistance: 120.00 (R1), 120.60 (R2), 121.20 (R3).


Gold hits 1195

Gold traded somewhat higher on Tuesday, but found resistance at 1195 (R1), near the 200-period moving average, and pulled back. Since the yellow metal is still trading above the downtrend line taken from the peak of the 22nd of January, I believe that the short-term outlook remains cautiously positive. Nevertheless, our momentum studies indicate that the short-term uptrend is slowing. The RSI hit resistance near its 70 line and is now pointing down, while the MACD has topped and crossed below its signal. Given these momentum signs, the fact that the price found resistance at the 200-period MA, and the proximity to the round figure of 1200 (R2), I would like to switch my stance to neutral for today. I prefer to wait for clearer signals on whether the up leg is over or has more to go. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.

• Support: 1185 (S1), 1175 (S2), 1165 (S3).

• Resistance: 1195 (R1), 1200 (R2), 1210 (R3).


WTI trades in a consolidative mode

WTI traded higher during the European morning Tuesday but later in the day, it pulled back to move in a consolidative manner between 47.15 (S1) and 47.75 (R1). Our hourly momentum studies amplify the case for further consolidation or even a minor down move, perhaps towards 46.60 (S2). The RSI gyrates around its 50 line, while the MACD, although positive, stands below its trigger and is getting closer to zero. On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the overall picture of WTI negative. However, there is still positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for price and momentum alignment.

• Support: 47.15 (S1), 46.60 (S2), 45.80 (S3).

• Resistance: 47.75 (R1) 48.25 (R2), 48.90 (R3).




Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68.55% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
We use cookies on this site to improve your website experience. By clicking “Allow” or continuing to use this site you consent to our use of cookies.