The Big Picture
A surprisingly weak US
service-sector PMI caused further mean reversion in US asset markets and
weakened the dollar somewhat, but it still managed to gain against several of
its G10 counterparts, indicating continued underlying strength (see technical
section on EUR/USD). The December non-manufacturing ISM index fell to 53.0, a
six-month low, from 53.9. The decline was largely due to deterioration in new
orders, but since that series includes many weather-sensitive sectors, such as
construction and agriculture, it may be due more to the weather than to the
economy. Nonetheless US bond yields fell – the 10-year Treasury was down about
4 bps – and implied interest rates on the longer-dated Fed Funds futures
declined 4-5 bps, while the stock market fell for the third consecutive day,
continuing the mean reversion that has characterized US asset markets in 2014.
The dollar lost some support as US rates eased, yet it still managed to open
this morning stronger compared with Monday morning’s levels vs CAD, AUD, JPY
and NOK, albeit weaker vs EUR, GBP, SEK and NZD.
The performance of USD/JPY is again impressive against the
background of another down day for Japanese stocks, which usually implies a
down day for USD/JPY as well. Similarly, the recovery of the GBP after
yesterday’s announcement that its service-sector PMI fell in December for the
second consecutive month is also impressive and underlines the continued demand
for that currency. A long position in GBP/JPY might be a way of capitalizing on
these two trends.
The main indicator during the European day today will be the
Eurozone CPI for December. Both the headline and the preliminary core figures
are expected to slow to +0.8% yoy from +0.9% yoy. The slowdown in inflation
could be a concern for the ECB; their forecast for headline inflation in 2014
is 1.1%.However we do not expect a decline on this scale would be enough to
cause any change in policy at this week’s meeting. Germany’s unemployment rate
for December is expected to have remained unchanged at 6.9%, while France’s
consumer confidence is expected to have seen no change in December from 84 in
November. Later in the day, the US trade deficit is forecast to have narrowed
slightly to USD 40.0bn in November from USD 40.6bn in October, although this
number rarely moves markets. There are two Fed speakers scheduled during the
day: Boston Fed President Eric Rosegren and San Francisco Fed President John
Williams.
In addition to the economic news, investors might want to
watch the US weather. The US is suffering from one of the coldest periods in
the last 20 years, with temperatures in many areas approaching record lows. The
market most affected by the cold weather has been US natural gas futures, which
are up sharply as the coldest start to the US heating season in 13 years boosts
fuel demand. Power generation accounts for 32% of US natural gas usage and
about 49% of all homes use the fuel for heating, according to the US Energy
Information Administration. Also, wheat prices are rising as the cold damages
Great Plains winter wheat that isn’t yet covered by a layer of snow to insulate
the plants. According to www.weather.com the cold is continuing throughout much
of the US. Market participants looking to diversify their trades might consider
looking into these markets. The question is whether there is further to go in
the trade or if conditions are now fully priced in. Partially that’s up to the
weather, a subject I claim no special insight into. Nonetheless we can say that
the technical outlook for natural gas still seems to be bullish (see below).
THE MARKET
|
EUR/USD
|
EUR/USD moved higher on Monday after forming a new low at
1.3570 (S1), but the advance was stopped at 1.3650 (R1). The 50-period moving
average is getting closer to the 200-period moving average, thus a bearish
cross in the near future may confirm the establishment of a new short-term
downtrend. On the daily chart, we can identify negative divergence between the
daily MACD and the price action, increasing the probabilities for further
decline.
Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).
Resistance: 1.3650 (R1), 1.3730 (R2), 1.3810 (R3).
USD/JPY
USD/JPY rebounded from the support of 103.90 (S1) and moved
slightly higher. The short term uptrend remains in effect, but a break above
the resistance area between the barrier of 105.45 (R1) and the 423.6% Fibonacci
extension level of the 17th -25th Oct. bearish wave is needed to signal its
continuation. If the longs are strong enough to overcome that strong resistance
area, I would expect them to trigger extensions towards the area of 107.00
(R2).
Support: 103.90 (S1), 102.14 (S2), 101.12 (S3).
Resistance: 105.45 (R1), 107.00 (R2), 109.00 (R3).
EUR/GBP
EUR/GBP consolidates between the support of 0.8270 (S1) and
the resistance of 0.8330 (R1). The outlook remains bearish, since the pair is
trading below the blue short-term downtrend line. If the bears manage to take
control and drive the battle below the 0.8270 (S1) support, I would expect them
to target the next support at 0.8220 (S2). On the daily chart, the rate remains
within a downward sloping channel (purple lines).
Support: 0.8270 (S1), 0.8220 (S2), 0.8080 (S3).
Resistance: 0.8330 (R1), 0.8390 (R2), 0.8431 (R3).
GOLD
Gold moved in a consolidative mode, remaining above the
200-period moving average and below the resistance of 1251 (R1). A break above
the 1251 (R1) hurdle may trigger extensions towards the next resistance at 1268
(R2). The RSI moved slightly lower after finding resistance near its 70 level
for an extended period of time, while the MACD, although in a bullish territory
seems ready to cross below its trigger line, thus further consolidation or a
pullback should not be ruled out. On the daily and weekly charts the
longer-term downtrend remains in effect.
Support: 1224 (S1), 1187 (S2), 1155 (S3).
Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Comments
Post a Comment