Market sentiment continues to be guided to a certain extent by the price of oil. In the past couple of trading days the oil price has shot higher as it has looked as though there is finally beginning to be some reaction by suppliers in the US to the huge price falls. This has resulting in a spike higher in the oil price which has buoyed sentiment on equity markets again. There are also now details emerging of a potential debt swap that the new Greek government will be proposing which involves a significant re-profiling of the debt to include instruments such as new growth-linked bonds and perpetual bonds. If this proves to be the case then although nothing has been agreed yet, the market loves a bit of clarity (ie. the opposite of uncertainty). The lack of potential haircut for bondholders would be seen as a positive and so sentiment is also benefiting from this too. Wall Street close over a percent higher last night with the S&P 500 1.3% up. Asian markets were mixed overnight with the Nikkei 225 suffering slightly as the yen has strengthened against the dollar. European markets are slightly higher in early trade.
In forex trading the big news overnight has been that the Reserve Bank of Australia is the latest to join the list of central banks to ease monetary policy, with a 25 basis point rate cut. This has resulted in selling pressure on the commodity currencies (Aussie, Kiwi and Loonie). In a similar theme to yesterday, the euro is holding up against the dollar, with sterling suffering, but the yen continues to make slight gains.
Traders will be watching out for UK construction PMI at 0930GMT which is expected to dip slightly to 56.9 (from 57.6) and other than that it is just US Factory Orders at 1500GMT (-2.2% month-on-month expected), which is a notoriously spikey number. There will also be New Zealand unemployment tonight at 2145GMT which is expected to dip slightly to 5.3%.
Chart of the Day – AUD/USD
We have seen a 25 basis points rate cut by the Reserve Bank of Australia overnight so what is the impact on the technicals? There was a reasonably positive day yesterday and the typical move following the rate cut has played out with a sharp decline. This move has formed a bearish outside day (or bearish engulfing candlestick) which suggests the sellers are in control. The Aussie has been sharply weaker for the past two weeks (ever since the rate cut by the Bank of Canada) and there had been rumours of a rate cut flying around and perhaps this move is not as pronounced to the downside as perhaps it might have been had the cut be truly a surprise. Technical indicators are incredibly weak though with RSI, MACD and Stochastics all in strongly bearish configuration. Now the 0.7700 support has been taken out there is little support until 0.7450 and the bigger support does not really come in until 0.7260 a key old resistance from January 2009.
I have already discussed in previous days the prospect that there could be something in this consolidation for the euro and now we will see. The resistance of the 6 week downtrend (around $1.1360) is now being directly challenged today as the euro continues to avoid selling pressure. The momentum indicators continue to unwind (without showing any overtly positive signals) with the RSI at a 1 month high, MACD lines close to crossing and the Stochastics at a 6 week high. The intraday hourly chart shows the euro also now trading above the falling 200 hour moving average for the first time since mid-December (when the downtrend began). However there seems to also be a reluctance to buy, with last Thursday’s resistance at $1.1370 still holding back the bulls, above which is the key near term level of $1.1420. Support comes in at $1.1260 and $1.1220.. This sense of consolidation suggests the need for a catalyst. Perhaps some progress in the debt renegotiation for Greece could be a mover, or in the least it is Non-farm Payrolls on Friday.
Whilst the euro is consolidating, Cable continues its negative drift. The resistance of the falling 21 day moving average (at $1.5115) remains important, with momentum indicators all in negative configuration. The intraday hourly chart continues to show the pair trading around the old neckline and key pivot level of $1.5030, however the outlook on the hourly chart is increasingly negative. Having backed away from $1.5200 resistance, there has been a series of lower highs in the past 4 days with the latest at $1.5100 now key near term. Also the hourly moving averages are all in bearish decline whilst the momentum indicators are in negative configuration. Although there have been spikes below $1.5030 (to $1.4988) there has been no decisive break. If this is seen in the European session (i.e. consistent trading below for a couple of hours) then this would re-open the $1.4948 low again. I still expect a retest of $11.4810 in due course.
I said yesterday that I was concerned that with the breakdown of 117.20 having been seen, despite the initial reaction higher, the failure of the rally meant that there would be further testing of 117.20. And so it has proven to be. The daily chart shows a subtle deterioration now with the RSI drifting lower again and the MACD lines also gradually falling away. The best way to view is on the intraday hourly chart though which shows a lower high having been posted at 117.85, whilst overnight we have seen the rate trading back below 117.20 once more. The support at 117.20 had previously been good support but is now giving way. With moving averages falling in bearish sequence and hourly momentum in bearish configuration, selling into rallies increasingly looks the way to play Dollar/Yen. Perhaps look to use the band of resistance 117.20/117.50 as a selling opportunity. The daily chart shows that now the rate is pulling consistently below the 23.6% Fibonacci level at 117.90, the price is likely to fall back to 115.50, the 38.2% Fibonacci retracement.
This is an interesting time for gold as there is still a battle on to prevent a dip back towards the $1252/$1255 support area once more. Having broken back below the old support at $1272, there was an element of support which came in yesterday at $1266 to prop up the price. There is the resistance of an 8 day downtrend which comes in around $1281 which is being tested. This would be a sign of intent for the bulls who have been under pressure for the past few days and if there could then be a move above the $1284.60 lower high then there could be a rally for the bulls. Hourly momentum is fairly neutral of late and this is becoming an important little battle near term.
There has been a significant improvement in the prospects of WTI in the past couple of days. The sharp gains of Friday continued on Monday and the bulls will now be eying a potential test of the key reaction high at $51.27. The intraday hourly chart shows a completed flag pattern breakout which implies a target of $51.00 as well, so there is every chance that the bulls will continue to run. The important feature of the daily chart is the broken resistance of not only the old downtrend channel but also the 21 day moving average (c. $47.30). On each of the three occasions during the past 7 months that the price has traded above the 21 day ma, each time has been followed by a bearish second day candle before the sellers returned. If the bulls can sustain the breakout then the prospect of some meaningful and lasting support will be significantly improved. The support between $48.00/$48.50 is now key near term.