Markets are now entering into a bit of a tailspin phase now as risk appetite is being hit from all sides. In the past couple of days we have seen Russia retaliate with sanctions on agricultural products (this will hit the Eurozone especially hard), the increasing threat of the Ebola virus, Italy moving into recession and now President Obama has announced that there will be airstrikes on the ISIS forces the protect the Kurds in Northern Iraq. Cue a flight to safety in asset allocation, with assets such as gold and the yen especially benefitting.
Wall Street was lower again with the S&P 500 down around 0.6% to 1910. With the exception of China (which reported impressive export numbers), Asian markets were sharply lower. The Bank of Japan was unmoved on monetary policy but downgraded its expectations for exports and industrial output, which hit Japanese equities hard, with the Nikkei 225 down 3%. The selling pressure in Europe is continuing too, with big declines in early trading. Since the 10,050 high on 20th June, the DAX last night closed at a 10% correction. The French CAC 40 closed 9.7% lower than its cycle peak. FTSE 100 has corrected just 4.3% from its peak in May. The way this recent sell-off is shaping up, it is more than just a correction.
The move into safe haven plays is having a mixed impact on the dollar in forex trading. Classic safe haven currencies such as the Japanese yen and the Swiss franc are stronger, whilst the commodity currencies (Aussie and Kiwi) are weaker in addition to Cable. However the jump in oil prices is helping to support the Canadian dollar, whilst the euro is also finding some support in early trading after the French industrial Production data was positive.
Traders will be looking out for the UK trade balance at 09:30BST (forecast to improve slightly to -£8.9bn (from -£9.2bn), which could have a supportive impact on sterling. Other than that there is just Canadian unemployment which is forecast to remain flat at 7.1% when the data is announced at 13:30BST.
Chart of the Day – AUD/USD
Since early April the Aussie dollar has been trading in a broad sideways band between 0.9200 and 0.9500. In this time, trading the RSI fluctuations between 35 and 65 have proved to be very successful. The recent weakness in the Aussie Dollar (since the disappointing unemployment data was released) has put the key support at 0.9200 back under pressure. However, if this support were to hold, then once again, the RSI is close to a buying level again. I must stress that the support needs to show signs of holding, as the moving averages are beginning to turn lower in bearish sequence, whilst the US dollar is increasingly strong and could easily result in a breach of 0.9200. However, the recent weakness in the Aussie dollar gives us a chance to play the range once more.
Despite the downside pressure that the euro endured following the end of Mario Draghi’s press conference, the support of Wednesday’s low at $1.3331 remains intact. Subsequently the argument for a reversal still stands (albeit increasingly tentatively) with the low from the hammer candlestick remaining intact. There is also still the potential for a bullish divergence on the RSI. However, I remain very cautious about the prospects of a near term recovery. The saying “the trend is your friend” is popular for a very good reason and if I had a gun to my head I would still want to be short rather than long. The bias remains towards a likely retest of the key September low at $1.3295. However the longer the support at $1.3331 remains intact the chances of a recovery will be improving. The intraday hourly chart shows all moving averages in bearish decline still, whilst hourly momentum indicators are on the bearish side of neutral. The overhead resistance at $1.3400 remains a barrier with $1.3440 stronger still.
I highlighted recently the resistance of the 4 week downtrend and this continues to be a drag on Cable as the rate has today breached the support of the reaction low at $1.6811. Daily momentum indicators remain in weak configuration and, as with the euro, the trend is your friend, so I am expecting a retest of the June reaction lows at $1.6737 and more importantly $1.6691. With the bullish longer term technical indicators now broken, the outlook continues to deteriorate. The intraday hourly chart shows a consolidation phase that is breaking down as hourly momentum and moving averages all turn bearish again. The immediate term prospects for Cable do not look good and any rally is being seen as a chance to sell once more. The resistance around $1.6890 is growing in strength, whilst there is nearer resistance from yesterday’s high at $1.6865 now to contend with.
Trading Dollar/Yen in the past four months has been an incredibly tough task. Just when it looks as though a trend is forming there has been a sharp reversal. Whilst the previous run higher went longer than most, the reversal is just as sharp and the correction back towards the lows of the trading band as seemingly taking shape. The daily technical studies are in correction mode now, including a crossover sell signal having formed on the MACD. Intraday hourly technicals have turned negative and the bias is once more towards the downside. It would seem as though this range trade which has moved from one area of support around 101.00/101.30 up towards resistance around 102.80/103.00 and back again is back in play. There is a band of support around 101.60/101.70, whilst the near term resistance is around 102.30.
With a series of geopolitical events driving markets now, the safe haven assets such as gold are back in favour. This is meaning that the near term prospects of gold have improved dramatically in the past few days. A move above $1312.10 has breached the latest key reaction high within the bear phase to suggest that the sellers are no longer in control over the near term medium term. The next resistance at $1324.44 is once more open, whilst above there is the key reaction high at $1345. The intraday hourly chart suggests a strongly improving outlook now, with support having been left at $1308.20 and $1301.75. Momentum is also positive now. The truth is that gold is rising due to geopolitical risks which have become elevated and now the US involvement in Iraqi brings a new element into the mix to add support to gold. This should now help to underpin the price, with the key support now at $1280. Just when the charts looked to be turning decisively negative again an external event has driven the price higher again.