The sentiment amongst global investors is increasingly concerning. Rallies are being sold into and the safe haven plays such as US Treasuries, the Japanese yen and gold are seeing positive flow. With Wall Street indices all over 1.5% lower on the day, the S&P 500 closed at its lowest level since 8th August. This selling pressure filtered through to Asian markets overnight, with the Nikkei around a percent lower as the yen strengthened amid an increasing preference for safer haven assets.
Weakness in Europe is a continuing theme as the economic data out of Germany continues to worsen. Yesterday’s 4.0% dip in industrial production was an incredibly disappointing number and came on the same day that the IMF downgraded its growth forecast for the region. European equity markets remain on the back-foot today, nursing losses once again.
In forex trading, after a couple of days of pressure the dollar is looking to regain some strength today. The greenback is trading positively against all the major pairs. With a lack of economic drivers during the European session, traders will quickly look towards the release of the FOMC meeting minutes this evening at 19:00BST. The market will be looking for signs of a hawkish lean from any of the members.
Chart of the Day – AUD/USD
The potential turnaround in the fortunes of the dollar is being played out in the chart of the Aussie dollar. After almost 4 weeks of significant selling pressure on the Aussie which saw over 7% of its value lost, the rate has now bottomed out. The breach of the 4 week downtrend was seen last week, has been followed by a series of improvements on the momentum indicators, including a positive crossover on the MACD lines, the Stochastics turning positive and the RSI picking up. After such a precipitous decline, an element of unwinding is natural, but a close above the reaction high at 0.8826 would suggest a near term recovery could be seen. It would complete a small base pattern that would imply a move back towards 0.9000. The strengthening of the US dollar overnight has begun to pull the Aussie lower again but this is a good test of the bulls. If they want to complete this base pattern then they will need to fight for it. In light of the recovering momentum indicators I am far more neutral on the Aussie than I have been for a long time, but a close above 0.8826 would begin to sway me towards the recovery camp.
If the dollar is having a wobble against the major currencies, it would appear as though the performance against the euro remains solid, for now. The first real signal would come if there were to be a break of the resistance at $1.2700 which was the reaction high in the wake of the ECB press conference last week. The momentum indicators are showing slight signs of recovery, with the Stochastics now beginning to advance above 20, however in the absence of any real recovery signs in the RSI and MACD lines this move should be taken more of a warning for running short positions. The intraday hourly chart shows a decent rebound, but the hourly momentum indicators have tailed off disappointingly since yesterday and suggest a slowing of the recovery. I am still happy to be a seller into strength but I am concerned about this recovery, if there is a sustained move above $1.2700 it would be a signal that the bulls are in near term control. I do ultimately see further weakness in EUR/USD. A breach of the intraday support at $1.2582 would open the key low at $1.2502 once more.
For the gains seen in Cable over the past couple of days the resistance of the sharper 3 week downtrend (as shown on the intraday hourly chart) is so far holding. The key near term resistance is the old reaction low at $1.6260 which has now turned into resistance. If this remains intact then the bears remain in control. The daily momentum indicators are still suggestive of Cable being a sell into strength, a view backed by the recent rally that is stalling at the 3 week downtrend. The intraday hourly chart shows the recovery over the past two days leaving a series of higher lows, with $1.6023 being the key near term low that the bulls need to remain intact to prevent a retracement back to the low at $1.5941. However, the hourly momentum indicators are now reversing lower as the steam is being taken out of the recovery. For now I am still a seller into these rallies, however I am mindful of the pressure that the dollar is coming under in the past 48 hours.
I have been speaking about the yen strength (dragging dollar/Yen lower) within this consolidation phase and the fact that a close below 108.00 would be a trigger for a possible dollar correction, and how close it came yesterday. An intraday dip late in the US session could not quite achieve that close, and Dollar/Yen closed at 108.02. The subsequent slight rebound today is keeping the consolidation intact, but I am mindful of the deteriorating momentum indicators. The Stochastics are now strengthening their downside momentum, with MACD lines in decline and RSI also in reverse. This is certainly adding to the pressure on the 108.00 support. The intraday hourly chart shows a decent rebound today and it will be interesting to see if the rally can gain momentum. Within this consolidation 109.00 has been a bit of a watershed between bullish/bearish control and should once more be seen as a barometer for this consolidation that is now into its third week.
The rally in the gold price could be seen as a good gauge for what is a negative correlation with the dollar. Significant weakness of the past few weeks is undergoing a minor recovery. Since hitting the critical support area and leaving a low at $1183.46 a $30 rebound has taken the gold price back towards the overhead supply. Daily momentum indicators have picked up in the past few days (Stochastics especially) but at the moment it is difficult to see this as much more than a bear market rally. This is now where the gold price is beginning to enter an important phase. The gold price has left a series of key lower highs during the sell-off and with the rebound continuing they are fast coming into view. There is resistance at $1221.64, then at $1223.50 and $1230.00. Over the past day, the hourly momentum indicators have just begun to tail off suggesting that the impetus in the rebound may be losing steam. With the price still trading under the resistance of the big downtrend channel (currently c. $1225), huge overhead supply perhaps the gold price is approaching the limit of its rebound?
Although a one week downtrend was broken yesterday the sequence of lower highs continues. The interesting factor is that now the WTI oil price is finding resistance at the overhead supply of the old key lows around $90.50. The technical indicators also remain in bearish configuration with negative moving averages on the hourly chart dragging the price lower and momentum indicators also still weak. The suggestion is that using the intraday rallies as a chance to sell remains a viable strategy. There is still a downtrend channel that can be derived over the past 9 weeks, with the low of that channel currently around $87.80. Use the rallies within the trend channel to sell as the WTI price seems to be moving ever closer towards the $85.61 April 2013 low. Overhead resistance comes in at $90.74, $91.79 and $92.96. The caveat would come with a dollar correction which would help to support commodity prices and whilst this is currently threatening, it still does not seem to be the most likely scenario.