08/12/2014: Markets consolidate after the strong Payrolls report as the Japanese economy deteriorates further

Market Overview

The Non-farm Payrolls report on Friday has resulted in another wave of dollar strength across the asset classes, as forex majors and commodities have suffered in the wake of the strength of the US economic recovery.  At 89.37, the Dollar Index is now within 0.25 of a test of its March 2009 key high. Strangely though, Wall Street failed to join in the fun on Friday with a rather tepid reaction, as the S&P 500 only gained by 0.2%.

Asian markets have been mixed to positive in their reaction on Monday, although key data released in the region is guiding the early moves today. There have been slightly positive moves seen in most markets apart from the huge gains in Chinese equities continuing. This has been driven by the disappointing release of Chinese trade data overnight, with the levels of both imports and exports significantly missing expectation. This is leading to increased speculation that there will be further monetary easing (possibly through an additional cut to the reserve requirement ratio on the banks). However, the announcement that Japan’s Q3 GDP has been revised lower to -1.9% with the recession worse than originally feared, the outlook has been stunted on indices. The European indices are also trading mixed to lower during the early exchanges.

In forex trading the outlook for the dollar remains strong, trading positively against all the major currencies. A familiar theme is also being seen, with sterling and the euro weaker, and the commodity currencies also struggling under the pressure. Even the prospect of a cut to the RRR in China is not enough to help support the Aussie and Kiwi dollars which are again both lower. There is little significant economic data due today, but there will be an interesting look at how many covered bonds and asset backed securities the ECB have been able to purchase, with an announcement due at 14:45GMT.

Chart of the Day – FTSE 100

Whilst other indices (such as DAX, CAC and S&P 500) have been making continued gains, the FTSE 100 has been trading sideways for almost 3 weeks now between 6637/6773. Through this time the positive outlook on momentum indicators has been replaced by one of consolidation if not impending correction. The Stochastics have fallen away, whilst the MACD lines have given a bearish crossover, whilst the RSI is also lower. Friday’s strong gains (on the back of the Non-farm Payrolls report) now threatens an upside breakout above 6773, however the move early today has been one of consolidation and perhaps the index is not quite ready for a sustained upside break. The indicators on the intraday hourly chart are not pointing to a strong pick up in momentum that would be consistent with calling an imminent upside break. Despite this though there is a slightly higher low now in place at 6673. With other indices so strong FTSE 100 may be dragged higher kicking and screaming, but it may have to wait a little longer first.

FTSE   08122014

EUR/USD

The outlook for the euro deteriorated once more after the strongly better than expected Non-farm Payrolls report on Friday. With the euro hitting a new low dating back to August 2012 in the wake of the news, all the downtrends remain intact and momentum indicators are bearish. The descending triangle implies a target of $1.2070, whilst the weakness in the chart suggests that downside is open towards a move back towards a test of the crucial July 2012 low at $1.2040. Continue to view any rallies as a chance to sell. Even on the intraday hourly chart all the indicators are negative, whilst the old breakdown support at $1.2357 should continue to be seen as the basis of resistance. The downtrend on the daily chart comes in at $1.2440, with Thursday’s intraday resistance at $1.2456 near term key.

EURUSD   08122014

GBP/USD

We have seen the outlook for Cable continue to deteriorate and even during the Asian trading early today the rate continues to drift lower. Having moved below $1.5585 the way is now open for the next low from August 2013 at $1.5425. The concern is that the momentum indicators are now falling away again to confirm the breakdown, with Stochastics and RSI falling back to a 2 week low. On the intraday hourly chart, the sequence of lower highs has continued with $1.5695. There is a slight suggestion of a near term bottoming, however any rally would certainly be used as a chance to sell and there is now a decent band of resistance between $1.5600/$1.5640 that should cap any rebound.

GBPUSD   08122014

USD/JPY

It appears as though resistance is now not really an issue for Dollar/Yen. It is difficult to say with any conviction that any minor peak back from mid-2007 will be registering seriously in traders’ minds, unless they are looking at the 124.16 key multi-year high. Subsequently the rate continues to rise, with another hugely strong day on Non-farm Payrolls Friday. When Dollar/Yen gets this type of momentum going it is difficult to stop and looking at the momentum indicators it is clear that momentum remains very strong. The intraday hourly chart shows a slight near term consolidation which may even result in a minor pullback, however the corrections which have been bought into at regular intervals over the past few weeks, remain opportunities to buy. The move on Friday was very strong but now means that there is little meaningful support even on the intraday chart until 120. The initial overnight resistance has come in at 121.84.

USDJPY   08122014

Gold

Having settled down through the back end of last week the Non-farm Payrolls report has resulted in a resumption of the selling pressure on gold. The daily chart now shows the strengthening of a new 3 month downtrend as resistance has been left at the $1221 reaction high and now at $1214.50 as a lower high. However the bulls will remain heartened whilst the key long term pivot level at $1180.70 remains intact as a level of support, however the appearance of a bearish divergence on the Stochastics will be a concern. The intraday hourly chart shows an initial level of support being formed  at $1186.10, but having broken back below the psychological support at $1200, unless this level gets retaken quickly there will be a new basis for trading and the pressure will begin to mount on the crucial pivot level. I continue to believe that gold will be pushing lower and below $1180.70 in due course.

Gold   08122014

WTI Oil

Despite the rebound from the low at $65.17 on Friday afternoon, the outlook for WTI is coming under increasing pressure. The sharp recovery from last Monday’s low of $63.72 is coming ever closer to being retested as a series of lower highs were posted in the drift lower last week. Friday also marked the appearance of a near term pivot level around $67.00 is lending resistance, whilst the resistance around $68.22 is increasingly key near term. Using rallies as a chance to sell seems to be the strategy whilst this low volatility trading continues, for a likely test of the low eventually at $63.72. Under $63.72 the next key low does not come in until the $58.30 reaction low from July 2009. The old downtrend channel remains the basis of resistance and currently comes in around $68. The bears are back in control.

WTI   08122014

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