09/12/2014: Weekly Trading Notes

KEY DRIVERS

  • Medium/long term US dollar strength is a huge on-going story in forex markets. The US economy seems to be the one guiding light in the global economy as Asian economies deteriorate, the Eurozone remains mired in stagnant perpetual low inflation and even the UK is wavering in its recovery.
  • Divergence of key central bank views. The Fed looks to be ready to make the next hawkish step, possibly next week with the removal of “considerable time” from the length of time before it keeps rates at record lows. Contrast this with the PBOC (China) which is rumoured to be ready to cut the reserve requirement ratio again; the ECB (Eurozone) which is seemingly preparing for the next phase of monetary easing (full blown QE of sovereign debt purchases); and the BoJ (Japan) which is going to have to retain or even extend loose monetary policy for some time to come as recession worsens.
  • Conditions are set for continued dollar strength in forex. Big trends of dollar strength continue in major pairs, with key multi-year levels being breached. The Dollar Index is looking to test the March 2009 high.
  • However, a near term flight to safety is underway and this means Treasuries, Gold and the Yen being bought and the dollar is under pressure along with equities – wait for this to settle before looking for the dollar positive trades.
  • Asian data disappoints and this is negatively impacting on indices (in the absence of any tier 1 US data this week) – a falling oil price is also hitting oil majors (c. 13% of S&P 500)
  • ECB announces the demand for the Targeted Long Term Refinancing Operation (TLTRO) on Thursday and after such a low take up during the first tranche in September (€82.6bn) expectation is for around €170bn. This is part of the ECB’s easing programme and a big number would be considered positive for market sentiment
  • Watch for: Chinese inflation, ECB TLTRO demand, flash PMIs next week

Yen strength

MARKETS

EUR/USD – Selling into strength within the descending triangle 

  • The euro remains a sell into strength with the key descending triangle targeting $1.2070 (or $1.1975 as a bearish target).
  • Anything that suggests the ECB is moving towards full blown QE is negatively impacting the euro
  • Above $1.2456 questions the immediate downside, above $1.2530 is a breach of a key reaction high.
  • Key resistance remains at $1.2600
  • Watch for: ECB TLTRO

GBP/USD – Looking to sell into any strength

  • A sequence of lower highs and lower lows suggests further downside, along with all bearish trends intact.
  • The key medium term downtrend currently comes in around $1.5780.
  • Back below $1.5530 re-opens $1.5425.
  • The bears are in control until a move above $1.5825.
  • Watch for: US Retail Sales

USD/JPY – Waiting for volatility to subside before looking for a buy signal

  • The fact that Japanese GDP has deteriorated so much brings into question Prime Minister Shinzo Abe and Abenomics.
  • Also a general move into safer haven assets in the last couple of days has strengthened the yen.
  • A correction off 121.84 has set in and is now 350 basis points lower.
  • The move has breached the support of the 5 week uptrend.
  • There is little reason to believe that the dollar rally is over yet, but support needs to form at least above 117.22.
  • Watch for: Dollar/Yen to be a gauge for market sentiment, US retail sales

 

Gold – Near term outlook is moving positively but the medium term trends all remain negative… for now

  • The deterioration in risk appetite in the past couple of days has driven gold higher.
  • A spike today through $1221 is bullish for gold (but negative for general market sentiment).
  • The resistance of the medium term downtrend channel is at $1235.
  • Watch for: Volatility with the recent breakout

 

Indices – Indices under pressure on flight to safety

A flight into safe havens is massively hitting sentiment for equities. European equities have been especially hit so far.

  • S&P 500 is back to support band now around 2040, with the next downside level at 2020.
  • DAX good support band around 9600/9800. Momentum indicators now rolling over and a correction of size is threatening.
  • FTSE 100 has been lagging the DAX and the breakdown of the support at 6600/6640 is now concerning near term. The next support is already being tested at 6559, below is at 6444.

 

WATCH OUT FOR THIS WEEK

Wednesday 10th December

  • China – CPI
  • UK – Trade Balance
  • New Zealand – RBNZ monetary policy

Thursday 11th December

  • Australia – Unemployment
  • Switzerland – SNB monetary policy
  • Eurozone – Targeted LTRO take up (2nd tranche)
  • US – Retail Sales

Friday 12th December

  • US – PPI
  • US – UoM Consumer Sentiment (prelim)

 

NEXT WEEK

Monday 15th December

  • US – Industrial Production/Capacity Utilization

Tuesday 16th December

  • Japan – Flash Manufacturing PMI
  • China – Flash Manufacturing PMI
  • France – Flash Manufacturing PMI
  • Germany – Flash Manufacturing PMI
  • Eurozone – Flash Manufacturing PMI
  • Eurozone – German ZEW Economic Sentiment
  • UK – Bank of England Financial Stability report
  • US – Flash Manufacturing PMI
  • US – Building Permits/Housing Starts

Wednesday 17th December

  • UK – Unemployment
  • US – CPI
  • US – FOMC monetary policy + Janet Yellen press conference

Thursday 18th December

  • Eurozone – German Ifo Business Climate
  • UK – Retail Sales

Friday 19th December

  • Japan – BoJ monetary policy

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