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12/03/2015: Signs of profit taking on the US dollar but will it last?

Market Overview

The dollar movement remains the big story that is driving financial markets. Markets do not tend to like it when sharp moves are made in major markets (see the reaction to the sharp oil price falls). The same is with this dollar run, markets are worried about the implications for Fed tightening. This is why we are seeing the VIX volatility index pushing higher in recent days (equity markets tend to move negatively with a rising VIX). Wall Street saw another day of declines, with the S&P 500 closing 0.2% lower last night.

Asian markets were interesting overnight as they were broadly strong. The announcement that Australian unemployment had dipped unexpectedly to 6.3% whilst the employment change was also slightly better than expected has given the region a boost. Also news of a rate cut by the Bank of Korea (by 25 basis points to 1.75%) and rumours of a further cut in the Reserve Requirement Ratio in China also boosted sentiment. The Nikkei closed around 1.4% higher. European markets are more following the lead of Wall Street, with broadly flat, however the DAX looks set to continue its stellar outperformance of the FTSE 100 once again today.

In forex markets there is a hint that there could be some profit taking against the dollar after its huge run in the past few days. These are only small moves in the context, but all the forex majors are clawing back losses today. It will be interesting to see if this turns into something bigger as the dollar has been significantly overbought in recent days. After the Australian unemployment data was better than expected the Aussie and the Kiwi are the standout performers so far.

After a quiet morning on the data front, traders will be waiting for the big data release of the week with US Retail Sales set for 1230GMT. The expectation is for +0.3% for the month which would result in a slight slide in the yearly data. The last two months of retail sales data has been disappointing and after the Consumer Confidence dipped recently it will be interesting to see the reaction today if the data disappoints again.

Chart of the Day – AUD/USD

The outlook for the Aussie remains weak as the price yesterday completed a two day close below the old key support at 0.7623, with a low at 0.7558. Selling into strength remains the strategy, and there may now just be a small bounce which can be used. The better than expected Australian unemployment data overnight has induced a small rebound. The daily RSI has ticked higher and the Stochastics are also showing signs of picking up. In the context of the recent price action though this is decidedly counter trend and is just likely to give another chance to sell. The intraday hourly chart shows considerable overhead resistance approaching, with 0.7680 an initial key level to watch. However, the really important overhead supply comes in at 0.7740. Hourly momentum indicators are unwinding but as yet show little more than this being a bear market rally.

AUDUSD   12032015


In recent days, at a push I could probably have written my whole euro piece in just one sentence and it would not be a long one, “The euro is going lower”. But is that the whole story? Probably not as there are signs today of a rebound early in the European session and at some stage there will be a reaction to the upside. It just depends upon how big it is. The daily RSI was down at 15 yesterday which is unprecedented and lower even than the 16 extreme it reached in 1997. These are almost uncharted waters of bearish momentum then. Across the board everything just looks so bearish, but that is what is beginning to worry me. During these times “never catch a falling knife” and the “trend is your friend” ring very true, however it does not mean I am comfortable just saying “stay short and everything will be fine”. The intraday hourly chart shows that a minor lower reaction high has not been breached for well over a week now, and if this rebound can make it above $1.0628 it could be a significant near term barrier breached. Key near term resistance remains $1.0823.

EURUSD   12032015


After a few days of seemingly building up support, finally sterling seemed to succumb to the incessant pressure the dollar bulls are exhibiting at the moment. Cable has subsequently closed below the January low at $1.4948 and this has now opened the next key low which is the July 2013 low at $1.4812. Perhaps it would be wise to wait though for a confirmed breach of the low before piling in on the short side, especially with the intraday bounce we have seen early today, so maybe we should wait for a second close below. The momentum indicators suggest there is downside potential, with RSI sitting just above 30 (it got to 24 as recently as January), the MACD lines are falling and Stochastics remain bearish. The intraday hourly chart shows that there is now overhead resistance in the band $1.4950/$1.5020. Very near term outlook shows the hourly momentum just unwinding slightly with a drift higher but suggests that rallies are a chance to sell now. It would need a move at least above $1.5100 to defer the bearish control now.

GBPUSD   12032015


The dollar remains very strong across the major pairs, but the one pair that leaves me with a nagging doubt is Dollar/Yen. The “doji” candle on Tuesday suggests caution, whilst yesterday’s move was fairly unconvincing in light of the huge moves on some of the other pairs. The likelihood is that the shackles are still on and once there is a clean break of the old 121.84 resistance, the pressure will be released. However until that is seen I will remain a touch cautious with Dollar/Yen. The Stochastics are threatening to roll over, but for now this is the only negative hint on the daily momentum. On the hourly chart I am now watching the rising 89 hour moving average which has provided support for the dips throughout the past week or so. The overnight move higher has just started to reverse as the European session has begun to take over. I am also keeping a close eye on the near term support at 120.90. If all these indicators remain intact then the drift higher will continue, but for now I remain cautious.

USDJPY   12032015


The outlook remains weak for gold, but early in the European session there are signs of support coming in. The low posted yesterday at $1147.10 has not been breached today, instead seeing some buying pressure come through. Let’s not get carries away too soon though, there is much that is still needed to be done. Momentum indicators on the daily chart are still in negative configuration and suggest that rallies should be sold into. On the hourly chart there has been a move above yesterday’s lower reaction high at $1165.20 which is an encouraging sign. Hourly momentum has also picked up somewhat with the hourly RSI at its highest since 2nd March. I will begin to sit up and take notice if the gold price can rally through the reaction high at $1170.60, whilst above $1175.40 would confirm a turnaround in sentiment. For now though this is likely to be treated as another near term bear market rally that will be sold into for a retest of the lows.

Gold   12032015


The last few days has really seen the dollar strength dragging the oil price lower. Last night the WTI price was clinging on to the support around $47.36 by its finger nails. This low has been in place for the past 6 weeks and a confirmed break down would be a significant bearish development. Daily momentum indicators are now beginning to deteriorate and the pressure is mounting. A breach of $47.36 would re-open the $43.58 critical low. This support remains intact for now though as the price bounced slightly, but the pressure remains on. The interesting feature of the intraday hourly chart is that in the past few days the Fibonacci retracement levels of the $54.24/$47.36 range have become key pivot levels, with the 23.6% Fib level at $48.99 having been a basis of support on 6th March has become a key near term resistance as it provided the ceiling on Tuesday and Wednesday. Unless this level is overcome, I can see downside pressure building on $47.36. The bears are circling.

WTI   12032015

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.