Financial markets continued to trade on the dollar strength story on Friday. This is a story that is likely to dominate decision making in front of this week’s FOMC meeting. With the dollar soaring, the oil price has again come under considerable pressure. The WTI price is now testing the 6 year low price of $43.58 that was hit in January. Equity markets have been under pressure as a result, and Wall Street was again sharply lower on Friday, with the S&P 500 closing 0.6% lower. Asian markets have been mixed to positive on Monday, with comments from Chinese Premier Li suggesting that there could be more easing from the People’s Bank of China in the offing. European markets are looking to bounce back a touch in the early exchanges today.
In forex trading we see some of the forex major bouncing back against the dollar after an incredibly tough week last week. After closing below $1.0500 last Friday, the euro has rebounded slightly, although there is little sign that there is any sustained recovery on the cards.
Traders will be looking out for US Industrial Production at 1315GMT which is expected to show a slight increase in the month on month production to +0.3%, whilst capacity utilization is expected to improve slightly to 79.5 (from 79.4). There is also the US National Association of Home Buyers index at 1400GMT which is forecast to improve to 57 from 55.
Chart of the Day – USD/CAD
The Loonie has been one of the better performing major currencies over the past few weeks, but even that is now succumbing to the onslaught from the strength of the US dollar. The pair had been trading in a broad range, however saw a move to a 6 year high on Friday, breaking out above $1.2800. The momentum indicators are in strong long term configuration but as yet are not confirming the breakout and this leaves a little question mark over the move, especially with the Stochastics turning slightly lower. Maybe we just need to wait for the confirmation to be seen before turning strongly bullish. The move has left a near term higher low at $1.2617 which is now the support that needs to be held also.
The weakness of the euro accelerated to the downside once more on Friday as we saw a close below $1.0500 for the first time since 2003. I have been suggesting that if the euro started to trade decisively away from its 61.8% Fibonacci projection level around $1.0620 then it should theoretically be on course for the next level which is at $1.0055 and the 100% Fibonacci projection. Therefore that makes today’s trading important. With such weakness in the trend, there is very little real resistance of any note and subsequently it is not until around $1.0630 and then $1.0700/$1.0820. If the euro can rebound above this then it could induce a rally. The RSI is above the level of 15 that was reached on Wednesday (the lowest level since 1997), and has just picked up slightly, but the momentum remains incredibly negative and rallies continue to be used as a chance to sell.
The sell-off on Friday took Cable below the key support at $1.4812 for the first time since July 2013 and to open levels not seen since mid-2010. This was a key move which now means that beyond a minor support around $1.4700 (which is currently holding) there is actually very little support until way back at $1.4230. There may be an minor oversold bounce today but there is little to suggest that this will be any more than a dead cat bounce before the selling pressure kicks back in again. Technical indicators are all in negative configuration and with further downside potential too. Look to use any technical rallies as a chance to sell. The old key support around $1.4812 becomes new resistance with the intraday hourly chart showing $1.4900 as key near term resistance too.
I am still very interested in the fact that Dollar/Yen has been fairly anchored whilst all the other major currencies are being absolutely smashed by this dollar strength. I find this to be indicative of a demand for a safe haven amidst the drastic moves on the dollar and the knock on impact. The resistance around 122 remains well intact and there is more of a consolidation feel to the USD/JPY chart than any trending scenario. However there is a near term band of support 120.60/120.90 which remains intact and is preventing the yen from strengthening too much. On the intraday chart there is also the uptrend that dates back to 26th February which comes in around 121.10 and will be viewed as an important near term indicator if it is broken.
The gold price remains under pressure completing a third daily close below the old support at $1168.25. The old support around $1168 is becoming new resistance and with the trend your friend, we must still expect a continued retreat back towards a test of the $1142.90 low and likely to be a move back towards $1131.85. The daily momentum indicators on gold remain really negative, with the RSI and MACD lines continuing to deteriorate and furthermore, there looks to be still downside potential with the RSI currently around 30 the November sell-off saw the RSI back at 20 before a rebound set in. It still seems as though rallies should be seen as a chance to sell on gold and this morning’s rebound could be just that chance. There is a series of overhead resistance with which to work from. The old $1168.25 floor, followed by an intraday lower high at $1170.60 and then $1175.40 which is the key near term level.
The WTI price is once more at risk of an incredible downside break that would send shockwaves through the market. Now the support has been cleared at $47.36 the pressure is firmly on the critical low posted on 29th January at $43.58. Friday’s trading was incredibly bearish and saw selling pressure throughout the day to leave a strongly bearish candlestick. The concern will be that momentum indicators have only just really started deteriorating and with that in mind there could be significant further downside potential. If the support at $43.58 were to be breached WTI would be at a 6 year low and there is very little to prevent a move back towards the multi-year low at $32.40. Selling into strength once more becomes advisable, with initial resistance between $46.30/$46.80.