The dollar continues to regain lost ground in the past few days as the number of Fed speakers giving hawkish comments continue to mount. These FOMC members have been talking up the remarkable prospect (certainly given the dovish FOMC statement/dot plots/Yellen press conference last week) of a rate hike in April. Until now none of the Fed speakers have been voting members, but James Bullard is a voter in 2016. Bullard tends to flit around on monetary policy but he has added his weight behind a hawkish view. This is impacting on the continued dollar rally which is in turn impacting on commodities. The correlation between oil and the equity market direction seems to be coming back into focus after a couple of days of wobble. Much higher than expected EIA oil inventories hit the ol price har yesterday and resulted in a negative close on Wall Street (S&P 500 down 0.6%), with weakness on Asian markets and a similar picture in the early moves in Europe today. Will this stronger dollar derail the recent market recovery?
The forex markets show once again moving into the European session that the dollar has been stronger in Asian trading. With a correction in commodity prices, currencies such as the Aussie, Kiwi and Canadian Loonie are all under pressure, whilst even the yen is weaker today. After significant selling pressure yesterday, gold is once more struggling, trading around $5 lower, whilst oil is continuing its correction and is down another 1%.
There are several economic announcements today, with UK retail sales at 0930GMT which are expected to drop to +3.4% (from +5.0%) on a year on year ex-fuel basis. At 1230GMT we have the US Durable Goods Orders which are expected to be -0.2% (ex-transport) for the month. There is also the US Markit Flash Manufacturing PMI at 1345GMT which will be interesting after last month’s 50.1. The Kansas City Fed manufacturing is at 1500GMT which was -8 last month and will be watched after such a big jump to the Richmond Fed data on Tuesday.
Chart of the Day – USD/CAD
Is this a rally to be sold into or is it something more sustainable? The recovery in the dollar in the past few days combined with an oil price correction is beginning to question the continued bearish outlook on USD/CAD. I feel it is too early to call an end to the oil bull run (see below), but USD/CAD is coming under increasing pressure, which is continuing today. The move has rallied and is now breaking the downtrend which has been in place since USD/CAD topped out in mid-January. However, a broken downtrend does not necessarily mean that this is the beginning of a new US dollar bull phase, more that it should be seen that the CAD is no longer as strong as it was previously. Despite this though, momentum indicators have ticked higher, and should now be watched though. The RSI recoveries have consistently been failing in the low to mid-40s in the past 8 weeks, whilst the Stochastics have also failed to mount a sustainable recovery. Both indicators are beginning to show signs of life again and should now be watched. The resistance around 1.3200 has been broken but the main resistance that needs to be breached to signal a real recovery comes in at 1.3400/1.3450. There is a near term pivot on the hourly chart at 1.3310 which should also give a gauge of the outlook. The dollar bulls are showing signs of life once more.
The negative drift on the euro continues as an array of factor continues to weigh on EUR/USD. The near term dollar recovery and the terrorist events in Brussels have helped to develop a fourth consecutive bearish candle and another correction of just over 30 pips on the day. Whilst this is a correction that I feel has gone on longer than I had expected, I do still see it as a correction that will form support for the next move higher. Having broken below $1.120, the long term pivot at $1.1100 is now open, but whilst the momentum indicators are reflecting the recent bearish drift there is no substantial mood of selling pressure. The RSI is still above 50 despite the four consecutive bear candles, whilst the MACD lines remain positive. The Stochastics have crossed lower but there is certainly no real venom in the correction. The hourly chart shows the drift with lower highs and lower lows. The old support around $1.1200 is now a basis of resistance.
After a third consecutive big bearish candle (where Cable lost 90 pips) the key support of the mid-March low at $1.4050 is under increasing threat. This is the key level that would really confirm a shift in the outlook. For now, Cable is arguably just in a messy consolidation period, where the move higher post the FOMC decision is being unwound. However breaking the $1.4050 low changes that to a resumption of a bearish outlook once more. The momentum indicators are giving warning signals without calling for the breakdown. The Stochastics, which are always the most volatile of the momentum indicators that I look at, are in sharp decline, however the MACD lines are around neutral still and the RSI is still above 40. The initial move today has been very muted (perhaps trades are unwilling to take a view ahead of Easter). The hourly chart shows that the momentum remains negative near term but also that the move is beginning to calm down. The Fibonacci retracements of $1.4051/$1.4514 are playing a role in this sell-off and so the 76.4% Fib at $1.4160 becomes the initial resistance and the 61.8% Fib at $1.4228 is the subsequent level. A breach of $1.4050 would open $1.4000 psychological again but then there is little real support until the key low at $1.3833.
The technical recovery on the pair continues, with the rebound now into its fifth day. Yesterday’s “doji” candle is interesting as it reflects uncertainty with the recovery and begins to ask a few questions. So far the recovery has been able to break through overhead resistance levels fairly easily with first 112.15 and then 112.60 being broken. However the hourly chart shows that the old pivot within the range at 113.15 is now approaching overhead and the hourly momentum whilst positive is beginning to tire a little. The pivot at 112.15 is still a key near term level to watch should the bulls run out of steam. The near term outlook continues the recovery but I am still of the opinion that the bears will regain control for a retest of the range lows again. A move above 113.15 would require a rethink f strategy.
The bears are finally starting to gain some traction in the correction on gold. Yesterday’s strong negative candle has completely negated the move in the wake of the Fed decision. Losing $28 on the day, gold has now broken down below the key near term support at $1224, with a close below the support. I spoke yesterday about this move completing a small top pattern which on a conservative basis gives an implied downside projection of $45 to a target of $1180. More interestingly this would mean a slide back towards the support around $1200 and a possible retest of the key breakout support at $1190. This is now where we get to see what the bulls are made of and whether they can react to support the slide or not. The momentum indicators remain corrective and are increasingly so, with the RSI back at its lowest level since early January (before the bull run really began in earnest) and the Stochastics still falling sharply. If the MACD lines go below neutral then this would be a big signal for concern for the bulls. The hourly chart is a touch stretched to the downside and could result in some upside unwind. The overhead resistance is at $1225 and $1237. Initial support is now $1211.20.
The oil price came under selling pressure yesterday in the face of a stronger dollar and higher than expected EIA crude oil inventories. This has left the chart with a strongly bearish candle that is threatening to do some damage to the outlook. For now this is not a hugely concerning move, but the bulls will certainly need to hold on to the support band around $38.50/$39.00. Technical momentum indicators remain positively configured and for now this correction should be treated as a providing with a chance to buy. There is a potential issue with the potential for a small negative divergence on the Stochastics, but for now this not yet a negative signal. The medium term base pattern still implies $43.50 and this is a target that remains fully in play despite Tuesday’s reaction high leaving resistance at $41.90. There have been a few two day corrections on WTI since the bottom in February, and for now I see this being a correction that will once more be bought into around $39.