Last updated: May 3rd, 2017 at 09:58 pm
Despite some early gains in equities, there are hints in the forex and commodity markets that risk appetite is low and not as positive as perhaps the gains overnight on Wall Street would have you believe. The US markets were playing catch up after Monday’s President’s Day national holiday and the S&P 500 surged by 1.6%. Asian markets have been mixed to lower overnight with the Nikkei down 1.4% as the yen has strengthened again and there was disappointment in the Japanese machinery orders. European markets have opened positively this morning, but will it last? Rallies have tended to be seen as a chance to sell and the safe haven plays are stronger today with gold, the yen and the euro all stronger in early moves. The oil price is lower again as markets also continue to be disappointed by the outcome of the OPEC meeting with Russia. Treasury yields also off their highs which should again be a warning sign for any equity bulls. This all comes ahead of the FOMC minutes tonight where we get more meat on the bones to the January meeting. With Fed chair Yellen and other members such as Stanley Fischer giving much less hawkish comments recently it will be interesting to see the slant of the minutes.
In the forex markets there are classic signs of the risk off trading, with the euro and yen solidly stronger, sterling is weaker again, whilst the commodity currencies are also under pressure today. Gold has consolidated yesterday’s dip back to $1200 and is looking to now form support. The oil price which had been such a driver in recent weeks is again lower at just around half a percent of weakness on both WTI and Brent Crude.
The Fed minutes at 1900GMT are the key focus, but prior to that, certainly sterling traders will be on the lookout for UK unemployment and earnings growth at 0930GMT. Unemployment is expected to fall further to 5.0% (5.1% last month), whilst average weekly earnings growth (ex bonus) is expected to dip further, to +1.8% (+1.9% last month), which with the market’s focus on wage growth would be seen as a marginally negative read for sterling.
Yesterday’s intraday sell-off in oil and US dollar strength has had a double impact on the USD/CAD chart, which has engaged a bullish reversal. Having hit a low at 1.3705 the intraday rally of around 200 pips has improved the outlook. The daily candle looked to be on course for a bull hammer only to dip slightly into the close, but still there is a feeling that the USD/CAD chart is building once more for a bull move. The momentum indicators are looking to bottom out with the Stochastics rising positively and the MACD lines interestingly flattening off around neutral. This all has now got the potential to end the bull market correction (that by the way has almost unwound to the 9 month uptrend). It may be a touch early to start talking about the bulls being back in control but the signals are mounting. The key reaction high and resistance around 1.4000 is the big market point now that needs to be overcome. Watch for the RSI pushing back above 50 too as helpful confirmation of improving momentum. This is an improving chart once more, but needs further confirmation. The bulls will be looking to use support in the band 1.3800/1.3850 as the basis of support now.
The euro continues to find support above the $1.1100 breakout. This comes as the correction in the wake of the dovish comments made by Mario Draghi begins to settle. Yesterday still had a bearish candle but far less decisive in nature. The reaction low was also only within a few pips of the previous low, whilst today’s candle is once more adding to that support (a third low now in the same area, at $1.1116) before a degree of support has come in overnight. I continue to believe that this move will turn out to be a buying opportunity, allowing momentum indicators to unwind and help renew upside potential for a push towards the top of the long term range at $1.1460. The intraday hourly chart shows the selling pressure has gradually abated over the past couple of days and there is now a slight bullish divergence across the hourly RSI, MACD and Stochastics. Initial resistance is yesterday’s reaction high at $1.1193 with further resistance at $1.1260. The hourly chart shows a key low at $1.1084 which needs to remain intact for the bullish argument to stand.
After over a week of uncertainty, the consolidation has finally broken down and this has significantly changed the outlook. There is now a far more negative bias. The breach of $1.4350 has been a key move, coming as this was a key price pivot, it was also around the 23.6% Fibonacci retracement of $1.5238/$1.4079, below the 21 day moving average which had become supportive. The momentum indicators have taken a turn for the worse also, with the RSI now back decisively below 50, Stochastics in sharp decline and the MACD lines turning over around neutral. The hourly chart shows a minor old pivot line at $1.4235 comes in as the next test but there is a likelihood of a test of the key support down at $1.4147 now. The old $1.4350 support becomes a new basis of resistance and marks the beginning of around 50 pips of resistance band between $1.4350/$1.14400 which will be seen as a sell zone now. The hourly momentum indicators are looking to unwind initially but I am now on the lookout for using rallies as a chance to sell.
I discussed the fact that the recovery was beginning to lose momentum yesterday and this seems to have continued over the past 24 hours. Having posted a reaction high at 114.85, there now seems to be a lower high possibly in place around 114.40. I also see the loss of the support at 114.20 as interesting near term. For now the recovery has certainly lost some of its impetus with the hourly momentum indicators more neutrally configured. I am also interested to see on the daily chart that the price is now moving between the Fibonacci retracements of 121.68/110.98, with 23.6% at 113.50 all but providing support for yesterday’s low and the 38.2% at 115.07 the basis for resistance. With the outlook more neutral around here, I see that quite how the pair treats these Fib levels will determine the next outlook. A move below the 113.15 support would confirm the bears are back in control.
Along with the yen, gold has been a key safe haven trade in recent weeks. Also, just like the yen gold is using the key Fibonacci retracements to define the outlook. The 38.2% Fibonacci retracement of the $1071/$1261 rally provide the support around the low yesterday around $1188. The traded low yesterday was also significant as it came within a whisker of hitting the old key October 2015 high of $1190.40 almost bang on, before bouncing. This is clearly therefore seen as a key support area. It is also interesting that yesterday’s high was within $1 of the 23.6% Fib retracement at $1216. The overbought exuberance of the run higher has therefore already unwound $70 from the high and it will be interesting to see now if this continues, because the price has started to consolidate within the two Fib levels and these will now be seen as key triggers for the outlook. The daily momentum is mixed with the more reactive Stochastics still in decline, whilst the RSI and MACD lines are less corrective. The hourly chart already shows the selling pressure is settling down. The bears would be in corrective control below $1190.40, whilst a breach of support at $1181 would confirm this.
The OPEC meeting between Saudi and Russia has driven much volatility in recent days and the disappointing news on production levels drove a huge intraday reversal on WTI which has again completely flipped sentiment around again. Having been up almost 6% on the day, the sell-off has completed a hugely bearish candle, which is almost a gravestone doji. The fact that the rally almost hit the resistance of the downtrend and then sold off is a reaffirmation of the bear trend and confirmation that rallies are a chance to sell. Also the move back below the old neckline at $29.25 which had been a pseudo pivot should not be overlooked as this is a bearish development in itself. I would continue to look at further weakness as being highly likely and see rallies as a chance to sell. As ever though volatility will be high and will not make catching the track lower easy. I would still look at $29.25/$30 as a sell-zone now. The downtrend today comes in at $31.80.
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