There have been a few factors over the weekend that have hit risk appetite for the start of the week, with the earthquakes in Japan (and also in Ecuador), but the fallout from a lack of agreement at the meeting in Doha has the potential to significantly hit markets in the coming days. With Iran not present at the meeting, Saudi Arabia obstinately prevented any agreements on a production freeze and once more a meeting involving OPEC countries has ended with no positive result. The oil price is suffering as a result, but the negative pressure will not just be contained to oil markets. There is a strong positive correlation still between oil and equities, with European equities around a percent lower at the open. Safe haven flows can also be expected with the Japanese yen a prime candidate to outperform with not only Doha but also the earthquakes at the weekend, whilst gold is also finding some support.
In forex markets, the higher risk commodities linked currencies such as the Canadian dollar and Aussie are both under pressure, whilst Sterling is also faring relatively badly. The euro is holding fairly firmly, whilst the Japanese yen is the best performing major currency. Gold is trading slightly higher, whilst the oil price is over 4% lower.
Traders will be dealing with the fallout from Doha in the days (and possibly weeks) to come, whilst today there is little economic news with which to distract them. The NAHB Housing Market Index is announced at 1500BST and the expectation is for a slight uptick to 59.0 from 58.0. FOMC membr Bill Dudley also speaks at 1330BST.
Chart of the Day – AUD/USD
A couple of weeks ago I highlighted the creeping bearish divergence that the momentum indicators on the daily chart exhibit versus the recent gains on the Aussie. The rally in the Aussie last week has once more seen the market hit another new 10 month high, however the bearish divergence continues. Once more I re-iterate that these bearish divergences are medium term signals which suggests that the price could continue to go higher, however I would expect the price to eventually be weighed down by the waning upside impetus and the rally will come under downside pressure. The higher highs and higher lows of the price on AUD/USD are tempered by lower highs and lower lows on both the RSI and the Stochastics. This sequence has continued as the price has opened lower after the weekend and the pressure could now build to the downside. This could result in once more the near term rally rolling over in the coming days. The supports at $0.7488 and then $0.7475 would be under threat in a corrective scenario. The hourly chart also reflects a loss of upside momentum whilst RSI and MACD lines have also deteriorated to six day lows and look set to drive a correction now. Friday’s range $0.7680/$0.7735 now becomes a band of resistance, whilst pressure back towards $0.7530 and $0.7490 looks increasingly possible. The next important resistance is $0.7850 from June 2015 and then $0.7930.
The breakdown on the euro below $1.1325 continues to imply a near term correction back towards $1.1200. The outlook remains broadly positive within the trading range over the medium term but the chart still looks corrective. The Stochastics continue to fall back and the MACD lines only recently crossed lower. The minor technical rebound at the backend of last week was rather tepid with a couple of rather drab, small bodied candles, whilst in the Asian session today there has been little real appetite to buy the euro. The hourly chart shows that the old support around $1.1325 has now turned into overhead supply, whilst the hourly momentum indicators are also beginning to roll over already. Initial support comes in around $1.1230/40, with more important support not until around $1.1140.
The near term bears remain in control whilst the resistance band $1.4280/$1.4320 is intact and I continue to see rallies as a chance to sell for pressure down on the support around $1.4050. The daily momentum indicators rolling over at successively lower levels confirms the continued downward pressure on the price despite the occasional technical rally in recent weeks. The early weakness in today’s session continues this trend and looks set to put pressure on the initial support at $1.4088. Hourly momentum is negative has rolled over with the bears controlling the early part of today’s session and there is further downside potential. The initial resistance comes in at $1.4240 which is under $1.4280 and the key near term resistance at $1.4350. The bears look set up to test the supports early this week.
The yen has opened sharply stronger in the wake of a couple of significant risk-off events over the weekend (Doha and a series of earthquakes in Japan), which has been something to once again put pressure on the recent low at 107.60. With the medium and longer term implied targets looking towards at least 107.00 (and possibly 105.20) to the downside there is still room for further weakness on Dollar/Yen. The near term improvement in the indicators is quickly dissipating and any rallies continue to be seen as a chance to sell. The hourly indicators are a touch stretched so there is the possibility of a bit of an unwinding move initially, but the initial opening gap lower following the weekend break has already been all but filled by the rebound to 108.45 overnight and the bears are unlikely to drive too much of a rally before a renewed push lower. Key resistance near term is at 109.70.
The choppy look to the chart continues as the short run of negative candles was broken on Friday and the outlook on the momentum indicators begins to turn increasingly negative again. The Price is once more trading around the middle of the medium term range that has formed between the supports at $1190/$1208 and the resistance up around $1282. The hourly chart shows that the corrective downtrend which has been pulling the price lower over the past four days has now been broken, whilst the configuration on the hourly momentum is now far more neutral. The pivot bands that need to be watched now come in with $1225 which is supportive and $1243 which is resistance. I have turned once more neutral, but if the fallout from the Doha meeting continues then there is likely to be an upside bias on $1243 and up towards $1250 and possibly $1262.60.
With no agreement over a production freeze in Doha, the oil price has opened sharply lower today. The technical deterioration could be significant and weakness in the oil price could extend now. The initial low at $37.60 was very early in the session, and it will be interesting to see how the US traders react, but any rallies are now likely to be seen as a chance to sell. The next real support is $35.25 from the April low which is also a six week low. From a daily point of view the momentum indicators have turned negative with the RSI falling away and the Stochastics on the brink of a crossover sell signal confirmation. Hourly momentum is also bearish and although there is a gap down from $40 which theoretically needs to be filled and is therefore the initial resistance, the market may not give it the chance, with the bears likely to remain in control today.