Last updated: May 3rd, 2017 at 09:58 pm
Whisper it quietly, but risk sentiment has improved overnight. There has been no definitive reason, however there has been a series of factors that can be attributable. Authorities in China removed the circuit breaker on the equity markets, whilst also setting the yuan rate at a higher level than yesterday. This seems to have calmed the jitters of traders, with a near term reversal in some of the risk trends. Oil has rallied, which in itself is a positive near term signal, whilst safe haven plays such as the yen, US Treasuries and even gold have all come off recent highs. After Wall Street’s sharp sell-off last night with the S&P 500 down 2.4% there was mixed trading in Asian markets with a volatile session in China ending higher and a slight decline on the Japanese Nikkei 225. European markets have are also mixed around the open. There has been an improvement in risk appetite, but add in the complexity of Non-farm Payrolls to today’s trading and the volatility could be a key feature in the market moves.
Forex markets are busy unwinding some of the moves of recent days. This means a correction for the yen and the euro after the big gains, a rally on sterling and gains across the board on the commodity currencies. Gold is looking to retrace some of yesterday’s breakout, whilst perhaps most important of all, the price of oil has rebounded over 2%.
Trader’s will now quickly refocus towards today’s Non-farm Payrolls report at 1330GMT, with this being the first report since the Fed raised interest rates. The headline expectation if for 200,000 which is slightly below last month’s 217,000 (and also below the 12 month average of around 220,000). However the focus will again be more on the average hourly earnings, which could be set to rise to 2.6% if the 0.2% month on month expectation is hit. This would be strong for the dollar and a positive for equities. Also watch for unemployment which is expected to stay at 5.0%. Usually in the run up to payrolls, markets will tend to consolidate but given the volatility over the past few days it seems that markets will continue to trade with direction off China and oil. However the payrolls report will also be ready to generate significant volatility also today. At the same time as payrolls there will be Canadian unemployment with the level expected to stay at 7.1%.
With a decline of over 4% in just 4 sessions the Aussie has come under considerable strain this week amidst the flight to safety and away from riskier assets. The move has breached the shallow uptrend that has been in place since September and broken a series of key supports. However the market’s treatment of the support at $0.7010 is now key for the near term outlook. This was the key November low and was stretched yesterday on an intraday basis on a move down to $0.6980 before an intraday rally. This support at $0.7010 is still important as a confirmed breach (on a closing basis) will put the bears firmly in control for at least a test of $0.6935 but more probably the crucial September low at $0.6895. So far today there has been a positive reaction after yesterday’s close bang on the support, however, momentum indicators are still corrective and have further downside potential on the daily chart. The hourly chart shows a broken 5 day downtrend and improving momentum. There needs to be a breach of the old support turned new resistance at $0.7090 for a recovery to be taken seriously now.
The sharp rally yesterday on the euro was the biggest one day gain since the day of the ECB policy announcement in early December. The big question is though whether it is a bear rally within what has become a small downtrend channel over the past 5 weeks. During the past few weeks rallies have consistently been sold into with a series of lower highs and lower lows, a feature that the RSI momentum indicator also exhibits. The overnight slide back for the euro means that the reaction high at $1.0950 remains intact and the trend channel continues. The hourly chart is interesting as it shows crossover sell signals on both the hourly MACD and the Stochastics. Look towards the hourly RSI and if that drops to below consistently below 50 then it would suggest the upside potential has waned. The hourly chart also shows support at $1.0825 and $1.0770. Non-farm Payrolls today will create added volatility too.
After days of pure bearish candles it is interesting that we have had the first signs of a possible near term rally on Cable. Yesterday Cable dropped to its lowest level since 2010 on an intraday breach of support at $1.4563. However this break was rejected and buying pressure forced an intraday rally which subsequently formed a questionable bull hammer candle (questionable because it has a bearish body so the pattern needs to be treated with an element of caution). This also comes with the RSI stretched below 30. The overnight moves have suggested the support is continuing, although as yet there are no bull signals on the daily momentum. There is a 4 week downtrend that today comes in around $1.4690 which needs to be breached before there can be any real notion of a recovery. Furthermore the hourly chart shows overhead supply and resistance as part of the stepped decline at $1.4645 initially, and then at $1.4680 and $1.4725. There is though a marked improvement in momentum which suggests that the bulls may be building for something.
After sharp incessant selling pressure this week Dollar/Yen has formed some support finally, leaving a reaction low at 117.30. For now the test of the key August low of 116.46 can be put on ice. With the RSI yesterday almost reaching 20 (the level hit during the huge sell-off in August) there has been a sharp recovery overnight. This is a move that has (as I write this) unwound the pair to the initial resistance of the 23.6% Fibonacci retracement of the August sell-off around 118.50. This has been a consolidation area in the past and also acted as a floor during September/October and if the bulls can push straight through today in the rebound, it would be a big positive signal again, also suggesting an unwind back to the next Fib level up at 119.83 which is the 38.2% level. The rebound early in the session will also trigger an end of day classic buy signal on the RSI if the price were to close around here. The intraday hourly chart shows improvement overnight with a downtrend broken but also a small base pattern has been formed along with improvements in the hourly momentum. The big near term resistance to overcome is at 118.75 which has been a pivot throughout this week. A move above there and the bulls are on their way.
The completed base pattern was more than confirmed yesterday as gold stormed back above the resistance at $1098 and the psychological level at $1100. This means that there is an implied target of $1130 now and that corrections should be used as a chance to buy. The momentum indicators show continued improvement too. The old resistance levels should now become supportive with $1098 and the neckline around $1089 both prime levels now. I am keen to stress that I still see this as a near to medium term improvement in the gold price rather than a longer term buy signal as the 144 day moving average continues to fall and is the key indicator in that regard. The hourly chart suggests letting the price settle again as the hourly momentum indicators have rolled over near term. However once the market has settled I believe that the improvement in gold is sustainable now over the near to medium term.
The oil price seems to have clawed back from the brink as a move to a new multi-year low (below the $32.40 November 2008 low) engaged in a big intraday rebound to leave a new low at $32.10 yesterday. This has left the chart with what some optimists may actually regard loosely as a reversal candle which has almost formed a hammer candlestick. However with the bearish body of the candle, it is a candle that comes with a significant caveat. With the degree of selling pressure that the oil price has come under in the past few sessions there will need to be much more done to prevent this being another rally that is simply sold into. The old support at $34.00 is the new basis of resistance, whilst yesterday’s intraday rally failed at resistance at $34.25 suggesting there is a band of overhead supply in place $34.00/$34.25. So far today there has been a degree of support which has formed a bull candle. However, pushing and holding above $34.25 would be the first positive signal on oil that global risk sentiment desperately needs.
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.