Last updated: May 3rd, 2017 at 09:58 pm
Anyone thinking it would be a quiet first trading day of the year would have been woken up with a quick slap to the face as a series of key market event have already driven sharp moves across asset classes. The weaker than expected China Manufacturing PMI data (both the official and unofficial Caixin data are troubling) has questioned any positivity, whilst the news of Saudi Arabia expelling Iranian diplomats has threatened to further destabilise the Middle East. Safe haven plays such as US Treasuries, gold and the Japanese yen are stronger, whilst the oil price has also been benefitting, it seems that little has changed despite the turn of the year. The double impact of the concerns have meant significant selling pressure in Asian markets with trading in China halted after the 7% swing circuit breakers were triggered. European markets have opened strongly lower with the DAX still seen as the volatility play of choice.
Forex majors are also seeing some key moves with the euro (viewed as a safe haven) trading stronger, whist the yen is also up against the dollar. Despite the jump in gold and oil, we are also seeing the Aussie and Kiwi dollars under pressure as concerns over a China slowdown continue.
The fun does not stop there either, as a slew of PMI data will be released throughout the day. The UK is at 0930GMT with a flat reading of 52.7 expected. Then at 1500GMT, the US ISM Manufacturing data is released which is expected to improve slightly to 49.0 (from 48.6) although if the Chicago PMI is anything to go by (it has been a decent indicator in the past) then the ISM data could come under pressure again today. There is also German CPI at 1300GMT which is expected to pick up to +0.6% from +0.4%.
The uptrend channel on the daily chart that the Kiwi has been in for the past 7 weeks looks as though it has been broken as a sharp bearish candle has burst through the bottom of the channel. The RSI has already dropped to a 5 week low as momentum indicators react negatively. Having decisively breached the original breakout support band $0.6785/$0.6830, the next support around $0.6760 is creaking. The support at $0.6683 is now important as this is the latest key reaction low within the trend channel and if this is broken then the bears will be looking to regain control again. Furthermore, the 21 day moving average which has been shadowing the run higher as a key indicator of support, and today comes in at $0.6775, is also being broken. The broken channel now becomes a basis of resistance at $0.6820 as rallies could now become a chance to sell.
Having held on to the support around $1.0810 for the past few weeks the euro remains in the consolidation band up to $1.1050. The early strength today during the Asian session has also helped to bolster this support and for now there is the prospect of a bullish engulfing candle (bullish outside day), although it is clearly very early in the session still. The momentum indicators have been drifting lower a touch in the past few days but are already looking to react higher again. Calling the euro on a near term basis is still rather indecisive but on the hourly chart there are initial resistance levels to watch, at $1.0940 and then at $1.0990. This could be a day that provides us with some near term direction after a few weeks of drift. The initial move is higher but there could be some conflicting moves as the Europeans and then the US session takes hold. More watch this space than anything really.
Whilst other forex major pairs have been in more of a consolidation mode during the Christmas trading period, Cable has been under continued pressure and has fallen to its lowest level since April. There is little change to my long held outlook that rallies should be seen as a chance to sell and that further weakness is likely towards the $1.4563 April low in due course. The problem is that there is a downtrend which Cable has consistently used as the basis of resistance for the rallies in the past few months, but that downtrend comes in around 400 pips higher at $1.5140 currently. This makes timing potentially a tricky situation. The momentum indicators are all habitually bearishly configured but not excessively oversold either. The hourly chart shows a resistance band $1.4800/$1.4845 as the initial overhead supply, with the $1.4950 high from the Christmas period as more sizeable (even if this came amidst reduced trading).
Safe haven plays have taken a boost today and this means the Yen is having a strong day. The consolidation that was previously forming around the 61.8% Fibonacci retracement at 120.20 has now moved to the next level, at 76.4% Fib around 119.35. If this level is decisively broken it would open for a full retracement back to 118.04. The momentum indicators are certainly increasingly negative, with the RSI hitting the lowest since August, whilst the MACD and Stochstics are also bearish. This would suggest that selling into strength or any rallies would be the strategy, with the hourly chart showing initial resistance around 120.00. It would need a move back above 120.75 to turn around the outlook on a near to medium term basis now.
I am always reticent to start calling out base patterns as I know that the prevailing trend tends to more often be the determining factor. However the lack of selling pressure on gold in recent weeks is notable and the improvement in momentum indicators is also clear. So could this be a base pattern forming? The big barrier to the completion of any pattern remains the resistance and overhead supply which comes in above $1077 to $1098. Last week’s reduced trading drift lower has been unwound already this morning by a strong start to 2016 and what is already looking to be a strong candlestick. If this completes today then the bulls will once more be eying the resistance above $1077 in the coming days. The support is now in place at $1058 and today’s low at $1061.50.
For the prospect of this potential base pattern the first trading day of the year could be really important as traders return to their desks after the Christmas break. This means that after two weeks, volumes will be back at normal levels and the direction of sentiment will be seen as key. The initial jump higher on news of diplomatic tensions between Saudi Arabia and Iran has pulled the price higher once more and resistance is again under pressure. The resistance band of the base neckline continues to come in at $37.75/$38.30 which is the key barrier of overhead supply that needs to be breached. The momentum indicators are mixed although the improvement in the near term is still present. The hourly chart remains neutrally configured and whilst the key near term support remains in place at $35.65 the prospect of a base pattern remains. However a breach of $35.65 would confirm the bear control again.
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