Market Analysis 03/09/14

03.09.2014, 9am

US outperformance means higher USD The US economy continues to outperform other major economies. The ISM index for August was expected to fall marginally, but instead powered higher to the highest level in over three years. Moreover, the headline number was supported by solid figures from new orders, production and export orders. The figures were a sharp contrast with most other countries – 15 of the 26 countries that reported on Monday saw a decline in their PMIs, including China, the UK and most of the major European countries, and only nine reported an increase (two were unchanged). The good results send Fed funds rate expectations up 6 bps in the long end and the dollar firmed against most of the currencies we track.

With interest rate expectations higher and the dollar firmer, it’s no surprise that gold was lower. With the technical looking poor too, gold seems headed lower for now. At the same time, the indications of strong US manufacturing were not enough to outweigh the indications of a slowdown elsewhere and oil prices fell sharply to the lowest in over a year. The fundamentals for oil seem poor but the technical are more mixed, making it a difficult call (see below).

GBP was the main loser after a survey by Yougov, a British opinion research firm, showed support for Scottish independence had risen to 47% vs 53% opposed. The 6 ppt gap between the two sides is down sharply from this poll’s 14 ppt gap just two weeks ago, suggesting that as the Sep. 18th referendum draws near, more of the undecided people are making up their mind to vote “yes.” Other polls do not show quite as narrow a gap nor as high a level of support for independence, but they do indicate the same trend. Since there was no risk premium for this event at all priced into GBP, it would be reasonable to expect the market to discount the possibility a little bit and for GBP to decline further. (I wrote about this likelihood for CNBC back in July; you can see the article at ).

Australia’s GDP rose slightly more than the market expected in Q2. It caused only a momentary spike in the currency however.

Today’s events: The main event will be the Bank of Canada policy meeting. In their last meeting, the Bank kept a neutral stance with respect to the timing and direction of the next change in the policy rate and revised their GDP growth forecast down for 2014 and 2015. We expect them to repeat themselves and remain on hold. The statement accompanying the release is most likely to reflect a dovish tone, which could weaken CAD somewhat.

As for the indicators, we get the final service-sector PMIs for August from the countries we got the manufacturing data for on Monday. As usual, the final forecasts from France, Germany and Eurozone are the same as the initial estimates, while the UK service-sector PMI is expected to have decreased slightly. Eurozone’s retail sales for July are also coming out and the forecast is for the monthly figure to drop, adding to the recent weak data coming from the bloc.

In the US, factory orders for July are forecast to have surged 11.0% mom from +1.1% mom in June. The MBA mortgage approvals for the week ended on August 29 are also coming out. Moreover, the Fed releases the Beige book report.

EUR/USD touches 1.3107

EUR/USD moved slightly lower on Tuesday to touch 1.3107, marginally above our support line of 1.3100 (S1), the lows of the 6th of September 2013. At the European opening, the rate is trading between that support line and the resistance of 1.3152 (R1). I would take to the sidelines now, for three reasons: 1) our proximity to the lower boundary of the blue downside channel, connecting the highs and the lows on the daily chart; 2) the positive divergence between our momentum studies and the price action, and 3) tomorrow we have the ECB policy meeting, which could bring a surprise either way. The possibility of a rebound near the lower line of the channel remains high. Although I remain flat for now, I still see a negative overall picture, since EUR/USD is trading within the aforementioned downside channel and also below both the 50- and the 200- day moving averages. If the bears get a reason to push the rate lower, we are likely to see extensions towards the psychological zone of 1.3000 (S2).

• Support: 1.3100 (S1), 1.3000 (S2), 1.2900 (S3).

• Resistance: 1.3152 (R1), 1.3215 (R2), 1.3240 (R3).

GBP/USD: The downtrend is back in force

GBP/USD collapsed after a minor move above the 1.6600 line. The pair moved below the psychological barrier of 1.6500 and also below our support line (turned into resistance) of 1.6460. This signals the continuation of the downtrend and could carry larger bearish implications. I would expect the dip below 1.6460 to open the way for our next support zone, at 1.6350 (S1). On the daily chart, Cable remains below the 80-day exponential moving average, the moving average that supported the lows of the price action for a whole year. As a result, the overall outlook remains negative in my view, and I would see any possible bullish moves below that moving average as corrective waves.

• Support: 1.6350 (S1), 1.6260 (S2), 1.6200 (S3).

• Resistance: 1.6460 (R1), 1.6500 (R2), 1.6535 (R3).

EUR/JPY surges but still within a major downside channel

EUR/JPY surged on Tuesday, violating two resistance obstacles in a row. At the European opening, the rate is trading slightly above the 138.00 (S1) barrier and I would expect it to challenge our next line at 138.45 (R1). Zooming in on the 1-hour chart, the 14-hour RSI looks ready to exit overbought conditions, while the hourly MACD has topped and moved below its signal line. Having in mind these momentum signals and the fact that the rally was too steep, I would expect a pullback before the bulls prevail again. Although I would expect the upside leg to continue, on the daily chart, the rate is still trading within a downside channel, drawn from back the beginning of April. Thus I see the pair in a retracing mode for now. I will reconsider my analysis if buyers are strong enough to exit the channel.

• Support: 138.00 (S1), 137.40 (S2), 136.65 (S3).

• Resistance: 138.45 (R1), 138.75 (R2), 139.25 (R3).

Gold breaks a long-term support line

Gold collapsed, dipping below the long-term upside support line (black line) drawn from back at the low of the 30th of December and below 1273. The decline was halted at 1262 (S1), but the plunge shifts the bias back to the downside in my view. A clear dip below the 1260/62 zone could pull the trigger for further downside extensions, perhaps towards the 1250 line. As long as the metal is trading within the purple downside channel and below the black long-term support line, I would consider the overall picture to be negative. However, on the 1-hour chart, the 14-hour RSI exited its oversold zone, while the hourly MACD moved above its trigger line. As a result, I would be cautious that the minor corrective wave may continue before the bears pull the trigger again.

• Support: 1262 (S1), 1250 (S2), 1240 (S3).

• Resistance: 1273 (R1), 1280 (R2), 1290 (R3).

WTI plunges back below 95.00

WTI tumbled back below 95.00 after finding resistance at the 96.00 (R1) barrier. The plunge was stopped by the 92.60 (S1) key support, defined by the lows of the 19th and the 21st of August. Having in mind that the 92.60 (S1) line provided reliable support in the recent past, I would adopt a neutral stance for now. Only a dip below that hurdle will shift my attention to the downside. Such a dip would be likely to target our next support, at 91.60 (S2). On the daily chart, despite the sharp fall, the MACD remains in a rising mode above its signal line, which gives me an additional reason to stay flat for now.

• Support: 92.60 (S1), 91.60 (S2), 90.00 (S3).

• Resistance: 96.00 (R1), 96.70 (R2), 98.45 (R3).

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