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FX Monday: Aussie, Kiwi Plunge

Published 11/03/2014, 05:34 AM
Updated 07/09/2023, 06:31 AM

Aussie and Kiwi plunge

Australian dollar and New Zealand dollar opened the Asian session with an approximately 0.50% and 0.20% gap down respectively. The drop came after data during the weekend showed that China’s manufacturing activity fell to its lowest level since May. The nation’s official Manufacturing PMI declined to 50.8 in October from 51.1 in September, below expectations of an unchanged reading. Even though the index remained above the 50 level, which indicates expansion, the decline in October’s figure suggests that further measures are needed to boost China’s economic growth.

The greenback already boosted by the relative strength of the US economy, remained elevated against its major peers during the Asian time. Based on the overall appetite for dollars and the strong fundamentals, I will maintain my longer-term USD bullish view.

As for today’s economic indicators, Monday is a (final) PMI day in Europe. It starts with the manufacturing PMI figures for October from several European countries, including the UK, and the final figure for the Eurozone as a whole. As usual, the final forecasts for the French, the German and Eurozone’s figures are the same as the initial estimates. The UK manufacturing PMI is estimated to slightly decline to 51.4 from 51.6.

From Canada, the RBC Manufacturing PMI for October is expected with no forecast available.

In the US, the final Markit manufacturing PMI and the ISM manufacturing index both for October are also to be released.

We have two ECB and two Fed speakers on Monday’s agenda: ECB Governing Council member Carlos Costa, ECB Governing Council member Ewald Nowotny, Chicago Fed President Charles Evans and Dallas Fed President Richard Fisher.

As for the rest of the week, many Central Banks hold their policy meetings. The spotlight will be on the ECB policy meeting on Thursday. The Bank has signaled that they will probably take time to assess the impact of stimulus measures announced in the recent months, especially after the first estimate of the region’s CPI showed a rise in the inflation rate.

On Tuesday, the Reserve Bank of Australia is expected to keep rates unchanged. Last time, the Bank seemed less concerned about the level of the currency than it was before and since then the currency rate gyrated around 0.8800 against the dollar. It remains to be seen if they retain their stance. We also wait to see if they say anything about the currency beyond its usual comment that it “remains above most estimates of its fundamental value”. In New Zealand, the Q3 unemployment rate is anticipated to decline a bit, while the participation rate is expected to increase and average hourly earnings are forecast to accelerate. The positive labor market data could prove NZD supportive.

On Wednesday, the final manufacturing PMIs for the countries we got the preliminary figures for on Monday are coming out. In the US, we have the ADP employment report two days ahead of the NFP release. The ADP report is expected to show that the number of jobs gained in October increased from September.

On Thursday, the Bank of Japan releases its Oct. 6-7 meeting minutes. However, these are not the minutes from the most recent meeting and following the announcement of further stimulus on Friday, they will probably have little importance. Besides ECB, Bank of England meets to decide on its policy rate. The BoE is unlikely to change policy and therefore the impact on the market as usual should be minimal. The minutes of the meeting however should make interesting reading when they are released on 12th of November.

Finally on Friday, the major event will be the US non-farm payrolls for October. The market consensus is for a rise of 235k, down from the unexpected increase of 248k in September. At the same time the US unemployment rate for October is forecast to remain unchanged at 5.9%, while average hourly earnings for the same month are expected to accelerate on a yoy basis. The strong employment data are consistent with the FOMC report saying that the underutilization in the labor market is "gradually diminishing”. Canada’s unemployment rate for October is also coming out and net change in employment is expected to switch back to negative again.

The Market

EUR/USD dips below 1.2500

EUR/USD

EUR/USD continued its plummet on Friday, reaching and falling below the psychological line of 1.2500, which happens to be the 76.4% retracement level of the July 2012- May 2014 major advance. Today, during the Asian morning, the pair found support at 1.2435 (S1). A dip below that line could challenge our next support of 1.2400 (S2). In my view, a clear break of the latter level is the move that could trigger another strong leg down, perhaps towards the 1.2300 (S3) area, defined by the low of the 20th of August 2012. As for the bigger picture, the dip below the critical line of 1.2500 (R1) confirmed a forthcoming lower low on the daily chart and signaled the continuation of the longer-term downtrend.

• Support: 1.2435 (S1), 1.2400 (S2), 1.2300 (S3).

• Resistance: 1.2500 (R1), 1.2635 (R2), 1.2700 (R3).

USD/JPY breaks above the psychological line of 110.00

USD/JPY

USD/JPY surged after the Bank of Japan expanded its monetary stimulus, breaking above the psychological zone of 110.00. The pair gapped higher today, confirming that the short-term bias is still positive. In my view, the bulls could continue driving the pair higher, probably towards the highs of December 2007, at 114.60 (R1) at first stage. On the daily chart, the rally above 110.00 (S3) confirmed a forthcoming higher peak, something that keeps the overall path of USD/JPY to the upside. Furthermore, the daily MACD rebounded from marginally below zero, turned positive, and crossed above its signal line, while the 14-day RSI surged above its 70 line and is still pointing up. This designates accelerating bullish momentum in my view and magnifies the case for further advances.

• Support: 112.25 (S1), 110.70 (S2), 110.00 (S3).

• Resistance: 114. 60 (R1), 115.00 (R2), 116.00 (R3).

GBP/USD in a consolidative mode

GBP/USD

GBP/USD moved in a consolidative manner, staying near the support barrier of 1.5950 (S1). A break below that line could target the low of the 15th of October at 1.5875 (S2). However, bearing in mind our momentum signs I would prefer to take the sidelines as far as the short-term picture is concerned. The RSI moved somewhat higher after finding support at its 30 line, while the MACD, although negative, shows signs of bottoming and could cross above its signal line any time soon. As for the broader trend, I will maintain the view that as long as Cable is trading below the 80-day exponential moving average, the overall path remains negative. But I would prefer to see a break below 1.5875 before getting again confident on the downside. Such a dip would signal a forthcoming lower low on the daily chart and could trigger extensions towards the resistance-turned-into support barrier of 1.5720 (S3), defined by the high of the 21st of August 2013. Moreover, I still see positive divergence between our daily oscillators and the price action. This confirms my view to wait for a move below 1. 5875 (S2) to signal the continuation of the down path.

• Support: 1.5950 (S1), 1.5875 (S2), 1.5720 (S3).

• Resistance: 1.6000 (R1), 1.6200 (R2), 1.6340 (R3).

Gold breaks below the strong barrier of 1180

Gold And The USD

Gold continued falling on Friday, reaching and breaking below the key area of 1180 (R1). It is worth noting that the last time we saw the precious metal trading below that level was back in July 2010. However, the decline was halted marginally above 1160 (S1), which coincides with the 61.8% retracement level of the October 2008 - September 2011 advance. In my view, the dip below 1180 (R1) strengthens the likelihood that the price could go even lower. A clear violation of the 1160 (S1) barrier could set the stage for extensions towards the low of the 19th of April 2010, at 1125 (S2). Our daily momentum studies support the notion. The 14-day RSI dipped below its 30 line and is pointing down, while the daily MACD lies below both its zero and signal lines, confirming the recent strong negative momentum. However, back on the 4-hour chart, I see that the RSI lies within its oversold territory and could move above its 30 line in the close future. Hence, I would be watchful of a possible upside corrective wave before the bears pull the trigger again.

• Support: 1160 (S1), 1125 (S2), 1100 (S3).

• Resistance: 1180 (R1), 1205 (R2), 1222 (R3).

WTI still trendless

Oil

WTI declined on Friday, but found support slightly above the 79.40 (S2) barrier. As long as WTI is trading between that support obstacle and the resistance line of 83.50 (R1), I would maintain my flat approach. I still prefer to see a dip below 79.40 (S2), before getting again confident on the downside. On the other hand, a move above 83.50 (R1) is needed to flip the short-term outlook positive in my view. In the bigger picture, although I still see a downtrend structure, the 14-day RSI remains above its 30 line, while the MACD, although below zero, stands above its signal line. These momentum signs give me additional reasons to remain neutral, at least for now.

• Support: 80.00 (S1), 79.40 (S2), 79.00 (S3).

• Resistance: 83.50 (R1), 85.00 (R2), 86.30 (R3).

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