Dollar weakens on profit-taking The dollar weakened against most G10 currencies despite a further rise Fed funds rate expectations and deepening concern about the Greek situation and Ukraine tensions. I can only assume that it was caused by profit-taking after the dollar’s payroll-induced bounce on Friday, as there was no fundamental news behind the move. Newswire reports attribute the dollar’s decline to risk-aversion owing to increased tensions, but that is clearly not true, as the best-performing currencies were the high-beta NZD and AUD, while the safe-haven JPY and CHF lagged behind.
Greek Prime Minister Tsipras vowed to keep on with the program that his government was elected on, namely allowing the current bailout program to expire on schedule at the end of this month while attempting to secure a new program. The Greek government will seek a “bridge agreement until June.” Meanwhile, German Chancellor Merkel rejected Tsipras’ plan, saying the current program was “the basis of any discussions that we have.” She added that “what counts” is the proposal “that Greece puts on the table” at tomorrow’s eurozone finance ministers’ meeting. But eurogroup head Dijsselbloem last week ruled out a bridge loan, so tomorrow’s meeting is likely to reject the Greek proposal. Thus the meeting is shaping up to be a key pressure point for the markets.
It’s notable though that while Greek problems are seriously affecting Greek assets, particularly bank stocks and bonds, the euro remained in a tight range vs USD yesterday. Yesterday’s range was only 0.8%, exactly in line with the average for the last six months. It looks as if the FX market may be discounting a successful conclusion to the very difficult talks that lie ahead. I agree that the two sides are likely to come to an agreement somehow, although it’s still hard to see how.
French election shows why EU has to settle Greek problem French President Hollande’s Socialist party won a narrow victory in a by-election in eastern France Sunday, but the real news was that the far-right National Front candidate won nearly 49% of the votes. This was the first parliamentary poll since the terrorist killings in Paris last month. The surprisingly good showing of the NF candidate is one reason why I believe the EU will work out some agreement with Greece. Incumbent politicians must be terrified about how the current austerity programs are fueling support for their opponents on both the left (e.g., Syriza in Greece) and the right (e.g., the NF in France). They have to prove to voters that the EU is listening to them and responding to them, otherwise there will be a revolt.
China’s disinflation deepens China’s consumer price index (CPI) rose at the slowest pace in more than five years in January, rising only 0.8% yoy (vs 1.5% in December), while the producer price index (PPI) fell deeper into deflation at -4.3% yoy (vs -3.3%). As usual, bad news is good news; Shanghai stocks were up 0.8% on expectations that the slowdown in inflation would lead to further monetary easing. Such reasoning shows how divorced the entire financial world is from economic fundamentals and how dependent markets are on the actions of central banks. Nonetheless, AUD and NZD were the best-performing currencies overnight. I believe in basing trading strategies on reality, not hope, and so I maintain my bearish view of these two currencies.
Japan’s tertiary index for December fell 0.3% mom while M2 money supply growth slowed to 3.4% yoy from 3.6%, indicating that the economic recovery remains fragile and the massive injection of base money has so far failed to feed through to accelerating growth in broader monetary aggregates. The ECB might be interested to note how massive QE for months on end fails to boost money supply growth in an economy based on bank lending.
Today’s highlights: G20 meeting ends The G20 meeting ends today. According to Bloomberg, a draft of the communique effectively gave the official stamp of approval to the recent “indirect currency wars.” It said that uneven global economic growth means some nations need easy monetary policies as others move toward normalizing policy and welcomed the ECB’s quantitative easing program. In other words, everyone can continue doing as they are doing. This is bullish for USD and negative for EUR, JPY and almost every other currency, come to think of it.
During the European day, French industrial production for December is expected to rebound from the previous month.
In Norway, the annual rate of growth in the CPI for January is forecast to decline further from the Bank’s 2.5% target. Despite the recent rise in oil prices and the overall country’s economics being in a good condition, we expect the slowdown in inflation rate to weaken NOK further as investors look for further easing from Norges Bank.
UK’s industrial production for December is forecast to fall on a mom basis, with the yoy rate of growth falling in half to 0.5%. That would be three consecutive months of mom decline, suggesting that the economy contracted towards the end of 2014. The news could leave GBP vulnerable.
In the US, only data of secondary importance are coming out. The NFIB small business optimism for January is expected to have increased fractionally to its highest level since October 2006. While this indicator is not particularly market-affecting, it’s well worth watching because of the Fed’s emphasis on the labor market. Small businesses employ the majority of people in the US. The Job Opening and Labor Turnover Survey (JOLTS) report for December is forecast to show a marginal increase in the number of job openings. Following last week’s strong employment data, this is likely to keep the dollar supported. Wholesale inventories for December are also coming out.
As for the speakers, German Finance Minister Wolfgang Schaeuble and ECB Governing council member and Bundesbank President Jens Weidmann will brief reporters after the G20 meeting. The two may be questioned about whether a compromise on Greece will be achieved eventually. I would expect them to maintain their tough tone ahead of the negotiations, which could prove EUR-negative. Richmond Fed President Jeffrey Lacker also speaks.
The Market
EUR/USD hits support near 1.1260
EUR/USD moved somewhat lower on Monday, hit support fractionally close to the 1.1260 (S1) support line, and rebounded to trade virtually unchanged. The rate has been trading between the aforementioned support line and the resistance obstacle since the 27th of January and therefore I would consider the near-term path of EUR/USD to be neutral. As far as the broader trend is concerned, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. I still consider the recovery from 1.1100 (S2) as a corrective phase and I would expect the bears to eventually take control again.
• Support: 1.1260 (S1), 1.1100 (S2), 1.1020 (S3).
• Resistance: 1.1540 (R1), 1.1650 (R2), 1.1730 (R3).
AUD/USD rebounds from near the 0.7730 barrier
AUD/USD edged higher after finding support slightly above the 0.7730 (S1) barrier. The rate remains between that line and the resistance of 0.7870 (R1). Taking a look at our momentum signs, I would stay watchful that the rate may continue higher for a while. The MACD rebounded from near its zero line and is now pointing north, while the RSI found support at its 50 line and moved higher. As far as the bigger picture is concerned, the break below the 0.8000 (R2) psychological hurdle is the move that triggered the continuation of the longer-term downtrend, in my view. Therefore, I would treat any possible upside extensions as a corrective move before sellers seize control again. I still expect the rate to challenge the psychological line of 0.7500 (S3) in the not-too-distant future.
• Support: 0.7730 (S1), 0.7615 (S2), 0.7500 (S3).
• Resistance: 0.7870 (R1), 0.8000 (R2), 0.8035 (R3).
GBP/JPY finds support at 180.25
GBP/JPY pulled back after hitting resistance at the 181.60 (R1) barrier, which happens to be the 50% retracement level of the 2nd -16th of January decline. The decline was halted by the support line of 180.25 (S1). As long as the rate is trading above the upper boundary of a sideways channel it had been trading recently, the short-term bias remains positive, in my view. A clear move above 181.60 (R1) could set the stage for extensions towards the 182.70 (R2) hurdle, which lies marginally below the 61.8% retracement level of the 2nd -16th of January fall. I have some concerns though, derived from our short-term oscillators. The RSI moved lower after hitting resistance near its 70 line, while the MACD has topped and fallen below its signal line. On the daily chart, the picture has now turned neutral. The 176.00 barrier prevented the pair from falling further, provided strong support and the bulls took advantage of it.
• Support: 180.25 (S1), 179.50 (S2), 177.70 (S3).
• Resistance: 181.60 (R1), 182.70 (R2), 184.50 (R3).
Gold rebounds somewhat
Gold rebounded somewhat after it touched 1228 (S1) following the strong US labour data. In my view, the technical picture is little changed since yesterday. Friday’s fall confirmed a forthcoming lower low on the 4-hour chart and turned the near-term picture back to the downside. However, given our momentum signals, we may see a positive forthcoming wave, perhaps to challenge the 1255 (R1) line as a resistance this time. The RSI edged higher after exiting its oversold territory, while the MACD has bottomed and appears ready to cross above its trigger. As for the bigger picture, on the daily chart the possibility for a higher low still exists and thus I would still treat the decline from 1305 as a corrective phase, at least for now.
• Support: 1228 (S1), 1222 (S2), 1205 (S3).
• Resistance: 1255 (R1), 1275 (R2), 1285 (R3).
WTi breaks below a minor-term channel
WTI found resistance slightly below the 54.15 (R2) barrier and slid to break below the lower bound of a minor-term upside channel. That move confirmed the negative divergence between our oscillators and the price action and increases the likelihood that the pullback may be extended. Nevertheless, WTI stood above the 50-period moving average, thus I would expect a dip below that moving average to confirm further extensions. On the daily chart, WTI is still trading below both the 50- and the 200-day moving averages, but given the positive divergence between the daily oscillators and the price action, I would prefer to stay to the sidelines as far as the overall picture is concerned as well.
• Support: 51.65 (S1), 51.10 (S2), 50.20 (S3).
• Resistance: 53.15 (R1) 54.15 (R2), 55.00 (R3).
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
