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Market Analysis For January 6, 2015

Published 01/06/2015, 06:16 AM
Updated 07/09/2023, 06:31 AM

Greek risk rises while Crude Oil, commodities fall: The market has been quite blasé about the risk of Greece leaving the eurozone (the “Grexit”) after the coming election, but that risk came into focus yesterday after the German magazine Der Spiegel said that “Chancellor Angela Merkel is willing to accept a "Grexit" should a new leftist government in Athens demand concessions.” The story was denied all around in the halls of power in Germany and Brussels, where it was argued that Greece is in the eurozone to stay.

However, the idea of a Grexit is getting a lot of boost from Greek PM Samaras, who is trying to scare people into voting for his party by warning that a vote for the opposition SYRIZA coalition would mean leaving the euro.

In any event, the election seems up in the air. Recent polls suggest neither Samaras’ New Democracy Party nor SYRIZA is likely to get a majority, meaning either a coalition or even another vote will be necessary. It seems to me that the uncertainty is likely to continue even past the Jan. 25th election and that this is likely to continue to put pressure on the euro.

For example, it’s unclear whether the ECB can institute quantitative easing while the Greek government is negotiating over its debt. That could hit confidence in the eurozone and a further exit from European assets. The Euro Stoxx was down 3.7% yesterday, with energy and mining shares the worst hit, while eurozone bond yields, both core and peripheral, moved higher. Where did the money go to? Probably out of the euro, is my guess.

The market is clearly less concerned about a Grexit than it was last time the issue came up in 2012. That’s because most of Greek debt is now in official hands, not the private sector, and there are more programs in place to deal with such disruption, like the ECB’s Outright Monetary Transactions plans.

On the other hand, the fact that the latest Greek crisis has occurred even while the Greek economy has finally started improving and the government has achieved a primary budget surplus is a warning that other troubled peripheral countries can’t be complacent. Finally, although there are more programs in place to deal with market disruption in case of Grexit, these plans have never been tested, nor is there enough money backing them if the crisis should spread to a large country like Italy. In short, the Greek crisis is likely to hurt sentiment towards the euro until and even after the election, in my view.

USD weakened yesterday nonetheless on what seems to have been profit-taking on the recent swift move. Further declines in Fed Funds rate expectations and falling bond yields as commodities fell (see below) may also have weakened the currency. I expect the dollar’s weakness will only be temporary though and I think if anything it simply sets up more attractive entry levels for long dollar positions.

GBP was the exception among G10 currencies as it weakened vs USD following a disappointing construction sector PMI. This strikes me as ridiculous. The PMI fell to 56.7 in December from 59.4, vs a consensus estimate of 59.0. But what is the PMI? Basically, it is the percent of people saying conditions are improving minus the percentage who say conditions are worsening. Conditions can’t improve indefinitely. Eventually conditions will be the same one month to the next, and the PMI will fall. But that doesn’t mean things are bad. In any event, 57.6 is far above the long-run average of 54.5 and still signals strong expansion. With oil prices falling and inflation nearing zero, UK growth looks likely to continue robust and I would expect GBP to gain vs euro, although probably not vs USD.

Commodities were generally weaker yesterday, led by oil. Oil prices continued to fall as Russia production hit a post-Soviet record, Iraq's oil exports in December were the highest since 1980, and Saudi Aramco cut the official selling price for its Arab Light crude to Northwest Europe. No wonder then that RUB was off around 2%! One major oil sand producer in Canada noted that production in Dec was down 14% mom, another reason to be bearish USD/CAD. China increased export tax rebates for some copper products in a move that’s expected to increase demand for copper. Nonetheless, copper prices fell 1.3%, which shows just how weak demand is. On the other hand, the Chinese government scrapped an export tax rebate on some steel products, which sent iron ore futures lower – a potentially AUD-negative development.

Commodity Indexes From January 2014-To Present

Despite the fall in commodity prices, AUD and NZD actually gained as China’s HSBC services PMI rose slightly in December and the composite PMI, incorporating both manufacturing and services, also rose to 51.4 from 51.1. I think though that the manufacturing PMI is more important, at least for AUD, and would expect to see AUD resume its decline. AUD/NZD has risen somewhat from the record lows hit on Dec. 30th, but I don’t expect this trend to last.

Today’s highlights: During the European day, we get the final service-sector PMIs for December from the countries we got the manufacturing data for last Friday. As usual, the final forecasts from France, Germany and eurozone are the same as the initial estimates. The revisions in the final manufacturing PMIs on Friday increase the possibility that we could see revisions in the service-sector PMIs as well. The UK service-sector PMI is expected to have decreased slightly, which could be GBP-negative after Monday’s disappointing construction PMI.

In Norway, the manufacturing (not service) PMI for December is expected to fall, but to remain just above 50. Given the plunge in oil prices, any signs of weakness in the domestic economy is likely to weigh on the Norwegian krone and keep it under increasing selling pressure.

In the US, we get the final Markit service-sector PMI and the ISM non-manufacturing index, both for December. Factory orders for November are also coming out. No speakers are on the agenda today.

The Market

EUR/USD stays virtually unchanged

EUR/USD moved somewhat lower after hitting resistance at 1.1975 (R1), but then recovered to trade virtually unchanged. Our short-term momentum indicators detect a slowdown in the downside momentum and therefore I would be careful of a possible upside corrective move. The RSI bottomed within its oversold territory, turned up and now appears able to exit the extreme field. The MACD has bottomed as well and is likely to cross above its signal line soon. Nevertheless, given that Eurozone’s CPI data (Wednesday) are expected to show that the bloc has fallen into deflation in December, I would expect any upside attempt to be short lived, perhaps near the 1.2000 (R1) psychological area. As far as the broader trend is concerned, I still see a longer-term downtrend. On the daily chart, we still have lower peaks and lower troughs below the 50- and the 200-day moving averages. If and when the bears seize control, I would expect a dip below the support of 1.1860 (S1) to set the stage for extensions towards our next obstacle of 1.1775 (S2), defined by the low of the 30th of December 2005.

• Support: 1.1860 (S1), 1.1775 (S2), 1.1700 (S3)

• Resistance: 1.2000 (R1), 1.2040 (R2), 1.2130 (R3)

AUS/USD hits support above the round figure of 0.8000

AUD/USD edged higher yesterday after triggering some buy orders above the round figure of 0.8000 (S2), specifically at 0.8035 (S1). The RSI rebounded from near its 30 line and has just poked its nose above its 50 barrier, while the MACD, although negative, has bottomed and crossed above its trigger. With these signs in mind, I would expect the rebound to continue and perhaps challenge once again the resistance area of 0.8200 (R1). Moreover, on the daily chart, I spot positive divergence between the 14-day RSI and the price action, while the MACD stands above its trigger and points north, supporting the continuation of the recent rebound. However, the pair is still trading below both the 50- and the 200- day moving averages and its structure still suggests a longer-term downtrend. As a result, I would treat the recent bullish wave or any extensions of it as a retracement before the next leg down.

• Support: 0.8035 (S1), 0.8000 (S2), 0.7865 (S3)

• Resistance: 0.8200 (R1), 0.8275 (R2), 0.8375 (R3)

Is GBP/JPY poised for deeper correction?

GBP/JPY Chart From October 16, 2014-To Present

GBP/JPY continued tumbling on Monday, breaking below our support (turned into resistance) line of 183.20 (R1). During the early European morning Tuesday, the rate appears ready to challenge the support hurdle of 181.50 (S1), determined by the low of the 16th of December. That line also happens to be the 38.2% retracement level of the 15th of October – 5th December advance. A move below that zone is likely to trigger the completion of a failure swing top on the daily chart and increase the probabilities for a deeper correction, perhaps even below the round number of 180.00 (S2). Our daily momentum studies corroborate my view. The 14-day RSI dipped below its 50 line and is pointing south, while the daily MACD touched its toe below its zero line. These signs confirm the recent negative sentiment towards the pair and strengthen the case for further declines if the 181.50 (S1) barrier is broken.

• Support: 181.50 (S1), 180.00 (S2), 178.00 (S3)

• Resistance: 183.20 (R1), 185.00 (R2), 188.00 (R3)

WTI knocked below the round figure of 50.00

WTI Chart From December 12, 2014-To Present

WTI continued sliding on Monday, reaching and breaking below the psychological barrier of 50.00. Nonetheless, the decline was halted at 49.65 (S1) and oil rebounded to trade back above 50.00. Having in mind the USD-bullish environment and the concerns over increasing oil supplies, I believe that it’s just a matter of time before we see sellers pull the trigger again. A clear violation of the 49.65 (S1) line could see scope for extensions towards our next support barrier at 48.00 (S2), marked by the low of the 27th of April 2009. In the bigger picture, as long as WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, the overall path stays to the downside.

• Support: 49.65 (S1), 48.00 (S2), 46.70 (S3)

• Resistance: 50.90 (R1), 52.00 (R2), 53.70 (R3)

Gold breaks again above 1200

Gold Chart From October 16, 2014-To Present

Gold continued firming up yesterday and managed to break again above the 1200 figure. However, given that the metal remains between the key resistance hurdle of 1210 (R1) and the support of 1173 (S3) area, which coincides with the 61.8% retracement level of the 7th of November – 9th of December advance, I prefer to hold my flat approach and wait for clearer trending conditions. A clear move above 1210 (R1) could confirm a forthcoming higher high and perhaps pave the way for the next obstacle at 1222 (R2). On the other hand, a dip below the 1173 (S2) barrier is needed to probably shift the near term bias to the downside.

• Support: 1197 (S1), 1180 (S2), 1173(S3)

• Resistance: 1210 (R1), 1222 (R2), 1238 (R3)

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