Markets: Tapering Questions Remain, Risk Seekers Wait

Markets have had three working days plus a weekend to come to grips with the changes in Fed policy revealed last week. We expect that some calm will be restored now that markets have had an opportunity to consider what is likely to happen. China too has taken measures to calm its markets through targeted injections of funds, helping to reduce worries from that front as well. But the question of the pace of “tapering” and its impact remains in the air and the general tone is likely to be less risk-seeking than before.

The dollar gained against virtually all currencies, the only notable exception being the BRL. Gains were especially strong against the Scandis. NOK in particular has weakened sharply after last Thursday’s Norges Bank meeting adopted an easing bias. The movement in SEK, which had been gaining broadly until recently on good economic data, seems to be largely a catch-up move after the sharp decline in NOK. The moves show how central bank policy is determining currencies nowadays and how the Fed’s almost unique status as a central bank with a tightening bias is likely to underpin the dollar (and undermine other currencies).

Political insecurity reignited in Greece a year after the formation of the tri-party coalition government, with bond yields spiking and the Athens Stock Exchange losing 6.1% on Friday, as the smallest coalition partner defected over the closure of the state broadcaster and the layoff of public sector employees. This turn of events has necessitated a cabinet reshuffle, whilst leaving the coalition with a slim majority of 153 seats in the 300-member Parliament, though support may come from a further 4 independent MPs who are inclined to vote in favour of the two ruling parties. Populace unrest, however, is likely to remain a prevalent feature as two-thirds of Greeks oppose the closure of the public broadcaster with the latest opinion polls showing that the two coalition parties currently have the support of 27.7% of voters.

The data in Europe today is confined to the Ifo survey for June, which is forecast to show the Business Climate index staying at 105.7, with the current assessment of business conditions marginally deteriorating from 110.0 to 109.5. Expectations, however, are forecast to rebound to 102.0 from the 101.6 reported the two previous months. In the US, the Chicago Fed National Activity Index for May is forecast to improve to -0.15 from -0.53 and the Dallas Fed Manufacturing Business Index for June is forecast to improve to -1.0 from -10.5. A speech by Dallas Fed President Fisher on US monetary policy may be more important however as he may try to clarify further the Fed’s intentions. Fisher is an ultra-hawk, scoring 5 out of 5 on the Reuters/Thompson Dove/Hawk scale (the most hawkish). As such he is more likely to confuse things in comparison with Chairman Bernanke’s more dovish point of view (2 out of 5).

The Market

EUR/USD
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• EUR/USD plunged further on Friday and opened with a small 30 pip downward gap as the dollar’s across-the-board gains continued. Strong support currently comes at 1.3075, which concentrates the 38.2% Fibonacci level of the July – February rally as well as the 50- and 200-day MAs. Weaker support thereafter comes at 1.3030 and just above 1.3000 with further tested levels at 1.2980 and 1.2955. Tested resistance is seen at the 1.3115 Fibonacci level with a strong rebound seeing resistance at 1.3160. The 5-day Stochastic is well into oversold levels but the 14-day and the RSI still have some room to go before reaching extremes.

USD/JPY
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• USD/JPY managed to break today the significant resistance found in the 97.90 – 98.15 area despite the head of the $1.14 trillion Japanese Government Investment Fund having his doubts with regard to the achievement of the 2% inflation target set by the BoJ. The pair may have been buoyed by news that Japan’s ruling Liberal Democratic Party (LDP) and its coalition partners won nearly two-thirds of the seats in an election in Tokyo over the weekend, which bodes well for the LDP’s performance in the Upper House election in July and hence the ability of PM Abe to achieve his legislative goals for economic reform. The 97.90 23.6% retracement level of the November – May rally is likely to act as a strong support now with initial resistance at 98.85 and thereafter concentrated at 99.15, which is the 50-day MA, and 99.35, with a breakout seeing resistance just below the 100-mark.

USD/SEK
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• USD/SEK furthered its gains on Friday breaking out from its 200-day MA, before retracing from key tested, resistance at 6.7150, which also sees the upper Bollinger band. A breakout from 6.7250 sees next key resistance significantly higher at 6.8000, the November 2012 high, which also sees the 50% retracement level of the June 2012 – February 2013 plunge. Weak resistance thereafter likely comes at 6.8740. Support may be found at 6.6550, with stronger Fibonacci and 200-day MA support at 6.6200.

Gold

• Gold’s disastrous week ended with a minor rebound to $1302 resistance, cutting down its weekly losses to 6.8%. A breakout from resistance may see a short-lived rally to $1320. Key support comes at $1285 with further support at the recent low of $1269. A breakdown from the low sees weak support around $1228.

Oil

• WTI and Brent both lost 1.9% since Friday morning making them the biggest losers of the dollar gains, behind the Swedish Krona. Crude has also been impacted by the increasing signs of a Chinese slowdown. 50-day MA resistance comes at $94.05 with $93.50 having some support though strong support comes around $92.35, which sees the 200-day MA and two notable Fibonacci levels. A rebound may find resistance at $94.50.

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