Ukraine crisis sets the tone
The crisis in Ukraine dominated activity Monday. The dollar gained all around against its G10 counterparts (even JPY) as the US currency’s safe-haven appeal came to the fore amidst general risk aversion. Stocks fell while oil and government bond prices rose. Gold was little changed, however.
Only two of the 15 EM currencies that we track -- RUB and CZK – were noticeably lower vs USD, while several gained substantially, including THB, TRY, IDR and ZAR. This shows there is little if any contagion effect from the Ukraine crisis on other EM markets. The gains of the high-yielding currencies suggest that carry trades are not being affected (yet).
Outlook for the crisis: The latest round of US sanctions against Russia, targeting publicly traded companies, is a clear escalation from previous rounds. While there was some division between the US and Europe on the scale of sanctions last week, the airline tragedy increases the likelihood that Europe will respond with stricter sanctions more in line with those of the US. We await the results of today’s EU foreign ministers’ meeting to see if EU governments will ratchet up their response.
Russian President Putin’s response to these sanctions is key. He has to choose between two unpleasant alternatives: either give up supporting Russian separatists in Ukraine and face a loss of political capital among nationalists at home, or tough it out against ever-tightening sanctions and face decreasing popularity among the general public. Alternatively, he could even escalate the crisis now in order to de-escalate later. His actions will be driven primarily by his desire to maintain his domestic popularity, which he gauges through his popularity ratings. The latest polls suggest that war fatigue may be setting in, with 56% of Russians against sending troops to eastern Ukraine. Such numbers suggest that Putin is likely to prefer to de-escalate the crisis. De-escalation of the crisis would of course cause a reversal of the risk-off pattern.
The UN Security Council yesterday unanimously (i.e., including Russia) adopted an Australia-proposed resolution calling for an independent investigation into the downing of Malaysia Airlines Flight MH17, cessation of military activity around the site and unimpeded access for investigators, AP reported. This response also suggests that Putin may adopt the de-escalation path. On the other hand, there are questions about how much control Russia has over the separatist movement.
On top of the geopolitical excitement in Europe, the Bundesbank monthly report said that “economic growth in Germany markedly lost momentum in the first two months of spring.” Yet after all that, EUR/USD is opening in Europe this morning just 13 pips lower than yesterday’s opening. However, one of the reasons EUR has been so well supported has been US buying of European stocks, but as European markets decline, those flows are likely to reverse, dragging EUR/USD down.
Today’s schedule: The EU foreign ministers’ meeting mentioned above is the main event in Europe. There are no major data due out from the Eurozone today. From the UK, we get the CBI Trends survey for July.
In the US, the CPI for June is anticipated to remain unchanged in pace at +2.1% yoy. Given that US average weekly wages rose by 2.0% yoy in June, this would make a second month in a row that real wages declined. Speaking last week before Congress, Fed Chair Yellen noted that real wage gains “have been nonexistent” (although to be fair, the Fed looks more at the Employment Cost Index, which is growing slightly faster.) She has previously emphasized the potential risks to consumer spending posed by wages rising by less than the rate of inflation.
Existing home sales for June are forecast to rise, but last Thursday’s disappointing housing sector data may push the figure to a weaker level. The Richmond Fed manufacturing index for the same month is expected to decline. The Federal Housing Finance Agency (FHFA) home price index is forecast to show that the pace of increase in house prices slightly accelerated in May.
Overnight, Australia’s Q2 CPI is forecast to have slowed +0.5% qoq, from +0.6% qoq. That could prove negative for AUD.
EUR/USD in a consolidative mode, slightly above 1.3500
The EUR/USD moved in a consolidative mode on Monday, remaining slightly above the psychological zone of 1.3500 (S1). Bearing in mind that we can identify positive divergence between the RSI and the price action, and that the MACD lies above its trigger line and is still pointing up, I would expect a rebound, maybe for another test near the 1.3580 (R1) zone. On the daily chart, I see a possible hammer candle, increasing the likelihood for an upside corrective wave. Nonetheless, I would keep a neutral stance as far as the overall trend of the pair is concerned. The rate is trading below the blue downtrend line, but we need to see if the sellers are strong enough to overcome the 1.3500-1.3475 zone before expecting larger bearish extensions in the future.
• Support: 1.3500 (S1), 1.3475 (S2), 1.3400 (S3).
• Resistance: 1.3580 (R1), 1.3650 (R2), 1.3700 (R3).
USD/JPY emerges above 101.40
The USD/JPY moved higher, breaking above 101.40 (resistance turned into support), and is now trading near the 50-period moving average. I still expect the rate to go for another test near the 101.80/85 (R1) zone. The RSI moved above 50, while the MACD, although in its bearish territory, crossed above its trigger line, supporting the notion for the continuation of the upside wave. However, the pair is still trading within the purple downside channel and as a result, I would consider the overall short-term path to remain to the downside and any advances within the channel as corrective waves.
• Support: 101.40 (S1), 101.10 (S2), 100.80 (S3).
• Resistance: 101.85 (R1), 102.25 (R2), 102.65 (R3).
EUR/GBP in a consolidative mode
The EUR/GBP moved in a consolidative mode on Monday, remaining between the support of 0.7915 (S1) and the 50-period moving average. Although the overall trend remains to the downside (marked by the downtrend line drawn from back the 11th of April), on the daily chart, I see positive divergence between our daily momentum studies and the price action. This keeps alive the scenario of an upside corrective wave in the near future, maybe towards the 0.7980 (R1) zone or near the blue downtrend line.
• Support: 0.7915 (S1), 0.7890 (S2), 0.7815 (S3).
• Resistance: 0.7980 (R1), 0.8030 (R2), 0.8080 (R3).
Gold somewhat higher
Gold moved slightly higher after finding support at the 1305 (S1) level, which coincides with the 200-period moving average. If the bulls are strong enough to continue the rebound, I would expect them to target once again the resistance of 1325 (R1). However, our momentum indicators keep providing neutral signals. Both the RSI and the MACD lie near their neutral levels, pointing sideways. Moreover, on the daily chart both the 50- and the 200-day moving averages are pointing sideways, adding to the unclear picture of the precious metal.
• Support: 1305 (S1), 1293 (S2), 1285 (S3).
• Resistance: 1325 (R1), 1332 (R2), 1345 (R3).
WTI surges again
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WTI rallied on Monday, confirming our expectations for a possible rebound and a higher low near the 102.60 (S2) barrier. The price reached and broke the 103.90 hurdle and found resistance a few cents below the psychological barrier of 105.00 (R1). Such a move confirms a forthcoming higher high and keeps the short-term bias to the upside. A decisive violation of 105.00 (R1) could trigger extensions towards the next resistance at 106.05 (R2). Nevertheless, zooming on the 1-hour chart, the RSI exited its overbought territory and the MACD seems ready to fall below its signal line. Moreover, I see negative divergence between both our momentum studies and the price action. As a result, I cannot rule out another round of profit taking before the longs take control again. In the bigger picture, the 14-day RSI moved above 50, while the daily MACD crossed above its signal line, magnifying the case for the continuation of the short-term uptrend.
• Support: 103.90 (S1), 102.60 (S2), 101.70 (S3).
• Resistance: 105.00 (R1), 106.05 (R2), 106.85 (R3).
MARKETS SUMMARY
