QE-Qualifying Quarter: Market Volatility Likely To Increase

The dollar generally gained against the majors over the last week, but lost ground against some of the EM currencies. It seems that this was largely a reversal of previous overdone moves, as the biggest gainers – ZAR, MXN and KRW – were ones that had been hit the hardest in the EM currency sell-off. Nor was this just people buying regions as CZK weakened but HUF gained vs both USD and EUR. The picture for commodities was also mixed; oil was the biggest gainer among the assets we track despite the stronger dollar, but gold was the biggest loser, with the other precious metals not far behind. All in all, it looks to us as if the market was reversing some of the abrupt movements that occurred as investors digested the reports of “tapering off” and considered what that would mean for the investment picture. If the “tapering off” effect is now largely discounted, then in the future currencies may well be more responsive to individual country stories rather than to general “risk on/risk off” moves, at least on a day-to-day basis, unless there is something major affecting the outlook for USD.

Today marks the start of the new quarter. For Britain, it’s the start of the Carny Era at the Bank of England. That makes Thursday, with a Bank of England and an ECB meeting, an important day for the markets. Volatility will probably increase because the US will be out on their Independence Day holiday that day. On Friday we get the US labor reports, which are the crucial bit of data nowadays with the Fed’s “tapering off” plans depending on improvement in the labor market. Again, expect greater-than-usual volatility as many US market participants will be making a long weekend of it. Finally, Lithuania takes over the EU presidency.

China started off today’s series of June manufacturing PMIs with some disappointing figures. The final manufacturing PMIs for the EU are due out later; the forecast are simply the preliminary figures. UK manufacturing PMI for June is expected to be up slightly. In the US, the Institute for Supply Management (ISM) PMI is expected to rise to 50.5 from 49.0, just nudging back over the 50 line again (it fell below in May for the first time in six months). That may help to reinforce the bullish USD sentiment. Eurozone CPI for June is expected to rise to 1.6% from 1.4%, which could take some pressure off the ECB to ease, except that Eurozone unemployment is coming out at the same time and is forecast to rise further into record territory. ECB President Draghi recently (25 June) said that “in terms of monetary policy, price stability is assured, and the overall economic outlook still warrants an accommodative stance.” Apparently they have dropped inflation as a concern and are focusing on “the overall economic outlook,” which although technically not in their mandate has fallen to them by default. That suggests the worsening unemployment picture, not the improving inflation picture, will be their main focus and the pressure to ease policy further will remain.

The Market

EUR/USD

• The EUR/USD breakout from 1.3075 on the overall higher-than-forecasted German CPI was short-lived as the Fed Governor Jeremy Stein stated that September could be an opportune time for the Fed to taper QE3, with the pair finding effective support at the 1.3000 round number following the upbeat Reuters/Michigan consumer confidence final reading for June, which was above 80 for a second consecutive month.

• The pair’s current rebound may test resistance at 1.3030, with further resistance at 1.3055 and strong resistance at 1.3075, which sees the 38.2% retracement level of the July 2012 – February 2013 bull run as well as the converged 50- and 200-day MAs. Support is currently seen just above 1.3000, with Fibonacci support at 1.2980 and further support at 1.2955.

USD/JPY

• USD/JPY has been consolidating for a number of hours at the 99.35 resistance level, having broken the 98.80 resistance level early on Friday, breaking the 99.15 resistance level on the strong US consumer confidence reading. The overall better than expected Q2 Tankan survey, with the large manufacturing index going into positive territory for the first time since Q3 2011 on Abenomics, did not have any lasting effect on the pair as Japanese equities fluctuate between gains and losses.

• A breakout from 99.35 resistance sees further resistance just below the 100-mark with resistance thereafter at 100.35. Support is concentrated at 99.15 and 98.80, with strong Fibonacci support at 98.10.

AUD/USD

• AUD/USD was a major loser on Friday, finding support at 0.9115. Today’s weak Chinese PMI did not trigger further losses, with the pair in fact rebounding as new PM Kevin Rudd, who reshuffled the cabinet, is leading in polls.

• With the RBA interest rate decision early tomorrow morning, the pair is likely to receive further trader attention. Fibonacci resistance is found at 0.9210 with further resistance at 0.9320. Support comes at 0.9140 and 0.91150.

Gold

• Gold gained on Friday after the higher-than-expected Reuters/Michigan consumer sentiment failed to push it through the $1180 low, with an ensuing rebound causing a breakout from the asset’s downward-sloping trading channel shown in this 4-hour chart. The technical break of the $1224 resistance level led to a rally to $1244 with a retracement from resistance coinciding with the upbeat Tankan survey. Gold nonetheless found support at the $1224 technical level rebounding towards $1244 resistance.

• A break of $1244 may see initial resistance at $1269 and thereafter at $1285, the 38.2% Fibonacci level of the post-Lehman gold rally. Weak support below $1224 comes at $1204 and thereafter at the low of $1180.

Oil

• WTI declined to $96.05 support as the marginally expansionary Chinese NBS manufacturing PMI for June was the lowest since February. The HSBC final reading came in even lower, showing the greatest contraction since August 2012, with the final figure being revised downwards for the fourth consecutive month relative to the preliminary figure.

• Having rebounded from $96.05, the 23.6% retracement level of the April – June rally, and with bullish RSI and Stochastic crossovers in the daily and H1 chart, with the H4 Stochastic lying in oversold territory, it seems like crude may rebound towards $96.95 resistance, with further resistance at $97.75, the 61.8% retracement level of the March – June 2012 plunge. Support below $96.05 comes at $95.65 and thereafter $95.00.

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