Risk Rebound Might Be Ending, Sterling to be Pressured on EU Referendum Announcement
Global stock markets rebounded last week as expected, together with crude oil. DJIA rose to as high as 16511.84 before paring some gains to close at 16391.99. S&P 500 also surged to 1930.68 before retreating to close at 1917.78. 10 year yield also rose to 1.847 before retreating to close at 1.748. WTI crude oil reached as high as 31.98 before closing below 30 at 29.72. Meanwhile, gold retreated to 1208.2 before recovering to close at 1230.8. Overall, the movements in the markets were quite consistent, following easing risk aversion that seemed to lose some momentum towards the end of the week. In the currency markets, Aussie and Canadian dollar ended the weak as the strongest major currencies. Yen overperformed Dollar and European majors and closed as the third strongest. Meanwhile, Euro and Swiss Franc were the weakest.
Crude oil and stock markets would stay as the main driver in the financial markets this week. As noted last week, WTI, DJIA and S&P 500 defended near term support level and recovered. Now the focus is back to key near term resistance level. That is, 34.82 in WTI, 16593.51 in DJIA and 1947.2 in S&P 500. All three were held below these resistance levels in spite of the rebound and thus, maintaining down trend intact. Attention this week would be on whether risk aversion would come back this week and drag down commodity currencies again, and push Yen higher.
There are a couple of developments to note in the currency markets. Firstly, EUR/JPY took out key near term support level at 126.09 which indicates down trend resumption. And that can be taken as a sign of Yen strength. Secondly, USD/CAD was held above key support level at 1.3456. AUD/USD was held below 0.7384 key resistance level. These kept CAD and AUD bearish against dollar. Thirdly, EUR/USD was held above 1.1059 minor support while USD/CHF was held below 0.9984 minor resistance. Thus, more upside is still in favor in Euro and Swiss Franc against Dollar. And this is consistent with the near term bearish view in dollar index to be discussed below. Hence, we'll be looking more Yen strength this week, to be followed by Swiss Franc and Euro, then Dollar while commodity currencies would be back under pressure. But of course, that is subject to renewed risk aversion as mentioned above.
So, how about Sterling? The pound could be under some free selling pressure this week after prime minister David Cameron finally announced the long awaited EU referendum on June 23. The announcement was done after what was described as the first cabinet meeting held on a Saturday since Falklands War in 1982. Technically, GBP/JPY was held above 159.72 support level week but looks vulnerable. GBP/USD is staying bearish even though it extended recent sideway consolidation. EUR/GBP also stayed bullish as recent consolidation continued. Initial focus this week would indeed be Sterling's reaction to the EU referendum announcement and we could see the pound lead the way down.
Here are some technical highlights. DJIA extended the consolidation pattern from 15450.56 with another rise last week. Still, we'd expect upside to be limited by 16593.51 resistance and bring fall resumption eventually. Break of 15370.33 is expected to follow as whole decline from 18351.36 resumes later. And in that case, DJIA would target 61.8% retracement of 10404.49 to 18351.36 at 13440.19 next. Though, decisive break of 16593.51 would open up the case for a test on 18351.36 high again.
Dollar index recovered last week but stayed below 97.19 support turned resistance and outlook is unchanged. The index is now in the third leg of the consolidation pattern from 100.39 and deeper fall should be seen to 161.8% projection of 100.51 to 97.19 from 99.82 at 94.44. We'll start to look for reversal signal below there and above 92.18/62 zone. Meanwhile, sustained trading above 97.19 support turned resistance will suggests that the fall has finished earlier than expected.
Regarding trading strategies, our AUD/JPY was stopped out on the stronger than expected rebound. But overall, the view on the markets wasn't changed. We're expecting risk aversion to come back soon which provide selling opportunities on Yen crosses. And as mentioned above, while commodity currencies would be the victim again in case of risk aversion, Sterling has the potential to lead the way this week. Thus, we'll sell GBP/JPY on break of 159.79 support.