USD Partially Overcomes Weak Service PMI; Weather Supports Natural Gas

USD partially overcomes weak service PMI; weather supports natural gas
A surprisingly weak US service-sector PMI caused further mean reversion in US asset markets and weakened the dollar somewhat, but it still managed to gain against several of its G10 counterparts, indicating continued underlying strength (see technical section on EUR/USD). The December non-manufacturing ISM index fell to 53.0, a six-month low, from 53.9. The decline was largely due to a deterioration in new orders, but since that series includes many weather-sensitive sectors, such as construction and agriculture, it may be due more to the weather than to the economy. Nonetheless US bond yields fell – the 10-year Treasury was down about 4 bps – and implied interest rates on the longer-dated Fed Funds futures declined 4-5 bps, while the stock market fell for the third consecutive day, continuing the mean reversion that has characterized US asset markets in 2014. The dollar lost some support as US rates eased, yet it still managed to open this morning stronger compared with Monday morning’s levels vs CAD, AUD, JPY and NOK, albeit weaker vs EUR, GBP, SEK and NZD.

The performance of the USD/JPY is again impressive against the background of another down day for Japanese stocks, which usually implies a down day for the USD/JPY as well. Similarly, the recovery of the GBP after yesterday’s announcement that its service-sector PMI fell in December for the second consecutive month is also impressive and underlines the continued demand for that currency. A long position in the GBP/JPY might be a way of capitalizing on these two trends.

The main indicator during the European day today will be the Eurozone CPI for December. Both the headline and the preliminary core figures are expected to slow to +0.8% yoy from +0.9% yoy. The slowdown in inflation could be a concern for the ECB; their forecast for headline inflation in 2014 is 1.1%.However we do not expect a decline on this scale would be enough to cause any change in policy at this week’s meeting. Germany’s unemployment rate for December is expected to have remained unchanged at 6.9%, while France’s consumer confidence is expected to have seen no change in December from 84 in November. Later in the day, the US trade deficit is forecast to have narrowed slightly to USD 40.0bn in November from USD 40.6bn in October, although this number rarely moves markets. There are two Fed speakers scheduled during the day: Boston Fed President Eric Rosegren and San Francisco Fed President John Williams.

In addition to the economic news, investors might want to watch the US weather. The US is suffering from one of the coldest periods in the last 20 years, with temperatures in many areas approaching record lows. The market most affected by the cold weather has been US natural gas futures, which are up sharply as the coldest start to the US heating season in 13 years boosts fuel demand. Power generation accounts for 32% of US natural gas usage and about 49% of all homes use the fuel for heating, according to the US Energy Information Administration. Also, wheat prices are rising as the cold damages Great Plains winter wheat that isn’t yet covered by a layer of snow to insulate the plants. According to www.weather.com the cold is continuing throughout much of the US. Market participants looking to diversify their trades might consider looking into these markets. The question is whether there is further to go in the trade or if conditions are now fully priced in. Partially that’s up to the weather, a subject I claim no special insight into. Nonetheless we can say that the technical outlook for natural gas still seems to be bullish (see below).


The Market

EUR/USD
EUR/USD 4 Hour Chart" title="EUR/USD 4 Hour Chart" width="452" height="352">
The EUR/USD moved higher on Monday after forming a new low at 1.3570 (S1), but the advance was stopped at 1.3650 (R1). The 50-period moving average is getting closer to the 200-period moving average, thus a bearish cross in the near future may confirm the establishment of a new short-term downtrend. On the daily chart, we can identify negative divergence between the daily MACD and the price action, increasing the probabilities for further decline.

• Support: 1.3570 (S1), 1.3525 (S2), 1.3400 (S3).

• Resistance: 1.3650 (R1), 1.3730 (R2), 1.3810 (R3).

USD/JPY
USD/JPY 4 Hour Chart" title="USD/JPY 4 Hour Chart" width="452" height="352">
The USD/JPY rebounded from the support of 103.90 (S1) and moved slightly higher. The short term uptrend remains in effect, but a break above the resistance area between the barrier of 105.45 (R1) and the 423.6% Fibonacci extension level of the 17th -25th Oct. bearish wave is needed to signal its continuation. If the longs are strong enough to overcome that strong resistance area, I would expect them to trigger extensions towards the area of 107.00 (R2).

• Support: 103.90 (S1), 102.14 (S2), 101.12 (S3).

• Resistance: 105.45 (R1), 107.00 (R2), 109.00 (R3).

EUR/GBP
EUR/GBP 4 Hour Chart" title="EUR/GBP 4 Hour Chart" width="452" height="352">
The EUR/GBP consolidates between the support of 0.8270 (S1) and the resistance of 0.8330 (R1). The outlook remains bearish, since the pair is trading below the blue short-term downtrend line. If the bears manage to take control and drive the battle below the 0.8270 (S1) support, I would expect them to target the next support at 0.8220 (S2). On the daily chart, the rate remains within a downward sloping channel (purple lines).

• Support: 0.8270 (S1), 0.8220 (S2), 0.8080 (S3).

• Resistance: 0.8330 (R1), 0.8390 (R2), 0.8431 (R3).

Gold
XAU/USD Hour Chart" title="XAU/USD Hour Chart" width="452" height="352">
Gold moved in a consolidative mode, remaining above the 200-period moving average and below the resistance of 1251 (R1). A break above the 1251 (R1) hurdle may trigger extensions towards the next resistance at 1268 (R2). The RSI moved slightly lower after finding resistance near its 70 level for an extended period of time, while the MACD, although in a bullish territory seems ready to cross below its trigger line, thus further consolidation or a pullback should not be ruled out. On the daily and weekly charts the longer-term downtrend remains in effect.

• Support: 1224 (S1), 1187 (S2), 1155 (S3).

• Resistance: 1251 (R1), 1268 (R2), 1290 (R3).

Natural Gas

Natural Gas is finding resistance at the red downward sloping resistance line. A violation of that line, followed by an upward break of the 4.39 (R1) hurdle, may trigger extensions towards the next resistance barrier at 4.57 (R2). The overall trend is to the upside, as indicated by the blue uptrend line and by the fact that the 50-period moving average remains above the 200-period moving average.

• Support: 4.20 (S1), 4.10 (S2), 4.00 (S3).

• Resistance: 4.39 (R1), 4.57 (R2), 4.83 (R3).

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS


MARKETS SUMMARY



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