USD Rallied On Good News

Good news moves USD but not EUR : Once again, EUR didn’t rally on better-than-expected news about the euro-zone economy but USD certainly rallied on good news about the US. The rise in euro-zone manufacturing PMIs announced Monday failed to support EUR/USD, but the dollar moved generally higher Tuesday after a surprising rise in the manufacturing ISM index. It had been expected to decline to 54.0 in August from a robust 55.4 in July but instead it rose further to 55.7. The index is being driven by extremely high readings for new orders and production. The strength in new orders is particularly encouraging, because it is a leading indicator of future manufacturing and suggests that the September ISM reading will be similarly strong. News that several senior Republicans backed President Obama in recommending military action in Syria dampened the bullish sentiment, but nonetheless rate forecasts from the Fed Funds futures finished the day as much as 5 bps higher to equal the July-5 peak.

The only G10 currency to make a noticeable gain against USD was the AUD, which continued the rally that started after Tuesday’s Reserve Bank of Australia meeting. We think this move has further to run and are now recommending going long AUD, particularly vs JPY and EUR. The Commitment of Traders report shows that speculative positions in AUD are close to the most short that they’ve been in five years; we could see some position closing that would send the currency higher. Meanwhile, better risk sentiment should keep JPY on a depreciating trend. Or again looking at the COT report, we can see that EUR positions are at the high end of the range for the last five years. Closing out of those positions as EUR/USD starts to break out on the downside could weaken EUR.

It was noticeable though that despite the improvement in risk sentiment and the generally brighter outlook for the global economy, EM currencies continued to deteriorate. It’s hard to imagine how INR and IDR can lose so much every day, but they do. This is getting worrisome. We should remember that large crises can start from small beginnings. Thailand was just a tiny part of the global economy back in 1997 when it touched off the Asia Crisis. Brazil, Indonesia, India, South Africa and Turkey, the five countries at the epicenter of this year’s EM troubles, are 15x as large as Thailand was then. That’s one reason why I am not as bearish on CHF as most analysts. I think there are plenty more crises to come and the safe-haven CHF, backed by Switzerland’s huge current account surplus, is likely to remain in demand.

Final service sector PMIs for August for the euro zone are due out today, but given that Monday’s manufacturing indices barely made any impact on the market, I wouldn’t expect these to have much effect either. Euro-zone retail sales for July are expected to increase 0.2% mom, a turnaround from -0.5% mom in June, which would agree with the small rise in consumer confidence that we saw during the month. That could bolster EUR somewhat. Revised euro-zone GDP for Q2 will also be released today; the headline figure is rarely revised. In the US, the surprisingly narrow trade deficit of USD 34.2bn in June is expected to have widened back to a more normal level in July of USD 38.8bn. Later in the day, the Fed releases the Beige book. The Bank of Canada Monetary Policy Council meets; economists unanimously expect it to keep the overnight rate unchanged at 1.0%.

The Market

• EUR/USD continued making minor moves to the downside, remaining between the 1.3152 (S1) and 1.3231 (R1) levels. At the time of writing the pair is slightly above the 1.3152 (S1) support. A clear downward break of that level would aim for the next support at 1.3077 (S2). We expect EUR/USD to move in that direction as the 20-period moving average lies below the 200-period moving average and alongside with MACD’s reading lying in a bearish territory, they confirm the bearish picture for the pair.
• Support: Support is found at the 1.3152 (S1) level, followed by 1.3077 (S2) and the psychological level of 1.3000 (S3) respectively.
• Resistance: Resistance levels are 1.3231(R1), followed by the psychological levels of 1.3300 (R2) and 1.3400 (R3).

• USD/JPY moved sideways after finding resistance on the upper boundary of the uptrend channel. The pair is still trading in an uptrend, but currently lies between the 99.13 (S1) and the psychological round number of 100.00 (R1). A clear break above that significant level should reveal investors’ intentions. I expect them to challenge the 100.84 (R2) level next. However, since both the RSI and Stochastic oscillator lie near their overbought levels, we should not be surprised if we observe a pullback in the near future (although in recent months USD/JPY has occasionally remained in technically overbought territory for significant lengths of time). On the longer time frame (daily chart), the price exited the upper boundary of a symmetrical triangle, adding significance to the pair’s bullish attitude.
• Support: Support levels are at 99.13(S1), followed by 98.09 (S2) and the psychological level of 97.00 (S3).
• Resistance: Resistance levels are the round number of 100.00 (R1), followed by the 100.84 (R2) and the 101.52 (R3) levels respectively.

• GBP/USD moved sideways yesterday, still struggling below the 1.5569 (R1) resistance level. If buying pressure is strong enough to push the price above that level, it would indicate the end of the downward correction and the continuation of the uptrend towards the next resistance at 1.5674 (R2). The MACD oscillator crossed above its equilibrium zero line, indicating bullish momentum for the pair and favoring the aforementioned scenario.
• Support: Support levels are at 1.5425 (S1), 1.5296 (S2) and 1.5200 (S3).
• Resistance: Resistance is identified at 1.5569 (R1) followed by 1.5674 (R2) and 1.5752 (R3).

• Gold moved higher after managing to overcome the 1394 (S1) level (yesterday’s resistance). Currently the price is heading towards the 1422 (R1) resistance level. If buyers are strong enough to push the price above it, they are likely to target the 1440 (R2) level, thus establishing new short-term highs. The MACD returned to its familiar territory above zero, adding significance to the price’s upward momentum. However, a failure for the price to move higher might signal the continuation of the short-term correction we are experiencing since last week.
• Support: Support levels are at 1394 (S1), followed by 1376 (S2) and 1347(S3).
• Resistance: Resistance is identified at the1422 (R1) level, followed by 1440 (R2) and 1485 (R3) (daily chart).

• WTI moved significantly higher as senior US Republican Party leaders endorsed President Obama’s decision to strike at Syria. It broke above the 107.53 (S1) level (yesterday’s resistance) and reached the upper boundary of the trading range at 108.85 (R1). Currently the price is lying below that level, and if long holders have the strength to win the battle at that level, the real exit of the sideways formation might occur. However, both RSI’s and MACD’s readings are near their neutral levels, giving no indications of what might be the next price action.
• Support: Support levels are at 107.53(S1), 105.50(S2) and 103.44 (S3).
• Resistance: Resistance levels are at 108.85(R1), followed by 112.14 (R2) and 114.21(R3), found from the weekly chart.