Use This Rally To Establish Shorts; WTI Remains Major Gainer

The IMF downgraded its forecast for 2013 growth for the fifth time; it now forecasts global growth at 3.1% this year, unchanged from 2012, as China and the US will grow less and Eurozone output will shrink more than previously forecast. The key line for the FX market was that it said monetary stimulus “should continue until the recovery is well-established.”

Given that the US is on its way to tapering off, that leaves the other central banks on easing mode, which would tend to underpin the dollar virtually across the board. The IMF’s new prediction for 2013 Eurozone growth (-0.6% vs previous forecast of -0.3%) is the same as the ECB’s and the IMF’s 2014 prediction of +0.9% is not that far off the ECB’s +1.1%. But given the pattern of revisions, the likelihood is that growth undershoots and the ECB is forced to ease further, which would weaken the euro.

ECB member Joerg Asmussen yesterday reaffirmed that the central bank’s policy will remain accommodative for “an extended period,” which he explained was more than a year although the ECB quickly issued a statement denying the specific time frame. As for the UK, the IMF forecasts UK growth at 0.9% this year, below the Bank of England’s 1.1% forecast but not necessarily low enough to require further easing measures there.

Against this background, the movements overnight were difficult to understand. Why would the commodity currencies be the best performers when the main news story is the downgrade to global growth prospects? To make matters worse, China announced a 0.7% m-o-m decrease in imports in June, deeper than the 0.3% m-o-m decline in May and confounding expectations of a 6.0% rebound. (Money supply growth slowed, too.) Yet CAD, AUD and NZD all gained, while the beleaguered ZAR was the best performing currency that we track.

On the other hand, CHF was the biggest loser. The answer must be that investors are looking to the US, where corporate earnings are coming in better than expected and stocks just keep going up. That’s a risk-on environment regardless of what the IMF says. USD to gain further. However I don’t think the commodity currencies can sustain a sentiment-based recovery while their economies weaken and so I would use this rally to establish short positions.

Following this week’s below-consensus German and UK industrial production, today’s French IP is likely to disappoint as well. Italian IP is expected to show a rise, probably because of mean reversion from the decline the previous month. The ECB’s Noyer, Costa and Asmussen will be talking during the day; perhaps we will get more clarification of how long an “extended period” is.

The big event of the day though is the release of the minutes from the US Federal Open Market Committee (FOMC) meeting of June 18th- 19th. We’ve heard so much from so many Fed officials recently that the minutes might not shed that much more light on the situation. The key will be the discussion on the risks around the Fed’s growth outlook, which are in effect the risks around “tapering off.”

Of particular interest will be any discussion about the employment situation and the falling participation rate. The falling participation rate means that the Fed’s 6.5% unemployment threshold for tightening now means a less healthy labor market than it did when the Fed introduced this criterion. Are they going to adjust that criterion in response? Fed Chairman Bernanke will be speaking later in the day and may clear up any confusion ignited by the release of the minutes. Otherwise, no major US indicators out today.

The Market

EUR/USD
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• Is this it? The rebound by EUR/USD found resistance at 1.2900 with a retracement to 1.2855 occurring over the next few hours, with the bearish momentum on a high as signalled by the bearish crossovers on the RSI and the Stochastic oscillator on the 1-hour, 4-hour and daily charts. The IMF downward revision of growth prospects for the Eurozone was the trigger for a EUR/USD breakdown with the pair finding support in the 1.2750 – 1.2765 area. To add insult to injury, Standard & Poor’s downgraded Italian creditworthiness to BBB, just two notches above junk level, and maintained a negative outlook. The break of 1.2800 signals a break of the head-and-shoulders neckline that may see the pair move a lot lower.

• Strong resistance is likely to be found at the neckline or just below 1.2800. Support below 1.2750 comes at 1.2705, with a key support level seen at 1.2680, the 61.8% retracement level of the rally from July 2012 to February 2013.

USD/JPY
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• USD/JPY was flat relative to yesterday morning, trading within support and resistance at 100.80 and 101.35 respectively, despite a majority of economists surveyed by Bloomberg seeing no further BoJ easing in the next 6 months.

• Support below the well-tested 100.80 comes at 100.40 and at 100.00. Resistance above 101.35 is seen in the 101.75 – 101.95 area.

GBP/USD
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• GBP/USD plunged to the 1.4825 – 1.4850 reversal area as any UK figures that could miss expectations did so. Industrial and manufacturing production showed larger than expected YoY contractions with the MoM figures also missing expectations. The trade deficit also widened relative to the revised figure for the previous month.

• A breakout from 1.4880 resistance is likely to be met with significant resistance at 1.4920. Significant support below 1.4825 comes at 1.4700.

Gold

• Gold’s rebound yesterday found resistance at $1259, retracing to the $1241 - $1244 area. Gold bulls may want to note that the bearish overall growth outlook by the IMF just triggered a test of resistance, partly due to lower growth forecasts translates to lower inflationary pressures.

• Support below the $1241 - $1244 area comes at $1234 and the $1224. Resistance above $1259 is seen near the $1267 - $1269 area.

Oil

• WTI was a major gainer since yesterday morning despite the IMF downgrading growth forecasts around the globe .The forecasts did trigger a breakdown to $102.30 support but the strong rebound we are seeing in US equities, the hiked price forecasts for 2013 by the Energy Information Administration and the forecast for a further decrease in crude stockpiles announced later today, triggered a breakout from $103.25 resistance and a breakout from $103.80, the very significant 61.8% retracement level of the massive bear market in oil prices in the second half of 2008. Resistance came in the $104.50 - $104.70 area.

• Key support now comes at $103.80 and weaker support at $103.25. Resistance above $104.50 is seen at $105.45.

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