The Yen continues to find itself stuck between a rock and a hard place when it comes to trading, but seems to present itself with the odd opportunity for traders in recent days as it once again finds itself stuck on a slow bullish trend line, despite the bearish down turn. For the most part the Bank of Japan has been looking at monetary policy to help improve the current market, but with the USDJPY still sitting above the 100 mark it seems unlikely they will budge to bolster the currency. Many analysts predict that the BoJ will only act if the USDJPY drops below the 95 mark and threatens the current outlook for an increase in inflation. For many in the Bank of Japan it seems that the outlook for inflation is very optimistic with the market however feeling that's not the case hence the recent fall in the USDJPY since the start of the year.
When looking at the USDJPY it's easy to find the trend that has been the most dominant and that is the strong triangle pattern that has formed in the recent months as the USDJPY has struggled to find any momentum below the 100 mark. Any push upwards has also been met with stiff resistance at 101.387 and the bearish trend line that has been in play now for almost a year. With all this movement so far it's looking more and more likely we will see some large swings from the USDJPY as it the bearish and bullish trend lines in play come together. I would expect to see it sink lower, as traders have a history of baiting the BoJ into taking affirmative action when devaluing the Yen when it slips too much. So that push down to the 95 level may in fact become a reality once we see the convergence of the triangle and the market look to slip lower.
Oil markets have also been swept up in the headlines as of late, as OPEC continues to try and bring something to the table to stabilize the current oil volatility around the low $40 dollar a barrel mark. It has so far asked for a production freeze in order to stabilise things, however the geopolitical situation is making very little sense, with both Libya and Iran looking unlikely to abide by such a thing. And Russia, Canada and the United States likely to keep on pumping in the near term in order to satisfy their own goals.
Any further dips lower than the current price level are likely to find stiff resistance at 43.00, which has so far been the line in the sand for the bears. Below this level and 41.46 becomes the next leg down to support, and after this we are back into volatility that leads to wild swings in the present market climate. With the USD becoming stronger coupled with OPEC's weakness to control the market it seems all the more likely that the bears may indeed get to take another bite out of oil in the short term.
Global stocks were chaotic on Tuesday with most equities vibrating between losses and gains as the mixture of anticipation ahead of OPEC’s informal meeting and ongoing discussions over the results of the first presidential debate created explosive levels of volatility. Asian shares started Wednesday on a shaky footing with the Nikkei descending -1.31% lower following oil’s steep decline which soured investor risk sentiment. Although European stocks have displayed signs of resilience, the lingering concerns over Deutsche Bank could cap upside gains. Wall Street received a welcome boost following Hillary Clinton’s firm performance against Donald trump in the presidential debate which boosted appetite towards riskier assets. While the short term gains in stocks are somewhat impressive, investors should remain diligent as the elevated concerns over the global economy and persistent Brexit uncertainty could trigger another wave of risk aversion.
Dollar edges higher
Dollar bulls received a lifeline during trading on Tuesday following the impressive consumer confidence report which elevated sentiment towards the US economy. As of late, the Greenback has been pressured by the diminishing expectations over the Federal Reserve raising US interest rates in 2016 but yesterday’s data provided somewhat of a lifeline. With the visible Fed divide amplifying the Dollar sensitivity, more explosive moves could be observed in the future. Although sentiment remains somewhat Bullish towards the Dollar, further positive domestic data may be needed for the Fed to justify raising US rates in December. Attention may be directed towards Fed Chair Janet Yellen's testimony which could provide additional clarity on when the central bank plans to break this prolonged trend of central bank caution. The Dollar Index remains pressured below 95.50 and a decisive break down below 95.00 could open a path lower towards 94.00.
Will OPEC disappoint again?
WTI received a slight uplift on Wednesday with prices perching towards $45.00 after industry data displayed an unexpected draw in U.S crude stocks. Regardless of the short-term gains, Oil remains heavily pressured with the ongoing concerns over the excessive oversupply providing a foundation for bears to attack. There is very little optimism over Wednesday’s informal OPEC consultation meeting concluding with a solution to the oil glut and this should cap upside gains. It is becoming increasingly clear that major OPEC members are engaged in a quest to reclaim market share with this prisoner’s dilemma ensuring low oil prices remain a recurrent theme in the medium to long term. Bears are on the prowl, and the catalyst that could send oil lower may be if investors are left empty handed once again today. From a technical standpoint, WTI may be vulnerable to heavy losses once the $43 support is conquered.
Commodity spotlight – Gold
Gold tumbled to fresh weekly lows at $1322.40 on Wednesday following Dollars resurgence which enticed Gold bears to install repeated rounds of selling. This commodity is currently engaged in a fierce tug of war with risk aversion, Dollar sensitivity and fluctuating expectations over the Fed raising US interest rates in December. Although Hillary Clinton's firm performance against Donal trump enticed investors towards riskier assets, the uncertainty ahead of November’s presidential election could rekindle the yellow metal's safe haven lustre. A hawkish tilted Yellen today may leave Gold open to further losses as optimism renews over the Fed stepping forward this year. From a technical standpoint, Gold is trapped in a wide range with support at $1305 and resistance at $1350. It could take an unexpected catalyst to provide Gold the direction investors have long sought.
Commodity currencies jump as Oil rally following output-cap deal
Volatility increased significantly on Wednesday despite the lack of economic releases today. However, all eyes were turned on OPEC meeting along with crude oil inventories during the U.S trading session.
Surprisingly, OPEC has agreed to cut production for the first time in eight years sending Oil higher more than 5% and breaking above $47 per barrel. The deal will become effective by the beginning of November and should give strong support for Oil prices at least in the near-term as investors may begin to re-adjust their med-term price targets.
In the equity market, the dow added 100points following the news while the German DAX broke above 10500 points erasing the majority of its weekly losses.
Looking at the FX Market and especially commodity currencies, we have seen a big jump in Canadian Dollar, New Zealand Dollar and the Aussie.
USD/CAD
Beginning with USD/CAD, the pair failed to break above 1.3280/1.3300 monthly resistance zone and turned sharply after prices dropped below 1.3194 support. The pair has reached a high of 1.3278 following crude oil inventories release before the sell-off begin. The move was fast because of the surprise effect following the output-cap deal and by now the pair the outlook has become strongly bearish in the short-term.
Technically, momentum indicators turned negative and a continuation lower is likely in the coming hours. Regarding the next levels of interest, the selling pressure should send prices to as low as 1.3000 psychological support while a recovery towards 1.3155/1.3172 zone is likely to cap any rally attempt.
To conclude, as far as 1.3225 peak is intact in the hourly chart, the trend should stay bearish.
AUD/USD
The Australian Dollar remain one the strongest currencies this year and a new rally towards 2016 peak is likely in the following days.
Looking at the recent price action, the pair continue to respect the higher lows structure seen from 0.7150 support, consequently, the preference should be to the upside. In the hourly chart, as far as 0.7640 low is in place, the pair should continue to gain ground in the direction of 0.7730 resistance while a drop to 0.7675/60 support zone should find strong buyers.
NZD/USD
After falling to a low of 0.7232 earlier today, the kiwi managed to bounce strongly on the back of OPEC recent deal. From a technical standpoint, the pair remain overbought in the near-term and as long as 0.7320 high is intact, we expect prices to keep trading sideways until a clear breakout above the mentioned above resistance level happens.
In the opposite, a daily close below 0.7210/20 support zone should confirm a change in the short-term positive trend.
Crude Oil (WTI)
Oil rallied more than 5% reinforcing the scenario of a double bottom patter near $44.20 per barrel. In the meantime, prices succeeded to overtake a major resistance level located at 46.50 level, which may clear the path for further advance in the direction of 47.75 barrier.
In the other side, a move to 46.50 may offer fresh long opportunities for bulls and therefore this former resistance is likely to turn as a support in the coming hours.
From a wider angle, Oil is trading sideways in the weekly chart and only a clear break above $51.00/51.75 per barrel will confirm that prices have bottomed for this year and a big recovery can be expected in the coming months. In the meantime, if we look at the theoretical target of the recent double bottom reversal pattern, we can see that 48.90 represents this price objective and coincide with a former resistance level.
To summarize, Oil outlook turned positive for the time being and the recent rally can extend to as high as $49 per barrel as far as 44.20 low is in place.
Energy stocks lead markets higher on OPEC surprise deal; Commodity currencies surged
When most traders thought an agreement to cut production was a mission impossible, OPEC surprised on Wednesday by announcing a preliminary deal to reduce output by about 700,000 barrels a day.
Battered finances of major oil producing countries forced the leaders to put their differences on one side and end a 2-years unofficial war on shale. Crude prices surged by 6% on the news yesterday and sent Asian equities higher with energy stocks leading the rally.
Such a deal should have had a stronger impact on oil, I would say at least a 10-15% rally, but the limited details of the agreement put a limit on the upside and we have to wait until Nov 30 to see whether the agreement will translate into actions, and whether non-OPEC oil producers will follow suit.
Commodity currencies surged on the news with the Canadian dollar and Norwegian crown benefiting the most. USDCAD fell below 1.31 from a high of 1.3269 earlier Wednesday and now the 1.3 psychological support seems to be the target, meanwhile USDNOK is trading at 5-month low of 8.014.
Risk appetite also pushed the Yen lower against all of its major peers falling by 0.7% against the dollar in Asia trade. Data from Japan showed consumers are still reluctant to spend with retail sales dropping for the sixth straight month, the longest streak since the global financial crisis. Retail trade dropped by 1.1% m-o-m in August sending the yearly decline to -2.1%, this is just another indication that Bank of Japan’s stimulus policy is not doing enough to send Japanese consumers into shopping malls.
European markets are set to open higher today with futures indicating a 1% rise in FTSE 100, and U.S. stocks likely to resume yesterday’s rally.
On the European data front, German annual consumer prices are forecasted to resume its recovery reaching 0.5% in September from 0.3% in the prior month. If oil prices continued to surge, this will translate into higher inflation expectations and put limits on further monetary easing.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
Week Ahead: Deutsche Bank settlement, Brexit talks, and U.S. jobs report
Deutsche Bank’s woes dominated market’s sentiments past week and revived memories of the worst global financial crisis in 2008 when Lehman Brothers went bust. The German bank hit a record low on Friday, wiping almost a quarter of its market cap since the U.S. Department of Justice requested the bank to settle a $14 billion in charges related to miss-selling mortgage backed securities prior to the financial crisis. Fears were intensified on news that several hedge funds that clear trades with the bank pulled billions of dollars to cut their exposure.
Stocks of Deutsche bank then managed to recover later on Friday’s U.S. trading session, surging by 14% on record volume after a report from AFP suggested the bank will pay less than 60% of the initial announced settlement.
The European banking system is clearly going through tough times, with high levels of non-performing loans, squeezed margins due to negative interest rates, tougher regulations, weak economic growth and competition with the FinTech booming industry. However, I’m against comparing Deutsche Bank to Leman brothers as the U.S. investment bank was extremely over leveraged while the German lender still have a solid balance sheet.
Deutsche bank will continue making headlines the week ahead with the adjusted settlement expected to be announced in the next couple of days according to AFP. With one more week to the earning season, expect any news related to Deutsche bank to become a key catalyst to risk.
Finally, some clarity on the Brexit timeline!
Theresa May announced on Sunday that U.K.’s divorce from the EU to start within 6-months. Article 50, the official notification to Britain’s partners will be triggered before the end of March 2017, which gives another two years to agree on the terms of the most complicated divorce in recent history.
The pound’s imminent reaction was a drop of 0.5% against the dollar in early Asian trading session, nothing compared to the 11% freefall after U.K.’s vote to leave the EU on June 23.
Now with timeline being set, the terms-negotiation will be a key driver for sterling going forward, but I expect it to be rough ride in the next few months.
U.S. Jobs
Investors will take a break from politics to shift back into the health of the U.S. economy with an interest rate hike looming on the horizon.
Friday’s non-farm payrolls report will be a key indicator to shape expectations for the Fed’s December meeting. The economy is expected to add 170,000 jobs in September, compared with 151,000 in August, meanwhile unemployment rate is forecasted to held steady at 4.9%.
Average earnings, which is forecasted to rise to 0.3% in September from 0.1% in August will share the same importance of the headline figure, as it might suggest that the labor market finally started to tighten and it’s only about time to start feeding inflation.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
The Canadian economy got a welcome boost today as trade balance data was more positive than economists expected, coming in at -1.9b (-2.5b exp). This was greeted positively in the Canadian economy which has so far been struggling under the weak commodity prices and especially around oil prices in particular. However, oil has been on the rebound as of late and this has been seen in the short term to offer some reprieve for the Canadian economy, which is still pushing on with its own commodity focused programs to boost the economy. The reality of the recent jump in oil prices is if it can actually be sustained, many are wondering if we had bottomed out and we may even see further upside potential after the recent crude oil inventory in the US showed a drawdown of -2.98M barrels. I would expect a slow recovery in oil and anything above the $50 dollar a barrel mark is likely to struggled unless OPEC actually puts in production cuts.
For the USDCAD it has been a mixed bag as many had expected that the USDCAD would fall as the Canadian economy improves and as oil continues to push upwards. However the US dollar has found some strength as people find themselves being bullish for the most part and economic data today out of the US painted a rather positive picture. The USDCAD lacked enough momentum to hit resistance at 1.3275 and this has set up a decent head and shoulders pattern on the charts. It looks likely we could see some further falls lower to support around 1.3149 and 1.3000 which is acting as the psychological level in the market. The 50 day moving average could also move upwards and it will be interesting to see if it can hold back any further bearish movement in the long run.
The Australian dollar also was relatively upbeat today as retail sales m/m came in at 0.4% (0.2% exp) beating the previous months flat reading of 0.0%. The Australian dollar has for the most part found itself under a fair amount of pressure in recent days after the cash rate was held at 1.50%, but the Reserve Bank of Australia warned of difficult market conditions on the horizon and that Australia may be further impacted. I've spoken previously about how the Australian economy is struggling, but for the AUD it still finds itself to be a popular currency for its interest yield; hence the appreciation in the currency at the end of the day.
AUDUSD technically speaking has struggled to find momentum today after some large swings. Dynamic support was formed around the 20 day moving average and it has so far been held up at the 23.6 fib ratio. Below these levels support is likely to be found at 0.7582, with the next major level at 0.7467. I would expect that if the USD remains strong we may see further losses for the AUDUSD when it comes to bearish movement.
Asian equities received a boost Thursday morning as oil traded near highest levels in 4-months and the Yen fell for 7 consecutive days.
European stocks also indicated a positive open after slipping back yesterday on reports that the ECB will consider tapering its bonds purchase program by early 2017. Although markets don’t seem really buying the news it still managed to move some asset classes especially gold which dropped by more than $50 an ounce since Tuesday.
Is the yellow metal’s rally over?
Gold has had a great performance so far in 2016, and although prices dropped by 4% since Oct-3 it’s still one of the best performing asset classes with 19.2% gains year-to-date. Of course speculations over a Fed rate hike and other central banks normalizing monetary policy are not good news for the yellow metal which benefited from a world of negative interest rates.
The recent selloff in gold was over exaggerated due to speculative positioning and breaking key technical support levels which triggered stop losses in derivatives markets. If U.S. non-farm payrolls report on Friday surprised to the upside we might see additional pressure on gold. However, I still see couple of factors likely to support prices on the short to medium term.
- Long term investors and physical consumers have been on standby for some time, and probably this dip will provide a good opportunity to jump in.
- China, the largest gold consumer is on a long Golden Week holiday, and we’re likely to see some interest when markets open on Monday.
- Demand in India picks up during the festival and wedding season that runs from October to December.
- According to World Gold Council a recent survey showed 90% of 19 central bank reserve managers planning to increase or maintain their gold reserve levels.
Although I’m not a big fan of non-yielding assets, I still believe that gold has an important role in portfolios. There’s lot of uncertainties going into 2017, with market’s valuations overstretched, looming banking problems in the EU, Brexit’s aftermath, China’s growing mountain of debt, and the list goes on. That’s why I still believe gold is an essential asset to hedge against all those risks.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
It's non-farm payroll day for the global economy, and the markets are just starting to get warmed up ahead of the reading tonight, the market consensus so far is for around 174K and this will be a strong reading going on from last month and for unemployment to stay flat at 4.9%. The power of a stronger non-farm payroll reading could send markets reeling lower, especially if it's above the current rate as pressure builds for a December rate hike from the FED, which would set the tone for next year and restoring accommodative monetary policy. Pairs to watch would be GBPUSD, AUDUSD and NZDUSD which would all be very volatile during this period. But the main focus I feel will be on the commodities in general as gold and silver are expected to move rapidly, as markets have been punishing bears over the last few days.
Silver in particular has seen sharp falls losing 2 dollars an ounce in the previous day - pushing all the way down to strong support at 17.133. If we have a strong non-farm reading I would expect a strong push even lower through support at 16.708 and all the way down to 15.933. If there was a large touch on 15.933 I would expect strong profit taking from traders looking to exit. In the event of a bad reading the market will likely swing back upwards and look to find dynamic resistance on the 200 day moving average.
For gold it's looking like more of the same with a hard level of support likely to be found at 1208 as the market looks to punish gold bulls in the short term, as bets increase over a US rate hike. The market can be very trigger finger over gold though, and volatility is likely to increase in the build up to non-farm payroll as traders look to capture people to leveraged. One again the 200 day moving average is likely to be the key level of resistance in the event that gold does indeed break upwards on the charts.
The New Zealand dollar is likely to be heavily affected by the USD movements over the next 24 hours and after the recent disappointing global dairy trade auction traders will be bearish on the NZDUSD. Pushing down the charts in the wake of the recent economic events it has so far struggled to find any upward momentum as resistance was found on the 100 day moving average. From here the next level down for support is likely to be at 0.7113 and in the long run it may in fact be a case of further lows and even a push on the psychological level of 70 cents.
Whatever way you look at the next 24 hours, volatility will be heavy as traders bet heavily on the result and the FED looking to utilise the result as a platform to lift rates in the near future.
Sterling/Dollar was exposed to extreme losses during early trading on Friday with prices flash crashing to 1.184 as the chaotic combination of heightened Brexit anxieties and thin liquidity encouraged sellers to attack incessantly. The currency was already immensely pressured this week with reports of French president Holland saying that Britain must follow through with a hard Brexit potentially sparking the shocking market shaking selloff. Sterling remains vulnerable to further losses in the future as uncertainty over how the Brexit negotiations will take place after the article 50 is invoked haunts investor attraction towards the currency. Sentiment towards the pound is clearly turning bearish by the day with bulls potentially waving the white flag as the Brexit jitters become deep rooted.
Investors may direct their attention towards the manufacturing production report which could provide some clarity on how the sector has fared post vote to leaving the European Union. Brexit fears may have mutated to new levels and this could create a situation where positive UK data falls on deaf ears with uncertainty keeping the currency subdued.
The GBPUSD has crashed over 750 pips in less than 24 hours and when one factors the possibility of the Federal Reserve potentially raising US interest rates in December, prices could descend lower back towards the 1.2000 regions. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. A weekly close back below 1.2400 could encourage a further decline towards 1.2200.
NFP in focus
Dollar bulls were unleashed on Thursday with the Dollar Index charging to fresh 2 month highs around 97.00 following the impressive employment data which reinforced expectations over the Federal Reserve raising US interest rates in December. Data from the States has repeatedly beaten this month heightening hopes of the Fed potentially breaking its trend of central bank caution in 2016. Much attention will be directed towards Friday’s NFP which if exceeds estimates could be the welcome boost needed for the Dollar Index to lurch towards 98.00. From a technical standpoint, the Dollar Index is bullish on the daily timeframe and a breakout above 97.00 triggers a further incline towards 98.00.
WTI Crude breaks above $50
WTI Crude was uplifted on Thursday with prices charging above $50 as the combination of a surprise plunge in US crude oil inventories and rising optimism over OPEC freezing production in the pending OPEC meeting enticed buyers. While the gains displayed are quite impressive, the upside may be capped if the lingering fears over the oversupply encourage bears to jump in near resistance. It may be too early to determine the sustainability of the current oil rally with investors awaiting the meeting on November 30th for further clarity and direction. It should be kept in mind that although OPEC has agreed that production may be cut up to 700,000 barrels a day, this has not been officiated which creates a sense of uncertainty. WTI could be exposed to downside pressures if the pending meeting leaves investors empty handed once again.
Commodity spotlight – Gold
Gold has been left vulnerable to heavy losses this week with prices tumbling to levels not seen since June 2016 at $1250 following Dollars resurgence which provided a foundation for bears to install heavy rounds of selling. The heavy decline was amplified by the rising optimism over a US rate increase this year which consequently repelled attraction towards the zero-yielding metal. Investors may direction much attention towards Friday’s NFP which if beats expectations could drive Gold prices much lower. From a technical standpoint, the precious metal remains under immense pressure as prices are trading below the daily 20 SMA while the MACD has crossed to the downside. A solid weekly close below $1250 could trigger a further decline lower towards $1225.
Week Ahead: U.S. Earnings and Fed speakers under the spotlight
The flash crash of the British pound on Friday overshadowed the U.S.’s no.1 market moving economic indicator, the non-farm payrolls. As the pound plunged 6.1% in less than two minutes in early Asian trade, some investors recalled the flash crash of May 2010 that sent the Dow Jones Industrial Average 1000-points lower in a matter of minutes - in what seemed to be one of the most turbulent periods in the history of financial markets. Unlike the 2010 crash, this time the pound’s plunge did not spread over into other financial assets but this incident should serve as a wakeup call especially when we expect similar moves attributed to the computerized trading in today’s trading environment. We can now see that there have been changes in the algorithms as well as regulators are no longer stepping in.
U.S. earning season finally kicks off this week, with banks including JP Morgan, Citigroup and Wells Fargo all due to release their third quarter results. If S&P 500 companies reported a decline in earnings for Q3 it will be the sixth straight quarter of year-over-year drop and with forward price-to-earnings ratio sitting above 17, it will be hard to justify news highs on the index. Markets are expecting about a 1% decline in earnings from last year, but based on the typical upside surprises there’s a high probability that Q3 will mark the end of the profit recession. Although this might seem optimistic, a year-end rally in stocks requires more than just upside surprise in earnings, but also a positive guidance.
With markets pricing in a 65% possibility for a rate hike in December, minutes of September’s FOMC meeting on Wednesday will provide more insights on how the Fed is thinking. The jobs report on Friday didn’t change the odds for a December rate hike, but lowered November’s expectations from 15% to 8% according to CME’s fedwatch. The U.S. labor market in fact did disappoint with only 156,000 jobs added to the economy versus expectations of 172,000 and unemployment rate spiked higher to 5%. The weaker than expected figures are not enough to rule out a rate hike in December as it remains satisfactory and you can still debate that the rise in unemployment rate is due to the increase in the labor force participation and make it look as better news. However, with two more job reports until Decembers meeting many things could change.
Many of the Fed members are due to speak this week including Fed Chair Janet Yellen at the annual economic conference hosted by the Federal Reserve Bank of Boston. If they continued to express their satisfaction on the path of the U.S. economy this could lend additional support to the U.S. dollar which fell against the Yen on Friday for the first time in 9 sessions.
On the U.S. data front, we have to wait until Friday for tier one data releases. Retail sales will be a key figure to watch as consumer spending will be a major driver to U.S. third quarter GDP. Markets expect a 0.6% rebound in September from -0.3% drop a month earlier.
