The Australian economy continues to be a roller coaster for any Aussie bulls, but one thing is certain the markets are not paying too much attention at present with the AUDUSD being one of the stand out performers in 2017 so far. However, markets should be paying attention to what is going on with the consumer economy with the weekly consumer confidence reading coming at 113.7 (previous 116.4). With the 3rd week of drops for the consumer economy the Reserve Bank of Australia may be starting to squirm slightly, especially as they head into a new year with an uncertain global economy focused on Trump and Brexit.
On the charts the AUDUSD has been a trail blazer as of late as the bulls have taken full control to run it up the charts. This has been on the back of risk sentiment being very strong in the wake of Trumps elections, but for the fundamental side of the Australian economy it's not making a lot of sense. Either way the technical's so far have been very positive with the 20 day moving average acting as dynamic support as it pushes the AUDUSD higher. Resistance has been quite strong around 0.7730 and 0.7754 and the market will certainly have to work hard to break through these levels. Consolidation between 0.7680 and 0.7730 is likely to be the next few days of trading before the market may look to retest previous levels, it would be with a degree of caution at present as there is still not a lot of clear direction globally.
Risk sentiment is not only driving the commodity currencies, but also the US equity markets which in turn saw another sharp spike today as it continued to make record highs on the back of positive economic data. Last week's Philly manufacturing index data took the market by surprise with a very strong reading of 43.3 (exp 18.0). This large jump is in part to the market believing that the Trump administration will look to boost the US domestic economy, and is likely to stimulate it and in turn give the manufacturing sector a much needed boost. Even with the threat of further rate rises the US equity markets have so far not faltered and look ever more bullish, even as the economic data points to another one right around the corner.
For the traders looking to cash in on the S&P 500 the bulls look to be in control. How long momentum can be sustained is hard to see at this stage, but the psychological levels become important as you go up the charts into new territory. With the market now sitting just above 2350 it's likely to look for the next level higher and this is looking likely to be 2400 for resistance. Past history has shown that these levels are major points for the market, and as the bulls look to see if the sky is the limits, you can expect to see some major levels of resistance around these round numbers.
Over the last few months hedge funds and traders have been seen placing large bets that OPEC will indeed come through with its production cuts and oil will accordingly jump higher, so far it has been positive on the production cut front, and we are starting to see oil markets looking like they may trend again - instead of the ranging behaviour we have seen over the last few months. One thing worth noting in all of this is how important Russia is, given that it just become the world's largest producer of oil as it overtook Saudi Arabia. But so far so good as 90% of the production cuts that were outlined have been implemented. However, US inventory data has been not positive for oil traders as since Trump has taken to office there has been a build up of supply, something that many were expecting not to happen. Despite all of the pros and cons oil has looked to jump back to life.
The 20 day moving average was key for oil as it looked to trend slowly up the chart, it had a few breakdowns previously but seems to still respect the level and as of now is sitting just below resistance at 54.36. What will be key here will be if oil can push above this level and look to extend higher; breaking out of the ranging phase and looking to trend again as it has historically been so good at. Above the current resistance level the next level will be found at 55.19 which was where the market looked to extend to earlier in December after the OPEC cuts were announced I would expect to see this area already priced in with the cuts, but it would also be pushed higher if we saw a reduction in US oil inventory data.
One of the other interesting commodities as of late has been silver, as it has charged up the chart much like gold on the back of speculation around Trump uncertainty. While not as popular as gold it has been a stand out performer in recent months and should not be discounted as it's prone to large movements on the c harts. And with preliminary GDP and unemployment claims still on the horizon for the US economy this week there is certainly room for further large movements. Also the USD weakness could be something that looks to push silver higher in the short term.
From a technical point of view silver has been quite bullish as of late, with large movements upwards since December in a constantly trending pattern. The 20 day moving average has largely been shadowing silver on the charts, with large bearish movements being pushed back by the silver bulls upon touching this level. The 200 day moving average has also been heavily respected, but the focus right now is on resistance at 18.091 with the market treating this like the level to beat. Long tails on the candles are also pointing that the bulls have not given up and further extensions higher may indeed be quite possible.
WTI Crude breached $53 during trading on Tuesday after industry data pointed to a potential ninth straight week of inventory builds which revived some oversupply concerns. Although OPEC members have made an effort to stabilizing the oil markets by cutting output, the growing threat of U.S shale ramping up production continues to limit gains on the commodity. While oil markets may be seen to be trapped in a fierce tug of war, a resurgent Dollar from the prospects of higher US rates could expose WTI to further downside shocks. From a technical standpoint, WTI Crude bulls are struggling around $52.50 with weakness below this level opening a path towards $51.50.
Gold pressured by rate hike expectations
Gold was exposed to further downside losses during early trading on Wednesday as expectations heightened over the Federal Reserve raising US interest rates next week. A strengthening Dollar from the improving sentiment towards the United States has fuelled the metals selloff with prices trading around $1213 as of writing. From a technical standpoint, Gold is under pressure on the daily charts with sellers eyeing $1200. Previous support around $1220 could transform into a dynamic resistance that offers that encourages a selloff towards $1200 and potentially lower.
EURUSD bears eye 1.0500
The growing political risks in Europe have left the Euro vulnerable to sharp losses. Although the economic fundamentals of the Eurozone continue to look encouraging, it is the uncertainty revolving around the French elections that has haunted investor attraction towards the currency. Market participants may direct their attention to Thursday ECB meeting which most anticipate concluding with the central bank leaving monetary policy unchanged. From a technical standpoint, the EURUSD is bearish on the daily charts. The downside momentum could encourage bears to drag prices towards 1.0500 in the short term and 1.0350 in the medium to longer term.
GBPUSD struggles above 1.2200
Sterling remains gripped by the Brexit developments and the rising anxiety ahead of the Article 50 invoke should create a foundation for bears to install repeated rounds of selling. In a technical perspective, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. With the pair creating lower lows and lower highs on the daily charts, the prerequisites of a bearish trend have been firmly achieved. Technical traders may observe how prices react below 1.2200 with further weakness opening a path towards 1.2100 and 1.2000 respectively.
GBPJPY breaks below 139.00
The bearish combination of Sterling weakness and Yen's resurgence from risk aversion has left the GBPJPY vulnerable to heavy losses this week. This pair may come under renewed selling pressures in the medium to longer term as uncertainty heightens from the Brexit developments. From a technical standpoint, the pair is bearish on the daily charts as prices are trading below the 20 simple moving averages. A decisive break down below 138.50 could open a path lower to the next relevant support level at 137.00.
Oil markets have shown they are more than capable of large movements but today's movement is the largest we've seen since July and showed that the bears are still very much alive and in control as they took 5% of the price of Oil in one day. OPEC nations have been cutting production in an effort to boost oil prices to sustainable levels, but at the present rate it would seem the global market as a whole is not consuming enough Oil. US crude inventories shocked the market today showing a strong surplus of 8.21M (1.97M exp), this is at odds with the current market thinking that Oil markets will be bullish in the wake of OPEC. The reality it would seem is that with a mild winter consumption has not been very strong and as a result OPEC nations may be forced to extend cuts in the long term in an effort to bolster prices. The question will be if those OPEC nations have the stomach for further production cuts, as a large number of them are currently struggling as it stands internally.
For Oil traders it's a technical dream as the bears have crushed lower on the back of today's news. Right now oil is trying to claw back some of those losses and the bulls are mounting some resistance on the new daily candle. So far it's come up short and the 100 day moving average looks to be holding back any further momentum. If we do see a further fall lower I would expect to see the 50.0 fib level be the ideal target for traders looking for a strong support level in the market. This also coincides with a key support area around 49.00, so I would anticipate this would be a key holding area and somewhere that the bulls will look to take control of. However, the only minor caveat is that I would expect OPEC to come out swinging if they thought they were losing momentum or to at least add some comments.
Moving across to the US markets and positive economic data continues to be strong for the US economy, with the ADP non-farm payroll change coming in much stronger than expected at 298K (190k exp). This shows there is a large amount of positive sentiment in the market for the economy and labour market will likely be a key driver as Trumps policies come into act. With non-farm payroll due at the end of the week it will be interesting to see if there is a strong correlation.
For the technical aspect of the S&P 500 there is of course the strong channel which has formed in the market and continues to look key for trading. The 20 day moving average continues to act as dynamic support and is currently riding against the bearish channel trend line. Despite the recent fall down to the trend line this could by the market waiting to see regarding Trumps policies, but the bulls will still be out there looking for a chance to strike.
U.S. rate hike is coming, but the U.S. dollar is not responding
The greenback is weakening for a third consecutive day in early Asian trade ahead of Wednesday’s most awaited Fed meeting. Investors are almost convinced that the Fed will move forward in tightening monetary policy, with speculators pricing in 89% chance of a rate hike according to CME’s FedWatch Tool. Friday’s robust non-farm payrolls report removed all doubts and now even skeptical investors believe that three rate hikes are the base scenario for 2017. So why is the dollar not benefiting from the shift in expectations?
I believe the answer to this questions is simply based on “buy the rumor, sell the news” adage. The U.S. economy added 235,000 jobs in February and unemployment dipped to 4.7% from 4.8%, meanwhile wages were revised up 2.8% year-on-year from 2.6%. Despite wage growth not being robust enough, the continuous improvement in hiring will force wage growth to accelerate and diminish the slack in labor market.
The divergence in monetary policy and aggressive expected U.S. fiscal plans have been the key factors which sent the Dollar’s index to a 14-year high back in January. But recent reports indicated that European Central Bank policy makers have raised the possibility of increasing interest rates before the asset purchases come to an end, indicating that this divergence will not last much longer and investors might require to adjust their expectations.
I would rather focus on U.S. treasury yields for now as a break above 2.64% on 10-year treasuries might not only indicate that the dollar’s slide is temporary, but could be a sign that the three-decade bull bond market has come to an end, which will eventually increase the risk-free rate required by investors. And if U.S. corporate earnings growth can’t catch up, then we’re likely to see the beginning of U.S. equity markets correction.
In Europe, the U.K. divorce from the EU might become official as soon as Tuesday if the Brexit bill clears parliament later today. This will be the beginning of a very complicated two-year process, and much of it will be felt in the pound. Meanwhile Dutch voters are heading to the polls on Wednesday providing an indication on how strong the populist movement is in Europe ahead of upcoming polls in France and Germany.
For traders there is no other trade than the FEDs announcement come 1800 GMT, with the market predicting a rate rise from the current 0.75% to 1.00%. This would be a momentous occasion as it would look to be the start of monetary policy returning to normal, and the market has big expectations with 94% of predicting a rate rise off the back of the Non-farm payroll results last Friday. So the market is pricing in rate rise, but historically the FED has been dovish and Yellen is not one to jump the gun on the back of market pressure. We could end up with a big swing if we don't actually see a rate rise in this case, and it may fall to Yellen's statement afterwards to provide real guidance for the markets. One thing that is clear is that regardless of a rise or not, the market will likely be quite volatile during this period and I would expect big moves off the back of this announcement across all major pairs and some commodities.
The USDJPY will be for me a big mover, as the market had been hedging in the USDJPY for some time off the back of the recent Trump election, and has been unwinding as of late in the build up to this FED announcement. Previous trending has so far shown a ranging pattern recently on the daily chart and the recent rejection at resistance at 115.630 is a clear signal that the market is pausing until it sees a much clearer picture from the FED. A rate rise tomorrow could propel it much higher to the next level of resistance at 118.688 and traders will be looking to open the flood gates here. No movement at all could send the USDJPY back down to support at 111.655. I would be slightly surprised to see it push through here unless the FED was very dovish, as it is likely that Yellen will be bullish in the event of a pause given the movements recently in the labour market.
Crude oil has been one of the interesting movers recently and with a new week and new figures we could see some fight back from traders. One of the key points though will be how OPEC reacts to the recent drops in oil prices, and could lead to calls from OPEC nations to extend production cuts further. I would be surprised to see the be less aggressive now, and it does feel that with the recent movements we will continue to see OPEC trying to influence as much as possible.
Looking at Oil on the charts and it's plain and clear to see that it's certainly hung up between support at 48.99 and the 50.0 fib level which is trapping it from further movements. Any strong directional movement from here will likely be carried forward, but it may be a case of Oil building up to tomorrows inventory announcement. A build up again will likely see oil retest the 61.8 fib level.
Crude bulls have been given a strong uplift by the market on the back of a weaker US dollar and also private inventory readings showing a strong drawdown in crude from supplies. While this just a precursor for the main reading tomorrow, it's a promising sign in the long run for suppliers of oil who continue to struggle to get decent prices in the market. The real will be tomorrow for price action amongst oil traders and expectations are high that strong technical trends will win through for oil markets. However, there could also be some slight fundamental action on the back of the Trump meeting in China, but it's unlikely to make big waves in the oil market.
Oil continues to be in a bullish trend upwards, and thus far the market has been rewarding for the oil bulls compared to the previous month. The 100 day moving average has managed to stop oil traders in their tracks at present, but this could only be temporary if we are going to see a strong draw down tomorrow and resistance at 51.68 would be unlikely to hold it back. If it's a strong draw down we could see price jump higher to 52.82 and extend even further if it was very large. In the even we don't see a strong draw down price could drop further and test support at 49.70, so there is a number of angles the market will be looking to play off - and while the market does respond to technical's, it does also tend to trend nicely after the announcement so it's worth watching.
The Yen continues to be impressive in trading as of late, and there are many believe that the USDJPY is currently not a productive trade, but it has been on the largest movers and most volatile over the last week. Other pairs like the EURJPY and GBPJPY have also had large swings, but the market keeps looking for a hedge as it's not impressed with the current Trump plans and how little has actually been done; despite all of the talk.
USDJPY traders have been looking to push lower, despite the market talking about buying opportunities. Until we some sort of political reprieve markets are likely to continue to hedge at this stage. So far support at 110.224 is looking quite strong and the 50.0 fib level is also acting as support around that key area. The 110 level is a psychological level that the market likes and so we could see continues pressure and support around it. If the market does indeed decide to flip it around a jump to 111.655 could also be on the cards. I would expect though that unless something fundamentally changes we could continue to see downward pressure and bearish trends for the USDJPY.
The best way to describe recent market price action is boring. Although S&P 500 touched a new record-high on Tuesday, the index has been trading in a range of less than 0.5% for the past ten days, and when excluding the rise of 0.41% on 5th May, it was a trading range of less than 0.2%.
Low volatility indicates that investors seem to be relaxed for now. Although they’re not willing to take much risk, they aren’t worried about a sharp correction. Multiple factors may explain the low volatility: steady earnings, stable economic indicators, and a decline in equities correlation, limiting a one-sided move. One of the questions I hear all day, is how long can this prolonged period of low volatility last? But the more important question should be, what direction are equities going to take when volatility returns?
First, let’s examine how markets reacted in the immediate aftermath of historic low volatility levels:
July 1993: The VIX fell to 9.11, S&P 500 gained 3.6% in the following eight weeks.
December 1993: the VIX dropped to a low of 8.89, four weeks later the S&P 500 surged 2.6%, then fell by more than 7% in two months.
December 2006: the VIX fell below 10. S&P 500 posted gains of 3.25% in ten weeks, followed by a 6.7% correction.
The takeaway from these samples is that for the most part, when the VIX falls below the 10 benchmark, equities make short-term gains, followed by a correction. On the longer-term, it’s much different. For example, in 1995 the S&P 500 surged 37.2% and in 2008 crashed 36.55%, suggesting that the VIX is a poor indicator of long-term trends.
A period of very low volatility doesn’t persist for long, and it only needs little surprises, whether it's macro factors, a change in earnings expectations, or a political shock to change investors’ behavior.
I still believe that valuations are overstretched, and if not supported by stronger earnings in the next two quarters, it will be hard to justify current price levels, especially considering that fixed income instruments will become more attractive as the Fed and other central banks start tightening monetary policies. I will also keep a close eye on oil prices, although I believe that we’ll be ending the year above $50. Any sharp move to the downside from current levels will drag equities with it.
The Australian dollar has been under a fair amount of pressure as of late, as a mixed bag out of China and recent weakness has got the Reserve Bank of Australia worked up. The weakness in China saw industrial production y/y dip to 6.5% (7.1% exp) and fixed asset investment y/y was also slip to 8.9% (9.1% exp) - worrying signs for one of the world's largest economies. This obviously has a flow on effect for the Australian economy as China is one of its largest trading partners. Additionally, the recent monetary policy meetings saw the RBA focus on the labour market and in particular growth in the jobs market and wage growth; all of which has been far too slow for the RBA and continues to be a headache. The market thus far has been accordingly putting pressure on the Australian dollar, and this will be somewhat welcomed by the RBA as a way to alleviate pressure and help stoke inflation. One of the main things to watch will be to see if this inflation flows over into wage growth to help the economy grow.
AUDUSD bears have been in control over the last month as the market enjoys a resurgence in USD bulls and plays of the weakness of the Australian economy. So far daily movements have been consolidated bullish movements followed by aggressive bearish plays to push the currency pair lower. The 20 day moving average has been tracking the movement lower and thus far has been acting as strong guidance for the direction and acting as a dynamic level on the way down. Resistance levels are currently being pressure around 0.7439 with the possibility of further out breaks touching on 0.7498 and 0.7568. However if the market does decide to follow the current trend this pressure on support levels at 0.7343 and 0.7178 are likely to be the main targets for traders on the way down. All in all though it seems that the AUDUSD is likely to find plenty of volatility in the coming months with a mixed bag from China and the US recently.
Oil has once again come under the pump, as private inventory figures have shown a build up in oil reserves. This should not be a surprise given how back and forth it is, but the market has been quick to turn its toes on the recent bullish run and drive oil prices lower. It does feel however that clean energy is starting to make its mark amongst shale oil and causing issues for oil bulls who have been betting big for some time.
So far Oil has struggled to break through resistance at 49.32 with each push through being pulled back by the market. Support levels are likely to be the next targets if we continue to see surpluses and I would expect 47.75, 45.78 and 44.02 to be the most likely candidates for large price action movements lower.
It could be a return to instability if the Greek issues rear there ugly head again. Recent reports out of Brussels over the Greeks and their handling of debt has been slightly worrisome, and markets are a little on edge over the discussions. Currently Greece needs another tranche in June in order to prop up its finances, and so far it has been working hard with some protest. But markets have not forgotten the previous ordeal when Greece almost collapse, and the turmoil it can cause on European markets. Certainly, the IMF and the EU will be looking to make sure they don't see a repeat of that and a resulting downturn in the Euro-zone, but it's always worth watching the Greek drama unfold with both eyes open as markets can be quite volatile. This has been reflective of the EURUSD which has had some large swings today on the back of rumours on Greece.
The question now for traders is if this Greek tragedy is over and the Euro can fly higher. So far it looks good for traders with a strong level of resistance likely to rear its head soon at 1.1298. The band between that level and 1.1366 will set the tone I feel for further bullish movements if there are more in store. Even if we did see a strong pull back at this level there is a bullish trend line at play in the market which is likely to add a strong layer of support which can't be ignored by any technical trader out there. I would also be quick to watch the 20 day moving average, as it managed to safe guard against some bearish movements a few weeks back and could come into play again if we do see a bounce back to earth at 1.1298.
Oil markets have also been showing great resolve recently as the bulls look to take control once again. This in part has been led by Iraq looking to extend its oil production cut by another 9 months in order to control prices. The market believes it is a done deal as it's the same as agreed originally back in December to help boost prices. However, with shale oil producers being more aggressive than ever it will be hard to tell if we will see prices look to drift into the high 60s anytime soon. Certainly not so until we see large drawdown's on current oil inventories.
On the charts it's clear that Oil is looking to rush up, but has been pushed back down by the bears at the 100 day moving average which has acted as resistance. It will be interesting to see if oil can break through resistance at 51.48 or if it will instead run out of steam and go one to retest support levels and the 20 day moving average.
