Market Overview
So a “one off” devaluation move by the People’s Bank of China was not that at all, as for a second day in a row the PBOC has raised the midpoint of the daily fix against the US Dollar. This time the bank has move it from 6.2298 to 6.3306. If there was any doubt that this was not turning into a currency war, then the argument is looking increasingly tenuous now. Tuesday’s Chinese devaluation sent risk appetite plummeting (equities lower, moves into the dollar, Treasuries and gold higher) and there is little reason to not expect more of the same today. The Aussie dollar which is closely linked to the Chinese economy due to its high proportion of metals exports, is being hit again. China’s industrial production falling to 6.0% for the year (6.6% expected) is not going to help risk appetite either.
Wall Street closed sharply lower last night and the Dow Jones Industrial Average had a reported “death cross” with the 50 day moving average moving below the 200 day moving average (personally I do not subscribe to this form of the death cross as I believe that the 50 and 200 day moving averages both need to be falling). However, Asian markets have slumped overnight with the Nikkei 225 down 1.6%. European markets are lower again in the early trading.
In forex trading there is a mixed outlook across the majors as the European session gets up and running. The euro is again positive (seemingly a continuation of the jump yesterday on the apparent agreement of the 3rd Greek bailout and also the short covering of EUR/CNY positions). Also the yen and the Swissy are fighting back too. Sterling continues to consolidate in front of the key unemployment data due at 0930BST. The expectation is for readings to stay steady with 5.6% unemployment and average weekly earnings (ex-bonus) to stay at 2.8%. Sterling does tend to be a mover on the earnings data due to its implications for inflation.
Other than UK unemployment the market will be watching for the US JOLTS job openings at 1500BST which are expected to drop slightly to 5.33m (from 5.35m last month). There is also the release of the weekly crude oil inventories which fell by 4.4m last week and are expected to drop by another 2.0m.
Chart of the Day – DAX Xetra
The DAX has broken sharply lower after a day of significant selling pressure. This has flipped the near to medium term outlook on its head once more. Equity indices have been notoriously choppy in recent weeks but the DAX has been able to ride out much of this with outperformance, however this could not prevent the bears taking control yesterday and early signs are not good for today either. The support of a 5 week uptrend has been broken, whilst the momentum indicators have turned sharply lower. The RSI is back below 50, but perhaps of more concern is the cross lower of the Stochastics. These crosses have tended to signal a period of selling pressure in recent months.
The immediate line of support is the 38.2% Fibonacci retracement of 9216/12,389 at 11,177 however the late July reaction low at 11,053 could also be under pressure if the bears go on a run. If that is broken there is the 50% Fibonacci retracement around 10,800 but little to prevent a full retracement back to 10,653. The hourly chart shows that very near term momentum has turned negative. Near term resistance comes in at 11,380.
EUR/USD
I continue to believe that my view of using the near term rallies as a chance to sell on the euro is correct, however my view is being seriously tested. The rebound from $1.0847 is now into its 6th consecutive session and is looking pretty strong. My expectation is still that the resistance of the falling 144 day moving average (currently $1.1063) which has capped the gains on numerous occasions in the past couple of months, will continue to be the basis of resistance, but it is being questioned.
The stochastics are now showing decent momentum but I think that I would need to start really thinking about a change of outlook if the RSI started to move consistently above 60 (currently in the mid-50s). The intraday hourly chart shows a series of higher lows on a near term basis with the latest key low in at $1.0960 with a minor low yesterday at $1.1010. A move above the key resistance at $1.1130 would be a one month high and open $1.1215.
GBP/USD
It has almost go to the stage at which the daily chart analysis is so rangebound and neutral that I can only really state the lows of the range (now at $1.5422) and the resistance at $1.5690. The momentum indicators are almost entirely neutral and suggest the continuation of the range. Even the Bollinger Bands continue to tighten and are now only 150 basis pips apart (which is incredibly tight).
The Fibonacci retracement levels seem to be a recurring theme on the intraday hourly chart and yesterday the price traded consistently using the 50% Fib of $1.5188/$1.5928 at $1.5558. The Fibonacci levels remain excellent reference points within the range with 61.8% at $1.5470 and 38.2% at $1.5645. Hourly momentum is neutral and all we can really do is look to play the range still.
USD/JPY
I spoke yesterday about the bulls being back in control and this was certainly confirmed by yesterday’s closing breakout above the previous reaction high. The move above 125.00 should now confirm that a retest of the 125.85 multi-year high should be seen in the coming days. Momentum indicators remain in bullish configuration with the RSI again above 60 and Stochastics strong. The higher low in place at 124.08 is now a key reference point in the push higher.
The intraday hourly chart shows a continued uptrend channel which is pushing higher with strong momentum and all moving averages rising in bullish sequence. There is now a good band of near term support 124.40/125.00 to use as the basis of any opportunities to get long again. Under 124.08 the key support comes in at 123.80 and 123.50.
Gold
The gold price has moved into a 5th consecutive day of gains amid the rout of risk assets as China continues to devalue the yuan. The technical set up is also favourable near term for further rebound in gold. Having closed yesterday above $1105.60 which was the previous near term resistance, it seems as though a rally is underway. Taking that as a base pattern, the measured target is between $25/$28 higher which puts the recovery back around the resistance of the old floor at $1131.85. The momentum indicators are certainly reflecting the improvement with the Stochastics and RSI sharply higher.
The intraday hourly chart shows consistent higher lows in place now on gold, with yesterday’s spike low at $1193.25 being bolstered by the fact that there seems to have been support forming around the $1105.60 breakout too. A move above yesterday’s high at $1119.00 would continue the recovery. In the event of a rebound towards $1131.85 I would then reassess my medium/longer term outlook which as it stands remains negative and I see near term rallies as a chance to sell.
WTIOil
Once again the sellers have returned in force to nip a technical rally in the bud and to drag the WTI price lower. The downtrend remains firmly intact and the resistance I spoke about yesterday between $45.00/$45.45 came perfectly into play and was seen as another chance to sell, thus strengthening the resistance. The price continues towards touching distance now of the crucial March low at $42.03. The downtrend resistance today comes in at $45.15.
I will have to now start talking about the next downside targets below the March low. The next level would naturally be $40 which is both a minor old support from February 2009 and also psychological. However, in truth there is very little to prevent the multi-year lows from December 2008/February 2009 at $32.40/$33.50.
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