Market Overview
After a quiet day of trading without the steer from US markets that were closed for Labor Day national holiday, there is still a degree of uncertainty amongst forex markets ahead of today. However, can the key commodities that made gains last week manage to build support and continue higher? The market will certainly be looking for follow through on a strong (albeit volatile) day for oil which picked up sharply as the world’s two largest oil producers, Russia and Saudi Arabia, looked ready to cooperate for some sort of agreement to limit oil production. The desire to stabilise the market could help to foster an agreement but previous attempts have all failed recently and it could still be down to the attitudes of Iran and Iraq once more over whether something is possible again. The strong of central bank meetings this week kicked off with the Reserve Bank of Australia which as expected held rates steady at 1.50%, having only just cut rates a month ago and with little change to the economic outlook since then. Asian markets were steady to slightly higher overnight with the Nikkei 225 up 0.3%, whilst European markets are also pulling mildly higher in early moves.
In forex the dollar is trading mixed against most of the major currencies, however the Aussie is the big gainer on the day. Even though the RBA did not move as expected, a better than expected reduction in the Australian current account deficit has strengthened the Aussie. Gold and silver are broadly flat, whilst oil is slightly higher again.
With the US closed yesterday for Labor Day, the service sector data will be announced today with the ISM Non-manufacturing PMI at 1500BST. The expectation is for a slight drop to 55.0 (from 55.5) and after the surprise disappointment in the ISM Manufacturing last week this number will be seen as important as it could put a final nail in the coffin for a September rate hike if it also disappoints.
Chart of the Day – USD/CAD
A day before the Bank of Canada (BoC) is set to announce monetary policy the outlook for the pair remains somewhat technically uncertain. The lack of trend continues however it is no coincidence that the Canadian Loonie has been strengthening in the past couple of days as the oil price has also been jumping. Technically the pair is a range play and this means an opportunity to play mean reversion with the momentum indicators. The resistance as consistently formed between 1.3100/1.3200, whilst the latest move back below the mid-range pivot at 1.2975 re-opened the 4 month range lows that tend to form around 1.2750. The RSI momentum is consistently turning lower around 60 only to then reverse back towards the range lows around the mid-30s once more. Furthermore, with the Stochastics having also given another sell signal within the range with a bearish crossover, the suggestion is that the bears are back in control near to medium term. Previous bull and bear runs tend to go for around one to two weeks over the past few months which suggests there is further legs in this run lower. As for the BoC, there is no expectation of any rate cut, but it will be interesting to see how dovish the rhetoric will be with the path of economic data such as inflation and labour productivity deteriorating. This could drive a weaker CAD and support USD/CAD higher, but for now the track is lower.
With the US on public holiday for Labor Day there was a real lack of conviction in trading yesterday, shown in the trading range of just 45 pips and a very small candle body. The market is still in need of direction though, because as big as the intraday turnaround on Friday was, the move simply unwound the gains from Thursday leaving the pair in a very similar position. The medium to longer term inference from the momentum indicators is that the outlook is broadly neutral now, however the Stochastics just dropping off slightly is a slight warning for the bulls. In truth though there is a band of support that is now between $1.1100/$1.1120 near term and resistance between $1.1233/$1.1250 and whilst this is intact the lack of conviction will continue. There is a mild bearish bias on the hourly chart with initial resistance around $1.1180.
The rally on Cable is just beginning to show a few signs of running out of steam. The strength of the candles is waning, with the candle bodies shrinking and yesterday’s move losing 75 pips from the high into the close. This could be that the bulls are just having a pause for breath as the breakout above $1.3280 is consolidated. The momentum indicators are looking to move into stronger configuration with the Stochastics looking positive, the RSI pushing towards 60 and the MACD lines having unwound to neutral. The near term momentum needs to be sustained to prevent some profit taking on the recent gains. The hourly chart shows the unwinding of the momentum and the importance of support at $1.3250near term. If $1.3250 were to be broken it would open $1.3160 and the more important medium term pivot level at $1.3060 again. However the initial support around $1.3280 is holding overnight and the bulls will still feel confident to push for further gains to retest yesterday’s high at $1.3375 and the next key resistance in the medium term range at $1.3470 in due course.
I continue to believe that this is an important time for Dollar/Yen and we are still no closer to knowing whether this is just another rally within the downtrend channel or will be a breakout of the long term bear phase. The top of the downtrend channel continues to come under pressure and the RSI is still around 60 where the previous rallies have failed. The resistance at 104.00 and up to 104.30 is growing now, whilst the 89 day moving average (at 104.79) which has been the basis of resistance on previous rallies is also a barrier. However, looking at the hourly chart I would lean towards selling into the rally, as there is a bearish divergence on the hourly MACD lines and RSI, whilst the bulls have lost the strong configuration which is now neutral at best. The support becomes key now. Yesterday’s low at 103.12 is an early indicator, but the support band between 102.80/103.00 is now key because losing this would complete a near term top pattern and imply between 130/150 pips of downside.
Gold
With the US on Labor Day holiday there was very little conviction to yesterday’s trading and it can almost be discounted for any serious signals. However the trading is consolidating the recovery of Thursday/Friday last week and the bulls will be feeling much better about themselves having ended the sequence of corrective candles. The momentum indicators picking up nicely is also an improvement with the Stochastics now rising. The improved outlook is confirmed on the hourly chart too with the configuration of the momentum indicators now far more positive and the minor little corrections being seen as a chance to buy. This means that a series of higher lows is now in place. The bulls will be hoping to build support above $1325 but if that is now possible then the first support to build above is $1315/16 which now protects the lows just above $1302. A push above the old pivot band of $1330 re-opens a test of $1341 which is now seen as a key resistance.
WTI Oil
There was significant volatility in the oil price yesterday as the two largest producers in the world, Russia and Saudi Arabia indicated they were happy to co-ordinate on production to ensure the “stability of the oil market… ensuring a stable level of investment in the long term.” There was a huge spike higher with a move to $46.50 but then a deep retracement. The market was higher on the day but it just shows how volatile the oil price could continue to be in the run up to the meeting of OPEC/Non-OPEC at the end of the month. The daily chart shows that the rally is unwinding the move from last week’s bear run but there is still much to be done. However, the big support is now in place at $43.00, whilst $44.05 will also be seen as a higher reaction low. The bulls will look to hold above a near term pivot at $44.65 today in an attempt to maintain yesterday’s gains. The chart also shows that there is a resistance of an old pivot around $46.35, meaning there is now a band of resistance at $46.35/$46.90 that is growing.
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