Market Overview
As the new trading week begins, market sentiment has started relatively settled but in a more positive mind-frame today with oil trading higher. The rally on the dollar has just stalled a touch in the early moves, with Treasury yields flat to slightly lower on the 2 year and 10 year maturities.
However, it seems to be a more positive start to trading for the oil price which is helping sentiment, after suggestions that there is a movement towards implementing the OPEC production cuts. Furthermore, Russian President Putin also suggested that there are few hurdles to reaching an agreement on production levels. This has helped to pull the price back higher again.
The positive sentiment is seen across forex majors with the yen remaining weak, whilst the Canadian loonie is outperforming the US dollar, another signal of a positive impact of oil.
Equity markets are supported today despite a mildly negative close to Wall Street on Friday. The Nikkei has closed 0.7% higher (further yen weakness helps this), whilst European markets are mixed to slightly higher. In forex, the dollar is slightly weaker, with the euro the best performing major. The dollar weakness is helping to support gold and silver, whilst oil is also a beneficiary of this, up over 1%.
There is very little on the economic calendar today, so attention will be on ECB President Mario Draghi who testifies before the European Parliament at 1600GMT.
Chart of the Day – NZD/USD
The kiwi has outperformed the Aussie in the past week (the Aussie has been panned), but this could go one of two ways. Is this just storing up downside potential for a breakdown on the kiwi this week? The Aussie has broken through a series of key supports against the dollar, whilst, for the Kiwi, support at $0.6960 from the June/July lows as yet remains intact. However, the momentum indicators have just taken a turn for the worse, whilst the RSI still has further downside potential.
There is also a band of overhead supply from the key lows between $0.0.7030/$0.7100 that is likely to prevent any technical rally getting too far this week. The break below the key support of the 144 day moving average and also the old key uptrend resistance both come in around $0.7120 which is just above the resistance at $0.7110 from Wednesday/Thursday last week. Hourly momentum configuration suggests that rallies are still being used as a chance to sell. Below $0.6960 opens $0.6880 and $0.6820.
In any market, ten consecutive bearish closes is a rare event, but in a market like EUR/USD it is an extreme situation. Support after support has been broken and the next key support, at $1.0538 from the December 2015 low is next in the firing line and there is little reason not to think it will not be tested. The early candle reaction has been higher this morning, but this situation has been a feature of the past few days where early gains get sold into during the US session.
The daily RSI is at 23 which is certainly stretched (and is the lowest since March 2015) whilst Stochastics and MACD lines are also negatively configured. The hourly chart momentum indicators suggest that rallies continue to be seen as a chance to sell, with the initial resistance band $1.0642/$1.0663, with the overhead supply at $1.0710. Despite the apparently stretched run, I remain bearish below $1.0745.
It has seemed as though Sterling was holding up fairly well in the face of significant dollar strength in the past couple of weeks, with more of a slight negative drift than any precipitous decline. However Friday’s candle was far more aggressive and the move breached the neckline support at $1.2330. The Stochastics have dropped back into bearish configuration and the RSI is back to falling below 50. However the failure to close back below $1.2330 means that the bears are not entirely in control quite yet and this will be the aim today to prevent this from happening.
The market is though looking far more corrective now and on the hourly chart the configuration of the momentum is negative whilst there is a succession of lower highs. There is now resistance of the overhead supply around $1.2380 whilst the latest reaction high was from Friday at $1.2435. A move back below $1.2297 (Friday’s low) would simply continue the track lower, with next support around $1.2240 and then $1.2200.
With another strong bull candle completed on Friday the pair is closing in on the next key overhead resistance band at 111.43/111.90. The momentum for the move remains very strong and despite the RSI sitting around 80 (which is historically stretched) in a bull market, dollar/yen has proved previously that the RSI can move well into the low to mid-80s. The hourly chart also shows that the outlook remains strong with the moving averages all rising strongly and the RSI and Stochastics still strong.
The feature that the bulls will be especially impressed by is that the old breakouts have been used as support for the next leg higher on the past two slight corrective moves. The support at 109.75 from Friday now becomes the key near term support. I am though still a cautious bull, and believe that long positions should be closely monitored. There is a lot of stretched momentum building up and this could still look to unwind. Watch the momentum indicators on the hourly for bear divergences and the support at 109.75. For now I am happy to continue on the long side, but with caution.
Gold
The selling pressure on gold in the wake of the latest dollar strength is putting increasing pressure on the key support around $1200. The negative configuration of momentum indicators certainly suggests that this pressure remains on, with the RSI hovering around 30 and the Stochastics negatively configured and in decline. Fridays low at $1203.50 is unlikely to be the bottom, even though today’s candle has reacted to $10 off the low.
The hourly chart shows the momentum indicators are consistently negatively configured and there is a band of resistance $1211/$1219 initially, whilst $1233 is increasingly important on a near term perspective. I still feel that there is room for further pressure on $1200, below which would open $1190 and around $1170.
WTI Oil
The strong dollar has been a drag on the oil price in the past few days, with the outlook for WTI increasingly mixed near term. A series of small candlestick bodies has reflected the uncertainty of a range play, whilst the failure at the medium term pivot level of $46.50 has prevented a recovery playing out. Perhaps though the bulls will take momentum from the positive candle posted on Friday, which has been followed up today with early gains.
The momentum indicators are also beginning to react more positively as the Stochastics have turned higher and the MACD lines are also looking to cross positively. It is the resistance of the old pivot at $46.50 that needs to be breached to really gain the upside traction now, and this will be the test. The hourly chart shows that the momentum into the close on Friday needs to be continued to prevent another failure and corrective slide back towards the support now in place at $44.55. A close above $46.50 re-opens the upside with $47.75 and $48.75 the subsequent resistance.
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