Chinese Revival Needed

We can only wonder if the PBOC read the last precious metal weekly that we posted. We went at length to argue the importance of China in the global economy and how its central government need to do everything in its power to save its own survival.

“the Chinese government needs to do what it can to revive its economic powerhouse.”

“China is heavily reliant on positive economic investment into the country and as the 2nd largest economy – it is still growing and producing most of the stuff that we buy. Everything made in china is still important – the trump card for a positive trade balance and economic prosperity.”

One should not be surprise with the typical Chinese tactic in deploying economic changes in the dark. The global market was left in shock and awe in an illiquid summer trading – many have to reposition frantically. Initially the dollar was bought as a safe haven mentality kicks in – mind you even gold was playing along in the roller coaster ride. Commodities and commodity currencies all suffered the initial shock that they need to remain competitive as the Yuan devalue in a one off adjustment. This was followed by the bloodbath in the global stock market as companies that are heavily reliant (even those that are not) on Chinese market were dumped on the prospect of lower demand. Overall damage was only lessened on the 3rd day of devaluation as the market adjusted and priced in the danger poses by a slowing Chinese economy.

We have heard many times of how the economy was actually grinding to some sort of recovery (the financial media and gurus will have you think that we have recovered and the good times are back). Just look at the economic barometer such as demand for copper, oil, soft commodities etc – prices continue to head lower with the prospect of lower prices. Market expectation for lower prices comes from the prospect of oversupply and lack of demand in that industry. The reasons are simple enough – consumers are setting in the deflation mood and confidence level about the overall recovery is low.

No matter what many have said, the lack of real wage growth and low inflationary pressure has created lower demand for goods. Definition of back to normal is the concept of easy money and consumers who spend and spend (as they grow confident and have the necessary savings to do so). The extra stimulus and money printing programme has kept the economy afloat but the newly printed money is used mainly to pay off old debts and benefited a few. Lack of trickle-down effect is felt everywhere and the social economic imbalances may continue to stretch much longer.

Understandably, the global debt will and need to continue higher in the hope that it will “eventually” trickle-down to the rest of the economy. Central banks are fast running out of option and tools to revive the ailing global economy but the resistance must go on. It will not surprise us that during Miss Yellen tenure as the Fed chairwoman – that she will consider another quantitative easing AGAIN!

Dollar Technical Outlook

Going forward, the dollar was heavily weakened since many dollar bulls left questioning if Janet Yellen need to reconsider a September rate hike. Given past economic turmoil such as Greece – Miss Yellen was not shy at using that as an excuse to further delay a rate hike. Despite that, dollar bull remains intact and by far the most sought after currency. As discussed last week, the central banks that have the intention for a rate hike will continue to ascend in value against others that continue to ease.

It was indeed a triple top formation as the dollar bull look exhausted on the weekly chart. Yuan devaluation has not helped to break above the key technical level – bulls gave up and retested the 38.2% Fib retracement level on the overall move since May 2015. Dollar have had an impressive run higher and made no mistake that it could still try higher. However, the short term prospect of a deeper pullback carries a higher probability. All will depend on next week Fed members speeches and FOMC statement to give the market a glimpse of a rather delayed view from the Fed.

We may have buy the rumours and sell the fact scenario again – meaning that we could see the dollar kick off on a strong foot next week but a sell off could play out here. The bearish candlestick on the weekly is so dominant but we will wait for a retracement first to 12020 – 12040 levels before we see further selling to target the 50% Fib retracement where strong support are seen at 11900 area (see the weekly chart black arrow). Any hint of a September rate hike will certainly cause an exodus of dollar bulls running out for the exit.

“We will continue to monitor the daily chart as the RSI divergence has given a clear signal that last week push higher was very much just a bull trap. Should the weakness prevail as we envisage, then the 20 weekly ma is the target which confluence with the bottom of the megaphone pattern.”

Gold Technical Outlook

The short term bottom is in and it is for the first green shoot after weeks of selling. The weekly RSI has perked up higher after it found the base and seasonality demand is at play. This remains to be a dead cat bounce and one has to remain wary that the revival is a short one. In the meantime, gold could capitalise with building a strong case to test 1140 levels in the coming weeks. A 50% retracement will target 1137 while layers of resistance starts to kick in from 1150 onwards.

“Weekly chart show a potential inside day pattern and only a clear break above 1105 will give the bulls some rooms to test higher.”

SilverTechnical Outlook

Silver put in a positive week after closing above the 20 dma that is the signal to enter long. In the short term, we see pullback to retest for support at the breakout zone and potentially at the 20 dma again. Only a close below the 20 dma will changed our view – but this pullback could prove to be a buying opportunity. At the start of next week, we envisage weakness in silver after putting in a double top on the daily chart.

Platinum Technical Outlook

As mentioned last week, the short term bottom is in – double bottom here and the dollar weakness has allowed Platinum prices to recover. Looking at the weekly chart, there is a possible fractal at play and price action met strong resistance at previous down trend channel. Weekly RSI breached previous low and at extreme oversold levels. There is a potential double bottom after weeks of selling since the start of May 2015 – is this the end of the selling rout? We could be in one if we are to repeat 2014 price action that seems to suggest that a period of consolidation sets in but price will ping pong to retest the low of 944. Going forward, a break below 944 could spell further trouble. As long as it holds, we look to play within the range of the box.

Palladium Technical Outlook

Palladium price action played out as we envisaged and the weekly chart is showing a bullish divergence on the RSI with a potential double bottom formation. A short term bounce is expected initially to target 634 – 663 levels. The long order we placed missed out but any pullback on Palladium is a buy on the premise that we could see short covering.

“A bounce to 20 WMA will be the minimum target given that it has disconnected ever since 1stof June! The daily price action has not close above the 20 ma but RSI continue to diverge – a tell-tale sign that a bottom is forming and we are looking for a dead cat bounce.”

Weekly

This article is written according to the author’s views and by no means indicates investment purpose. Opinions expressed at Sharps Pixley Ltd are those of the individual authors and do not necessarily represent the opinion of Sharps Pixley Ltd or its management, shareholders, affiliates and subsidiaries. Sharps Pixley Ltd has not verified the accuracy of any claim or statement made by any independent writer and is reserved as their own and Sharps Pixley Ltd is not accountable for their input. Any opinions, research, analysis, prices or other information contained on this website, by Sharps Pixley Ltd, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. Sharps Pixley Ltd will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The data contained on this website is not necessarily real-time or accurate.