Market Overview
The safe haven plays are once more in demand, gaining ground as politics again looks to play a key role in market moves. With concern over political risk in the Eurozone rising, surrounding the French Presidential election, the yields on French OATs have pulled sharply higher. This is putting pressure on the euro which is beginning to weaken against the US dollar. However the desire for safe havens is outweighing the positive impact on the US dollar, with gold and the yen strengthening, whilst Treasury yields are falling (another reason why the dollar is not able to pull too much strength). Key barometers of risk appetite (even my chart of the day, EUR/JPY) are showing the strains of this. Equity markets fell cautiously yesterday and they are looking cautiously lower again today, especially with the safe haven bid still in play.
Wall Street closed slightly lower yesterday with the S&P 500 -0.2% at 2293 with the Nikkei in Asia -0.4% on the yen strength. In forex trading, the euro is again under pressure, whilst the dollar has started the day strongly again, but if Treasury yields continue lower it will be interesting to see if the rally can last. The Aussie is also in focus after the Reserve Bank of Australia held rates steady at 1.50% and suggested that the rate is likely to be held steady for the coming months. This comes with the RBA confident of around 3% growth and inflation pulling back higher towards its 2% target. The statement also commented on central banks no longer having an expectation of further easing. This certainly seems to be the RBA moving away from easier monetary policy and that although a rate hike may not be immediately on the horizon, the next move seems more likely to be higher. Gold and silver are slightly down on the dollar bounce today with oil so far supported.
With all of Donald Trump’s focus on how the US is performing against its trading partners due to currency devaluation abroad, there will be added focus on the US trade balance in the coming months. Trade for the final complete month of Obama’s presidency (December) is announced at 1330GMT and is expected to show -$45.0bn which would be a mild improvement from last month’s -$45.2bn. The US JOLTS jobs openings for December are at 1500GMT and are expected to improve slightly to 5.56m (from 5.52m in November). Watch also for the quit rate which at pre-recession highs around 3 million is a sign of strength in the labor market and means workers have more leverage to demand higher wages.
Chart of the Day – EUR/JPY
The market is moving more into safe havens and the euro has come under pressure (from increased concern over Eurozone political risks surrounding the French election). This has all added up to pressure on EUR/JPY which has broken below a key support yesterday. For the past two months the pair has been consolidating sideways between 120.50/124.10, however the market has now completed a downside break on a close below 120.50, with the concern exacerbated when looking at the recent deterioration in the momentum indicators. The RSI has been in decline for most of the range, as have the MACD lines which yesterday fell below neutral. Confirmation of a breakdown is coming with (RSI below 40 and Stochastics below 20), the bears are gathering momentum now. With the increasingly negative configuration on daily momentum backed by deterioration on the hourly chart, rallies are seen as a chance to sell and the hourly chart shows a “sell-zone” today between 120.00/120.50, with a near term pivot at 121.20 also resistance. A two day close below 120.50 would confirm a top pattern and imply 280 pips of downside on a minimum target basis, towards 117.70. Above 121.70 improves the outlook with the corrective configuration in control until a move above 122.50.
The euro is coming under increasing corrective pressure as the uptrend in place since the turn of the year is in the process of being broken. Yesterday, yet again there was another intraday move below the uptrend only for a late rally to close just at the trend line, however, the bears have again taken hold today and the market is drifting lower. This is now beginning to have a negative impact on the momentum indicators which are in the process of forming a range of negative signals. The Stochastics have completed a bear divergence and a sell signal is confirming. A similar crossover sell signal is also being seen on the MACD lines, whilst the RSI is towards a 4 week low and a move below 50 would be negative. The daily chart shows the first key reaction low at $1.0617 but a loss of $1.0577 would confirm a bearish breakdown. The hourly chart shows a loss of the support around $1.0710 , the market trading below all the falling moving averages and bearish configuration on momentum. Use intraday rallies to sell with the initial resistance band $1.0710/$1.0755.
The market continues to drift back as it tests the support around $1.2430, but for now the breakout support remains largely intact. This comes with the negative candles completed in the past 3 sessions, but the moves have been relatively contained, with the importance of the support of this old breakout level clearly an issue for the market. There has been a couple of marginal intraday breaches of $1.2430 but nothing that would confirm. Despite this though there is a deterioration on the momentum indicators underway, with the Stochastics giving a confirmed near term sell signal, and the MACD lines on the brink. The hourly chart shows a run of lower highs and lower lows, with negatively configured momentum adding the pressure. There is initial resistance $1.2490/$1.2500 with a near term pivot at $1.2600 adding to resistance. A closing breach of $1.2430 opens the downside in the range with the next real support at $1.2250.
The market has been testing the bottom of the 112.50/115.60 range for several days. Intraday breaches could not find the closing break, however the decisive move cam yesterday with a drop below 112.00 and a close at 111.70. This completed a trading range breakdown and implies a potential 310 pips of downside in the coming weeks (towards 109.40). The momentum indicators are all negatively configured and suggest that rallies will increasingly be sold into. The next support is at 111.30 which was a reaction low within the late 2016 bull run and also an old key breakout. The resistance now comes in between 112.00/112.50 with the hourly chart showing a downtrend that is consistently being sold into as momentum unwinds. The key resistance near term does not come in until 113.45.
Gold
The market has been positioning for an upside break for a few days and with the decisive and strong bull candle closing well clear of the $1220 breakout yesterday, the bulls have re-opened the upside. The initial resistance at $1233 has already been broken which means that $1241/$1250 is now the next target zone. Taken as a bullish breakout of a trading range between $1180/$1220, the bulls will be targeting $40 of upside in the coming weeks. The momentum indicators are positively configured but it will be interesting to see how the RSI moves now, as 70 has limited the bulls for the past year. The hourly chart shows strong positioning and momentum, with corrections being bought into. There is a near term pivot support at $1225 meaning that $1220/$1225 is now a near term buy zone.
Once more it seems as though the bulls just cannot find the traction to push on towards the highs of the two month trading range. The market continues to trade between the lows around $50 that were hit in early December and the key resistance at $55.25 of early January. However, whilst there is a minor positive bias within this range (trading above the pivot around $52.00), the bulls just cannot find the upside impetus. Momentum indicators are neutrally configured, with the RSI unable to get back above 60 and the MACD lines are plateauing. The Bollinger Bands are almost entirely flat (between $51.00/$54.40) with little sign of a decisive upside break. That would suggest, continuing to play the range and anything in the $54.00/$55.25 range will be limiting the upside and profit-takers will re-appear. The last three daily candles have upper shadows above $54.00 and small candlestick bodies, indicative of a struggle for the bulls. The hourly chart has broken a mini consolidation of the past few days and implies that $52.00 will now be tested again.
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