Market Overview
After a few days of dollar consolidation, Federal Reserve chair Janet Yellen stoked the fire in the belly of the dollar bulls once more yesterday. Yellen see that a rate hike would be appropriate “relatively soon”, whilst she also confirmed that she intends on serving her full term to 2018. Markets will now start to consider how many rate rises the Fed might now be able to fit in next year. Perhaps even the “dot plots” in the December FOMC will be believed now. This reassuring and arguably hawkish lean from Yellen has resulted in the US trade weighted Dollar Index surging through to a new 13 and a half year high as it burst clear of 100.5. The incredible recent run for the dollar priced against the euro and also the yen has taken on a new lease of life after beginning to look rather tired earlier in the week. The other angle is that Treasury yields have also taken on a next leg higher too. Rising yields and a rising dollar have generally helped to improve risk appetite and equity markets are also looking more positive once more.
Wall Street closed higher again with the S&P 500 +0.5% at 2187, whilst in Asia the Nikkei was also helped by renewed yen weakness to close +0.6% higher. European markets are positively biased this morning although not excessively. In forex, the dollar is king one again versus the major currencies, with only the Kiwi managing to hold up. The yen is the biggest underperformer again. Gold and silver has come under renewed selling pressure with the dollar strength and the oil price also lost gains yesterday after Yellen’s speech and is a percent lower today.
There have been a whole raft of Fed speakers giving their views this week and we finish off with three more today. James Bullard will be making more comments at 1030GMT but he has already well documented in his views this week. Bill Dudley is around again at 1430GMT so the market will probably be looking more at Esther George who was previously the outlier hawk calling for rate hikes and it will be interesting to hear just how hawkish she is now.
After a rather heavy week of economic data, traders have a fairly sedate end to the week on the economic calendar. Canadian CPI is at 1330GMT with +headline expected to increase to +1.5% (from +1.3%) but the core is expected to stick at +1.8%. Also of interest we will have a speech from ECB President Mario Draghi at 0830GMT and the Bundesbank President Jens Weidmann at 1030GMT.
Chart of the Day – DAX Xetra
The sharp rally on the DAX in the wake of the victory of President-elect Trump has again hit up against the resistance around 10,800 in the past few days and tailed off. It is interesting to see that the number of negative candles have been racking up in the past few days, whilst the momentum indicators are once more tailing off. The RSI is again failing around 60 which it has done on ever rally towards 10,800 in the past three months. Also the Stochastics are now beginning to turn lower for a sell signal. This does not bode well for the breakout above 10,800. The market has now formed an intriguing near term trading range between 10,575/10,800 as the consolidation of the past few days has developed. The hourly chart shows this range well, whilst the momentum indicators have also dropped away and a lower high has formed at 10,750. If the hourly RSI starts to drop consistently below 40 it would be a concern for the bulls, whilst a the MACD lines turning more negatively configured would also be a warning. A breach of 10,575 would imply a 220 tick top pattern (implied target 10,360) whilst the pivot band around 10,450 would be the likely first test. The reaction of the bulls today to the early gains will be interesting, with the 10,750 resistance in sight, however it would take a close above 10,827 (the October intraday high) to confirm an upside breakout. For now though the technicals point towards another corrective move first.
A ninth consecutive bearish candle was formed yesterday as the euro continues its spiral lower. There had been a time earlier in the week when there was a sign of a potential stalling of the selling pressure, however the strength of yesterday’s bear candle shows that there has been renewed vigour. The market has closed well clear of the previous key support at $1.0709 and now $1.0538 is the next key low in sight. That is the big December 2015 low (when the pair spiked higher following the ECB’s disappointing lack of further easing). The low is the critical multi-year low at $1.0456 from March 2015. The concern would be that the RSI is now clearly in massive sell-off mode. Consolidation around 27 on the RSI did not induce a rally but now it is accelerating down to 22 there is serious selling momentum, with the low in March 2015 hitting 15 before a rally kicked in, so there is precedent for further downside. Yesterday’s candle was yet another where the early gains were sold into leaving a further lower high. The hourly chart shows there is now resistance which has left resistance at $1.0665, then yesterday’s high at $1.0745.
Once more, the selling pressure that has beset the euro and the yen amidst the dollar strength has yet to discernibly impact on Cable. The market did move lower yesterday but considering the strength of the dollar, sterling has held up remarkably well. The market seems to just be drifting back to the near to medium term key breakout at $1.2330, and whilst the candles are negative, they are rather benign and not reflecting any volatility in the selling pressure. The momentum indicators have though deteriorated with the RSI back below 50 and the Stochastics falling away (to be expected with four consecutive bear candles). However, the market is still trading above the 21 day moving average (around $1.2360) which suggests the improvement has not been entirely scuppered yet. The hourly chart shows a string of mini higher lows at $1.2350 and $1.2380 which come above the $1.2330 neckline are also still intact, whilst hourly momentum indicators are reasonably neutral. A breach of $1.2330 would change the complexion of the chart, but for now the bulls hang on. Resistance is initially at $1.2505/$1.2515.
After spending much of the early part of the session looking susceptible to a consolidation or even correction, Dollar/Yen has power higher again. Boosted by a number of factors including yield differentials, in addition to what the market took as hawkish hints from Janet Yellen and a seemingly positive meeting between Japanese Prime Minister Abe with President-elect Trump, the dollar has strengthened and the yen weakened. A strong bull candle has been posted which has seen the market again bursting higher closer towards the next key resistance that is between 111.43 and 111.90 from the May and April highs this year. Momentum has once more surged higher towards 80 on the RSI. This is around where momentum tailed off in June 2015, however there is precedent for the RSI to push well above 80 (in December 2014) so there is still upside potential. The hourly chart shows more breakout resistance turning into support at 109.75, whilst the strength of the momentum on the hourly chart also points to further gains. There is now not a key near term low until 108.50.
Gold
With the renewed dollar strength induced by Janet Yellen’s testimony, gold has ended its period of consolidation with another break to the downside. There is now very serious pressure on the key support around $1200 which was posted during Q1 and Q2 this year. This support is now crucial to what would become a resumption of the long term bearish outlook as a confirmed breach would complete a huge top pattern that would imply significant further downside. After a brief consolidation, the momentum indicators have turned bearish once more and look concerning for the bulls. The hourly chart shows how the breakdown late yesterday evening has left minor resistance around $1219 whilst $1233 has taken on added importance. I have been an advocate of selling into strength for a while and this remains the strategy until sustainable support signals are formed. Below $1200 there is support at $1190, $1170 and then $1155.
WTI Oil
The bulls have hung on well despite the previous surprise EIA inventory build. The closer we get to the end of November (when the biannual OPEC meeting is held) the more we will see headline driven moves, however at the moment the strength of the dollar is a negative drag on oil. For now though the bulls will still be looking at the potential for a recovery which has not been entirely dismissed despite yesterday’s late selling pressure which breached the near term support at $45.00. The bulls will now be looking at the support at $44.30 as their buffer for the potential for a rally and whilst this remains intact the move is still viable. The late selling pressure below $45.00 now makes this a near term line in the sand today as the hourly momentum has deteriorated. Essentially the near term outlook is turning into a consolidation range now down from the resistance at $46.50. Consistent trading below $45.00 puts pressure on $44.30, a breach of which re-opens the low around $42.20.
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