Contributed By: DailyFx
“5 waves down from the high are visible, which confirms that the larger trend is down…the corrective nature of the rally from the low confirms the larger bearish bias. The AUDUSD reversed at its 50% retracement so a secondary top is probably in place.” The AUDUSD is also breaking its channel (like the EURUSD) and a break of 9650 would expose 9500 (100% extension).
Contributed By: DailyFx
British Pound Fortunes Tied To Solution for Ireland
Fundamental Forecast for British Pound: Bearish
* BoE Minutes Reveal Three Way Split
* Jobless Claims Unexpectedly Fell by 3.7K in October
* UK Inflation Rises to 3.2% As Fuel Costs Gain
The British Pound closely tracked the issues in Ireland on the week with the ongoing saga expected to be a driver of price action going forward, as U.K. banks have significant exposure to their indebted neighbor. Irish officials are in talks with the EU and IMF on a potential bailout package similar to what was extended to Greece. However, a point of contention remains the country’s low business tax which has helped attract foreign investment in the country. Any aid will assuredly come with strict austerity measures to help bring down the bloated deficit and any resistance could threaten the potential for a resolution. The prospect of a solution helped stem sterling losses but signs of a road block have brought the currency back under pressure.
Dovish comments from BoE governor King sparked a mid-week sell off as the lead policy maker derailed building interest rate expectations by stating that "We could do further quantitative easing if that turned out to be necessary, further asset purchases. We see that as a normal instrument of monetary policy." Inflation rising to 3.2% in October improved the hawkish case that has been developing since the central bank didn’t follow its U.S. counterpart down the path of quantitative easing. However, the minutes from the MPC’s last policy meeting showed the tally remained unchanged at 7-1-1 as the majority continues to be willing to sit on the sidelines until price growth shows signs of slowing before adding stimulus. Indeed, Deputy Governor Paul Tucker recently restated the monetary authority’s belief that inflation will return below their 2.0% target as existing slack in the economy remains. Despite the dovish talk positive fundamentals has the outlook for yields at their highest since August as improving retail sales and employment data provide a counter argument.
The upcoming economic docket pales in comparison to the past week with only the second reading of 3Q GDP and BBA loans for home purchase on tap. Therefore, we may see price action continue to be at the mercy of broader trends with the issues in Ireland the biggest influence. A resolution could provide sterling support but sign that talks are meandering toward a disappointing end could sink the pound. A second story line that must be watched is China’s efforts to curb domestic growth as a dimming outlook for the global economy could spark a flight to safety which could see the cable lose ground to the greenback. Nevertheless, a bullish case can also be made on the back of a aid package for Ireland and the building case for higher yields which would be furthered by a upward revision in growth.
Contributed By: DailyFx
The CADJPY has worked its way into an ascending channel which has remained intact since the end of October. We entered into a long position at 80.86as the pair broke above its falling channel that lasted nearly seven months. I believe this pair has a great risk to reward level. A break and a close above 82.50 will validate my bullish bias. Looking ahead, we will shift our focus to the Canadian interest rate decision. As of late, economists are forecasting the annualized inflation rate to rise to 2.2 percent in October from 1.9 percent the month prior. In turn, this report may be the catalyst needed for the CAD to push higher. At the same time, holding onto out long British pound positions despite Irish woes proved well as the currency rallied yesterday amid speculation of an Irish bailout. Though I favor additional upside in the GBPJPY, I will take profits at this level and look to re-enter if the pair manages to break and close above the 200-day moving average. On the other hand, I will remain long GBPUSD as price action managed to break above the descending channel on the 4 hour chart. However, I will take off half of my positions as the slow stochastic indicator looks poised to cross back over to the downside, hinting at a slight pull back.
Nonetheless, entering into an AUDCAD short may be in the horizon as the pair has broken below the rising channel on the 4 hour chart. Taking a look at the daily chart, a close below 0.995 may validate additional downside risks towards the 0.97 area. Interest rate expectations in Canada are 16.0 percent versus 3.0 percent in Australia. Good luck trading!!!
Contributed By: DailyFx
Europe Session Key Developments
* Stocks Edge lower as China Increases Reserve Requirements
* 14 of the 18 Western European Benchmark Indexes Close Lower
European Stocks Close Lower Amid Debt Concerns and Chinese Economic Policy
European markets closed lower as investors waited on whether Ireland would accept a bailout and China increased reserve requirements in order to cool inflation. When a central bank decides to increase the reserves a bank must hold, they are essentially tightening credit and slowing the money multiplier process, thereby pursuing contractionary monetary policy. The effect of this is a decreased rate of inflation at the cost of slower economic growth. Overall, many investors feel that the economic picture remains uncertain as European debt concerns are still weighing down markets. National benchmark gauges declined in 14 of the 18 western European markets, as the FTSE 100 experienced the largest decline among the major indexes.
FTSE 100 / 5,732.83 / -35.88 / -0.62%
The FTSE 100 experienced the largest decline among the major western European gauges. Lloyds Banking Group Plc and HSBC Holdings Plc fell over one and a half percent. European banking shares dropped 2.3 percent today, the worst performance among 19 industry groups in the Stoxx Europe 600 index. Rio Tinto, the world’s third-largest mining company, fell 2.3 percent, while BHP Billiton ltd dropped 2.6 percent. Basic resource shares were the second largest decliners in the Stoxx Europe 600. Hammerson fell 2 percent as Morgan Stanley downgraded the stock to “equal weight” from “overweight.”
CAC 40 / 3,860.16 / -7.81 / -0.20%
The CAC 40 closed lower at the end of the trading session on Friday. Essilor International SA fell 0.9 percent, ending a two-day advance. The company was cut to “underperform” from “neutral” at Exane BNP Paribas. Lagardere SCA advanced 0.6 percent as the company may surpass its upgraded guidance for the year thanks to a stronger advertising market. Technicolor gained 2.6 percent, the largest advance in more than a month. The production and distribution services company announced a court rejected an appeal to its restructuring plan.
DAX / 6,843.55 / +11.44 / +0.17%
The benchmark DAX managed to be one of the few major European indexes to close in the green on Friday. Bayer jumped 2.2 percent after Germany’s largest drug and chemical maker announced it aims to cut about 800 million Euro a year in expenses. Volkswagen preferred shares surged 3 percent. The 20-member supervisory board approved the outlays for plants, vehicles, and developing the carmaker’s nine brands at a meeting today in German. Henkel AG rose 2.4 percent as the company was upgraded to “overweight” from “equal weight” at Barclays Plc.
IBEX 35 / 10,271.70 / -53.60 / -0.52%
The IBEX 35 closed lower as 7 out of 10 sectors retreated at the end of the week. The benchmark index closed lower for the first time in three days. Banco Bilbao Vizcaya Argentaria SA fell 1 percent to 8.26 Euros, the second drop this week. Spain’s second-largest bank today ends a 5.06 billion-Euro rights offering. Ferrovial SA advanced 1.6 percent, the stock’s third gain this week. The UK competition regulator announced it may reconsider its ruling that the company must sell three airports after the UK government cancel plans to build a third runway at Heathrow.
S&P/MIB / 21,385.45 / -95.92 / -0.45%
Italian equities lost 0.8 percent for the day and 0.6 percent for the week. Banca Popolare di Milano Scrl declined 2.4 percent, retreating from a 3.2 percent gain yesterday. The Milan-based cooperative bank was cute to sell from hold at UnicreditSpA. Lottomatica SpA, Italy’s largest lottery company, advanced 2.5 percent to 10.5 Euros, leading gains in the FTSE MIB.
Contributed By: DailyFx
U.S. Session Key Developments
* Investors Optimistic About Ireland Bailout
* China Raises Reserve Requirement for Second Straight Week
Markets Close Higher Amid Optimism over Potential Bailout Package
U.S. Markets closed higher at the end of the week as investors became more optimistic about a bailout for Ireland. However, the markets were kept from surging after China’s move to curb inflation. Friday, China raised its banks’ reserve requirements for the second time in 2 weeks. When a country requires banks to hold more cash in their reserves, banks will have to lend less money in order to meet the new standards. The move is expected to help curb inflation at the cost of some economic growth. Overall, markets plunged this week amid concern that the policy in China could cut demand for US goods and commodities. The markets managed to close higher after statements from Irish Prime Minister Cowen, who announced the second day of talks on a possible aid package is going well.
DJIA 30 / 11,203.55 / +22.32 / +0.20%
The DJIA closed slightly higher at the end of the trading session on Friday. Walt Disney and Boeing were among the Dow’s worst performers and experienced 1.8 and 1.6 percent declines, respectively. Hewlett-Packard advanced 1.6 percent ahead of its fourth quarter earnings report Monday.
S&P 500 / 1,199.73 / +3.04 / +0.25%
The S&P 500 also closed flat as investors were uncertain how to balance improved European outlook with the contractionary Chinese monetary policy. Among stocks in focus, AnnTaylor Stores surged 8.5 percent. The women’s apparel retailer reported fiscal third quarter profits that substantially outpaced expectations. The company also boosted its sales target for the year. Foot Locker climbed 12 percent after announcing better-than-expected profit in the fiscal third quarter as its comparable sales climbed and gross margin imporved. General Motors gave back some of yesterday’s gain, as the stock fell 0.3 percent. GM surged yesterday after the auto company returned to the public market.
NASDAQ / 2,518.12 / +3.72 / +0.15%
7 out of 10 sectors closed in the black Friday for the NASDAQ. The US benchmark gauge experienced the smallest advance among the three major indexes. Oil & Gas and Basic Materials led the index with 1.10 and 0.63 percent gains, respectively.
Contributed By: DailyFx
EUR/JPY:The market has done a very good job of holding above the daily Ichimoku cloud to suggest that we could be on the verge of a material shift in the structure in favor of significant upside over the medium and longer-term. Daily studies are however in the process of consolidating, so the preferred strategy is to look to buy into dips rather than on upside breaks. Ultimately, only a close back below 110.00 would put the pressure back on the downside.
Contributed By: DailyFx
North American Commodity Update
Commodities - Energy
Where Risk Trends Pull out of its Dive, Crude Maintains its Tumble
Crude Oil (LS Nymex) - $80.44 // -$1.90 // -2.31%
Though broader risk appetite trends were able to level off through US trading hours Wednesday, US oil maintained its tumble. This decline marked the fourth consecutive decline (fifth if Thursday’s unchanged performance is counted) and is thereby matches the worst performance the commodity has suffered since the series of declines through August 24th. The extension of this bearish phase is a combination of both fundamental and sentiment-based factors; but technical traders have no doubt taken note of the session’s low. Looking back at historical price action, the $80 figure besides representing an easily identifiable, even level is also a well-worn support/technical level and represents the mid-point of the September to December advance. So, while the technical trend channel of this period has indeed been breached, there is still meaningful support and the market has already retraced half of the previous two months’ advance.
For fundamental guidance on the day, we saw a shift away from risk appetite trends to the more tangible macroeconomic drivers. Looking at investor sentiment in fact, we see that the S&P 500 (a good, basic barometer for the level of optimism) was little moved through Wednesday’s session just a day after marking a critical shift in trend. This change in the backdrop reflect a market that is reluctant to unwind otherwise profitable positions and are therefore waiting to see the level of contagion financial problems in the US, China and especially Europe will have. In the meantime, the demand/supply balance behind oil’s fundamental value was tipped by a few big ticket developments. In Asia, China’s Premier followed up on his vow to fight inflation with a more refined effort to put temporary price controls on “important daily necessities.” This is a more elegant solution than simply vowing to put in inflation measures; but the effect on growth will likely be the same. What’s more, energy commodities can be grouped under necessities. Another indicator to note from China was the quarterly consumer confidence survey which dropped for the first time in six quarters. Moving forward to the US session, the lowest reading on core inflation on record warns of a slowing economy though does support stimulus efforts. Something to take note of for future concerns, October housing starts plunged 11.7 percent to its second lowest levelon record. Depressed activity, growing foreclosures and overleveraged real-estate derivatives could prove a new crisis.
From macro concerns to energy market-specific issues, we see that there was a big miss on the Department of Energy crude figures. Instead of the no change expected by economists, the API figures (which showed the biggest plunge since September 2008) were more reasonable forecasters with a 2 percent drop in inventories equivalent to 7.286 million barrels. On the futures market, the December contract is soon to expire; and we have seen activity roll out to the January contract – which reported a 52 percent jump in volume to its own record 341,921 contracts.
Crude Futures Chart (Daily)
Commodities - Metals
Gold Little Moved After Critical Break as Investors Wait for the Next Shoe to Drop
Spot Gold - $1,336.00 // -$3.70 // -0.28%
Though it would put in for a fourth consecutive loss, gold was still looking at a far more reserved decline through Wednesday’s close. This tempered pace fits both a fundamental pause from the speculative ranks and a meaningful technical backdrop. For guidance on the supply and demand course, the ‘alternative asset’ value for the metal was little changed as other gauges for sentiment trends were similarly little changed for the day. From price action, the break of the three-and-a-half month rising trend channel yesterday doesn’t mean the market is in free fall. The past month, the metal has developed a frequented level of support around 1,320 and there is still a range of short-term term rising trendlines to fall back on.
Yet, despite the technical levels that exist, fundamental and sentiment concerns can easily drive this market to resume its plunge or otherwise completely reverse the losses of the past week. There are many general financial and economic concerns that quickly puts the metal’s safe haven appeal and alternative asset value back to work. European developments are still at the forefront. However, with Ireland’s decision to not ask for financial aid at the monthly EU meeting, the region is floating in limbo. Nevertheless, EU, IMF and ECB members are scheduled to travel to Ireland and comb the nation’s finances to see if its banking system can stand up by itself. A passing or failing grade will be delivered soon. In the meantime, clearing housings for investors that are trading Ireland’s debt are boosting margin and there is concern that support for Greece’s bailout program is disintegrating. State-side, the US saw inflation trends cool to the lowest level on records going back half a century. This curbs the appeal of gold as an inflation hedge on the one hand but confirms the devaluing effects of Fed stimulus on the other hand. And, in Asia, investors are waiting to see what measures China will take towards cooling rampant inflation. This could curb speculative turnover globally and lower the risk of financial crisis from this particular region.
In addition to the big, intangible themes, we can see there is still a supply and demand influence on price. The World Gold Council released its 3Q market outlook with projections for demand growing through jewelry use, institutions, central banks and industrial. At the same time, the supply trend is also seen rising in the months ahead. One highlight for demand however shows India’s imports have through the first three quarters already overtook the total consumption of 2009 at 624 tons. Meanwhile, total ETF demand was little changed for the day.
Spot Silver - $26.17 // $0.53 // 2.07%
Wednesday’s performance for silver was essentially a mirror of the previous day. There was little progress made as volume on the active December contract dropped to its lowest level since November 2nd. Momentum has slowed on this metal’s decline for a number of days; yet it is still early to say whether this is simply a reduction in speculative interests after the increase in margin by the CME or a shift back towards optimism.
Spot Gold Chart (Daily)
Contributed By: DailyFx
Retail sales in Great Britain are expected to rise 0.4 percent in October after falling 0.2 percent the month prior. At the same time, sales excluding auto fuel are estimated to rise 0.2 percent during the same period. Indeed, this may be the last push higher heading into the Christmas season. A rise in tomorrow’s figures will be the first increase since July of this year where the National Statistics in London said that sales rose 0.9 percent. I expect non specialized store sales to extend September’s advance, while clothing and footwear sales will likely reverse last month’s decline.
In the upcoming months, retail sales are expected to come back under pressure as higher value added taxes will weigh on household spending. These measures are estimated to begin in January. At the same time the massive spending cuts recently announced by the government will also put downward pressure on retail sales. The fiscal tightening measures proposed by Chancellor George Osborne marks the largest cuts in decades, and will in turn weigh on growth. All in all, a reading exceeding expectations will bode well for the British pound, but the advance may be short lived as sales and overall growth in the region will likely come back under pressure in 2011 amid tough austerity measures by the government in order to battle its high budget debt. However, a disappointing result could push the pound lower and lead to a key reversal in the GBPUSD.
GBPUSD Daily Chart
Charts Created Using Intellicharts – Prepared by Michael Wright
GBPUSD: The pair has extended its two day decline and is now testing the rising trend line dating back to the middle of May. Failure to break back below this level of support may lead the pair back towards the 1.59 area. However, yesterday’s drop below the key 1.60 level is of great concern as the dollar index has worked its way into a tight ascending channel on the daily chart. Unless the greenback buckles, I do not rule out a reversal in the GBPUSD in the near term.
Contributed By: DailyFx
* Japanese Yen: Weakens Across the Board
* British Pound: Jobless Claims Fall For First Time Since July
* Euro: Holds Relative Flat on Fears Surrounding Debt Crisis
* U.S. Dollar: Consumer Prices, Housing Starts on Tap
The British Pound rallied to a high of 1.5936 on Wednesday as the economic docket reinforced an improved outlook for the U.K., but fears surrounding the European debt crisis may continue to bear down on the exchange rate as the risks for contagion intensifies. A report by the U.K. Office for National Statistics showed claims for unemployment benefits unexpectedly slipped 3.7K in October to mark the first decline July, while average weekly earnings including bonuses increased 2.0% during the three-months through September, which was largely in-line with expectations. As the GBP/USD pares the overnight advance ahead of the North American trade, we should see the pair find near-term support around the 50-Day SMA at 1.5838 as it maintains the upward trend from May, but a shift in market sentiment could lead the pound-dollar to weaken further throughout the week as European policy makers struggle to restore investor confidence.
Nevertheless, the Bank of England policy meeting minutes showed the MPC voted 7-1-1 to maintain its current policy in November, with board member Andrew Sentance pushing for a 25bp rate hike, while Adam Posen pressed the central bank to expand quantitative easing by another GBP 250B given the ongoing slack within the real economy. The BoE reiterated that it remains “ready to adjust policy in either direction” as the fundamental outlook remains clouded with uncertainties, and saw a greater risk for inflation as policy makers expect price growth to hold above target throughout 2011. As a result, Mr. Sentance argued that the recent developments strengthens the case to start normalizing monetary as the recovery gradually gathers pace, while Mr. Posen saw increased downside risk for growth as the new coalition in the U.K. tightens fiscal policy in order to balance the budget deficit. As the majority of the BoE maintains a wait-and-see approach, the central bank is likely to keep the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B throughout the remainder of the year, but there could be a growing split within the MPC as inflation continues to hold above the government’s 3% limit for inflation. According, we are likely to see interest rate expectations play a greater role in driving future price action for the GBP/USD, and the central bank may look to adjust monetary policy in the beginning of the following year as the
Policy makers in Europe tried to talk down the fears surrounding the European debt crisis as the governments operating under the fixed-exchange rate system struggle to address the root of its problems, but the euro showed little reaction to the efforts as it held a narrow range throughout the overnight trade. As a result, we are likely to see the single-currency hold steady throughout the day, but increased fears of contagion could drag on the exchange rate throughout the day and lead the EUR/USD to fall back towards the August high at 1.3333. Meanwhile, European Central Bank board member Guy Quaden said policy makers should “avoid restrictive monetary policies and ban protectionist attitudes” as the global recovery remains “fragile,” and continued to see a risk for an “uneven” recovery during an interview with a Belgian newspaper. As the European financial system remains weak, with the debt crisis intensifying, we are likely to see the Governing Council support the economy throughout the remainder of the year, but speculation surrounding the outlook for monetary policy is likely to have a greater impact in driving price action for the euro as the central bank plans to withdraw its emergency measures in 2011.
U.S. dollar price action was mixed overnight, with the USD/JPY extending the rally from the previous day to reach a high of 83.54, and the greenback could face increased volatility going into the North American trade as the economic docket is expected to reinforce a mixed outlook for the U.S. Consumer prices in the world’s largest economy is forecasted to expand at an annual pace of 1.3% in October after expanding 1.1% in the previous month, while housing starts are projected to contract 2.0% during the same period after rising 0.3% in September. At the same time, building permits are expected to jump 3.9% in October following the 5.6% contraction in the previous month, and the batch of mixed data could produce choppy price action in the dollar as investors weigh the outlook for growth and inflation.
Contributed By: DailyFx
The day we have long been awaiting is finally upon us. Investor optimism has finally crumpled under its own weight. This looks like a great opportunity to short equities, commodities and all other things tied to risk (given good trade setup and money management of course). That said, it is interesting to note that I am only in one position at the moment - USDJPY. I have been waiting for this shift in underlying sentiment; and opportunities in these other asset classes look good for entry now. However, for the currency market, the issue is a little different. It is more about timing. The final crack in risk trends was no doubt helped along but the build up of issues over the past few weeks (the downsides of the need for US stimulus, Chinese efforts to slow growth, increased margin requirements on multiple assets, G20 agreements for emerging markets to curb hot capital inflows and of course European financial troubles). However, the big topic of the day - the rapid deterioration of Irish and other EU members' financial health - has not found definitive resolution. Ireland has not yet asked for a bailout. We could still see a potential relief rally for risk trends and more importantly the euro on such a step; but that probably won't erase the turn in sentiment. I am looking for the reaction to tangible steps in Europe; but I will also be looking for entry on a number of positions risk-linked in the mean time (with an aim for better prices).
One reason USDJPY is my only active position on today is because I decided to take profit on the remaining half of my USDCAD long position. I could have certainly tried to squeeze more out of this pair than the second exit point at 1.0210; but this pair is far too choppy and its fundamentals too troublesome to expect it to move in a straight trend. As for my USDJPY, the pair has shown continued improvement. Progress is measured; but that is to be expected as the shift in balance of risk position between these two is finely balanced.
For potentials: my list is long. I think the euro is in for trouble; but I think a relief rally is still possible on an actual bailout. I'll look for an entry on a short around 1.3600/50. If they ignore this step and go straight to the long-term implications of multiple bailouts, I'll still try to jump in below 1.3475 (but that would be a reduced position because it would essentially be chasing an entry). Other euro-based pairs I like include EURJPY on a break below 111.50 and EURCHF below 1.3265 - both range lows. The pound is offering us some interesting risk-related moves (further colored by the UK's stimulus/rate hike speculation. I would like a short on GBPUSD either with a move back up to 1.5950 or a confirmed break below 1.5825 should this risk aversion move hold up. Similarly, I am holding out for a GBPCAD breakout from its wedge and still open to a possible GBPJPY pullback to the resistance in its former descending trend channel. Other majors to watch is a possible AUDUSD short with a move back up to 0.9825 and/or a drop below 0.96; NZDUSD in a drop below 0.7650 and USDCHF with an eye above parity.