Contributed By: DailyFx
North American Commodity Update
Commodities - Energy
Speculative Strength Finally Succumbs to Reality as Crude Breaks Bull Trend
Crude Oil (LS Nymex) - $82.34 // -$2.52 // -2.97%
In the past two and a half months, oil has climbed approximately $16 - or 22 percent. While some energy bulls may try to attribute this advance to growth projections that feed into boosting the market’s expectations for demand; such an explanation is self-serving. It isn’t a coincidence that oil was advancing through the same period that equities rose and the dollar tumbled. Rather than following the outlook for economic activity, traders were content with tracking risk appetite trends to drive their oil trades to capital gains. However, that correlation works both ways. At the same time the S&P 500 marked a critical reversal on its bullish trend from the beginning of September, US crude would mark a reversal of similar magnitude in its drop below $84.50. Having faced its first series of three-consecutive daily declines since September 17th, the possibility of a temporary correction is high; but the likelihood of a return to the previous bull wave is much lower.
Looking at the catalyst for today’s oil move, we have to broaden our horizons beyond the workings of the energy market. Looking at the S&P 500, the US 10-year Treasury note and other benchmarks for the important assets classes; we see the same tumble. Cross-market correlations at this level of intensity and that occur alongside meaningful technical developments are almost always founded on investment-wide fundamental themes. The theme Tuesday was the collapse of risk appetite under its own weight. While we can say that the troubles with (and lack of progress in correcting) Ireland’s financial troubles was the spark, the pressure has been building for a while behind cooling growth trends, efforts to curb capital market expansion in emerging markets and growing financial instability between stimulus and anemic capital flows. Adding to selling pressure was the sustained advance from the dollar. Maintaining a negative correlation to risk trends; it is also the primary pricing instrument for US oil.
Concentrating on the more tangible fundamental health of the oil market, today’s data would offer a mixed picture of value. Chinese fixed direct investment grew 7.9 percent in the year through October and the Leading Indicators index advanced to 71 percent. The implications for energy demand were somewhat offset by comments made by the Premier that his cabinet was drafting anti-inflation measures. In other news, US factory was unchanged through October; while German investors outlook for growth finally pulled up.
Energy traders should take note that the API reported crude inventories through last week plunged 7.652 million barrels – the biggest drop since September 2008; which could translate into a drawdown on tomorrow’s DoE figures. Trading volume was up 22 percent from Monday; but still below last week’s highs. Also, open interest is shifting from the December to January contract.
Commodities - Metals
A Critical Break for Gold’s Bull Trend Founded on Margin Hike and Tempered Inflation
Spot Gold - $1,338.40 // -$30.10 // -2.20%
It may not seem unusual to see gold tumbling through Tuesday’s session since nearly every risk-sensitive asset class was diving. However, the precious metal still represents a favored safe haven asset and alternative to more traditional securities. And, despite a recent shift to a positive correlation to risk trends, today’s hand-in-hand move is still remarkable given the severity of the development. While the 2.2 percent decline through the close wasn’t’ as severe as Friday’s correction; the session’s performance was perhaps more meaningful. That is because with Tuesday’s close, spot gold has finally broken through the floor of a rising trend channel that has guided the commodity higher since the end of July. A nearly four-month trend has been called to a technical and tentative end; but how readily will the market jump in to unwind their long gold holdings? That is a question of fundamentals.
Looking at the precious metal’s performance Tuesday, we can simply attribute the commodity’s direction to the recent positive correlation established between traditional speculative assets and the metal. There is certainly an element of buying here simply to take advantage of the potential capital gains. However, beyond that, we see a very clear weight levied on the gold in the former of a margin increase. The Chicago Mercantile Exchange (the primary futures exchange for gold trading in the US) decided to replicate its efforts to curb silver, cotton, soybeans and other commodities by increasing required margin on trading the precious metal 5.9 percent to $4,500 per contract. This naturally reduces participation by speculators as it increases the cost of trading.
Yet, looking beyond this structural change in market conditions, there will be a more nuanced balance for the direction gold takes going forward. On the one hand, we have the threat that troubles with keeping the Greece bailout program financed by all EU participants and Irish financial troubles evolving into a European crisis leveraging the value of gold as an alternative to currencies and those assets whose values are determined by those fiat promises of value. Alternatively, we have policy officials stating clearly that there is little threat of inflation going forward (one of the positive price elements of gold). The Fed’s Dudley rebutted an op-ed letter calling on the central bank to withdrawal stimulus by saying officials could hike rates to contain inflation at any time. BoE Governor King talked down inflation threats through the medium-term – though short-term they could spike. And, China is reportedly working toward anti-inflation measures.
For trading statistics, volume on the CME’s December futures contract surged 40 percent to 279,735 but this wasn’t as high as the turnover from just this past Friday. In the meantime, speculative interest in ETF exposure is still level at 67.13 million ounces.
Spot Silver - $25.48 // $0.00 // 0.00%
Silver was still within its broader retracement pattern through Tuesday’s close; but the metal wouldn’t make any progress besides setting a new intraday, two-week low. It is particularly remarkable that the commodity was otherwise stable through the session considering the CME decided to hike margin for a second time in a week by 12 percent to $7250 per contract. Speculative interest is deeply rooted here – a fact made tangible through the record high ETF holdings through the day (476.754 million ounces).
Contributed By: DailyFx
60 Minute Bars
“Keep in mind the potential for an extended first wave count in which this latest drop is a terminal thrust from a small triangle.” The latest thrust certainly appears to have been from a 4th wave triangle and the decline channels nicely. Waves a and b appear complete so expectations are for wave c to spike above 13776 and test 13800-13830 before the larger decline resumes. Bottom line, the larger EURUSD trend is down and I favor selling rallies.
Contributed By: DailyFx
60 Minute Bars
“An AUDUSD top is most likely in place.” 5 waves down from the high are visible, which confirms that the larger trend is down but also suggests that a corrective advance is around the corner. What’s more, the latest decline is probably a terminal thrust from a triangle. Resistance is at 9950. In the event of additional weakness, support is 9700 then 9650.
Contributed By: DailyFx
The GBPUSD is failing just ahead of its year+ resistance line. The line is at 16310 this week. For some time, I’ve favored the idea that a triangle is unfolding from the January 2009 low. If this is the case, then the GBPUSD should decline for months towards 15000 in wave d. Near term, the GBPUSD appears to have put in a secondary top at 16185.
Contributed By: DailyFx
The dollar index climbed smartly on Monday as the buck continued its journey higher, touching the highest level since October 1. The dollar was boosted early in the day by stronger than expected retail sales in the US, the recent string of better-than-expected data out of the US is calling into question if QE2 is warranted and how much will really be implemented. The index continued to gain late Monday as Treasury prices deepened their decline, pushing 10-year yields towards the highest level in three months follow a report that a Moody’s analyst said extending Bush tax cuts would be bad for the US credit rating. As Treasury prices tumbled US stocks erased the bulk of their gains with the positive sentiment that prevailed after the jump in retail sales getting knocked.
The index has come under some pressure in the over-night session as US Treasury prices climbed (and yields fall) after attracting some bargain hunting interest out of Asia with market players call the massive sell-off over the last two days as over-done. Adding to the pressure are Fed Yellen’s comments in a WSJ interview defending QE2 and with a generally bearish outlook for the US economy she stays in line with her generally dovish stance.
Contributed By: DailyFx
* Dollar Index Scores a Meaningful Bullish Breakout but European Issues, Risk Trends Still Blurred
* Euro Traders Look for Clarity on Ireland’s Future and the Future of the European Monetary Union
* British Pound Stifled by Disappointing Housing Data, Look for Clear Direction with CPI Data
* Japanese Yen: Why Did a Strong 3Q GDP Reading not Promote a Yen Rally?
* Australian Dollar Steady on Minutes that Show Concern over Inflation, OECD that Warns the Same
* New Zealand Dollar Sees Limited reaction to Strong Retail Sales Data thanks to Trading Conditions
Dollar Index Scores a Meaningful Bullish Breakout but European Issues, Risk Trends Still Blurred
Once again, the dollar put in for a significant and progressive price development. And yet, fundamental traders should be more suspicious of the greenback’s progress now than they were last week. Looking to the trade-weighted Dollar Index, we see that the benchmark currency was able to surpass a troublesome range high at 78.35. The monthly high this move presents certainly seems the next logical progression of a reversal that was jumpstarted after a quick dip to a low for the year. However, we can see the stain of doubt underlying this move despite the meaningful progress the day’s advance would imply. The first sign of uncertainty is found from the Dollar Index itself. After such a meaningful breakout, we would expect a significant increase in momentum to accelerate gains as traders are drawn into the development; but follow through was notably restrained. Another hitch to the greenback’s boundless recovery is the variation in progress across different pairs. While EURUSD has slipped below notable support (once again, lacking momentum) and USDJPY seems to be taking meaningful steps towards a larger advance; GBPUSD, USDCHF and AUDUSD are much further away from establishing conclusive reversals. Typically, when there is a mixed performance for a currency across its most liquid pairings, the confusion prevents definitive progress. And, venturing into the fundamental side of things, the greenback’s lack of momentum is consistent with the S&P 500 having yet to break from its two-and-a-half month rising trend channel.
All these factors taken into account, it should not be immediately concluded that the dollar’s bullish run is doomed for failure. Instead, it suggests that traders are simply more concerned with tangible fundamental catalysts rather than letting rampant speculation dictate activity levels. What is needed is a definitive shift in one (or more) of the more pervasive and influential trading themes. Effectively taking up the gauntlet of top fundamental driver from stimulus speculation, risk appetite trends now hold the greatest potential for the dollar’s advancement or retracement. This is why we make the regular reference to the health of the US equity market benchmark. Should there big an underlying shift in the balance of risk/reward, the stocks and other relatively-risky assets will be unloaded and safe havens will be scooped up. And, though the greenback’s shelter appeal has diminished significantly; when capital flows turn into torrents, the market will likely defer to historical norms. What can push equities into that tempting bear trend and subsequently leverage the dollar’s appeal? European financial uncertainties are at the top of the list. A crisis situation in this economy has very clear implications for investment trends; but even a move to bailout Ireland would further the dollar’s case. Such a move would be clear step towards government-backed support. The US isn’t the only government providing support…
Speaking of stimulus, we note a growing wave of dissension against the Fed’s decision to implement the second round of quantitative easing. While much of the grumbling comes from the speculative market and emerging markets, Fed member Lacker stated that he opposed the move as being potentially ineffective and even dangerous. Don’t expect the central bank to fold to pressure anytime soon though. In other news, data seemed to offer a bullish balance. Advanced retail sales were better than expected with a 1.2 percent improvement – cut to 0.4 percent excluding gas and auto sales. For some contrast, the Empire manufacturing index dropped to a July 2009 low.
Euro Traders Look for Clarity on Ireland’s Future and the Future of the European Monetary Union
Irish officials responded to growing fear of a national financial crisis and subsequent speculation of an impending bailout by stating simply that they had not filed for aid and the government was fully funded through mid-2011. Clearly, this reiteration does not provide investors with a sense of confidence. In fact, it is adding to regional troubles according to the ECB’s Ordonez. Leaving the market in a state of uncertainty balances Ireland between the tarnished reputation of having to look for additional funds and potentially leaving its banking system open to collapse. With that in mind, Prime Minister Cowen is expected to bring the topic up at Tuesday’s meeting of European leaders. In the meantime, Portugal’s Finance Minister lamented that his country is at high risk similar troubles and the EU revised Greece’s deficit to GDP ratio up significantly.
British Pound Stifled by Disappointing Housing Data, Look for Clear Direction with CPI Data
Not to be ignored, the Rightmove released an indicator that showed a 3.2 percent drop in house prices in October – the biggest since December 2007 – and the longest turnover time on record. However, the market easily ignored the weak figure. That said, traders won’t as readily disregard Tuesday’s CPI data. Speculation of stimulus and rate hikes top’s the pound’s personal list of fundamental concerns.
Japanese Yen: Why Did a Strong 3Q GDP Reading not Promote a Yen Rally?
Expectations for Japan’s 3Q GDP numbers were tame heading into the release of the data. Yet, when the economy reportedly grew 0.9 percent in the three-month period and 3.9 percent on an annualized basis – both much better than expected – the yen showed little response. This can be partly attributed to timing; but with the Japanese Economic Minister suggesting 4Q will show the mirror performance, optimism will be muted.
Australian Dollar Steady on Minutes that Show Concern over Inflation, OECD that Warns the Same
All signs point to further gains for the Australian dollar – except for risk appetite trends. Early Monday, the OECD issued a statement warning the RBA to remain vigilant on inflation pressures and the bank’s own minutes on Tuesday supported a sustained hawkish lean. However, rate hikes later down the line will be overlooked if investors abandon carry trades to fund maintenance margin on losses in other trades.
New Zealand Dollar Sees Limited reaction to Strong Retail Sales Data thanks to Trading Conditions
The economic docket was stocked for the New Zealand dollar very early Friday morning; and yet the data has ultimately very little reaction on the currency. Data released during early in Auckland’s trading session hit at a time when few other markets are online; and doing so prior to Monday’s open exacerbates the issue. Therefore, a 1.6 percent jump in retail sales was able to rouse little activity before risk trends set in.
Contributed By: DailyFx
Currencies are up a across the board against the buck in early Tuesday trade and ahead of the European open, with most of the price action seen more as consolidative rather than attributable to any significant fundamental developments. The release of the Australian RBA minutes were on the whole more balanced than many hawks would have liked, with the central bank suggesting that they could be content with leaving rates as is for the time being. The Australian Dollar has therefore been lagging against most of the other major currencies as a result. Elsewhere, Fed Dudley comments have been getting some attention after the official recently said that the need exit from current policies could be years away. These comments could be hurting the Greenback a bit, although, market participants should not be surprised by dovish comments from the Fed official.
On the strategy side, unfortunately after booking 200 points profit on half of our long Eur/Aud position, the market then pulled back to just take out our stop on the remaining half of the position which had been moved to break-even. We are now only holding one position, which is a short Kiwi position from 0.7920 from several days back. At the moment, there are no new and interesting set ups, but as always, we will be on the lookout for the next trading opportunity. Things have been going real well over the past couple of months and we are not inclined to force anything to compromise our positive results.
Looking ahead, a batch of UK data is slated for release at 9:30GMT including; CPI, DCLG house prices, and the retail price index. Eurozone CPI, and Eurozone ZEW are then out at 10:00GMT, along with German ZEW. US equity futures and commodities are tracking lower into the European open.
Contributed By: DailyFx
Commodities – Energy
Crude Oil Stalls as Bearish News Flow Spurs Profit Taking
Crude Oil (WTI) - $84.52 // $0.34 // 0.40%
Commentary: Crude oil erased early gains to finish close to unchanged on Monday at $84.86. Price action for the day was in step with that of U.S. equity markets, with European sovereign debt concerns offsetting the bullish underpinnings of the financial markets, which include the Fed’s QE2 program, the improving U.S. labor market, and sizzling growth in the emerging market economies.
This price action we are seeing in crude and equity markets is merely consolidation after enormous gains over the past few months. The European debt crisis and Chinese inflation fears are simply excuses for traders to lock in profits. After prices finish consolidating and work off their overbought conditions, look for the rally to resume.
Given this view, it should be no surprise to readers that we are looking at this correction as nothing more than a buying opportunity. An ideal entry would be just below $80 for crude, but if Wednesday’s inventory report is another bullish surprise like last week, that may be a stretch.
Technical Outlook: Prices continue to test support at a rising trend line set from mid-September (now at $84.73) having put in a bearish Shooting Star candlestick formation. A break below this juncture exposes horizontal support at $83.27. Near-term resistance lines up at the $86.00 figure.
Commodities – Metals
Gold Follows Through to the Downside as Dollar Rises
Gold - $1359.40 // $1.20 // 0.09%
Commentary: Gold followed through on last Friday’s $40 decline, as the metal shed another $8.15, or 0.6%, to settle at $1360.60. While the dollar index advanced 0.56%, as we have been harping on, most of that was due to yet another move lower in the Euro. Commodity currencies, which have been exhibiting an extremely strong correlation with gold, were mixed, but close to unchanged. The Aussie rose just slightly, while the Kiwi and Cad fell.
Profit taking seems to be the biggest motivating factor for gold’s latest sell off, as it is clear that very few market participants believe this bounce in the dollar is anything but a correction in the longer-term downtrend. As we stated yesterday, to see a sustained move lower in gold, “there will need to be some sign that the easy monetary conditions in the U.S. and Eurozone economies are coming to an end. With QE2 made official just two weeks ago, there is little to suggest that that will happen anytime soon.”
On the other hand, as we have said repeatedly in our Gold – Forex Correlations report, gold has gotten way ahead of the increase in ETF holdings. Were there to be a reestablishment of the relationship between these two variables, prices could fall steeply. Without investor demand backing up gold, there is little to support prices, regardless of the outlook for the dollar or inflation.
Technical Outlook: Prices are testing support at a rising trend line set from late July, now at $1353.97 having declined after putting in a well-defined Bearish Engulfing candlestick pattern. A break lower exposes $1322.39, the 38.2% Fibonacci retracement for the 7/28-11/9 advance. Near-term resistance lines up at $1387.35.
Silver - $25.64 // $0.16 // 0.63%
Commentary: The silver liquidation continued on Monday, with prices falling another $0.60, or 2.29%, to settle at $25.48. Prices are now down significantly from the 30-year highs put in earlier this month at $29.36.
The gold/silver ratio rose to 53 and is now up notably from levels near 50 earlier this month. The long silver-short gold trade seems to be unwinding fast. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance while a lower ratio indicates silver outperformance).
Technical Outlook: Prices have continued lower to test support at $25.33, the 61.8% Fibonacci retracement of the 10/22-11/09 upswing. Continued selling exposes $24.92. Near-term resistance lines up at $26.10, the 50% Fib.
Contributed By: DailyFx
* Japanese Yen: Benefits From Risk Aversion
* British Pound: U.K. Price Growth Accelerates
* Euro: Inflation Rises The Most Since November 2008
* U.S. Dollar: Producer Prices, Industrial Production on Tap
The British Pound slipped to a low of 1.5980 during the European trade as investors scaled back their appetite for risk, and the exchange rate may push lower throughout the North American trade as market sentiment falters. However, as the GBP/USD bounces back from the 20-Day moving average at 1.5983, we may see the exchange hold steady throughout the day as market participants wait for the Bank of England policy meeting minutes tomorrow at 9:30 GMT. There is likely to be another 7-1-1 split within the MPC given the broad range views amongst U.K. policy makers, and there could be little reaction to the statement unless we see an increased split within the central bank.
Nevertheless, a report by the U.K. Office for National Statistics showed the headline reading for inflation unexpectedly increased to an annualized rate of 3.2% in October, which forced BoE Governor Mervyn King to write his fourth letter of explanation to Chancellor of the Exchequer George Osborne, and the stickiness in price growth could lead the central bank to start normalizing monetary policy over the coming months as it aims to balance the risks for the region. Mr. King reiterated that the MPC stands ready to move monetary policy in either direction as the central bank expects inflation to hold above target in 2011, but went onto say that the outlook for price growth remains “highly uncertain, with substantial risks in both directions.” As the economic outlook remains clouded with uncertainties, there could be a growing split within the MPC as board member Andrew Sentance pushes for a 25bp rate hike while Adam Posen sees scope to QE further, and we may see the GBP/USD hold steady ahead of the BoE minutes due out tomorrow as investors weigh the prospects for future policy.
The Euro fell back from a high of 1.3654 on Tuesday and the lack of momentum to hold above the 50-Day SMA (1.3641) could lead the single-currency to retrace the overnight advance as policy makers in Europe continue to endorse a bailout plan for Ireland. European Central Bank Vice-President Vitor Constancio said the Governing Council’s temporary bond program has helped to stabilize the financial markets during a speech in Frankfurt, but went onto say that a bailout for Ireland would help stabilize the current situation as investors see a risk for the country to default on its obligations. As fears surrounding the European debt crisis intensify, the recent reversal in the EUR/USD may gather pace as policy makers fail to address the root of the problem, and the ECB could face increased pressures to support the real economy in 2011 as the economic recovery tapers off. Nevertheless, the economic docket showed consumer prices in the Euro-Zone increased at an annualized pace of 1.9% in October to mark the fastest pace of growth since November 2008, while investor confidence in German increased for the first time in seven-months as the ZEW survey increased to 81.5 in November from 72.6 in the previous month. As the outlook for growth and inflation improves, the ECB may look to carry out its exit strategy next year, and speculation surrounding the outlook for monetary policy is likely to play an increased role in driving future price action given the mixed outlook held by the members of the Governing Council.
The greenback rallied against most of its major counterparts, with the USD/JPY advancing to a fresh monthly high of 83.32, and the reserve-currency may appreciate further throughout the day as it benefits from the rise in safe-haven flows. As equity futures foreshadow a lower open for the U.S. market, the rise in risk aversion is likely to carry into the North American trade, but the event risks scheduled for Tuesday could spark increased volatility in the exchange rate as investors weigh the outlook for future growth. Producer prices in the world’s largest economy is forecasted to increase at an annualized pace of 4.6% in October after expanding 4.0% in the previous month, while demands for U.S. assets are projected to rise $62.5B in September following a $128.7B rise in the month prior. Moreover, industrial outputs are anticipated to rise 0.3% in October, while the NAHB housing market index is expected to increase to 17 in November from 16 in the previous month, and the slew of data could reinforce an improved outlook for the economy as the recover gradually gathers pace.
Contributed By: DailyFx
AUD/USD:Clear signs of another short-term top emerging with the market stalling out by fresh post-float record highs at 1.0185 several days back, and then reversing course to end a sequence of consecutive daily higher lows. The latest break back below the 20-Day SMA further encourages bearish outlook from here, and we will look for a 2-day close below this shorter-term moving average for additional bearish confirmation. From here the risks are for declines towards critical support by 0.9650, below which will really accelerate. Any intraday rallies should be very well capped ahead of 1.0000.