Contributed By: DailyFx

A long hanging man candle on Friday combined with RSI divergence on the daily warns of a reversal but price needs to break Friday’s low in order to confirm. 1400 may prove to be a psychological barrier as well.

Contributed By: DailyFx

Commodities – Energy
Crude Oil Digests Recent Gains Near 25-Month Highs
Crude Oil (WTI) - $86.92 // $0.07 // 0.08%

Commentary: Crude oil is close to unchanged as prices consolidate following five straight days of gains last week. After rising 6.7% last week, prices hit a new 25-month high in overnight trade, but so far crude has been unable to decisively break the May highs near $87.15, which is the top of a 13-month range. The U.S. nonfarm payrolls numbers we got last week were unequivocally bullish, and just add to an already bullish picture for the global economy. It is probable that crude oil continues higher in the coming weeks to levels over $90 as demand continues to increase.

This coming week’s economic calendar looks to be extremely light, which is in sharp contrast to last week’s excitement amid the Fed, ECB, BOE, and BOJ policy decisions and the U.S. jobs report. This probably means that the bias of markets will likely remain to the upside given all the positive developments of last week. On the other hand, equities and commodities are extremely overbought and ripe for profit taking. The most likely outcome is that markets end this week fairly flat as recent gains are digested.

Technical Outlook: Prices have put in a bearish Shooting Star candlestick formation below resistance at $87.15, the major swing top set in May that – until last week – served as the 2010 yearly high. Negative RSI divergence continues to point toward a pullback, with a reversal lower initially targeting resistance-turned-support at $84.43, the 10/07 wick high.

Commodities – Metals

Gold Tries to Hold on Despite Dollar Strength

Gold - $1388.10 // $5.55 // 0.40%

Commentary: Gold is down just slightly as the metal is hit with the same profit taking considerations that are affecting crude. Recall that gold rocketed to new all-time highs just under $1400 last week in large part due a sinking U.S. Dollar. But the most interesting action was on Friday when gold continued to hold gains and even finished a bit higher despite a notable 0.88% recovery in the dollar. Perhaps gold traders are considering the one day move in the dollar as just a corrective bound in a strong downtrend.

But if the dollar’s recovery turns out to have legs, we’ll likely see gold begin to move lower, for as we have been pointing out in our Gold – Forex Correlations report, the strong inverse relationship between gold and the dollar very much remains intact:

“Over the past week, we saw the trade-weighted dollar index decline four of five days, while gold advanced three of five days. Incidentally, after the Federal Reserve policy decision on Wednesday, it looked as if the gold-dollar correlation was about to break down. And it did for a brief moment as a swath of gold traders “sold on the news”—gold was down $32 at one point while the dollar also sold off. But that breakdown proved to be ephemeral as gold sharply rebounded by the end of the session to finish lower by only $9. The next day on Thursday, the dollar continued to sell off to new lows for the year, while gold surged a stunning $44 to hit a new record high.” Read more in the latest Gold-Forex Correlations report.

Technical Outlook: Gold prices have put in a bearish Doji candlestick below resistance at the psychologically significant $1400 figure, hinting a pullback may be forthcoming. Initial support lines up in the $1364.77-$1381.00 region.

Silver - $26.69 // $0.05 // 0.20%

Commentary: Silver is flat after rallying $2, or 8% last week. Prices are hitting at new 30-year highs and show no signs of slowing down. Prices continue to benefit from a long-awaited contraction in the ratio between gold and silver prices. Indeed, even with the recent outperformance of silver relative to gold, the ratio between the two metals is only at the lowest since 2008.

The gold/silver stands at 52, the lowest level since August 2008. (The ratio measures the relative performance of gold and silver. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance).

Technical Outlook: Prices have taken out support at the top of a rising channel set from late August to pause ahead of the $27.00 figure, a psychological boundary reinforced by the 200% Fibonacci extension of the 10/14-10/22 downswing. Negative RSI divergence hints that (at least) a corrective pullback may be next. The first layer of significant support lines up at the $25.00 figure.

Contributed By: DailyFx

On Friday, in our Opening Comment, we warned of a potential pullback in the Euro, despite the fact that at the time there were no real signs of such reversal on either the technical or fundamental front. In our analysis, we cited our in-house proprietary model that tracks retail positioning as the source for our reversal warning. While the Euro had remained well bid into Friday, retail traders had actually been cutting back on their Euro shorts to suggest that they had finally given up on selling the Euro, making it an optimal time for a reversal to finally take place. We also highlighted the fact that because most analysts and market participants (including my own technical bias) were now targeting a direct retest into the 1.4500 area following the break back above 1.4160 last week, the probability for a let-down had dramatically increased as it is often the times when there is no reason for a market to reverse that it actually does so.

Clearly, the fundamental catalyst for the latest pullback in the Euro has been driven by a solid employment report out of the US on Friday, which once again has investors reconsidering the latest Fed policy and stance towards QE. While the Fed did indeed announce additional QE measures of up to $600B, there were no guarantees that all of this would in fact be necessary and there was every indication that should conditions improve, the Fed would reserve the right to tighten up on policy. This of course would be a net US Dollar positive (not positive for US equities) as interest rate differentials would undoubtedly narrow back in favor of the Greenback. Furthermore, the latest solid economic data and reversal in the US Dollar would also have investors reminded of the fact that 3 new members are scheduled to join the FOMC in January, all of whom share a more hawkish approach to monetary policy.

An op/ed piece published in the WSJ on Monday reaffirms this fact, with Fed Warsh echoing our sentiments exactly. Here are some excerpts form the piece: “The FOMC did not make an unconditional or open-ended commitment. I consider the FOMC’s action as necessarily limited, circumscribed andsubject to regular review”…….“Policies should be altered if certain objectives are satisfied,purported benefits disappoint, or potential risks threaten to materialize”…..“Evidence that recent weakness in the dollar,rising commodity prices and other indicators feed into final prices could mean the Fed’s price stability objective might no longer be a compelling policy rationale”….“In such a case – even with the unemployment rate still high – wewould have cause to consider the path of policy. This is truer still ifinflation expectations increase materially.”

Finally, although we did not mention this in our report on Friday, we are not at all surprised to see negative headlines resurface in Europe relating to the distressed Eurozone economies. Indeed, Ireland is back in the news with a report saying that Ireland may need a bailout from the IMF. This is generally the way markets work and how sentiments shift so quickly when the price begins to reverse one way or another. Renewed upside pressures in the Greenback, result in renewed fears over developments in economies and currencies of those countries affected by the market reversal.

Looking ahead, Swiss unemployment (3.5% expected) is due at 6:45GMT, followed by German trade (12B expected) and current account (9.0B expected) at 7:00GMT. Eurozone sentix (10.0 expected) is then out at 9:30GMT, with German industrial production (0.4% expected) capping things off at 11:00GMT. US equity futures are pointing to a slightly lower open, while oil is marginally higher, and gold is weighed down.

Contributed By: DailyFx

Fundamental Headlines

• Europe’s Markets Edge Lower – Wall Street Journal

• Debt Concerns Hit Euro – Wall Street Journal

• Obama Defends QE2 Ahead of G20 - Financial Times

• Irish Fight To End Bond “Buyers Strike” as EU Examines Budget- Bloomberg

•IG-20 Spat Risk Eases as U.S. Eschews Pushing Targets - Bloomberg

EURUSD: Investor Confidence in the 16 member euro area topped expectations as figures rose to 14.0B in September from a revised 5.0B the month prior, reaching a three-year high. Despite today’s advance, confidence will likely scale back in the coming months as governments implement tough austerity measures to battle their high debt. Meanwhile, the trade balance in Germany widened to 16.8Bin September from 9.0B in August as exports jumped 3.0 percent, while imports contracted 1.5 percent. Not to overlook, industrial production in Germany missed expectations during the same month and entered negative territory for the third time this year. Going forward, Portugal is expected to hold its last bond auction on November 10th, which is expected to cover the rest of this year’s funding needs (of which I expect the ECB to purchase these bonds). Taking a look at the currency markets, the euro is down against all major currencies expect for the New Zealand dollar amid concerns regarding Ireland’s budget deficit. Of particular note is the EURUSD which has extended Friday’s losses to reach an intraday low of 1.38907. Downside risks towards 1.38 remain as the MACD has yet to reverse course.

Contributed By: DailyFx

Talking Points

* Japanese Yen: Rallies Across The Board
* British Pound: Holds Narrow Range
* Euro: Investor Confidence Advances to Three-Year High
* U.S. Dollar: Fed Officials on Tap

The Euro slipped to a low of 1.3890 on Monday as investors scaled back their appetite for risk, and the single-currency may depreciate throughout the North American trade as risk sentiment continues to dictate price action in the foreign exchange market. With the U.S. dollar regaining its footing, the EUR/USD looks as though it will retrace the advance from October as it appears to have carved out a near-term top ahead of 1.4300. However, as the euro-dollar bounces back from the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900, we may see the pair hold steady throughout the day as the economic docket remains fairly light for the remainder of the day.

Nevertheless, investor confidence in the Euro-Zone rose to a three-year high in November, with the Sentix survey advancing to 14.0 from 8.8 in October to exceeded projections for a 10.0 print, while the trade surplus for Germany widened to EUR 16.8B in September from EUR 9.0B following a 3.0% in exports. At the same time, we saw industrial outputs in Europe’s largest economy unexpectedly contract 0.8% in September to mark the biggest decline in over a year, but it seems as though currency traders are showing little reaction to the mixed batch of data as fears surrounding the European debt crisis resurface. European Union Economic and Monetary Affairs Commissioner Olli Rehn has flown into Ireland today to review the government’s new budget plan, which will increases tax revenues by as nearly EUR 6B over the following year, and the uncertainties surrounding the economic outlook may continue to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As the governments operating under the single-currency tighten fiscal policy to address the budget deficit, there could be increased pressures on the European Central Bank to support the real economy as the rebound in global trade cools, and the Governing Council may uphold the expansion in monetary policy throughout the beginning of 2011 in order to balance the risks for the region.

The British Pound extended the decline from Friday, with the exchange rate slipping to a low of 1.6102 during the overnight trade, but the GBP/USD may continue to push higher over the near-term as it maintains t he upward trend from May. As the Bank of England holds the benchmark interest rate at 0.50% and maintains its asset purchase target at GBP 200B, the neutral policy stance endorsed by the central bank could spur a rise in interest rate expectations as the recovery in the U.K. slowly gathers pace, and members of the MPC may see scope to start normalizing monetary policy over the coming months as price growth continues to hold above the government’s 3% limit for inflation. However, as the BoE is scheduled to deliver its quarterly inflation report due out later this week, the GBP/USD may be confined within a narrow rate in the days ahead, but hawkish commentary from the BoE could spark another short-term rally in the exchange rate, which could lead the pound-dollar to retrace the decline from earlier this year.

The greenback advanced against most of its major counterparts, while the USD/JPY slipped to a low of 81.00 as the Japanese Yen rallied across the board, and the rise in risk aversion may dictate price action throughout the day as the economic docket remains fairly light for Monday. We have Fed policy makers scheduled to speak throughout the day, with James Bullard lined up to speak on deflation at 17:30 GMT, who will be followed by Richard Fisher at 18:00 GMT. In addition, the Fed’s Kevin Warsh is scheduled to speak on the economy at 20:30 GMT, and comments from the central bankers could spark a shift in market sentiment as central bank maintains a cautious outlook for future growth. Nevertheless, as equity futures foreshadow a lower open for the U.S. market, the drop in risk appetite may keep the U.S. dollar afloat throughout the day, and the greenback may appreciate further throughout the day as market sentiment continues to dictate price action in the currency market.

Contributed By: DailyFx

OVERVIEW – Economic developments in the region are becoming less and less influential in terms of their impact on price action in the local currencies, with the direction in the markets highly contingent on the overall direction in the US Dollar. The FX markets have broken away from traditional correlations of risk on and risk off, with the dominant theme now one of US Dollar sentiment. Should the US Dollar manage to mount a significant recovery, then we would expect to see the local currencies come under pressure across the board. However, should the US Dollar continue to slide, then we foresee additional upside in the Nordics, with both the NOK and SEK outperforming all of the major currencies. We would however suggest that it may be worth looking at being long the NOK against the SEK at this point, with the NOK/SEK cross looking quite stretched and due for a material bounce. There are no key economic releases slated for Monday.

Eur/Sek Although the overriding trend is still intensely bearish, the market looks to have finally found some form of a base by 9.09 after triggering an inverse head & shoulders pattern. From here, look for additional upside back towards a measured move objective by 9.50 over the coming days. Ultimately, only back below 9.13 would delay and give reason for concern.

Eur/Nok Overall price action remains quite choppy with the market confined to a well defined range over the past several weeks between 7.80 and 8.20. The latest rally attempts have once again stalled out just over the 8.20 range resistance, and the risks from here are for range trade resumption back towards the 7.80 area over the coming sessions. Only a close back above 8.20 would negate outlook.

Usd/Sek The latest rally attempts have once again stalled out and any hopes for the formation of a material base by 6.50 are looking less and less likely. The underlying trend remains intensely bearish and a close below 6.50 will solidify this fact and open the door for the next major downside extension. At this point, only a break back above 6.83 would negate outlook and give reason for pause.

Usd/Nok The latest rally attempts have once again stalled out and any hopes for the formation of a material base by 5.70 are looking less and less likely. The underlying trend remains intensely bearish and a break below 5.70 will solidify this fact and open the door for the next major downside extension. At this point, only a break back above 5.96 would negate outlook and give reason for pause.

Gbp/Nok Overall price action remains quite choppy with the latest sharp sell-off being very well supported ahead of psychological barriers by the 9 handle. From here, we will use the 9.50 level as a gauge for directional bias. While the market holds below, we would expect to see downside pressures persist, but back above will relieve downside pressure and potentially open some fresh upside back towards the 10.00 handle.

Nok/Jpy Remains confined to a multi-day range broadly defined between 13.25 and 14.50. The market has most recently stalled out by the range highs, and as such, the preferred strategy is to look to sell in favor of a continuation of the prevailing range trade. Ultimately, a close back above 14.50 would be required to negate.

Contributed By: DailyFx

FUNDYS

On Friday, in our Opening Comment, we warned of a potential pullback in the Euro, despite the fact that at the time there were no real signs of such reversal on either the technical or fundamental front. In our analysis, we cited our in-house proprietary model that tracks retail positioning as the source for our reversal warning. While the Euro had remained well bid into Friday, retail traders had actually been cutting back on their Euro shorts to suggest that they had finally given up on selling the Euro, making it an optimal time for a reversal to finally take place. We also highlighted the fact that because most analysts and market participants (including my own technical bias) were now targeting a direct retest into the 1.4500 area following the break back above 1.4160 last week, the probability for a let-down had dramatically increased as it is often the times when there is no reason for a market to reverse that it actually does so.

Relative Performance Versus USD Monday (As of 11:35GMT)

1. YEN+0.18%
2. STERLING -0.31%
3. CAD-0.45%
4. AUSSIE-0.52%
5. SWISSIE-0.59%
6. EURO-0.83%
7. KIWI-1.18%

Clearly, the fundamental catalyst for the latest pullback in the Euro has been driven by a solid employment report out of the US on Friday, which once again has investors reconsidering the latest Fed policy and stance towards QE. While the Fed did indeed announce additional QE measures of up to $600B, there were no guarantees that all of this would in fact be necessary and there was every indication that should conditions improve, the Fed would reserve the right to tighten up on policy. This of course would be a net US Dollar positive (not positive for US equities) as interest rate differentials would undoubtedly narrow back in favor of the Greenback. Furthermore, the latest solid economic data and reversal in the US Dollar would also have investors reminded of the fact that 3 new members are scheduled to join the FOMC in January, all of whom share a more hawkish approach to monetary policy.

An op/ed piece published in the WSJ on Monday reaffirms this fact, with Fed Warsh echoing our sentiments exactly. Here are some excerpts form the piece: “The FOMC did not make an unconditional or open-ended commitment. I consider the FOMC’s action as necessarily limited, circumscribed andsubject to regular review”…….“Policies should be altered if certain objectives are satisfied,purported benefits disappoint, or potential risks threaten to materialize”…..“Evidence that recent weakness in the dollar,rising commodity prices and other indicators feed into final prices could mean the Fed’s price stability objective might no longer be a compelling policy rationale”….“In such a case – even with the unemployment rate still high – wewould have cause to consider the path of policy. This is truer still ifinflation expectations increase materially.”

Finally, although we did not mention this in our report on Friday, we are not at all surprised to see negative headlines resurface in Europe relating to the distressed Eurozone economies. Indeed, Ireland is back in the news with a report saying that Ireland may need a bailout from the IMF. This is generally the way markets work and how sentiments shift so quickly when the price begins to reverse one way or another. Renewed upside pressures in the Greenback, result in renewed fears over developments in economies and currencies of those countries affected by the market reversal. Any positive data out of Europe on Monday has been completely ignored in light of these renewed European debt concerns, with some solid German trade and current account, along with a much better Eurozone sentix investor confidence, failing to prop the beleaguered Euro, while the much weaker than expected German industrial production has only helped to accelerate declines. Elsewhere, Swiss unemployment held steady as was expected.

Looking ahead, economic releases are few and far between in North American trade, with the only meaningful data coming from Canada housing starts (183k expected) at 13:15GMT. However, Fed officials make up for the lack of US data, with Fed Bullard at 17:30GMT, Fed Fisher at 18:00GMT and Fed Warsh at 20:30GMT. US equity futures are pointing to a lower open, while commodities are also trading in the red.

GRAPHIC REWIND

TECHS
EUR/USD: The latest break to fresh multi-day highs beyond 1.4160 has lacked any real follow through, with the market stalling out ahead of 1.4300 and reversing course quite sharply. From here, it is difficult to establish any clear directional bias, but while the price holds above 1.3695, the overall pressure remains on the upside and dips can be expected to be well supported. Back below 1.3695 will however relieve topside pressure and force a shift in the structure.

USD/JPY: While we like the idea of the market establishing a major base by current levels over the medium and longer-term, short-term price action has still not confirmed any signs of a bottom, with the price action over the past few days more characteristic of a bearish consolidation ahead of the next drop towards the record lows. Ultimately, a close back above 82.00 will now be required to relieve downside pressures. However, we will be on the lookout for an opportunity to buy on dips below the 79.75 record lows.

GBP/USD: The market has been holding above 1.6000 barriers over the past few days, and has most recently pushed beyond 1.6100. This opens the door for additional upside over the coming days, with the 1.6500 figure standing out as the next major resistance point. There is some short-term support by 1.6075, and a break and close back below this level will be required to take the pressure off of the topside.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported ahead of 0.9500 in favor of a sustained recovery. The market should in fact hold above the 0.9580 area on a close basis which represents a 78.6% fib retracement off of the latest move. Ultimately only back below 0.9460 would negate and give reason for pause. Look for a break back above 0.9740 to accelerate.

FLOWS
Losses in Eur/Usd have been led by Russian commercial and Middle Eastern sellers with semi-official demand failing to hamper the drop. Macro funds and real money supply in Cable with an ACB on the bid, and a US prime name seen on the offer repeatedly in Eur/Jpy

Contributed By: DailyFx

Fundamental Outlook

The Bank of England is expected to release their quarterly inflation report on Wednesday, November 10, 2010. The report is of great importance due to the fact that it precedes the BoE minutes on November 17th. Inflation forecast by the central bank is expected to take into account the spending cuts announced by the government last month, which is approximately 800 billion pounds. The increase in the value added tax (VAT) measures is projected to keep prices at their elevated levels; however, tough austerity measures to be implemented by the government in the upcoming months will weigh on growth and may force policy makers to follow the Fed and purchase treasuries next year. In turn, the BoE could increase its mid-2011 inflation forecasts (which will raise interest rate expectations) or keep expectations unchanged in order to see the impact of the planned VAT hike on inflation expectations. Not to overlook, economic activity in Great Britain doubled economists’ expectations in the third quarter as figures rose 0.8 percent; thus, traders should not rule out higher growth estimates for 2010 year end. Meanwhile, I expect the BoE to raise concerns of consumer spending as households begin to save amid uncertainty in growth. All in all, a hawkish BoE will validate my bullish GBPUSD bias.

Technical Outlook

GBPUSD Daily Chart

GBPUSD: The pair has recently bounced off of key support at the 50-day SMA, which coincided with the rising trend line. In turn, the pair had reversed course and continued its northern journey. Upside risks remain so long as price action is capped by the 10 and 20-day moving averages. Meanwhile, the MACD has yet to reverse to the downside. I will look to tighten my stop ahead of the quarterly inflation report in order to avoid any unforeseen losses.

Contributed By: DailyFx

The dollar index notched up its best day of gains since mid-October and its second best day of gains in four months as NFPs on Friday came in much better than expected. I had considered the eventualities of a stronger NFP reading Friday and how investors would react considering the open-ended language from the Fed, which allows them to slow bond-purchases as they deem necessary. Following a better than expected NFP reading many players will now be wary of the Fed doing exactly that (slowing their purchases) as the economy improves, which boosted the dollar late last week and has allowed the index to start the week on the front foot.

After this strong reading we have noticed a material shift of focus back onto forgotten topics, like Ireland and Portugal, which have been cited over-night has part of the catalyst for sharp euro declines. We find this to be a remarkable coincidence that over the same period that NFPs knock QE2 prospects all of a sudden traders are interested in what is taking place in Europe once again. Therefore, we finally see the possibility of the dollar forming a material base, something we have been looking for over the last week, as focus shifts away from the dollar and back to the euro which is likely to come under pressure since its recent rise is not representative of the underlying fundamentals in the euro-region.

Technically, the index may be in the process of carving out a double-bottom with a break and close back above 77.00 confirming the initial forming of a bottom. We will then look for a break out of recent trend highs above 78.30 which should accelerate gains in the index back toward the psychologically important 80.00 level.

Contributed By: DailyFx

The EURUSD has reversed after entering the congestion area from January of this year. The congestion area is 14215-14580 (2010 high to date). Near term, the decline appears impulsive and near term support is 13850 and 13800. I favor short positions on rallies. 14000 and 14100 (former supports) are now resistance.