A Chance for Further Gains in EUR/CHF

The FX Trader’s view - After establishing a major low in October a strong rebound was then followed by a deep pullback. This found good support from a 76.4% level and recovery from here could shortly receive a boost.

• MONTHLY CHART: The 2008 drop only briefly pierced the major 1.4391 low of 2001. This remains a key support area.
• WEEKLY CHART: The bear channel top projection was eroded, but the slightly higher 76.4% retracement level proved a very good resistance level. 76.4% was also a useful level on the Daily chart…
• DAILY CHART: The expected pullback from the 76.4% level was deep – another 76.4% (support) level has been tested now, and holding so far. Bulls now need a close above the 1.5142/61 area for a confidence boost, when the next target would be towards 1.5600 (another 76.4% level, as these are working well at present). At this stage any buyers on dips will probably favour initial stops below 1.4652 14-Jan low, perhaps seeking partial profits on the first break through 1.5142/61, then targeting towards 1.5590.

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Copper Waiting to Break Higher

The Commodity Trader’s view - Last year’s dramatic fall in Copper prices slowed towards the end of the year, finding at least a temporary base in December. Recent action has been uninspiring, but a s/term bull signal is not far off from current levels.

• MONTHLY CHART – CONTINUATION: The major reversal from 427.00 May high saw the deep 76.4% retracement of the 2001-2008 upmove eroded. However, the lower 122.00 area, 1.618 swing projection off prior 238.50-427.00 upleg, is currently providing some support.
• DAILY CHART – MAR-09: The s/term consolidation in Jan has now eroded the bear channel top projection – a further sign that bears are losing momentum. Near by is the 162.25 07-Jan high, and a close above this would provide a bull trigger. We would then first target towards the 217/230 area (30-Oct high/38.2% retracement). Buyers on such a break will now favour initial stops below the prior correction low at the time (currently 137.30). The analysis goes awry on a drop below the 125.50 Dec low.

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Diverging bonds – which is right?

The Technical Trader’s view:

DAILY BUND CHART

The market has foiled the bulls for the moment, in the very short term, They (we!) wanted a break-up driven by the completed Continuation Triangle. But the pattern failed. Yet the market has demonstrated a powerful strength to get up as far as this – the push through the 123.64 2005 high was impressive. And twice the market has rejected attempts to fall back down through that level…. Compare that to the Gilts

DAILY GILT CHART

This is an altogether weaker contract. The failures both to penetrate the long-term Pivotal High and to sustain the bull trend above major support (120.75) contrast powerfully with the doughty bund. The Bunds and the Gilt have diverged, certainly. But relative performance is one thing. More interesting is which of these markets is pointing in the correct future direction? (Or does anyone suppose they will go in opposite directions? We think not!) Earlier this week we wondered whether the US TNote would resolve the uncertainty. But that hasn’t happened yet. Increasingly, we think that the Gilt is ahead of the game that other markets may begin to focus on in due course…

The Macro Trader’s view:

As Governments globally pump billions into their economies in an attempt to stave off what increasingly looks like the worst recession since WW11, the recent rally in bonds has paused. The first signs of investor hesitation occurred a couple of weeks ago when the German government failed to cover a Euro 6.0B Bund issue, which raised eyebrows but didn’t end the rally. But now, as governments are forced to pump yet more money into their Banks, with calls in the UK for wage subsidies to contain unemployment and a rescue bid for French car makers, the bond rally looks ripe for a correction.

In the UK the situation looks even more serious. Government debt already forecast to soar as a result of the November budget, now looks like spiralling out of control. The EU issued a damming report on the UK economy and the outlook for government borrowing, expecting the Budget deficit to hit 8.8% of GDP and the debt to GDP ratio to exceed 70%.

This is due to the economy contracting by more than the government forecast. In the November Budget, the Chancellor forecast growth for 2009 0f between -0.75% to – 1.25%. That now looks woefully inaccurate.

Unemployment is rising fast, house repossessions are soaring and retailers are going bust. Were it not for the government pumping in vast amounts of taxpayers money, the UK Banking industry would now be a mere shadow of its former self.

But even with government financial support, UK Bank shares continue to collapse on the stock market, leading to calls for the once giants of the Banking world; RBS and Lloyds Banking Group, to be nationalised.

Herein lies the Gilt’s weakness.

The UK government’s attempts to save the Banking industry and efforts to protect against a recession that will hit anyway have at a stroke put the UK’S AAA sovereign rating at risk.

In the last few days the Pound has sold off hard as currency traders have begun pricing in the risk of a sovereign downgrade, which would not only make it more difficult for the UK government to fund its deficit, but also make it more expensive and thereby make the fiscal position even worse.

While the Bund has corrected over recent days, the Gilt has come under much greater selling pressure, and the announcement on Monday that the Bank of England will receive new powers to expand the money supply by buying corporate bonds/ print money, has failed to offer the Gilt market any support at all, in fact the opposite has occurred as traders/investors are increasingly losing confidence in this governments economic competence.In this environment we expect to see the Gilt weaken further.The Bund is not currently afflicted by these concerns to the same extent:- Core Euro zone countries are considered relatively sound,- Even though peripheral Euro zone economies have caused the IMF to place a question mark over their fiscal sustainability.

Whether or not the Bund is able to resume its rally, and currently the Macro Trader thinks it will, we see the Gilt seriously under-performing with the yield spread between the Gilt and Bund widening in the Bunds favour.

Using fiscal pump priming to stabilise a weakening economy is ok, but this government has not only thrown caution to the wind, but their sense of rationality and proportion too.

Mark Sturdy, John Lewis

Seven Days Ahead

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Cocoa Recovery Not Over Yet

The Commodity Trader’s view Cocoa has already enjoyed a good recovery from last October’s low. Bulls then paused for thought as a consolidation/pullback took hold. A key support area has recently been neared, prompting a bounce that could well be the start of the next leg up.

• MONTHLY CHART – CONTINUATION: The 76.4% level of the 2004-2008 rise, near 1800, currently underpins the market. It is close to old highs from 2003/2005 –reaction here has been very positive.
• DAILY CHART – MAR-09: The bull move from the Oct low found strong resistance from the 61.8% recovery level. The market has eased back towards key support in the 2300 area (50% pullback level/28-Nov high/falling return line), and this has prompted a smart rebound. We had been assuming that any s/term weakness would be only temporary/corrective. Buyers on dips (as suggested in last Monday’s Commodity Trading Guide) will have stops below 2300 initially, targeting towards 2700/18 for partial profits, then seeking a break higher to the next target around the 76.4% 2911 level. The bull scenario would be in serious jeopardy should price fall below both the key 2300 area and the lower 2200 61.8% pullback level.

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Bounce In EUR/USD On The Cards

The FX Trader’s view The slip back in the Euro from a 61.8% resistance area has been deep. But now, we are looking closer for the chance of a temporary rebound.

• MONTHLY CHART: The extent of last year’s fall implies that a medium term bear move is underway, with long term bull momentum on the wane.
• DAILY CHART: The early Jan break below the 1.3822 19-Dec low proved to be a very good bear trigger. In the FX Trading Guide we developed a 1.3080-1.2890 target, the base of which was the 76.4% pullback level, which has now been tested. We are now awaiting better reaction around this level, with better scope for a s/term bounce. As yet we have had no bull confirmation, so any purchases would be highly speculative. We would not see such a rebound as long-lasting and, ideally, resistance should emerge at/below that 1.3822 low. (Note how the Daily EUR/CHF chart is already recovering off a 76.4% support)

Note: The title of last week’s Update was misleading – it should have read ‘Bull Signal in Canadian Dollar Chart’, referring to the USD/CAD chart, with bearish consequences for the Canadian Dollar. Apologies for any confusion.

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The Yen is winning

The Technical Trader’s view:

The Dollar Yen is a long-familiar picture:

WEEKLY CHART

The Yen is certainly been strengthening for a while – the breakdown through the Lows at 101.30-70 created massive resistance which helped drive the market lower. But unless you are already Long of Yen this looks rather mature and extended. But if traders look elsewhere there are interesting situations developing against the Euro and Sterling which may offer better risk reward trading opportunities. The Euro is an especially interesting sell against the Yen:

WEEKLY CHART

The Yen trying to break down through the 120.05 Fibonacci support. And a small continuation Triangle has completed. If the breakout is confirmed then the support from the Fibonacci retracement would have collapsed. The Yen would surely speedily strengthen against the Euro

WEEKLY EURO YEN CHART

The drama of this short-term chart is unmistakable. Certainly the triangle has completed, but the potential Double Top is rather more impressive still. That needs a break down through 115.91 suggesting a move to 104 or so. Watch and wait

MONTHLY STERLING YEN CHART

This big picture is fascinating: the market, driven by the Bear Rising Wedge has reached a vital juncture. A break of the long run Pivotal low at 129.15 (established in 1995) would herald fresh Sterling selling. Now look at the detail.

DAILY STERLING YEN CHART

The market has already touched the long term Pivot once and bounced. But note well that it was only allowed to bounce up as far as the resistance from the low at 139.11. In all, it has actually failed there multiple times. Hence the pull-back to the 129.15 Pivot. And this is a vital test.

The Macro Trader’s view:

Much attention has been paid to the Pound recently as it almost collapsed in the run up to Christmas, especially against the Euro, almost reaching parity. The Dollar too has come in for much attention as the US currency experienced an unexpected period of weakness going into mid December, before starting a recovery which now looks like an extension of the Bull move which began in July 08.

Then there is the Euro. Initially it was supported as an alternative to the Dollar, but now it is increasingly tarnished by an economy that is weakening rapidly because of concerns over the sustainability of the fiscal position of several peripheral Euro zone members.

But these are not the only players. The Yen has been in a Bull trend against the Dollar since June 07, albeit with several corrections. Against the Euro, the Yen bottomed in July 08 and against Sterling the Yen has been in a strong Bull market since July 07.

Yet despite the strong Yen performance, the Japanese economy has experienced its own difficulties, and is now in recession with deflation once more a serious threat, with the Bank of Japan recently easing monetary policy back to almost zero.

The Japanese trade account has suffered too, with exports recently dropping by 27%, so why is the Yen so strong against the other majors? Certainly, Interest rate differentials aren’t supporting it and Japan’s stock market remains weak.

Since currency trading is about relative strengths, involving selling one currency against another, traders react to the latest piece of news. Once a dominant newsflow develops, either negative or positive news dominating, the “passive” currency will either suffer or gain from the resultant market trend that develops.

Currently the market is focused on the negative news flows coming from the US, UK and Euro zone and the Yen is benefitting as the passive currency. The market knows the situation in Japan is poor, but sentiment is such that that story seems only more of the same, nothing new has happened.

The other leading economies have turned relatively quickly from a prolonged period of strength with strong upward inflationary pressure, to suffering one of the worst downturns in living memory requiring Central Banks to slash interest rates and raise the possibility of quantum easing, a tool previously used in Japan.

So is the Yen strong? Yes but only because the news coming from the other major economies is so poor, and until that position changes the Yen looks set to strengthen further.

Mark Sturdy, John Lewis

Seven Days Ahead

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Bull Signal in Canadian Dollar

The FX Trader’s view

The 2008 recovery in USD/CAD last year found good resistance around the 1.3000 level. The chart has been consolidative for two/three months, but now, within this consolidation area, an interesting bull signal has occurred.

• MONTHLY CHART: The relatively quick recovery off a 0.9056 Nov-07 low has so far failed to reach the next Fibo level of 61.8%
• WEEKLY CHART: The current consolidation has found nice support at/above the 38.2% level of the 2007-08 recovery. The chart structure suggests another upleg can be anticipated, before we look closer for signs of medium term bear fatigue.
• DAILY CHART: In the latest FX Trading Guide we had been looking for a break above the two small highs from Dec for a bull trigger, which has now happened. This follows good support from the 76.4% area within the consolidation pattern. The chart now looks well-placed to challenge resistance from the 1.3000 area, with a greater chance of breaking through this time. Next target would be that 61.8% level of 1.3465 from the Monthly Chart. First support comes from those 1.2373/60 Dec highs.

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Initial Soybean Upleg Now Complete

The Commodity Trader’s view The sharp retracement in 2008 eventually found support from a long term 76.4% level, in Dec. Following an initial recovery phase there are now clear technical reasons why a s/term pullback has commenced.

• WEEKLY CHART – CONTINUATION: The 76.4% retracement of the 2006-2008 upmove, in the 790s, and the Jun-05 757.50 high have provided a very effective zone of support.
• DAILY CHART – MAR-09: When the bounce off that long term 76.4% support exceeded the top of the s/term bear channel top projection, the loss of bear momentum was confirmed. The break of 985.55-993.50 area (23.6%/04-Nov high) was also bullish - however, we had been expecting resistance from the 1072.00-1113.25 area (Apr-08 low/38.2%), and it came from the base of this area. Looking closer…
• DAILY CHART – MAR-09: The shorter term candlestick chart highlights the Key Reversal Day from Monday, with probability the market will retrace greater than the 38.2% area seen so far. We currently assume the pullback to be corrective within a recovery phase, anticipating another upleg in due course. Ultimately the 850 area, which comprises the 76.4% retracement and prior lows from last year, needs to hold. Buyers on dips will ideally favour stops below here.

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Base Completed in Aussie Dollar

The FX Trader’s view In Dec we looked at what was required for the Daily AUD/USD chart to complete a temporary base. These conditions have now been achieved, with shorter term bulls now in favour.

• MONTHLY CHART: Of the major 2001-2008 upmove the market last year retraced very close to 76.4%, before finding support. This is sometimes a very effective technical level. The Daily chart below now suggests that bulls have done enough to prolong a recovery phase.
• DAILY CHART: In Dec, the breaks through the falling resistance lines were followed by a close above the key 0.7000 area (23.6%/38.2%). This completed a small base pattern, and provided a final bull trigger (in our 11th Dec Update we suggested that some traders may have used a close above the first of these resistance lines for a bull signal).
• Continuation higher has been modest so far, but we currently still aim for the 0.7500 area, our initial/minimum target. Note that stronger resistance, however, could lie between the 0.7800 17-Sep low and 0.7925 dual retracement level, if reached. Ideally first support around the 0.6753 24-Dec low will hold, in order to preserve s/term bull momentum.

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Coffee Bulls Are Now Stirring

The Commodity Trader’s view

In late 2008 the downtrend in Coffee had looked as though it was in the mature stage, suggested by the overall chart structure for the previous 6 months. There are now bullish signals that cannot be ignored.

• WEEKLY CHART – CONTINUATION: The major fall from last Feb’s peak has taken the form of two distinct downlegs. Good support has come from the 76.4% level of the 2005-08 upmove, this just above the 100.00 2007 lows. Technically, a rebound from here would not be a surprise.
• DAILY CHART – MAR-09: After support was found near two Fibo projections that we had, around 103.00, two things have happened now to provide an initial bull trigger, 1) a break above the small bear channel, and 2) a break of the 114.00 15-Dec high This opens up our first target towards the 125.43 38.2% level and 125.85 14-Oct high. Any buyers will likely have initial stops below the 106.05 05-Jan low. A break below this would negate the current bullish signs. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Bunds fascinate

The Technical Trader’s view:

WEEKLYCHART The market is teetering at a critical level – the very longstanding previous high (an all-time-high) established in 2005. The fascination lies in the balance of forces – the bull surge from the Double Bottom has not yet reached its minimum target - somewhat higher than 123.64. Yet the market is hesitant. And a failure here would be powerfully negative. When would we know that the market had failed? Look closer.

DAILY CHART Here is the short-term situation. The market has failed twice already at the 125.39 level. A breakdown through the 121.60 would complete that Double Top. And, at the same time signal a second failure at the long-term 123.64 level. That would be a good sell, surely?

The Macro Trader’s view:

The Bund has enjoyed a strong Bull Run which began in late July 08 and peaked at the end of December. We at the Macro Trader’s Guide remained sidelined from the market during the early stages of the rally, as we harboured concerns about increased sovereign debt issuance resulting from the authorities globally pumping vast amounts of money into their Banks to prevent a threatened meltdown of the financial system, which as is now widely accepted, was precipitated by the collapse of Lehman Brothers. However, our view changed as we concluded that the outlook for growth, not just in the Euro zone, but globally, had weakened to such a degree that worries over a recession turning to a slump took priority over the sustainability of public finances.

As the US announced sizeable piecemeal publicly-funded rescues of various financial institutions, culminating in President elect Barak Obama announcing a fiscal stimulus (close to $1.0T upon inauguration), the markets reacted positively as they judged these as prudent measures designed to defend against deflation. The UK and Euro zone too, announced their own stimuli with the Euro zone pledging Euro 200.Bn in addition to individual packages pledged by member states. Indeed, the earlier reluctance shown by Germany and France to commit to anything other than a modest fiscal stimulus has now evaporated. Additionally, as interest rates globally increasingly look set to converge on zero, Central Banks have began seriously considering quantum easing measures, which involve governments issuing debt to raise funds for public works/tax cuts etc and the Central Banks buying them as a means of expanding the money supply. This led to a change of tone in equity markets as stocks staged a Year End rally that spilt over onto the New Year. But bonds, including the Bund, have recently corrected lower. It seems traders/investors may have awoken to the longer-term implications of ever-bulging budget deficits and growing National debt. While Central Banks buying bonds as part of a quantum easing plan places something of a floor under the market, there are some real risks to this:

 Will the Central Banks withdraw in time to prevent excess liquidity from causing a massive burst of inflation?

 Will governments retain the confidence of investors, or will the credit worthiness of the major economies be called into question?

 Will private investors simply continue to buy all the debt issued not bought by the Central Banks?

Already this week the German government failed to cover a Euro 6.0Bn Bund auction. Was this an aberration or a sign of things to come? While the current economic outlook remains weak (the recession in the Euro zone and elsewhere continuing to deepen) and inflation continues to correct ever lower (assisted by collapsing energy prices) that concern is not immediate, but at some point all this debt will need financing in the open market and hopefully repaid. Traders easily switch their attention from one concern to another, especially if the flow of data and news becomes yet more of the same. They could start casting around for the next big development and in Bonds that could well be the next bout of inflation or the fiscal burden being built into the future for Western taxpayers.

It may be too soon to suggest the Bund is about to turn bearish, but we judge the lights are flashing amber. Will they go back to green or turn red?

Mark Sturdy John Lewis Seven Days Ahead

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