The renewed weakness of Sterling

The Macro Trader’s view:

On the 30th July, 4 weeks ago, we wrote a piece entitled “How vulnerable is Sterling”, our conclusion at the time was that we thought it not very vulnerable against the Euro, since we judged, based on available macro economic data available at that time, that the UK looked closer to emerging from recession, than did the Euro zone, and in some respects the UK economy compared favourably against the US economy too.

So what has changed over the last few weeks?

The Euro zone economies of France and Germany have since released Q2 GDP data showing they have emerged from recession, moreover, other data:
- The Euro zone PMI composite survey,
- The German PMI Services survey,
- Both German and Euro zone ZEW surveys, and- More recently German IFO.

have shown improvement which lends support to the surprisingly better GDP data that was initially taken not only with disbelief, but discounted on the grounds the improvement would prove unsustainable.

In the US while data has remained mixed, with:- Retail sales undershooting consensus,
- CPI & PPI falling further than expected, and
- The recent ISM non-manufacturing survey disappointingly coming in below consensus,

There have been some key positives:
- Non-farm payroll has continued to moderate showing a steadily declining pace of job destruction,
- The ISM manufacturing survey continues to improve, but more importantly
- The Housing market has shown further important signs of recovery with both Existing and New home sales coming in higher than consensus over the last week, indeed New home sales, a GDP component, rose by 9.6% month on month as reported only yesterday.

Furthermore, the Fed’s Lacker said today “the economy (US) is levelling out and housing is no longer a drag.

While all of this explains the international environment, what has changed in the UK? The Bank of England has surprised the market several times in the last few weeks by 1st resuming its QE after suspending it the previous month, but more importantly, at the same time increasing it to £50.0B, this hit Sterling.

Then the Bank of England quarterly inflation report painted a picture of subdued inflation over the two year target period, based on current interest rates, which surprised both interest rate traders and currency dealers and undermined the Pound. But if that wasn’t enough, the recent MPC minutes revealed that Governor King and two colleagues wanted to increase the QE by a larger £75.0B, indicating the Bank may not yet be done with easing and this too depressed Sterling.

But probably the biggest shock came today when quarterly investment data was reported to have shrunk by 10.4% in the 2nd quarter and by 18.4% year on year. This not only explained the shock Q2 GDP contraction of -0.8% released a few weeks ago but probably makes any upward revision unlikely.However the UK economic picture isn’t all black, retail sales continue to expand and the housing market continues to confound the pessimists by showing clear signs of revival.

But as for the Pounds fortunes, they look less optimistic than they did 4 weeks ago, but much of the negative UK data quoted above is already historic, the Pounds fortunes will be decided by the run of data as we move forward and there are still strong indications that the economy could emerge from recession later this year, so short/medium term Sterling looks vulnerable, but longer term it should stabilise and gradually recover.

Mark Sturdy,John Lewis
Seven Days Ahead
NB.No technical comment today, Mark Sturdy is on holiday.

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Bears in USD/CHF Are Losing Interest

The FX Trader’s view - An earlier downmove in USD/CHF effectively came to a halt at the start of June, a choppy consolidation then ensuing. Bulls have so far failed to take the initiative but, for now, shorter term downside may well be limited…

• WEEKLY CHART: The breach of the medium term bear channel top projection was a hint that long term bears were losing momentum, despite the subsequent deep pullback. This was supported above the 76.4% retracement – it is unclear now if latest weakness will extend this far.
• DAILY CHART: Choppy action has been a clear feature here recently - a type of final ‘downleg’ in process perhaps. The bear channel top has been very effective resistance, but a small break of this could prove deceptive, so we keep in mind the higher 1.0934 30-Jul high too and a further channel top projection around 1.1000 (with 1.1020 24-Jun high just above) – all this must be cleared to break free of the consolidation/bear phase and confirm a bull phase underway. Meanwhile, on the downside, we currently have two Fibo projections at 1.0435/10, above the 76.4% level on the Weekly chart, and await with interest the reaction here, if tested. In the FX Trading Guide we have maintained a bearish stance recently, but acknowledging that downside could be restricted.

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Cocoa Bulls Struggle at 76.4% Level

The Commodity Trader’s view - The 76.4% retracement level has often been useful when reading the Cocoa (ICE) charts. Recently an upswing on the Daily chart lost momentum upon reaching a medium term 76.4% level and we are on the lookout for a pullback phase now.

• MONTHLY CHART - CONTINUATION: The 76.4% level of the 2004-2008 rise, near 1800, was close to old highs from 2003/2005 and provided good support last year. On this continuation chart the medium term 76.4% recovery level is at 3027, somewhat higher than on the front month.
• DAILY CHART – DEC-09: The 76.4% rebound level provided clearer resistance on the old Sep-09 chart, but here price definitely struggled to break higher from this area. A bull channel top has also provided nice resistance – the 3000 area looks tough to crack. In the Commodity Trading Guide we said that a close below the 2811 29-Jul low would encourage a down-phase – we think this should be the case, the subsequent strong bounce notwithstanding. Note potential support from 2580, a small 76.4% pullback level, ahead of the channel base at 2480, and 2450 25-Jun low.
• In the Guide we suggested that, following a close below 2811, sellers may favour entry on any subsequent bounce back to at least 2900. Taking into account the 3027 76.4% level on the long term chart initial stops may be favoured above here, say 3040, targeting 2600 for partial profits then lowering stops to cost. Should the channel base break then next profit target would be the 2400-2350 area.

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Cable rally hits the buffers but sellers should be cautious.

The Technical Trader’s view:

MONTHLY CHART

We can see that there’s a long-term trading range well-established from the early 1990s.

And the market’s recent rally has driven it up to substantial resistance at the 1.050 low.

WEEK CHART

The struggle at that level is clear – a band of resistance looks to be in place 1.6802-1.7050.

(Equally we note that there was a double bounce from the lows adding great vigor to the rally.)

DAILY CHART

But this reveals that the market has just tip-toed up to the resistance band and pulled back.

Certainly the prior High Supports nearby at 1.6661 have been smashed – yet we are not that bearish because there is no clear REVERSAL structure in place – short-term.

So for the moment we are standing back awaiting short-term patterns that endorse the medium-term failure at the 1.7050-1.7450 band of resistance.

Mark Sturdy,
John Lewis
Seven Days Ahead

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Will NZD/USD Bulls Look Tired Soon?

The FX Trader’s view - Continuing the theme from the last FX Update on the US Dollar Index and a possible final downleg unfolding there we look at a similar (but reversed) chart structure in NZD/USD where bulls could be steadily scraping towards the bottom of the barrel..

• WEEKLY CHART: After a temporary pause ahead of the 0.6637 Aug-07 low, when support emerged from a 23.6% level, a further push higher has seen the 0.6945 61.8% recovery level loom into view.
• DAILY CHART: The recent breach of the early Jun 0.6595 high signalled that s/term bulls now have the controls. Note s/term support has come nicely from that high – ideally this will hold for now, in order to preserve current upward momentum. We are currently keeping an eye on one interesting Fibo projection at 0.7000, just above the 61.8% recovery level. In the FX Trading Guide we have already conjectured that we are seeing a final, third upleg. This is turning out to be less choppy than some other markets such as EUR/USD. We hold a s/term bullish stance and don’t, at this stage, anticipate maintaining this for too long – we’ll see.

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Further Upside in CRB Index

The Commodity Trader’s view - An earlier pullback in the CRB Index found solid technical support in early July and subsequent recovery has been impressive. Following a recent erosion of former 23.6% resistance there seems to be scope for further modest gains at least.

• WEEKLY CHART: After a low of 200.16 the best recovery since the start of the index’s collapse last year has been seen. The first target on this chart was the 23.6% 264.78 retracement – it was reached and provided initial resistance, now again under pressure. Now note higher resistance from the significant 284.61 Jan-07 low.
• DAILY CHART: A strong bounce from near the 229.62 24-Mar high has now resulted in a new high for the year. There is currently little in the s/term chart structure to suggest bear fatigue – a recent small key reversal day (06-Aug) is thought to be too weak a bear sign. Another push higher would see a Fibo projection area of 281.35/282.30 loom into view. This lies close to that old 284.61 low on the Weekly chart – we will be on the lookout for resistance around here.

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US Dollar Index – Third and Final Downleg?

The FX Trader’s view - An earlier failed attempt to embark on a recovery phase, thwarted by a 23.6% resistance area, has seen the Dollar Index slipping lower. However, it could be that this is a final downleg…

• MONTHLY CHART: The main sign in 2008 that long term bears were losing momentum was the breach of the bear channel top projection. Subsequent resistance was found from the 38.2% recovery level. Current weakness has tested/eroded the 61.8% pullback level and Dec-08 low (77.688) – how much lower this can go is unclear. See Daily chart…
• DAILY CHART: In the Guide we had been on the alert for further s/term bear pressure, and the recent breaks of the small channel base and 78.334 02-Jun low have confirmed the bears in control for now. At this stage we note a Fibo projection at 76.40, ahead of the 75.17 76.4% level on the long term chart. Characteristic of some other markets too (e.g. EUR/USD), note that a third and possible final impulsive leg (down in this case) is unfolding. We think it is right to be cautious about how long this trend lasts.

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Retreat in Wheat Does Not Look Complete

The Commodity Trader’s view - The long term Wheat chart has twice tried to overcome its 23.6% recovery level and failed. Notable weakness in June put bulls firmly on the sidelines, and there remains good potential for further shorter term losses.

• MONTHLY CHART – CONTINUATION: The long term 76.4% retracement has provided good support, but the market is currently unable to keep away from this. But it still could provide the platform for a better medium term recovery phase in due course.
• WEEKLY CHART – CONTINUATION: Note how the 23.6% recovery level has thwarted two tries to trend higher. The 455.00 Dec-08 low remains vulnerable at present.
• DAILY CHART – SEP-09:: Current action remains capped by resistance from the old rising support/return line, AND the current 23.6% area (eroded intraday but not closed above). As remarked in the Commodity Trading Guide the risk remains to the downside. We currently keep in mind two Fibo projections, at 468 and 440 – these straddle the 455 low on the Weekly chart. At this stage a close above the 557.50 03-Aug high would provide a s/term bull signal and delay a continuation lower.

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