Key Reversal Week in AUD/USD Bearing Fruit

The FX Specialists view - In the FX Specialist Guide we had pointed out a Key Reversal Week that potentially boded bad for bulls. We still believe this to be the case and signs begin to emerge on the Daily chart that back this up.

• WEEKLY CHART: Key Reversal Weeks tend to be more reliable than key reversal days, and we saw one of the former recently in AUD. The current risk is to the downside. On this chart note the first interesting support/target is around 0.8600, the 23.6% retracement.
• DAILY CHART: We have now seen a failure of the shorter term bull channel support today. The confirming signal would be a close below the 0.8905 02-Nov low. In the Guide we had already noted a negative RSI divergence that was heralding bull fatigue. Note lower support coming from the slightly longer term bull channel base at 0.8760 currently, ahead of that 0.8600 23.6% pullback level.
• In the Guide we had suggested sales, on the back of that Key Reversal Week, into 0.9300/20. Those now short will now favour lowering stops to 0.9325, targeting 0.8925 for partial profits. Balances may seek to close nearer to 0.8600 – we’ll review this in due course.
• Note: A recent Key Reversal Week seen in EUR/USD was not considered a strong example of one – and this week it was negated. However, there has been fresh failure close to a long term 76.4% level...

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The surge of the Yen

Why, when the US economy has also emerged from recession and it has a better debt-to-GDP ratio than Japan, has the Yen begun to show such unequivocal strength against the Dollar and also against the Euro and Sterling?

The Macro Trader's view:

The Yen is a currency that has recently benefited from periods of risk aversion. When stocks have been sold the Dollar has rallied on safe-haven buying and the Yen has strengthened too. Even though the Japanese economy has suffered its own damaging recession, traders see the Yen as a refuge from periods of great uncertainty.

Recently, the Japanese economy has begun to recover with the recent release of stronger than expected Q3 GDP but weak spots remain: condo sales have been weaker than expected recently and so too have department store sales.

But the historical strength of the Japanese economy has mostly been due to exported manufactured goods and that remains true today. However, even as recession has been declared over, Japan continues to be dogged by deflation with CPI data released last week showing a decline of 2.4% year on year.

So why, when the US economy has also emerged from recession and it has a better debt-to-GDP ratio than Japan, has the Yen begun to show such unequivocal strength against the Dollar and also against the Euro and Sterling?

The answer is that even though Japan continues to suffer from deflation and the country has a debt-to-GDP ratio in excess of 100% it has a large current account surplus and a trade surplus which means they have few concerns about financing a budget deficit.

The US, on the other hand, not only runs a huge budget deficit, projected to be 12% of GDP or in cash terms US$1.8T with a debt to GDP ratio forecast to hit 70%+ of GDP, but also runs a large trade deficit.

Although this dramatically reduced during the recession, as the US economy has begun to grow again, so too has the trade deficit. For now funding issues are manageable as the outlook for US inflation remains benign and the markets retain confidence in Fed chairman Bernanke.

But China, India and others are not happy. They have massive reserve holdings in US Dollars and Dollar denominated assets, principally US Treasury Bonds. They are unhappy that current US Government economic policies will lead to an erosion of the Dollar's value over time.

The Euro, often touted as an alternative reserve currency, isn't quite up to the role. So the only other currency that offers a safe place to hold reserves is the Yen and this could partly explain the Yen's current strength against the Dollar. Clearly, the percentage of the world's reserves held in Yen remains small compared to the Dollar, but we are talking about diversification, and Gold has also benefited from this. Looking ahead we see a clear trend establishing and the Yen will be the beneficiary.

The Technical Trader's view:

MONTHLY CHART

The failure of the market to get back up through the powerful resistance from the old lows at 101.30 and 101.70 is clear.

A retest of 79.78 is likely...

DAILY CHART

Having driven down through both the near old lows at 88.27 and 88.04 and the pivotal old lows at 87.15 and 87.16, the market has a great deal of resistance above in case of any attempted Dollar rally.

The speed and violence of the move makes it look over-extended.

But the Dollar bears will take great comfort in that overhead resistance.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUA, Carbon Emissions, Favour Short Term Bears

The Commodity Specialist view - Price swings over the last few months have kept the charts in consolidation mode, below a long term key Fibo resistance level. Recent losses have temporarily tilted the scales more in favour of the bears, but losses should prove temporary in the grander scheme of things.

• WEEKLY CHART – CONTINUATION: The 38.2% recovery level has proved a tough barrier to push through, and remains first key resistance on this long term chart. The multi-month consolidation is now seeing more of a sagging in price but this should ultimately be temporary ahead of a later (postponed for now) break above that 38.2%.
• DAILY CHART – DEC-09: This week’s break below rising support around 13.00 confirms that s/term bears are in control. We think that s/term rallies will prove temporary/corrective ahead of further weakness. Resistance-wise first note the prior Oct lows around 14.00 and 61.8% bounce level at 14.06. Then the 76.4% level at 14.43 and falling resistance line just above. The 12.00 area is something of a minimum target (note the small bear channel base just below here). But also keep in mind an interesting Fibo projection at 11.60, currently coinciding with a larger bear channel base – better support could be seen here.
• Ahead of the targets being neared, the ideal sell area looks to be around 14.00, if seen, with stops above the 14.43 76.4% level and falling resistance, say 14.60. 12.50 would be targeted for partial profits, stops reducing to cost. Traders choice whether to target 12.00 or towards 11.60 for more.

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Cotton Bulls Waver At 61.8% Recovery Level

The Commodity Specialist view - The recovery in Cotton from its Nov-08 low slowed during the summer, at one stage suggesting a reversal was in the offing. However, an Oct break to the upside kept bulls on track for the next upside target around a 61.8% recovery level – and now there are indications that a temporary pullback is due.

• WEEKLY CHART - CONTINUATION: Former clear resistance from the Jun-08 low (which coincided nicely with the 50% retracement) was finally broken in Oct this year. The 61.8% level just above 70.00 has now been tested. Note the recent ‘doji’ week on this candle chart, with open and close near the same level suggesting a moment of indecision. Is a temporary pullback phase now on the cards?
• DAILY CHART – DEC-09: Before we turn to the new front month of Mar-10 note resistance from the channel top on the Dec chart (not evident on the new chart) – coinciding with the occurrence of a Key Reversal Day.
• DAILY CHART – MAR-10: Note the 11-Nov bearish Key Reversal Day, which combines with that ‘doji’ week on the Weekly chart and test of 61.8%. A pullback would not surprise at this stage. Initial supports include the 68.40 23.6% pullback, then 67.88/ 67.28 prior highs. Lower support comes from the rising support line and 38.2% level at 64.76. The current pullback scenario would be invalidated on a close above the 74.27 high.
• In the Commodity Specialist Guide we have already suggested aggressive shorts in the 72.50/73.00 area. Initial stops are favoured at 74.75 (catering for a small overshoot), with partial profits targeted around 69.00. With stops then lowered to cost the balance may try and close at/above 65.00.

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USD/CAD – Signs of the Next Bull Leg

The FX Trader’s view - The correction from the 1.3063 Mar high has been deep. Whilst recent support has not come from the most obvious of levels it is still worth looking to see what is now needed to trigger further s/term bull interest.

• WEEKLY CHART: The downmove has so far stopped short of the 76.4% level at 1.0000 (however, there is no requirement that this be reached). Ahead of here support has come from near the 1.0296 Sep-08 low, the take-off point for the last major upleg – it was briefly eroded but a rebound has been prompted.
• DAILY CHART: The initial recovery found clear resistance from the 1.0880 23.6% retracement. It remains the first key resistance, and a close above this would provide a bullish signal. Our focus would then turn to the area of the 1.1124 17-Aug high which currently coincides with a bear channel top projection. Whilst temporary resistance may well be seen here we would expect the recovery to push higher. We are currently leaning towards the idea that the recent pullback was temporary/corrective, ahead of a further upleg.

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Is the Dollar Euro on the turn?

Today Obama seems finally to have woken up to the dangers of running too big a deficit and allowing the national debt to seemingly spiral out of control. He said the deficit needs reducing or else the US runs the risk of a double dip recession.

Fine words, but his policy faces the other way...

The Technical Trader's view:

WEEKLY CHART

The drama of the Dollar lies in the completion of a massive Double Bottom when the market drove up through the 1.4716 level in mid October this year.
Since them of course, the market has hovered above that level, but not departed from it.
The implications of the massive Double Bottom are grave for the Dollar both medium and long-term
The minimum move is up to 1.70.
Through the previous all-time-low of 1.6036.
Now study the pause above 1.4716 to reveal the short-term situation.

DAILY CHART

This view reveals a number of important supports that lie beneath the market.
The Euro bears/Dollar bulls need those to break before getting excited.

DAILY CHART

But this detail is illuminating too.
The Double failure at 1.5062 - so far - is interesting certainly giving rise to bear possibilities - which would be confirmed on a break beneath 1.4650
On the other hand, only a break up through the recent high 1.5062 will get the Euro bulls going.
Watch the short-term price action carefully.

The Macro Trader's view:

The Dollar has been under pressure, principally against the Euro since March of this year, when the worst of the financial crisis was thought to be over and equity markets began to rally. This robbed the Dollar of its safe-haven status and as risk aversion began to ease a little, the Dollar's weaknesses were exposed.

Traders saw the US running up huge budget deficits, adding unimaginable amounts to the national debt and since a US$1.8T budget deficit wasn't just an emergency measure to help stabilize the economy, but part of Obama's economic policy to "remake" the US economy, traders judged the Dollar a sell.

During the Dollar's decline China has voiced dissatisfaction with the Dollar's role as world reserve currency and both she and India have bought Gold in a move to gradually diversify away from US Dollars.

Even while Obama has been visiting China, the complaints from the Chinese side haven't lessened as they accused the Fed of running policy in a way that is fuelling the next big asset market bubble as the Chinese complain the Fed is allowing cheap Dollars to finance riskier asset purchases.

While this is arguably true, the Chinese are no saints and are artificially depressing the value of their own currency.

In recent days Fed Chairman Bernanke saw the need to speak out in the Dollar's defence, something Fed chairmen never normally do since, traditionally, the Fed talks about monetary policy and the US Treasury Secretary talks about the Dollar.

As a result the Dollar gained brief relief before again testing the lows. So today Obama seems finally to have woken up to the dangers of running too big a deficit and allowing the national debt to seemingly spiral out of control. He said the deficit needs reducing or else the US runs the risk of a double dip recession.

Fine words, but his policy faces the other way.

Currently the Dollar is enjoying one of its numerous corrections, but nothing has changed and the Dollar remains a sell against the Euro and other major currencies. That even includes the Pound - despite the UK's own budget deficit and debt problems.

Mark Sturdy, John Lewis
Seven Days Ahead

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The Sterling yield curve

The Short Sterling and Gilt contracts represent two markets reacting to similar concerns, but sometimes moving in opposite directions. Hence the steepening of Sterling's yield curve...

The Technical Trader's view:

WEEKLY CHART DEC10 SHORT STERLING

Few could deny the exuberance of the Short Sterling market - now well above the long- run all-time-highs from February and May this year - they will surely be good support and help ratchet the market better again.

Now contrast that with the DEC11 chart...

WEEKLY CHART DEC11 SHORT STERLING

See how further down the futures curve the current price is far below the highs of Feb this Year.

The market is languishing bearishly rather than making new highs. Now look still further along the yield curve - at the Gilt chart.

WEEKY CHART UK GILT

In February this year the market re-tested the High established in 2003 around 124. Thereafter it fell.

So far it has found support at the 116.08 level.

But notice that there has been no bounce from there.

The market is yet more bearish than the DEC11 Short Sterling. The yield curve is steep and looks set to steepen. Bears should look along the futures strip (and beyond) to establish positions while bulls should buy as close to the Spot Month as possible.

The Macro Trader's view:

The Short Sterling and Gilt contracts represent two markets reacting to similar concerns, but sometimes moving in opposite directions.

The Short Sterling market has remained largely bullish throughout this year, apart from the occasional correction that occurs in any bull or bear market.

Over recent months we have watched as data has turned increasingly bullish of the economy:

1. the PMI Services report began a sustained recovery that now reports sold growth,
2. The housing market defied all predictions of collapse and not only began to stabilize, but is now reporting regular month on month price increases, and
3. Retail sales, while depressed, held up well given the recession. And so developed a view of the economy which expected recovery to emerge sooner rather than later.

So Q3 GDP was a complete surprise to us (and others) when it came in as -0.4%. At first we thought the ONS has made one of its classic mistakes. But the Bank of England's Quarterly inflation report, released yesterday, made no mention of this. Indeed, despite £200.B of QE and interest rates at almost zero, the BoE still forecast CPI below target in two years time.

There is a short term spike to above 2.0%, but policy makers expect that to quickly correct. All of this is based on the current market yield curve, which has priced in a gentle tightening. Moreover it also incorporated the current Government's fiscal tightening plans.

If the opposition Conservative party fulfills opinion poll predictions and wins next year's General election due in May/June, the fiscal tightening on their current plans will be even greater. Clearly on that basis, the outcome for CPI inflation should be even lower, meaning the Bank can leave policy on hold for virtually all of next year.

This offers Short Sterling traders a convergence trade.

The Gilt has all of this to consider, plus the unprecedented debt build up. But the market has traded within a wide range since June. On more than one occasion it has tried to break both the upside, on weak growth, and the downside on debt and future inflation concerns, but has failed to find the impetus to follow through, leaving gilt traders searching for direction

In short, the Short Sterling market is concerned with inflation and how policy is likely to react to it. Since there currently is no inflation there has been no policy response. This allows the bullish convergence trade to cash to take place. But the Gilt is faced with all that, plus a massive debt build up and periodic threats from credit rating agencies to the Sovereign debt rating. The Gilt looks confused short-term, with nothing like the capacity of Short Sterling to rally, yet unable to sell-off.

Mark Sturdy John Lewis
Seven Days Ahead

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US Dollar Index Might Be At Pivotal Moment

The FX Trader’s view - During 2009 the US Dollar Index has enjoyed a deep pullback. Its current position doesn’t exactly excite, but an interesting technical level is being tested and we here highlight what would be taken as the first bull signal.

• MONTHLY CHART: The recovery from early 2008 low found good resistance from the 38.2% retracement. In the process it breached a bear channel top projection suggesting long term bear momentum was waning. Subsequent deep pullback does not invalidate this observation. At this stage we are awaiting reaction after the test of the 76.4% pullback level – these can sometimes be very good supports.
• DAILY CHART: Recent support came from a falling support line here, at the same time as the test of that long term 76.4% level. As we have repeatedly stated in the FX Specialist Guide it is possible we are seeing a third/final downleg (from 81.466 08-Jun high) in the move that commenced from the 89.624 Mar high. At this stage a close above the 76.817 03-Nov high would also violate the small bear channel top projection and provide an initial bull signal. The first hurdles facing s/term bulls would then be prior 77.428/77.688 lows, ahead of the 23.6% recovery level.

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Sugar Bears Still Have Energy

The Commodity Specialist view - A Key Reversal Week in early September, which we highlighted in a previous Update, has provided a bearish backdrop to the technical picture of Sugar. It remains the marker of the end of a previous strong bull run and there is still bear risk.

• WEEKLY CHART – MAR-10: The early Sep Key Reversal Week prompted us to adopt a bearish stance. Subsequent price action has been quite choppy, but we currently seek a bear resolution from this.
• DAILY CHART – MAR-10: We have been viewing any s/term strength as temporary – this is likely to be the case while resistance from the bear channel top around 24.00 and 24.68 19-Oct high stays effective. Next downside target is the 38.2% level. Also note lower support from the bear channel base around 20.00 currently, close to the 19.73 2006 high on the continuation chart. In the Commodity Specialist Guide recently-suggested shorts around 24.00, with initial stops at 25.00, are seeking 21.00 for partial profits with stops then reducing to cost. 20.00 is favoured as a further profit target.

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EUR/USD Bulls’ Unease After Key Reversal Week

The FX Trader’s view - Bulls are on the alert after a recent potential reversal signal on the Weekly chart. But so far not enough has been done on the downside to fully persuade the bears, and the jury is still out, deliberating.

• WEEKLY CHART: Recently there was a type of Key Reversal Week which, admittedly, could have been a clearer one as there was not the clear ‘higher high’ prior to the ‘lower close’. However, we ignore this clue at our peril – it might prove to be a timely marker of a turn in trend. Ideally this would have been seen after a more accurate test of the 76.4% recovery level, but this is not essential.
• DAILY CHART: In the FX Specialist Guide we have been looking at bull channel base projections – the s/term one has not been breached on a closing basis yet, which would be the first bear confirmation. Currently, believers in the Key Reversal indication may try for speculative sales around 1.4950, just ahead of a s/term 76.4% bounce level (61.8% has already been reached, and sometimes this can be a good level in EUR/USD – we are looking at a lower risk entry, but with the chance it won’t be seen). The 1.5061 high offers a nearby risk level for stop purposes. Note lower key support is offered by the prior 1.4446/04 prior highs area, which also incorporates the main 23.6% pullback level and the next bull channel base projection – closing below this would provide a further clear bear sign.

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Natural Gas Pullback – a Temporary Affair?

The Commodity Specialist view - An impressive rally from a September low point has halted medium term bears in their tracks. And in the process an interesting reversal signal has been seen on the longer term continuation chart. The current pullback could prove temporary…

• MONTHLY CHART - CONTINUATION: Note how Sep produced a positive Key Reversal Month, suggesting the bears have had their day. However, this signal was not apparent on the front month charts so should be treated with a degree of caution. Note how resistance has so far come from the 23.6% recovery area.
• DAILY CHART – DEC-09: The break through falling resistance was an encouraging sign for bulls. However, in the Commodity Specialist Guide we had anticipated a deep pullback – which is now occurring. We are currently assuming this will be temporary. 76.4% support is now under test and we wish to await reaction here before contemplating buy strategies – that said the 4.340 04-Sep low does provide a clear and nearby risk level for buyers. (Note that a deep pullback on the continuation chart (not yet seen) would imply new front month lows)

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The alignment of Gold

Gold rallied hard on Tuesday and again on Wednesday, after India announced it had purchased $6.9B worth of Gold Bullion from the IMF, approximately half of the IMF's annual sales.

But why does it matter whether or not India chose to buy Gold from the IMF?

The Technical Trader's view:

DAILY CHART

On the Market Update of 5th October ‘How High Can Gold Go?' We presented this chart.

It shows the Gold price just about to break above a Neckline

We were excited because a Head and Shoulders Continuation pattern was just about to be completed.

As a result we felt the bulls were in charge: medium and long term.

From that H&S pattern and various Fibonacci extensions, we were able to build a series of medium and long-term targets for Gold at 1106, 1210, and 1330.

Now look closer.

DAILY CHART

What happened?

On the 5th October the market had just broken back through the Neckline of the massive H&S pattern.

The market surged ahead in the very short-term and then ground to a halt at the Pivotal Prior high at 1060.

The pull-back found support at the prior High at 1025.

The bounce from that level has driven the market up through the 1060 again - in a typical ratchet-like fashion for a well structured bull trend. 1072 (Prior High) is now good short-term support.

Short, medium and long-term structures are all in alignment.

So we are keen bulls.

The Macro Trader's view:

Gold rallied hard on Tuesday and again on Wednesday, after India announced it had purchased $6.9B worth of Gold Bullion from the IMF, approximately half of the IMF's annual sales.

But why does it matter whether or not India chose to buy Gold from the IMF? Although the sum is significant it is a small percentage of India's reserve holdings, which like most other countries, is mainly denominated in US Dollars.

However, the deal is significant because China also recently announced it had been buying gold over recent years. China has been a critic of the US Dollar as the World's sole reserve currency. So these purchases mark a decision by two of the World's largest and fast developing economies to begin diversifying their reserves away from the Dollar.

China holds in excess of US$1.0T in reserves; India's holdings are not far behind. With no other currency alternative immediately available, the big reserve holder nations such as China, India and the oil exporting nations of the Middle East have only one real alternative and that is Gold.

If this week's actions by India mark a new trend away from the Dollar, then Gold has gained some major support and will surely rally much further. This is so even if India's decision to buy gold this week turns out to be little more than portfolio rebalancing. That is because the Dollar is hampered by the current administration's decision to run massive budget deficits, which are adding hugely to the US national debt.

China has expressed its unease about the Dollar's long term value and the impact further Dollar weakness would have on China's (and India's) reserve holdings. So we view these recent Gold purchases as a clear attempt to begin a move out of the Dollar and would expect to hear news of similar actions from other countries as well as repeat purchases by India and China.

At a time when the economies of the US, UK and Euro zone are weakened and burdened by debt, Gold represents (as it always has) a neutral store of wealth, free from the policies of any one nation. Current western economic policy is geared to prevent financial and economic collapse while fostering economic recovery. If that results in a period of higher inflation, Gold will rally.

So India's purchase of Gold this week is important. We believe it endorses and strengthens our long-term bullish view of this market.

Mark Sturdy
John Lewis
Seven Days Ahead

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