How strong is the Bund rally?

If the recent rally is to enthuse the bulls, there needs to be a great deal more price action with which the market can build a bottom from which it can convincingly attack the resistances above.

The Technical Trader’s view:

MONTHLY CHART

The long-term bund chart remains extremely bearish.

The succession (five pinpointed here) of breakdowns through the support from Prior Highs – both diagonal and horizontal remains a blight on the market.

Anyone of those supports might have formed a bottom to the market – but none did.

DAILY CHART

So the rally of the last week or so has to be seen in the context of the longer term chart.

Just two of the broken supports are superimposed on this short-term chart – and will act as a medium-term band of resistance.

Certainly the rally has penetrated the first short-term band of resistance 123.76 -124.27, and the near-term down trend resistance (coincident with the horizontal band) but drifting open interest suggests the covering of shorts rather than new longs.

If the rally is to enthuse the bulls, there needs to be a great deal more price action with which the market can build a bottom from which it can convincingly attack the resistances above.

Mark Sturdy

John Lewis

Seven Days Ahead

For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com

NZD/USD Bears Begin to Stir

The FX Specialist view - After a good recovery last year, which still fell short of the major 2008 peak, the chart turned indecisive. One or two clues are appearing that suggest a period of weakness could now be seen.

• WEEKLY CHART In the FX Specialist Guide we have been noting the rising support line that was running through the 0.7500 area. A weak close on the week would see an initial break of this, when downside focus would turn to the 23.6% 0.7248 pullback level for potential support (but also see Daily chart).
• DAILY CHART: Good resistance had previously emerged from around the 0.7835 22-Nov high (near to a 76.4% bounce level, not shown). The drop back from this has now seen a violation of the 0.7521 21-Jan low which provides a s/term negative sign. The 0.7329 16-Dec low could provide support, but more interesting could be the bear channel base projection just above 0.7200 now. Currently, s/term rallies should prove temporary.

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Booster Rocket Ignites in Crude Oil

The Commodity Specialist view - Following Brent Crude’s earlier break above the May-10 high we had been focusing on certain Fibo targets and more recently looking for signs of bull fatigue as these were approached. But bulls have got a second wind, calling for higher projections/targets now.

• BRENT CRUDE - WEEKLY CONTINUATION CHART: We had recently been targeting the 61.8% recovery area around 105.00, looking for possible resistance - but renewed strength now turns focus towards the higher 121.25 76.4% level.
• BRENT CRUDE - DAILY CHART APR-11: In the Commodity Specialist Guide we have, for some while, been keeping in mind the 1.618 swing target off prior May-10 drop, at 106.20 on the Apr-11 contract. Now violated, the next two higher target/resistance levels became a traditional swing target at 113.60 (already breached intraday), and the 2.618 swing projection at 125.60. The latter lies somewhat higher that the 121.25 76.4% from the Weekly continuation chart, but quite close to the equivalent 2.618 swing level on that chart, at 124.25. The chart structure remains very bullish at present.

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Cable poised to go higher

Despite King's laboured attempt at yesterday's press conference to quell expectations of tighter policy, it is clear there are many conflicting views among policy makers. In fairness, King did admit this. And although Short Sterling interest rate futures traders reacted by reducing their bets on the likelihood of a near term rate hike, foreign exchange traders seem to take a different view...

The Technical Trader’s view:

WEEKLY CHART

Triangles can be bottoms as well as Tops.

This is all the more likely in this case since the market is bouncing from an already established low from 2001.

Bulls need to watch the price action at the Upper diagonal carefully

DAILY CHART

The rally so far from the lows has been characterized by the importance of Fibonacci levels and Prior Highs.

The hesitation at the 1.6298 Prior High Pivot as well as at the gently falling Triangle diagonal.

But note too the support from the relatively minor Prior High at 1.6059 – preventing the market from falling back further.

The cluster of Fibonacci extensions above 1.6298 may be a problem, but on balance we are cautious Sterling bulls - waiting for confirmation of a break through 1.64.

The Macro Trader’s view:

The Bank of England quarterly inflation report released yesterday had been anticipated by market players as the starting signal for the Bank to begin hiking interest rates sometime in the next few months.

The inflation outlook short term showed a higher peak than the November forecast before dropping back, based on the Short Sterling futures strip’s forecast of rising interest rates. But Bank Governor King seemed to do his best at the press conference to dampen expectations of higher interest rates in the immediate future.

His defence of the Bank’s record and policy stance rests on the impact external shocks have had on inflation. In a nut shell he argued that domestic price and wage pressures are subdued, but it was rising world energy, commodity and food costs that were responsible for pushing up inflation and were exaggerated by the Pound’s 20% devaluation during the financial crisis/recession.

He further argued that to react now to current inflation by hiking interest rates would be wrong, since once these “one off” shocks had worked through the statistics, inflation would fall to target, so a series of hikes now would likely cause an inflation undershoot relative to the 2.0% target.

But just how many on the MPC share his view?

Only today MPC member Andrew Sentence argued that the window for gradual policy adjustment might be closing, meaning a more aggressive series of rate hikes might be needed eventually. So despite King’s laboured attempt at yesterday’s press conference to quell expectations of tighter policy, it is clear there are many conflicting views among policy makers. In fairness, King did admit this.

Although Short Sterling interest rate futures traders reacted by reducing their bets on the likelihood of a near term rate hike, foreign exchange traders seem to take a different view. After a brief period of weakness yesterday, the Pound has recovered against the Dollar and to a lesser degree the Euro, which suggests Cable traders still expect interest rates to rise sooner rather than later.

Are they right?

King based his argument on the recent external price increases representing one-off shocks. But looking at commodity markets, those price rises could extend further. The demand created for raw materials, energy and food by the economies of China and India, together with other larger emerging economies, could conceivably drive those prices higher yet.

Indeed, if the US economy is truly recovering towards something like its own growth potential, demand for key raw materials and energy will increase, further driving up costs. Will the Bank simply stand idly by and say there is nothing we can do as inflation pushes ever higher?

King argued yesterday that to have kept inflation at target, the recession would have been deeper. So what policy makers have done is spread the pain of reduced living standards across the economy, through rising inflation, rather than concentrate it in a smaller group by pushing up unemployment through higher interest rates.

But they may need to do that anyway if external inflation continues to rise. Paradoxically, foreign exchange traders are betting on that outcome as they push the Pound higher against the Dollar. Ironically, if the Pound goes far enough, it might just help choke off imported inflation and the need for rate rises! But that is a long way off.

In the meantime, can the Pound rally further on expectations of rates rising sooner rather than later? We think it can, but the move is likely to be volatile.

Mark Sturdy

John Lewis

Seven Days Ahead

For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com

AUD/USD Uptrend Looking Tired

The FX Specialist view - The upmove in AUD/USD from the May-10 low exceeded the major 2008 peak, but started to lose momentum in November. Bulls are now cautious and we here look at what the danger signs could be.

• MONTHLY CHART The break through the 0.9849 2008 peak has met with resistance from the long term bull channel top, around 1.0300. Thoughts have also crept in about a possible change in chart structure which would imply bull fatigue – see below.
• DAILY CHART: Resistance had previously been suggested in the FX Specialist Guide around a Fibo projection close to 1.0200. After the Nov-10 test of this the chart structure has changed, now suggesting that bulls have tired. This resistance area, including prior recent highs, has again been a barrier in Feb. The rising support line (at 0.9965 now) offers first support, and a break below this followed by breach of the 0.9800 12-Jan low would provide the initial bear signal A later drop below the s/term channel base projection around 0.9640 currently, would provide bear confirmation, with temporary support then looking likely around the 0.9405 Nov-09 high (near to the current 38.2% pullback level).

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Copper Pushing Against Long Term Channel Resistance

The Commodity Specialist view - New uptrend highs in Copper have been seen in 2011 and the next interesting long term resistance has now been reached. We await reaction around here, looking for bull fatigue clues on the Daily chart.

• COPPER HIGH GRADE - WEEKLY CONTINUATION CHART: The uptrend is currently pushing against resistance from the bull channel top projection around 4.6500. We stay on the lookout for resistance here, but a successful break through would turn attention to higher targets such as the 5.0930/5.1070 area, a Fibo projection and equality target (2009/2010 upmove extended from the 2.7250 Jun-10 low).
• COPPER HIGH GRADE - DAILY CHART MAR-11: The bull channel top at 4.8500 offers current resistance as initial speculation creeps in that the current chart structure could be hinting at possible bull fatigue. In this regard note a negative divergence beginning to appear on the daily RSI momentum indicator. That said a break below the channel base at 4.3400 is needed to provide an early bear sign, with a break/close below the 4.2080 25-Jan low to back this up. A better pullback phase may well get underway then.

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USD/CHF Bears Resting – Do Bulls Lie in Ambush?

The FX Specialist view - The downtrend in USD/CHF has slowed over the last few months, support emerging on the longer term chart. Our stance in the Commodity Specialist Guide has remained bearish, but a clear break of a key resistance area would change this.

• WEEKLY CHART Following erosion of the long term bear channel base support has emerged from the equality target at 0.9345 (Nov-08/Nov-09 downmove measured off the 1.1730 Jun-10 high). Note resistance on this chart offered by the old support/return line.
• DAILY CHART: The initial bounce off the 0.9298 31-Dec low found was repelled by the rising old support/return line. This low has stayed intact, keeping the next Fibo projection at 0.9040 out of reach for now. At this stage a recovery needs to overcome key resistance that centres on the 0.9914 Nov-09 low and includes that old return line and a bear channel top. A clear break/close above this resistance would provide us with a clear bull signal, and justify calculating higher retracement levels. We await developments.

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Sugar Bulls Faltering at Long Term 76.4% Level

The Commodity Specialist view - Following the sharp 2010 drop back in Sugar the subsequent recovery has seen new highs which have tested a long term Fibonacci level. We currently await a better reaction around here but, so far, the market is finding resistance.

• SUGAR 11 - MONTHLY CONTINUATION CHART: The bull move has reached the long term 34.75 76.4% recovery level where we await better reaction –s/term resistance is currently apparent here.
• SUGAR 11 - DAILY CHART MAR-11: This year’s brief new high followed by fresh weakness keeps the technical picture uncertain, with the long term 76.4% resistance (above) still having an effect. The first negative sign here would be a drop through the 29.50 30-Dec low. But more key is dual support from the channel base projection and current 38.2% pullback at 27.85. A break of this support area would herald a more prolonged pullback phase.

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Is this lift-off for Cable?

The ground may have shifted in Sterling's favour, but given the uncertain outlook for the UK economy, don't expect Cable to rally as dynamically as it previously sold off, at least not just yet.

The Technical Trader’s view:

MONTHLY CHART

The tight trading range between 1.3688 and 1.7050 is clear.

WEEKLY CHART

And within that range the market has described a Triangle.

But triangles are not normally reversal signals, but rather, continuation patterns. That is, in this case, bearish,

The test of the upper diagonal would gain credibility if the near high was overcome as well.

DAILY CHART

The near-term Prior High pivot is clear at 1.6298.

Bulls need a break above there to convince on the upside.

(Note, in addition, the cluster of Fibonacci resistances above the 1.6298 level.)

So we remain skeptics of the bull run - for the moment until there is an unambiguous break of the 1.6298 level.

The Macro Trader’s view:

Our long-term view of Sterling is that the currency was over-sold during the financial crisis/recession and that a recovery against both the Euro and Dollar was to be expected.

When we last wrote about Cable here in our weekly update on 20th January we said...

...” Our current view of Cable is the Pound isn’t yet sufficiently free from uncertainty to allow it to fully recover. Until there is greater clarity about the economy’s ability to weather the current fiscal retrenchment, we judge the Pound is likely to suffer a correction lower, before the big rally begins, so in conclusion the recent high may be it for a while”...

Cable did indeed correct lower on January 25th, but was that the correction we meant? And if not, what if anything has changed in the UK economy to send Cable almost back to the highs made in early November last year?

In our earlier piece we were concerned the economy was set to suffer a growth shock as a result of the Coalition government’s fiscal retrenchment, evidence for which we thought would present as Q1 data began to be revealed. In the event, the Q4 GDP data released on January 25th was very much weaker than even the biggest pessimist had expected and that was largely responsible for the sell off on that day mentioned above.

But Cable quickly bounced. Part of the reason was the hawkish MPC minutes released the next day. But really, they were a little too historic since policy makers wouldn’t have know the Q4 GDP data when the January meeting was held, and if they had their tone might have been less hawkish.

The other reason that the Pound has recovered has been fears about inflation, not just in the UK but globally. The PMI manufacturing surveys released this week by the leading economies, including the UK, were all stronger than expected, but they all also revealed a worrying build up of inflationary pressures.

Today saw the release of the UK PMI Service sector survey which covers a much larger part of GDP and that too was stronger than expected. Moreover it was the best reading for 10 months and halted and reversed a worryingly weak trend that had established over recent months.

The Q4 GDP report cannot be ignored, it was truly weak, but the strong performance of this week’s PMI surveys suggest the Bad weather might have been responsible for much more of that weakness than previously supposed, meaning the underlying health of the economy could be stronger than feared.

That said, the US too has released very strong equivalent ISM manufacturing and non-manufacturing data this week and Cable has slipped from the highs reached earlier today.

But in Sterling’s favour, the Dollar looks fundamentally weak for two reasons:

- The recent crisis in Egypt, a regional lynch pin and key US ally, failed to force any Dollar safe haven buying, and

- The fiscal position of the US is untenable long term and requires a plan to correct it, so far resisted by Obama.

For these reasons we judge the ground has shifted in Sterling’s favour, but given the uncertain outlook for the UK economy, don’t expect Cable to rally as dynamically as it previously sold off, at least not just yet.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/JPY Reaches First Interesting Resistance

The FX Specialist view - Long term support in EUR/JPY has come from a 76.4% pullback level, and we are still waiting to see if a better recovery can get established. At the moment the first noteworthy resistance has now been tested, although not yet overcome.

• MONTHLY CHART The 76.4% pullback level has been providing good shorter term support. The first recovery level of note here is the 118.32 38.2% retracement, but also see Daily chart.
• DAILY CHART: We have added nearby dual resistance on the Daily chart, coming from a s/term 76.4% bounce level and falling resistance line just above, around 114.00 just now. A clear close above this would be the first interesting bull sign, with further breaches of 114.95 and 115.66 prior highs providing a boost, with first target being that 38.2% level from the Weekly chart. Support is offered by the 110.24 04-Jan high.

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Cocoa Bulls Now Back in Control

The Commodity Specialist view - Following a correction low last September Cocoa prices lacked direction for several months, albeit with an upward bias. Recent breaks of resistance, though, have provided a clear bull signal.

• MONTHLY CONTINUATION CHART: Correction from the 3510 Dec-09 peak essentially found support around the 38.2% retracement. Subsequent recovery is now well underway, and the peak is now in sight.
• DAILY CHART - MAR-11: Breaking through falling resistance and the 3140 07-Dec high were bullish signs, and s/term dips are seen as temporary, and should probably not be deep at this stage. In this regard note the first interesting support area from that 3140 07-Dec high and falling return line at 3100. Buyers on dips may well enter above here now. At this stage note two Fibo projections at 3655 / 3700, the next target/resistance area.

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