USD/CAD Recovery Holding Below Key Resistance

Our last USD/CAD Update (06thMay) highlighted certain downside Fibo projections which looked supportive. Subsequent recovery has so far been unable to overcome initial key resistance though.

• WEEKLY CHART -CONTINUATION Our Fibo projection at 0.9485 has provided initial support. A modest recovery has so far found resistance from the Apr-10 low.
• DAILY CHART: A different Fibo projection on the Daily chart also provided support. The recovery has so far made heavy weather of extending to first key resistance offered by the 0.9973 15-Mar high, which coincides with a 38.2% retracement. Bear channel top resistance is not much above now, around 1.0000. A break through this is needed for a clear positive signal.

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Lower Targets Open For Brent Crude

An earlier fall in Brent Crude Prices in May found initial support from a 38.2% level. This has now come under pressure again, inviting calculation of lower targets.

• WEEKLY CHART -CONTINUATION The first 38.2% support has come under pressure once more, and a breach would herald a more prolonged pullback phase. Note the longer term 38.2% retracement, of the whole 2009/2011 upmove, at 92.32 which offers the next downside target. This lies close to a 61.8% level and the May-10 high.
• DAILY CHART –Aug-11: A second bear leg got underway after resistance from the 120.00 area. Downside focus is now on an equality target at 98.80 and lower channel base projection at 97.30. S/term support here would not surprise. On the support side the interest is as much in the longer term charts at present.

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Uk Gilts rally on hint of more QE

The prospect of the QE policy being re-activated has begun to drive gilt yields lower and sent Gilt futures higher.

The Bank is more likely than not going to restart QE and the Gilt will enjoy the support restarting that program will offer, together with the support traditionally offered bonds from slower growth and declining inflation.

TECHNICALS:

WEEKLY CHART

The market is being driven better from the clear completed Head and Shoulders pattern, the minimum move set to be up just beyond the 61.8% Fibonacci resistance.

DAILY CHART

The bull trend remains very much intact. The medium-term pattern is sustaining the bulls’ hopes, though a careful watch on the effect of the small resistance above the market should be kept.

Cautious bulls will wait for a break up through those levels. Others will be long from lower down and looking to add!

FUNDAMENTALS:

The rally in government bond markets over recent months has been driven by two anxieties:

1. The health of the global economic recovery, and
2. The Euro zone Sovereign debt crisis.

In the US, the economy has been slowing for several months despite the Fed’s QE2 program which worryingly draws to a close at the end of this month. The Fed acknowledges the weakness but so far hasn’t proposed any new measures designed to reverse the slowdown due to fears of gradually accelerating inflation.

In China, the authorities have tightened monetary policy on several occasions as they try to contain inflation and prevent an asset bubble from developing in an economy that has invested heavily in manufacturing capacity designed to fuel export-led growth.

In the Euro zone the recovery continues to be propelled by fast-growing Germany. But strip out German growth and the picture looks very different, with weaker peripheral economies struggling to cope with the burden of public debt and austerity measures designed to bring public finances back under control. But despite this, Greece and a few others remain in intensive care with default, at least in Greece looking like a real possibility.

IN the UK the coalition government has put into place deep spending cuts designed to bring public finances back to controllable levels that don’t hinder private sector growth, but the short/medium term consequences are slower growth, maybe even recession?

Over the last 1–2 years the Bank of England has walked a policy tightrope that this year has become ever more demanding.

As the austerity measures have begun to bite, the economy has rapidly cooled with the most recent retail sales report coming in at -1.6% month on month. This is bad news for a service sector led economy.

The Bank until recently had been widely expected to begin tightening policy later this year in an attempt to gradually return CPI inflation to its target of 2.0% from the current and persistent overshoot of 4.5%.

Indeed, the committee had for several months been split over how to respond to the dichotomy facing the economy. Six members had consistently voted for policy to remain on hold, but with various caveats about growth and inflation, the other three had voted for an immediate rate hike, with one seeking 50bp.

As if that wasn’t enough of a split, one of the group of six wanted to increase the QE program from its current level of £200.0B, but was constantly out-voted. This week the Bank of England released the MPC minutes for the meeting held earlier this month and there was a clear change of tone.

Although inflation remains substantially above targets, policy makers are becoming increasingly concerned about growth which looks set to slow further over the coming months.

The Government has little choice but to see through its fiscal retrenchment or else risk a debt crisis similar to the one playing out in the Euro zone.

So fiscal policy isn’t an option. The Bank of England can not cut interest rates since they are already at 0.25% where they have been for about two years. The only option open is to restart QE and that seems to be the direction policy makers are heading.

If the economy does slow further as feared, the thinking is that inflation will correct substantially lower. Interest rate hikes will be unnecessary. But then deflation could conceivably become a risk once more.

The Bank then would have to start buying bonds once more and it is the prospect of the QE policy being re-activated that has begun to drive gilt yields lower and send Gilt futures higher.

We judge the Bank is more likely than not going to restart QE and the Gilt will enjoy the support restarting that program will offer, together with the support traditionally offered bonds from slower growth and declining inflation.

In short, the gilt rally seems far from over.

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Is GBP/USD Momentum on the Wane?

After positive signs were seen on the GBP/USD chart earlier this year a recent drift back threatens to develop into something more lasting.

• WEEKLY CHART -CONTINUATION The previous break through falling resistance was bullish –but after the 50% recovery level was neared the market has slipped. Support from the old falling return line just below 1.6000 is now being tested.
• DAILY CHART: The recent break of rising support was an initial sign of momentum loss. However, lower supports are more crucial, including the 1.5934 28-Mar low and, in particular, the channel base projection around 1.5800. This latter combines with a 38.2% pullback level nearby at 1.5785 –a violation of this would signal a more prolonged correction phase was underway.

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Coffee Bears At The Helm

The steady surge in Coffee started to falter earlier this year, and after a peak in early May the chart structure began to change. Recent weakness has confirmed a bearish outlook.

• WEEKLY CHART -CONTINUATION The chart structure has changed, implying fatigue. This was particularly the case when temporary support from around the 23.6% pullback level gave way. Focus has now turned on the lower 228.00 38.2% retracement, as next potential support.
• DAILY CHART –Sep-11: Recent support from around the 259.40 05-Apr low has yielded now, after s/term consolidation. This followed the negative signal that came from the break of the channel base projection. Bear focus turns to the 220.00 area where a Fibo projection resides (not much below the 38.2% level on the Weekly chart). First resistance now comes from congestion below the 276.75 03-Jun high.

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Stocks are weak, especially the DJ EuroStoxx

TECHNICALS:

WEEKLY CHART

The market’s double failure at the 3050 High is very troubling for the bulls.

Note the support at the 50% pull-back which has already forced a substantial bounce once before…

But there is no clear Top formation in place here…

DAILY CHART

The day chart has a near Double failure (not apparent on the weekly chart) at the 3000 level.

Note too the completion of a bear head and Shoulders at the 2760 level (though there was some uncertainty at the Neckline).

Minimum move for the bears measured from the Neckline?

About the Prior Low at 2591.

The bears are in charge.

FUNDAMENTALS:

The rally in equity markets globally looks at risk now as traders start to re-assess the health of the global economy. And no matter where one looks, all the major economies are experiencing their own unique and sometimes shared difficulties.

In the US the burden of run away fiscal deficits and clear signs of persistent economic weakness are taking toll on equity markets as investors turn to bonds.

In the UK, the fiscal retrenchment has turned a recovery that was pumped up on fiscal stimulus under Labour, into a more sluggish affair as the current administration struggles to return UK public finances to a healthier path, leading the Bank of England to turn a blind eye to clear inflationary pressure.

In Japan, that economy was already struggling to free its self from the grip of a deflation that has persisted for the best part of two decades, and cruelly just as the authorities seemed to be on the verge of improving conditions, a natural disaster struck earlier this year that swamped the economy and pushed Japan back into recession, requiring the authorities to spend Billions at a time when the rating agencies are starting to feel uneasy about Japans fiscal health.

Even in the much-heralded economies of India and China the authorities are trying to tame inflation induced by growth rates in excess of 8% a year.

But it is the Euro zone that seems to have the most difficult task ahead. The Euro zone came about by the force of political will even though many of the conditions required for an optimal currency area had either not been met or even prescribed.

Many Euro zone countries have maintained their 1^st world lifestyles on the back of public spending. As members of the EU funds were made available to the poorer regions to help develop infrastructure and support regional economies, there has never been an imposed discipline requiring EU member states to keep budgets to GDP or debt to GDP ratios in a sustainable range.

The Maastricht treaty did stipulate acceptable ratios as part of the Euros launch, but have never really been imposed. When core Countries like France and Germany have exceeded these on occasion, how can the weaker periphery be expected to behave any differently?

When economic times were good, these problems were conveniently ignored, but the financial crisis/recession exposed all of these weaknesses and despite repeated efforts to rescue the likes of Greece, Portugal and Ireland with huge amounts of money and externally imposed fiscal retrenchment, the Euro zone sovereign debt crisis goes on.

With the health of the global economy once more under scrutiny and the US sleep-walking towards its own fiscal crisis, are equity markets and in particular the DJ EUROSTOXX50 such a good buy?

Over recent weeks this market has corrected lower, but the correction risks becoming a new bear trend. Greece has seen its debt downgraded to a level where default is imminently expected and although the spot light shines on the hapless Greeks several other peripheral economies aren’t fairing much better.

We judge the DJ EUROSTOXX50 looks vulnerable to further material downside weakness since the problems outlined are yet to be convincingly addressed, let alone solved.

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USD/CHF Bears Show Short Term Fatigue

The USD/CHF chart has continued to grind lower during 2011, offering little reason to suggest a change in trend is due. There is now one small sign of bear fatigue, but further signs are required before a recovery is presumed.

• MONTHLY CHART Continued weakness has tested the credibility of support from around the bear channel base projection on the long term chart.
• DAILY CHART Note how a positive divergence has developed on the RSI indicator, the first sign that bears are temporarily tiring. However, recovery through the falling resistance line at 0.8830 is required, followed by a further push through possible resistance from the current 23.6% level at 0.9125, before a more lasting upmove will look underway.

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Cocoa Drop Pauses at Multiple Support Area

The fall back in Cocoa prices from a multi-year peak in early March recently found interesting Fibo support which the market seems reluctant to break through –is a temporary recovery just round the corner?

• MONTHLY CHART -CONTINUATION The drop back from the 3826 peak recently tested the 38.2% pullback of prior 2004/2011 upmove, at 2860. Also note the rising support line nearby –we keep a lookout for better support to emerge here.
• DAILY CHART –Sep-11: See how support continues to be influential from the recently-eroded 76.4% pullback. With potential support suggested by the longer term continuation chart too we must be on the lookout for a recovery phase getting underway. This would mean lower levels such as the Sep-10 low and 2660 equality target ( (Mar downmove extended off the late Apr 3351 high) stay out of reach for now. Initial resistance has come from the 23.6% recovery level (of the whole downmove from Mar) with higher 3165 38.2% and 3280 channel top projection looking more key at this stage.

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Growth woes hit the S&P

The S&P is looking vulnerable to further downside price action. Early last week, the market looked set to snap out of what then looked like a correctionm but a run of weak data, that began with the ISM Manufacturing survey sent the market lower...

TECHNICALS:

WEEKLY CHART

The bull progress of the market is clear. Successive H&S patterns have spring-boarded the market better…until the prevarication at the 1342.30 level.

DAILY CHART

There is a lack of structural clarity, but the inability of the market to ratchet better on the back of Prior Highs is clear – the failure of the small rally to get back through 1332-1329 was revealing.

And the bears have gained some momentum there is no doubt.

The Prior Lows at 1311.70 and 1305.20 are now good resistance above the market.

The question of when a multiple Top is in place arises: the break of 1285 is not conclusive, and the 1240 looks more compelling for the bears…

FUNDAMENTALS:

The S&P is looking vulnerable to further downside price action.

Early last week, the market looked set to snap out of what then looked like a correction, but a run of weak data, that began with the ISM Manufacturing survey sent the market lower.

The move extended on the back of a disappointing ISM non-manufacturing survey and weak non-farm payroll. Traders began to speculate the Fed might respond to what is clearly a weakening economy with a rethink on their QE policy which expires at the end of this month.

Indeed, there were two opportunities for the Fed to communicate a willingness to offer fresh support this week:

1. The Beige book released on Wednesday, and
2. A speech from Bernanke on Tuesday.

The Beige book acknowledged the economy has slowed but attributed the weakness to a break down in the supply chain caused by events in Japan, which should ease when the crisis in Japan eventually eases.

Bernanke also acknowledged the weaker economic performance, but omitted any new commitment to a “QE3”.

Faced with an indeterminate period of economic weakness both in the US and abroad, traders retreated further from equities and the S&P looks set to sell off further. The pull-back already exceeds the sell-off that occurred in March, caused by the earthquake/Tsunami/nuclear crisis, in both duration and points and traders are now worrying if it will revisit the March lows.

We judge the market’s performance from here will be dictated by both US and Global economic performance. The US economy has been showing weakness for several weeks. The housing market is experiencing a double-dip and the labour market is again weak. Jobless claims have re-established firmly above the important 400k mark, the unemployment rate is back above 9.0% with the non-farm payroll report showing the economy simply isn’t creating enough new jobs to absorb new labour force entrants, let alone re-employ the unemployed.

The other negative weighing on the market is the still small but growing threat of a US debt default. The administration and Congress are locked in a battle over how and by how much to reduce the US budget deficit. The Federal government keeps bumping up against its debt limit requiring congress to raise the ceiling on how much the government can borrow.

The House Republicans see refusing to automatically raise the ceiling as a means of forcing Obama to negotiate about a broader debt reduction, but if they fail to authorise a bigger spending limit, there is a real risk the US will perhaps miss interest payments that fall due on its bonds or be unable to repay maturing debt. Either scenario is a default and the impact that would have is serious, not just for the US but globally.

So until that threat is removed this market has several reasons to attract the bears.

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USD/JPY Still in Pullback Mode

In March the sharp spike down in USD/JPY and rapid reversal gave a bull signal, and subsequent weakness is still viewed as corrective ahead of another upward push.

• WEEKLY CHART Note how the Mar sharp sell-off saw a test of the projected bear channel base before recovery set in. First resistance here, from the late 2009 84.81 low, was earlier tested -a push through this would be a bull sign.
• DAILY CHART The pullback has been trying to hold around the 80.00 support area. Pressure is still bearing on this so we are keeping in mind the lower 76.4% pullback at 78.58 for the time being. At this stage a rebound back above the 82.23 19-May high would be a useful sign for the bulls. In due course we look for a return to the 50% recovery area.

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Short Term Natural Gas Bulls Up Against Resistance

Price swings in Natural Gas have so far avoided giving a clear directional signal in 2011. Latest strength has brought the market to key resistance, and a breach would provide an initial green light to the bulls.

• WEEKLY CHART -CONTINUATION Price swings in 2011 have had an upward bias, but no clear break to the upside. If better recovery off the dual support (from near the 3.155 May-09 low and 76.4% pullback) is seen then note possible resistance from the 76.4% 5.425 retracement. Further out we would target the 38.2% recovery level at 6.720 plus equality target just above at 6.910.
• DAILY CHART –Jul-11: In the Commodity Specialist Guide we were recently looking at support from the 4.154/4.141 area (former 76.4% pullback and 11-Apr low). This worked nicely and the recovery has now put resistance from the channel top projection under scrutiny (at 4.870 currently). A break through this channel would be bullish, initial focus turning to a Fibo projection at 5.220, ahead of levels on the weekly continuation chart.

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AUD/USD Bulls on the Alert

Bulls have been making the running in AUD/USD but this is another market where a key reversal week was seen, in early May, which could encourage a better pullback phase.

• MONTHLY CHART The bull move here recently overcame resistance from a long term channel top projection. However, there is now potential resistance at an equality target, the 2001/2008 upmove measured off 0.6004 Oct-08 low, at 1.1080.
• WEEKLY CHART In common with some other FX charts there was an early May key reversal week, which sets up the possibility of a better corrective phase.
• DAILY CHARTThe bull trend remains intact so far but the key reversal week requires caution.First support has come from around a prior channel top, at 1.0500 now (also close to a 38.2% pullback, not shown).The next lines of defence are •the old trading range top starting at the 1.0253 Dec-10 high •the rising support line at 1.0150 currentlyBreaks of these latter would be a strong indication that a more prolonged setback was underway.

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Silver -Temporary Recovery Off Fibonacci Support

The surge in Silver came to a halt in Apr, and subsequent pullback was sharp. Interesting Fibo levels have recently provided support but we remain on the lookout for a further bear advance.

• WEEKLY CHART -CONTINUATION The sharp drop back recently found support near the 38.2% level. Failure here would confirm a medium term setback underway.
• DAILY CHART –Jul-11: Clear support on the Daily chart emerged from around the 32.00 76.4% pullback level, ahead of the 31.37 early Jan high. In the Commodity Specialist Guide we had said that a s/term recovery from here would not be a surprise. Initial resistance has come from the 39.00 38.2% bounce level. It is unclear how strong the rebound can be, but also keep in mind higher potential resistance from the 44.64 26-Apr low. A later break of 76.4% support would target the late Jan 26.45 low next.

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The Dollar is unable to strengthen

TECHNICALS:

MONTHLY CHART

We last wrote about the Euro on 14^th April when the wedge had just been completed….there has been a pause since, within which there has been a retest of the breakout levels….

DAILY CHART

The two critical levels are the upper diagonal of the wedge and the Horizontal from the Prior High at 1.4281.

They were twice tested, and found to be solid.

There is no clear short-term reversal pattern in place yet, but the medium and long term pressures for a lower Dollar and higher Euro look to be firmly in place.

Our Euro optimism looks to be well founded.

FUNDAMENTALS:

The Dollar’s recent rally appears over, or is it?

Until the start of May the Dollar had been under relentless selling pressure that drove it to within a whisker of 1.50 against the Euro. Then suddenly it corrected, very vigorously. The catalyst was a mix of events, but the Portuguese debt crisis was at the centre of the drama weakening the Euro.

After a period of uncertainty the Portuguese government finally sought financial help from the EU/EZ/IMF and this seemed to bring the Euro zone’s debt crisis into sharp relief with Spain seen as the next victim.

Additionally, speculation had built that the ECB would follow up April’s rate hike with a move in May helped the Euro rally through April. But when the ECB left policy unchanged and Trichet failed to offer guidance on the next policy move, the Euro lost its support and the Dollar staged a lightning rally.

Switching to the Dollar, the US released a non-farm payroll report at the start of May that was better than expected and traders took this as a sign that the Labour market was at last repairing the damage caused during the Financial/crisis recession.

Moreover, the Dollar was back in favour as a safe-haven trade. The Chinese were concerned about controlling domestic inflation, Japan was still in the middle of her natural/nuclear disaster and the Sovereign debt in Europe crisis raged on. So questions were being asked about the sustainability of the global recovery, especially as oil prices had recently hit $115.00 and threatened to go higher.

But over the last few days the Dollar’s rally has run out of steam. What has changed?

The Euro zone Sovereign debt crisis if anything has deepened as Greece is once again in the spot light for all the wrong reasons: more financial assistance is required and the Euro zone authorities are working to arrange assistance.

But traders wonder if that is the answer. Greek debt has been downgraded to junk, and traders doubt that country as a nation has the will to see through the restructuring needed. A debt rescheduling is seen as a way out, but the Greek PM has said no, the markets now wonder if Greece will ultimately default or leave the Euro zone.

While all of these options are apparently not on the table, the Greek economy doesn’t seem able to cope with the prescribed medicine.

However the Euro doesn’t seem undermined by this as it has rallied over recent days, but in reality recent price movements in Dollar/Euro aren’t Euro zone driven, they derive now from the US.

The US housing market seems to be in a double dip recession as house prices have fallen back, erasing gains made since the depth of the recession. Other data releases over recent week’s have turn weak and that is despite the still very easy fiscal and monetary policy.

Worryingly the Feds QE2 program ends at the end of this month. What then for US growth?

So the Dollar is again under selling pressure because the US economy is again looking weak, only this week the PMI manufacturing survey unexpectedly weakened.

But that isn’t all that weighs on the Dollar. The Administration and Congress are still at loggerheads over the Government debt ceiling. The House Republicans refuse to vote through a debt ceiling extension, as they want to use it as a bargaining chip in negotiations with the White house over reducing the budget deficit. If agreement can not be reached the federal government will be forced to shut down.

In short, the US economy is again showing weakness.

Politicians cannot agree on how to tackle the Country’s growing debt mountain.

The Fed’s QE2 policy is near closure, and despite all of this, some policy makers at the Federal reserve are worried about inflation, even though the CPI and PPI readings are still mainly benign.

All is not well with the US economy and as the World’s largest economy, the woes of the US currently eclipse those of the Euro zone and are set to drive the Dollar lower.

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