EUR/GBP Picture Not Yet Clearly Bullish

Following new 2011 highs recently the EUR/GBP cross rate has slipped back from long term resistance. Key supports are coming under scrutiny, the first of which being a 38.2% pullback level.

• WEEKLY CHART: The earlier breach of falling resistance looked to be a positive sign but note how the old rising support/return line (underside of an old triangle) resisted bulls’ advances. It is not yet clear if bulls have a clear advantage –note that support has so far come from the 38.2% pullback of the whole recovery from Jun-10 0.8065 low. A break below this would be an initial negative signal.
• DAILY CHART: The slip back from the rising resistance line is not far off key supports here. Besides the 38.2% level from the Weekly chart note the s/term channel base projection at 0.8650 ahead of the 0.8606 26-May low –violation of these would be negative and at least postpone new 2011 highs.

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Next Resistance in Gold

A negative signal in Gold in early May did not come to much, and the bulls have reasserted their authority. Short term we look for the next possible resistance points.

• WEEKLY CHART -CONTINUATION The bull move temporarily halted near our earlier Fibo projection, which has now been breached. Not much overhead lies the next projection at 1635.
• DAILY CHART –Aug-11: Following violation of the 1577.70 early May high the market has kept firm and upside focus is currently on a) the rising resistance line near 1650.00 (1655.00 in Dec), and then b) a bull channel top projection at 1672 (1675 in Dec). Resistance would not be a surprise in this area. Below the old 1577.70 high note the s/term falling resistance/return line at 1545.00 offering support on a future dip.

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Chart Support Prompts EUR/JPY Recovery

Following the Mar/Apr surge in the EUR/JPY cross the drop back has almost been as dramatic. Lower support has now been found but there is currently a question mark over how long this can hold.

• MONTHLY CHART -CONTINUATION The long term 76.4% retracement earlier provided good support , but recovery from this area has been modest so far, and latest weakness could again put it to the test.
• DAILY CHART: The recent bear leg tested interesting dual support from a 76.4% pullback level at 109.64 bear channel base projection. This stands in the way of the main rising support line at 108.85 currently. The s/term rebound has so far neared resistance from the rising support in the low 113.50s. But more key resistance comes from the channel top at 116.50. This latter would have to be breached before earlier bulls could win favour once more.

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Cocoa Recovering Off Key Support Area

The last time we looked at Cocoa the 2011 downmove had halted at a multiple support area. The then prospects of a recovery are now being borne out, although the final bull signal is still awaited.

• MONTHLY CHART -CONTINUATION The drop back from the 3826 peak tested the 38.2% pullback of prior 2004/2011 upmove, at 2860. The rising support line nearby has also helped provide support. Now see the Daily chart.
• DAILY CHART –Sep-11: The break through the 23.6% recovery level was the initial positive sign, after support was found near the 76.4% pullback. Now important resistance from the channel top projection (now at 3225) is under pressure. A clear breach of this would provide a boost to the bulls and turn focus initially to the 3350 area, where 29-Apr high and 61.8% recovery coincide. There should, though, be the strength to push on towards higher 3462 76.4% level where a Fibo projection lies close by.

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The uncertainties of Oil

TECHNICALS:

WEEKLY OIL CHART

The market is testing the integrity of the bull market from early 2009.

Note that the diagonal support has been breached.

But too that the horizontal support from the Prior Highs 87.15-92.58 remains, for the moment, intact

DAILY OIL CHART

The detail of the breakdown through the rising diagonal support is clear.

A continuation triangle completed, that was the catalyst for the breakdown.

In the small rally of recent weeks, see how the lower diagonal of the bear continuation triangle has been good resistance.

Short-term bears need confidence that the rally has failed ( thus need a breakdown through 94.02…

(Medium-term bears need reassurance that the weekly support band 87.15-92.58 has been smashed (see above) … that may take longer!

FUNDAMENTALS:

The Euro zone sovereign debt crisis had barely been quietened by Greece agreeing to the austerity terms of her second financial rescue, when traders turned their attention to the public finances of Italy.

With the 2^nd highest debt to GDP ratio in the Euro zone and 4^th highest globally, it is surprising that Italy hasn’t been under scrutiny previously, but unlike Greece and Portugal and even Ireland, the Italian economy is broader-based and has a solid manufacturing base.

However, after Berlusconi criticised the austerity measures of his finance minister, traders became concerned about the sustainability of Italian public finance. Bonds rallied hard, stocks sold off and the Dollar strengthened against the Euro.

Gold too enjoyed a rally registering a new all time high as the other thorny issue worrying markets, the US budget deficit and lack of agreement about how to reduce it, risks pushing the US towards default. That is, unless the Congress and President can agree a plan to raise the debt ceiling.

But oil has remained well-supported during this period. Apart from being an essential commodity, it is also a risk asset and has tended to track the fortunes of the stock markets, since confidence in equities usually equates to optimism about economic growth and by extension demand for oil, so current price action is impressive.

The current worries concerning the Euro zone and US have growth implications, not just locally, but globally.

If the Euro zone cannot come up with a plan that neutralizes and then corrects the debt problems of its member states, at some point the real economy will suffer. The weaker periphery cannot be expected to adopt ever-harsher austerity measures in exchange for aid that has the affect of crushing growth. And the richer countries like Germany will pobably refuse a situation that becomes a transfer union in all but name.

But even if the Euro zone gets to grips with its problems, should the US fail to agree a plan that lifts the Federal governments debt ceiling, the US will be in default. For a country that borrows vast amounts daily that would be a mistake and a disaster. Once investors lose confidence in the credit worthiness of a country like the US that has for years been the back bone of the global economy, the repercussions would be truly global.

The US would struggle to finance herself at acceptable yields and would probably have to adopt strict austerity measures.

Global markets could be thrown into turmoil. Just think of the size of China’s foreign currency holdings that are mainly in Dollars and largely invested in US Treasuries… add to that India and the oil-exporting states and there could well be a move to divest from US assets on a scale that would create a financial crisis beyond anything so for experienced.

With these risks so very real, it is surprising to see how well oil has held up. Clearly traders have confidence in the Euro zone and US authorities ability and basic common sense to reach a solution that avoids the worst-case scenario.

Moreover, the likes of China and India continue to record strong growth; China’s current growth rate is 9.5% and that is considered a slowdown, so oil has some independent demand.

So looking beyond the current crop of difficulties it is easy to see why oil is a long-term bull market, but getting from the short term to the long term isn’t a trouble-free path.

The Euro zone Sovereign debt crisis has been running for well over a year and we doubt the authorities there really grasp what needs to be done and if they do, political will is lacking.

In the US, policy makers and legislators seem to forget that the US has new global challengers creeping up; China, and India. The US used to be seen as the consumer of last resort; the US sold Treasuries to surplus countries to fund her lifestyle, the surplus countries needed somewhere to invest, but that relationship is slowly being eroded, a US default would likely cause a fatal rupture.

So although oil has held up well so far, what would be the reaction if:

1. the US failed to raise her debt ceiling,
2. the rating agencies slashed the US credit rating,
3. US bond yields soared, and
4. the US was forced into making deep spending cuts.

The US economy would likely go into a deep recession and US military power would decline. Old certainties would vanish and the world economy would be forced to adjust, meaning oil prices would collapse.

Can this happen? It’s in the hands of the Euro zone and more important, US authorities.

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Next Bear Leg in EUR/USD Now in Process

Our previous Update on EUR/USD highlighted a key reversal week in early May, which has marked the start of a consolidation/correction phase. Following renewed weakness we look at where the next supports reside.

• WEEKLY CHART -CONTINUATION The early May key reversal week was just ahead of the 1.5055 76.4% retracement. It marked a pause and at least temporary reversal in uptrend. Next support has been neared, the 38.2% pullback at 1.3770, with rising support line just below. Breaks of these would give bears a boost. Also see Daily chart.
• DAILY CHART: Recent weakness, after earlier failure at the former 76.4% level, has kept bears in control, with downside focus on s/term channel base support around 1.3650. This will soon coincide with the lower bull channel base projection at 1.3555 currently, and temporary support would not be a surprise in this area. However, of equal interest is the lower 1.3405/1.3360 area, a Fibo projection and 76.4% pullback level.

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Sugar Surge Nears Interesting Resistance

After peaking in early Feb the drop back in Sugar 11 found a low in May, from whence a recovery got underway. This has made a new high on the front month chart, but certain resistance levels are now not far off.

• WEEKLY CHART -CONTINUATION The earlier fall in 2011 found support not far above the old 19.73 2006 high. Subsequent recovery has been strong and steady, and focus is now on the 32.40 76.4% retracement where we look out for resistance.
• DAILY CHART –Oct-11: Continued strength here has exceeded the 27.57 Feb high and eroded our bull channel top projection. With the current structure showing no sign of fatigue note the next target/ possible resistance here comes from the 1.618 swing projection off prior Feb/May downmove, at 31.80, close to the 76.4% level on the Weekly chart. Resistance near here would not surprise.

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US Dollar Index Poised For Recovery?

The 2011 downleg in the US Dollar Indexearlier found support on the long term chart and produced an initial reversal sign in early May, holding above the major 2008 low. A bull signal is still awaited, however.

• WEEKLY CHART Note how support has come from the bear channel base projection, following the brief breach of the 74.170 Nov-09 low. The start of the recovery was marked by a key reversal weekin early May, which provided an initial bull sign. Further recovery could find resistance from the rising return line.
• DAILY CHART The Index remains below the 38.2% recovery level, with the early May key reversal week still providing a positive backdrop. A clear break of this would provide the first bull signal. Note that key resistance lies higher, at the channel top at 78.400 –a more lasting recovery phase would be likely if this was clearly breached. Meanwhile s/term support comes from the 76.4% pullback at 73.560.

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A cross-roads for the Bund?

TECHNICALS:

WEEKLY CHART

The retracement and failure at the 50% Fibonacci retracement resistance is clear.

The failure is especially significant as it is a weekly Key Reversal…

DAILY CHART

The day chart encourages the bears still further.

Note well the rally back up to the 61.8% Fibonacci resistance - and the failure so far, there.

We anticipate a retest of the band of support from the Prior Highs 124.59- 124.32.

And note too the Fib support there – coincident at that levels making it very significant for the bears.

FUNDAMENTALS:

Last week the Greek Parliament voted to accept the austerity measures demanded by the EU/EZ/IMF as a condition of the financial rescue package designed to avert a Greek government default. The Euro rallied, stocks rallied and Bonds sold off as traders moved out of safe haven assets and back into riskier asset classes.

A week later and equities are holding their gains, but the Euro has weakened against the Dollar and the Bund has staged a limited recovery, what has happened?

It has long been our opinion that the rescue deals cobbled together at the last minute by the EU/EZ/IMF are not addressing the root of the sovereign debt problem that has dogged the Euro zone for more than a year.

In truth, Greece, Ireland and Portugal have been lent massive amounts of liquidity to provide them with breathing space to cut their budget deficits and reduce their debt build up. But the terms attached to each rescue are very austere, so much so that growth has shrunk. That shrinkage has meant that the deficit has increased as a percentage of GDP making it more, not less, difficult for the hapless three to service their debts, hence the reason why Greece has required a second rescue.

Both the rating agencies and the markets see the flaw in this process. Portugal has seen her debt downgraded to junk this week by Moody’s as they judge Portugal will soon require a second rescue too and Ireland will also in the near future.

This has seen Irish and Portuguese Bond yields rise to Euro era highs and is primarily the reason why the Bund has held up so well even as stocks continue to recover.

But if the Bund is seeing a fresh wave of safe haven buying, why isn’t the Bund future much higher than it currently is?

Well, there are reasons:

The ECB has today hiked rates a further 25bp despite on going concerns about the debt crisis. Their view is the debt crisis is a political problem for politicians to solve, their job is to keep inflation at or below target, and they are right.

The ECB has also said it will continue to accept Greek bonds so long as there is no default - technical or otherwise - which means debt-restructuring.

For now, traders have re-focused back to stocks. The Q2 corporate reporting season has just begun. Interest rates in the US and UK are set to remain on hold for a considerable time and traders are still relieved that a Greek default has been averted.

But we judge the crisis will resurface sooner than expected. Portugal and Ireland will likely be forced to apply for a 2nd rescue due to sky high financing costs, making the rating agencies’ fears self-fulfilling. Moreover, it is by no means clear that the Greek people are willing to suffer the sacrifices demanded of them or the loss of Sovereignty implied by accepting the rescue.

At some point the debt burden in the Euro zone needs to be dealt with at its root. Certainly, budget deficits need cutting and the state needs to move away from being a major economic force in the weaker peripheral economies, but the debts of the weaker countries will likely need to be rescheduled so that there is a chance they can be serviced without constant recourse to rescue funds.

If this doesn’t occur, because the Euro zone wont allow it, the risk grows that one or more of the weak periphery will leave the Euro zone.

What would be more damaging to Euro zone credibility?

1.A restructuring of debt, which would allow the Euro zone to remain together and remove the distraction of organising repeated bailouts, or

2.An untimely exit from the single currency of one or more of its members.

We judge option two would damage credibility the most. It would prove what many said of the currency union at the start to be true; it was ill-thought out and couldn’t last, and moreover the Euro zone authorities lacked the will or vision to solve their problems.

Whereas a debt restructuring would show there is political will among all members to solve problems collectively and learn from mistakes, rather than punish with punitive measures and move on together.

What then for the Bund?

The answer lies in the way the authorities handle the crisis moving forward. There is a body of opinion that holds the view the Bund sovereign debt would be better and stronger without the weaker economies diluting the Eurozone.

On the other hand, a debt-restructuring is bearish because it would would reduce the need to buy bunds as a hedge against the threat of default. But until one or other route is chosen we see the Bund as likely to remain a crisis-driven bull market.

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Soybeans Pushing on Pivotal Support

In early 2011 a Soybean recovery encountered clear resistance from a long term Fibonacci level, and the market has since turned consolidative. Pressure is currently bearing on a pivotal support area.

• WEEKLY CHART -CONTINUATION The market earlier pulled back from dual resistance from a bull channel top projection and 76.4% retracement level. First support from around the 1291.25 2009 high was earlier tested, and has again come under scrutiny. This ties in well with Daily chart support.
• DAILY CHART –Nov-11: The slip back from near the Apr 1411.25 high initially breached a rising support line , which was not viewed as significant. However, fresh pressure is now being put on the 23.6% retracement –this coincides nicely with Weekly chart support and is seen as a pivotal level. A break below this would provide an initial bear sign here, and invite a test of the 12.18.70 38.2% level next.

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Is the Euro in the clear?

TECHNICALS:

WEEKLY CHART

The dithering short-term market cannot disguise the completion of a bull wedge and the refusal of the market - the euro bears - to break back into it.

Both the falling diagonal and the horizontal from 1.4281 are good support.

DAILY CHART

Looking closer, the day chart shows the near completion of a bull triangle, a clear break and close above 1.4550 is required to do that.

Notice too the possible Double Bottom already in place – the catalyst for a break of the triangle, surely.

Cautious Euro bulls will wait for the break.

FUNDAMENTALS:

The Greek Parliament has voted to accept the austerity measures demanded by the IMF/EU/EZ in return for additional financial assistance, is the crisis for the Euro zone over or is it just a sticking plaster applied to a deeper wound?

Until the latest saga of the Euro zone debt crisis, centred on Greece emerged early in May, the Euro looked set to extend what was a well-established bull trend against the Dollar, driven on by:

1.the continuing weakness of the US economy,

2.the inability of the US administration to take concrete steps to shrink the over sized US budget deficit, and

3.The extraordinary economic recovery enjoyed by Germany

But all that was pushed to one side when the Greek debt crisis forced its way back to centre stage. It was immediately clear that without a new rescue package Greece would more than likely default.

The rating agencies saw this and repeatedly downgraded Greek debt to a level consistent with imminent default. Much was written about the crisis and it was suggested Greece leave the Euro and devalue its way out of trouble, but both the Greek and Euro zone authorities ruled this out as even a remote possibility.

Now the Greek Parliament has narrowly voted to accept the austerity measures the Euro has rallied, but the Greek people are on the streets protesting against measures that they intuitively judge will retard economic growth and impoverish them for many years, and for what? Membership of the Euro.

For now the markets have breathed a sigh of relief. Greece will get her money and default has been avoided. The spotlight is now back on the US with its sluggish growth, bloated budget deficit and quarrelling politicians that are unable to agree a debt reduction plan.

The House Republicans are refusing to allow an extension of the US debt ceiling, using it as a stick to force Obama into agree to a broad-based debt reduction strategy. But unless the ceiling is lifted, the US will be unable to meet an interest payment on Government debt that falls due on August 4th; that’s Monday of next week.

In an effort to nudge the US towards commonsense, the rating agencies have said the US credit ratting would be reduced several notches to reflect the fact of selective default, while we think the authorities will raise the ceiling, the Dollar is the victim.

The Euro zone debt crisis has dominated for more than a year, but the US is running its own fiscal circus. Many US states have a debt situation at least as bad as Greece, so if the Greeks are able to get their house in order, will the US become the next point of focus for those fearing a developed nation will soon default?

We don’t think the US will default. We doubt a meaningful debt reduction program will be agreed before the 2012 US Presidential elections and suspect there may well be several more chapters of this high stakes game of ‘Chicken’ before a deal is finally reached, but the US authorities on both sides of the political spectrum are smart enough to understand the damage even a limited default would do to US credibility and the financial system.

What then of the Euro?

We judge the Euro is likely to enjoy a limited rally on relief that a Greek default has for now been avoided. But why did Greece need extra help when the 1st deal she reached was deemed sufficient, if not generous enough to ensure set the Greek house in order.

The reason is clear. The austerity measures shrink GDP, this makes it harder for Greece to service her debts as the pot from which her wealth is drawn has shrunk. We judge the same spiral of despair will start all over again and in several months time Greece will be back with the begging bowl seeking more help.

So in summary, yes the Euro can enjoy a relief rally, but longer term, unless the likes of Greece are offered either:

A.A longer term solution which deals with the debt and doesn’t just provide liquidity, or

B.Greece leaves the Euro and defaults or renegotiates her debt,

●

This whole sorry saga is set to repeat, sending the Euro lower.

Clinton turned record budget deficits into sizeable surpluses. The difference between now and then is the US is fighting a costly war in Afghanistan and has recently fought a costly war in Iraq and they are draining US resources. Nonetheless, in the long run the US will tackle her debt burden..

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