More EUR/CHF Recovery Needed to Cast Bear Doubts

The FX Specialist view - The chart of the EUR/CHF cross remains weak, with previous recovery attempts only proving short-lived affairs. At present the current bounce is relatively unexciting, but we are looking at certain overhead levels that, if breached, could signal better bull interest.

• WEEKLY CHART So far, following earlier violation of the long term bear channel base, a shorter term channel base has contained the downmove. At this stage note potential resistance around 1.3220, the 23.6% recovery of the downmove from 1.5881 Dec-08 high. Now see Daily chart...
• DAILY CHART: The current recovery is approaching resistance offered by the 1.3225 12-Nov low, which coincides nicely with the 23.6% on the Weekly chart. This represents an important barrier, but probably more key is the somewhat higher channel top projection at 1.3545 currently. A break above this latter could see a subsequent pullback become temporary, prior to another bull leg, with a medium term recovery unfolding. For now, however, there is no indication that bear fatigue is setting in.

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CRB Index Up Against Long Term Resistance

The Commodity Specialist view - After a major low in 2009 the CRB Index started its recovery, a second upleg getting underway in May last year. Fairly steady progress has now seen the Index starting to test the next key resistance area, and we currently await reaction here.

• WEEKLY CHART: Recovery has so far been pushing at resistance from the bull channel top projection, which lies just ahead of the 50% recovery level, and then 341 equality target (Feb-09/ Jan-10 upmove extended off the May low). All this provides a key resistance area which looks likely to encourage some sort of pullback phase.
• DAILY CHART: The Index is currently consolidating, keeping below the bull channel top projection at 350 now. While first support is offered by the 320.38 Nov high (and rising support line), more key is the s/term channel base at 313.00 currently – a breach of this would imply that a more prolonged correction phase was in process. We could then calculate deeper potential supports. The picture remains bullish for now, but bulls are on the alert.

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No respite for Bunds

The safe-haven days of the Bund are clearly in the past. After the frenetic buying that peaked in August, the Bund has been on a clear trend lower and it hasn't been alone. But given the Eurozone sovereign debt crisis still remains a live issue, and it was that very crisis that sent the Bund and other Bond markets soaring on safe-haven trading, what has changed?

The Technical Trader’s view:

MONTHLY CHART

The market is under tremendous pressure – because of the succession of failed supports dating back to 1999.

Most recently the horizontal band from the Highs 124.60-126.53.

WEEKLY CHART

The weekly chart shows more detail of the failure at the cluster of Fibonacci resistance…

the market tried to bounce from the 124.50/53 Prior High support and failed.

DAILY CHART

The daily price action shows that the rally from the 124.53 low was a channel - perhaps a parallel flag - which broke down.

(NB If it was a flag then they classically appear halfway down the move - suggesting another seven big figures on the downside.)

Note too, the break through the Prior Low at 123.76, establishing powerful overhead resistance. The bears are in charge.

The Macro Trader’s view:

The safe haven days of the Bund are clearly in the past. After the frenetic buying that peaked in August, the Bund has been on a clear trend lower and it hasn’t been alone.

But given the Eurozone sovereign debt crisis still remains a live issue, and it was that very crisis that sent the Bund and other Bond markets soaring on safe haven trading, what has changed?

There are several factors now at work, but these are the key dynamics driving the market:

1. The growth outlook for the world economy continues to look positive, but whereas earlier last year growth was driven mainly by China and India, the Euro zone and the US are now contributing, and

2. The threat of inflation globally has become a real concern in both the large emerging economies and the developed.

Staring with growth, the Eurozone economy has performed well considering the hysteria generated by the debt crisis last year. Indeed there was a real fear that the Euro zone wouldn’t survive in its current form and the real economy would take a hit. It didn’t.

Germany acted as a corner stone for the Euro zone rescue fund. And her economy continues to power ahead aided by the French which together make up at least 40% of Euro zone GDP, masking the weakness of the peripheral states that continue to struggle.

Additionally, the US economy, moribund for so long, has finally woken up. The Fed remains concerned enough to stick with its QE2 program, but also acknowledges an improvement. However, the US remains wedded to a fiscal policy that is building a huge mountain of debt, fast approaching 100% of GDP, and although the Euro zone has rescued several of its weaker members through the rescue fund, the total amount of debt in the Euro zone remains unchanged; just redistributed.

Then there is inflation. The fiscal pump priming employed by the G20 saved the world from a financial market meltdown and depression, but unlike the UK, the US and Japan are still supporting their economies through expansive fiscal policies that longer term are unaffordable.

The US President has a liberal agenda requiring massive public spending, which isn’t going down too well with the US public, hence the midterm election results that saw the Republicans do well. Japan remains in the grip of a deflation that policy makers there seem unable to shake off.

Additionally, the Fed, Bank of England and Bank of Japan have resorted to quantum easing to help re-inflate their economies. But higher inflation is the likely price. In the US inflation remains broadly contained and Japan is grappling with deflation, but the Euro zone CPI rate is now above the ECB’s target and the UK has experienced CPI inflation well above the official target for a prolonged period. The economies of China and India are also at risk of overheating and the authorities there are tightening policy.

Both the Bank of England and the ECB have started to sound more hawkish about inflation in recent weeks and this has unnerved the markets, especially the Bund and Gilt.

But where is the trigger that could send bonds lower?

Yesterday the S&P credit rating agency downgraded the Sovereign debt rating of Japan for lacking a credible plan to reduce its deficit and control the National debt (well in excess of 100% of GDP).

For a long time traders assumed, as did we, this didn’t matter. Japan has large currency reserves, runs a trade surplus and domestic buyers are the main investors in JGB’s, but it appears Japan has reached a level of public indebtedness that make its credit rating unsustainable.

If Japan’s rating can be cut, the Euro zone and the US other two look very vulnerable and bonds no longer look safe.

Mark Sturdy

John Lewis

Seven Days Ahead

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Can Sterling's strength continue?

The Pound may not be sufficiently free from uncertainty to allow it to fully recoveruntil there is greater clarity about the economy's ability to weather the current fiscal retrenchment. So corrections are possible before the big rally begins...

The Technical Trader’s view:

MONTHLY CHART

The wide context of cable is clear and well-structured: within the immediate trading range of 1.36-1.70 a triangle has formed – look closer.

WEEKLY CHART

Of course, Triangles are typically continuation patterns, in this case a bear continuation pattern…

But not always and the close approach to the upper falling diagonal boundary (currently at 1.6170) is intriguing.

As is the possibility that that diagonal might be regarded as the Neckline of a bull Head and Shoulders pattern. The slope of the neckline is a weakness of this interpretation, but if 1.6170 were overcome a completed bull H&S would be plausible.

Look closer still.

DAILY CHART

There is no clear short-term source of bull impetus at work here.

Certainly the market’s strength in overcoming the prior Low resistance at 1.5846 was impressive.

But there is no driving pattern behind the bull trend - yet trends can continue with their own internal logic. If it does then an assault on the diagonal + and Prior High at 1.6298 must follow - with the exciting bull implications from the week chart.

The Macro Trader’s view:

We have argued over recent months in the Macro Trader’s guide that Sterling was oversold during the financial crisis and subsequent recession. We judged the UK economy fared no better or worse than most other leading developed economies.

What seemed to rattle investors most about the UK wasn’t the actual Debt-to-GDP ratio or even the Deficit-to-GDP ratio that emerged as a result of the recession, but rather the speed and degree of deterioration compared to the UK’s peers.

Now though, the UK has taken some harsh and difficult steps to cut both the budget deficit, structural deficit and control the national debt. The worry is the measures adopted might prove too strong a medicine for the economy to handle and risk falling back into recession.

This fear is a potential negative for the Pound, but right now Sterling is enjoying a period of relative strength against the Dollar and to a degree the Euro. There are several reasons for this, some are domestic others are not. The main reasons though are;

- The level of UK inflation over the last 2 years has or so proved consistently worse than the Bank of England’s quarterly inflation report forecast,

- UK Interest rates are now forecast by independent analysts to rise this year to control inflation despite fears of a potential economic slowdown,

- US interest rates look set to remain low for an extended period as the Fed tries to nurture the US economy back to health,

- US public spending is still running at the crisis levels previously seen in the UK, with a budget deficit to GDP ratio around 10 - 12% and a debt to GDP ratio fast approaching 100% and in the absence of a policy change, won’t stop there,

- US inflation is running at very low levels and looks contained leaving the Fed free from pressure to tighten policy.

So does this mean the Pound is already clawing back the losses it previously suffered on the way back to a more realistic level? One that reflects Sterling’s purchasing parity (about 1.7000 -1.7500) or is this rally a false dawn and if so why?

While we would like nothing more than to be able to proclaim a new bull trend is in place for Cable, we feel unable to do so. While there are very real concerns about the short term path of inflation, which is currently forecast by independent analysts to rise to between 4% – 5%, we judge the factors behind the run up are either one-offs like the VAT hike or are a result of higher energy and food costs which originate abroad and cannot be easily controlled within the UK economy simply by hiking rates.

We also hold the view that the economy will slow this year. Unemployment is forecast to rise by around 250k. The government hopes the private sector can absorb most of the public sector workers displaced as a result of the spending cuts, but so far there is scant evidence for this.

Our current view of Cable is that 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 the recent high may be it for a while.

Mark Sturdy

John Lewis

Seven Days Ahead

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GBP/JPY Bulls Trying to Gain Control

The FX Specialist view - Price action in the GBP/JPY cross was relatively subdued in the second half of 2010, although staying on the weak side. A recent bounce has again raised the prospect of a better recovery phase, but key resistance still needs to be overcome.

• WEEKLY CHART Price swings have continued here, with the market still unable to hold below the 76.4% level. On the upside a recovery through the current 23.6% rebound level at 134.30 would be a positive sign.
• DAILY CHART: Recent strength has been putting pressure on the bear channel top at 132.25/30. A close above this would be positive, but a further recovery through the 134.21/30 area (Nov high and 23.6% level, see Weekly chart above) is needed for a decent bull signal. We would then start calculating higher targets. First support could lie around the 129.31 30-Nov low.

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Soybeans Close to Key Resistance

The Commodity Specialist view - Last year’s recovery in Soybean prices has so far continued in 2011. However, key resistance levels have now been approached on the long term chart which puts us on the lookout for a better pullback phase.

• WEEKLY CONTINUATION CHART: After the earlier breach of the 1291.25 2009 high the market has continued higher, now nearing dual resistance from a bull channel top projection and 76.4% retracement level at 1453.75. We await reaction around here, expecting to see some form of resistance.
• DAILY CHART - MAR-11: Current upside focus is on the 1455 area, a 1.618 swing projection off the prior Nov setback. This ties in nicely with resistance on the Weekly chart. We wait to see if the recovery from mid-Nov low is a final upleg prior to a better correction. Near support has come from around the 1354.50 12-Nov high, although this is not a significant level. Further supports are calculable only after a temporary top looks to be in place.

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Short Sterling and Euribor, which is the better bear market?

We think it could be Short Sterling . If Oil prices continue to rally, driven by a strengthening global recovery, incorporating a US economy in full recovery mode, domestic UK conditions may not be weak enough to offset these external influences. Which means the Bank may have to respond sooner than it might like, to contain inflation and retain credibility

The Macro Trader’s view:

Inflation is increasingly becoming an issue for traders in many markets. As economic recovery slowly strengthens, fears of deflation, even in the US have given way to worries that inflation may emerge as the next big challenge after a prolonged period of exceptionally low interest rates in the major developed economies.

In the UK the economy has suffered a severe recession and the Bank of England has responded with record low interest rates and quantum easing because of fears of a banking collapse and deflation. In a string of quarterly inflation reports the Bank forecast a near-term spike in inflation, followed by a near collapse in the CPI rate as unemployment and spare capacity were expected to bear down on inflationary forces.

The economy is 2 to 3 quarters into a recovery and inflation has failed to collapse. In fact CPI inflation is now expected to hit 4.0% over the next few months (the MPC’s CPI target is 2.0%). Opinion is becoming increasingly divided about how the MPC should respond.

Should the MPC retain their strategy and keep rates low based on the government’s austerity program? This program might knock the wind from the recovery’s sails with inflation finally collapsing as a result. Or do they take the view that growth will continue, even if only weakly, and that oil prices, commodity prices and food prices will continue to rise? This suggests that interest rates should be raised before inflation becomes too entrenched.

In the Euro zone, the economy has been in recovery mode too, led mainly by Germany and France with the peripheral tail being dragged along behind. Inflation in the Euro zone did collapse to very low levels, but has over recent months risen to 2.2%; just above the ECB’s 2.0% target.

The main cause of higher Eurozone inflation is as in the UK: rising Oil, food and commodity prices. The ECB seems reasonably relaxed about current inflationary developments, noting the underlying weakness of the money supply and the likely temporary nature of the external forces causing the upward inflationary pressure.

In the Euro zone, the ECB continues to buy large tranches of Euro debt. Unlike the Bank of England and the Fed, the ECB is acting to provide liquidity and isn’t creating new central bank reserves or quantum easing. Their actions are necessary to support the economies of Greece, Ireland and other weak economies that had seen their bond yields soar on fears of Sovereign default. This is a factor the ECB has to consider when setting policy.

So the UK and Europe are two economies, both:

- in established economic recovery,

- with different problems going forward, and

- seeing inflation as a potential future problem, albeit with different degrees of severity.

Which Central Bank is likely to hike first, and more important, which market will start to price higher official rates into the yield curve?

Based on all the evidence we think it could be Short Sterling and the Bank of England. If Oil prices continue to rally, driven by a strengthening global recovery, incorporating a US economy in full recovery mode, domestic UK conditions may not be weak enough to offset these external influences, meaning the Bank may have to respond sooner than it might like, to contain inflation and retain credibility.

When could a rate hike happen in the UK? Probably not for several months yet, but traders will be acting ahead of any move as always, indeed Short Sterling is in an advanced topping out process.

The Technical Trader’s view:

WEEKLY EURIBOR CHART

The wild price action of the last few months in the Euribor looks to have been resolved in favour of the bears.

The inability of the market to get back above and hold above the resistance from the Prior Low at 98.44 is clear.

So too is the recent push in the last week beneath the Prior Low Pivots at 98.2150 and 98.1650.

That band should now act as powerful resistance above the market, ratcheting it lower.

The move beneath 98.1650 also marked the final and unambiguous breakdown of the diagonal trendline support.

WEEKLY SHORT STERLING CHART

The Short Sterling chart is altogether better structured than the Euribor: a Head and Shoulders top has completed…

And the Neckline has proved to be powerful resistance,

And the horizontal support from Prior Highs (which has been strong in the past) looks likely to be breached.

The minimum move down is as far as 97.85.

Mark Sturdy

John Lewis

Seven Days Ahead

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Medium Term EUR/GBP Downtrend Resuming

The FX Specialist view - A medium term bear signal in the EUR/GBP cross was given in the first half of 2010, with subsequent recovery finding good technical resistance last October. Renewed weakness now looks like the resumption of the main downtrend.

• MONTHLY CHART Prior breaks of support signalled a medium term bear move was underway. Recovery from the 50% pullback level found clear resistance from the old triangle. Below the 0.8065 Jun-10 low next focus would be on potential 0.7783 61.8% support.
• DAILY CHART: The Dec bounce failed around the 0.8649 01-Nov low and close to the underside of the old bull channel. S/term support at the 76.4% pullback is not a surprise, but this should presently give way to open up a test of the Jun-10 low. Any near term bounce is not expected to be deep. We will look at lower targets in the FX Specialist Guide in due course.

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Crude Oil Finally Clears Last Year’s High

The Commodity Specialist view - After a pullback in 2010 found support from the 38.2% retracement the ensuing recovery returned to the area of the May high, but seemed temporarily reluctant to push decisively through. This is now happening though.

• BRENT CRUDE - WEEKLY CONTINUATION CHART: On the continuation chart the May-10 high was breached sooner. With the 50% recovery level also surpassed our next focus here is on the 105.00 area, the 61.8% retracement.
• BRENT CRUDE DAILY CHART - MAR-11: Recent consolidation around the May-10 high has given way to another s/term bull move, reinforcing our bullish stance. Initially on the upside we keep in mind the 1.618 swing projection off prior 93.91/73.19 May-10 drop at 106.72. This lies a little above the 105.00 level on the Weekly chart. Ideally at this stage support from the 90.00 area will hold s/term dips in order to preserve current momentum. This ties in quite nicely with the 89.58 May-10 high from the continuation chart.

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USD/JPY Bulls Still Have Cause for Optimism

The FX Specialist view - After last year’s downmove support has remained above the early Nov low. Following a rebound and correction the chart still looks well-placed to produce another upleg, before any later resumption of the long term bear trend.

• MONTHLY CHART In the FX Specialist Guide we have continued to note a positive RSI divergence, which questions the longer term bears’ resolve. The major 1995 low just under 80.00 is so far providing support.
• WEEKLY CHART The downtrend in 2010 fell short of the projected bear channel base, the next support on this chart. First resistance here comes from the late 2009 84.81 low – see also Daily chart, though.
• DAILY CHART: The breach of the bear channel top was a positive sign – note how the recent pullback found support from this old line, as well as the 76.4% retracement. We have been viewing any dips as temporary and in the FX Specialist Guide continue to hold a bullish stance. On the upside focus should be on the 85.86/93 area, 38.2% recovery and 16-Sep high. However, the more key, pivotal resistance area is 87.60/88.00, 50% recovery and old key support.

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Natural Gas Continues to Give Bulls Hope

The Commodity Specialist view - Last year was dominated by a bearish corrective phase which finally found good support from a Fibonacci level. Subsequent action has started to raise bulls’ hopes and we are poised to adopt a bullish stance.

• NATURAL GAS – WEEKLY CONTINUATION CHART: A typical 3-wave downmove in 2010 eventually found dual support from near the 3.155 May-09 low and 76.4% pullback. If recovery continues note possible resistance from the 76.4% 5.425 retracement (see how this ties in with the Daily chart). Further out we would target the 38.2% recovery level at 6.720 plus equality target just above at 6.910.
• NATURAL GAS - DAILY CHART FEB-11: After the Oct-10 low initial resistance has emerged from a 38.2% recovery level and bear channel top projection. This is again under pressure and a break through would be a clear bull signal. The initial target would be the 61.8%/76.4% area – note how the 76.4% level (although a different calculation) coincides nicely with a 76.4% on the Weekly chart, and s/term difficulty getting through here seems likely.

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