Sugar Bounce Getting Underway

2011 has so far favoured the bears in Sugar, following the test of a long term Fibonacci level which provided strong resistance. Certain supports have been reached, or neared, which suggest a recovery phase is in the offing.

• SUGAR 11 –MONTHLY CONTINUATION CHART There was a clear negative reaction after the test of the long term76.4% retracement. The downmove has now got close to the level of the old 19.73 2006 high, as well as a bull channel base projection not far beneath.
• DAILY CHART –Jul-11: In our 17thMar Update on Sugar we said that the bear picture should have the power to extend to the 61.8% pullback. On the Jul-11 chart this nicely coincided with the Nov-10 low area. There is now a good prospect of a better recovery phase getting underway. Note the last downleg segment from the 24.00 area coincides with the 38.2% bounce –temporary resistance would be likely here. Higher resistance of interest comes from the rising return line around 25.50 currently.

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Another Key Reversal Signal –in EUR/GBP

As in the EUR/USD (Update 12/05/11) the EUR/GBP cross recently displayed a key reversal week, which implied at least a temporary halt in the 2011 uptrend. This week’s violation of key support now suggests a weakening in upward momentum.

• 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 the old triangle) resisted bulls’ advances. A negative key reversal week resulted, suggesting a better pullback phase to come. See how previous key reversal weeks have worked.
• DAILY CHART In fact there was also a key reversal day on 05-May which encouraged the s/term bears. In the FX Specialist Guide we have been looking at key support from the area of the 0.8672 26-Jan high and bull channel base projection. The recent breach of these signals loss of upward momentum and is a boost for the bears. One possible lower support comes from the 0.8462 76.4% retracement of the 2011 gains. More key though would be the longer term channel base support.

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Bunds Uncertainty

Over recent weeks Government Bond markets have staged a strong rally, at a time when traders and investors have become increasingly concerned about the Euro zone Sovereign debt crisis and the US budget deficit. Why is that? And will it continue?

TECHNICALS

MONTHLY BUND CHART

The market’s fall from the All Time Highs of 2010 has been brisk.

More than that, it has smashed multiple supports that have destroyed hopes of the rally continuing: for example, the breakdowns through 126.53, 124.60 and the steep rising diagonal trendline support.

So medium-term bulls are dashed, but are the bears in charge?

WEEKLY BUND CHART

The rally from mid April broke the sharp downtrend, but has paused beneath the band of broken supports, which (classically) now becomes resistance.

And note too that the market has failed there before…

Look closer still.

Daily Jun 11 Bund CHART

The pause in the very short-term is interesting and though not a reversal, merits close attention.

A push up through 124.60 would be convincing strength; equally, a pull-back through the rising diagonal would be telling weakness…

FUNDAMENTALS

Over recent weeks Government Bond markets have staged a strong rally, at a time when traders and investors have become increasingly concerned about the Euro zone Sovereign debt crisis and the US budget deficit.

Given that government bonds are no more than IOU’s, one could be forgiven for expecting US and Euro zone bond markets to sell off on these anxieties. But there have been several factors at work that have driven bond markets higher, which are:

1.Fear of resurgent inflation driven by lose monetary policy,

2.Fear rising oil prices would pose a downside risk to the global economic recovery,

3.Correcting equity markets driven by risk aversion derived from the above, and

4.And general safe haven buying driven paradoxically by the Sovereign debt crisis.

But since the Sovereign debt crisis has been a Euro zone phenomenon, why has the Bund performed so well?

A significant part of the answer is to do with traders fearing that one or more of the peripheral economies in difficulty with debt and receiving financial support, might yet default on their debt.

Although the EU/EZ/IMF rescue fund was set up to prevent such an occurrence, the terms imposed on states taking the help are so draconian that they have retarded economic recovery and in some cases deepened recession making it even more difficult to meet credit obligations.

Rumours have been circulating in both the press and the markets recently that Greece is on the verge of rescheduling her debts, and while these have been denied they have persisted and contributed to the Bund rally. Investors have sought to hedge against default of a Euro zone country by buying what is essentially Blue chip German debt.

In fact, some finance ministers have publicly begun to entertain the thought of a Greek debt restructure. This has helped ease the current wave of risk aversion and the Bund has eased lower.

The ECB has today let it be known it is against a debt restructure and said it would no longer accept Greek bonds if a restructuring went ahead.

While those remarks are unhelpful, it does indicate the level of discussion concerning debt restructuring. In the end the politicians, not the ECB, will decide whether or not a Greek or indeed Irish or even Portuguese debt restructure is acceptable.

The markets seem to take the idea positively: stocks have begun to recover, and the Bund has eased lower. While a debt restructure could be viewed as a soft default, since bond holders would have to accept longer repayment periods etc. it would create them breathing space the Euro zone needs.

Simply put, one year after the Sovereign debt crisis broke, the problem remains unresolved. The effect of massive rescue fund which was meant to reassure has been neutralized because of the strict conditions insisted upon by Germany. A debt restructure would allow individual states greater room to manoeuvre.

If such a solution were to be adopted, the Bund could begin a long correction lower.

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Reversal Signs in US Dollar Index

The 2011 downleg in the US Dollar Index recently violated the 2009 low but has held above the more major 2008 low, finding support on the long term chart and producing an initial reversal sign too.

• WEEKLY CHART Current support is coming from the bear channel base projection, following the brief breach of the 74.170 Nov-09 low. Note that the rebound has been marked by a key reversal week, which provides an initial bull sign. Further recovery could find resistance from the rising return line at 77.25 just now.
• DAILY CHART On the Daily chart another bear channel base has provided support. S/term resistance has come from the area of the 75.631 Nov-10 low and a 38.2% recovery level around 76.000. A push through here would be s/term positive, building on the reversal week. However, key resistance lies higher, at the channel top and 76.4% level just above, at 79.380 –a more lasting recovery phase would be probable if this was overcome.

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Initial Reversal Signs Appear in Gold

The upmove in Gold recently stalled after reaching interesting resistance on the longer term chart. An initial reversal indication calls for shorter term bulls to be cautious now.

• WEEKLY CHART -CONTINUATION Our last Gold Update on 21stApril showed resistance on the Weekly chart which we were looking at closely. A recent key reversal week at this dual resistance (from the projected bull channel top and 2.618 swing projection off prior 2008 downmove) now suggests that further correction is likely.
• DAILY CHART –Jun-11: Besides resistance on the Weekly chart resistance on the Daily chart was found from the bull channel top projection, leaving our higher 1640 Fibo projection out of reach. In light of the recent weekly key reversal further s/term weakness is likely. Support firstly comes from the Dec high and a break below this would be first sign of momentum loss. More serious, though, would be a violation of channel base support around 1400.

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Negative Key Reversal Week in EUR/USD Gives Bulls Pause

This year’s uptrend recently neared a 76.4% recovery level, but a sell-off last week has stopped bulls in their tracks for now, with current risk of further losses shorter term.

• WEEKLY CHART A warning to the bulls appeared last week by way of a key reversal week. This implies a better pullback could well be seen now, leaving the 1.5055 76.4% retracement out of reach.
• DAILY CHART In the FX Specialist Guide a s/term Fibo projection we had marked in was tested last week, prior to a retreat. S/term support looks to be coming from around the 1.4155 18-Apr low, which coincides with a 38.2% pullback. Failure here would imply momentum loss. Modest support is then offered by the 1.3861 02-Feb high, while key support comes from the current channel base and 1.3426 14-Feb low area. In light of the key reversal week s/term rallies may well prove short-lived.

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Crude Oil Slip Finds Temporary Support

In recent issues of the Commodity Specialist Guide we had been noting possible bull fatigue in Brent Crude Oil. A sharp sell-off found temporary support from a 38.2% pullback level, but failure here would herald a more prolonged correction phase.

• WEEKLY CHART -CONTINUATION Bulls have not been able to hold the higher ground above the 121.25 76.4% mark (& an equality target). The current interest here is a 38.2% pullback level at 104.53, which also lies close to a longer term 23.6% pullback, not shown. It has provided temporary support, but a subsequent breach would herald a more prolonged pullback phase.
• DAILY CHART –Jul-11: In the Commodity Specialist Guide we had pointed out that the Mar/Apr structure was hinting at bull fatigue. This proved correct, and the market has collapsed after testing the 2.618 swing projection (using the prior May-10 downmove) close to 126.00. The 107.28 16-Mar low has not provided accurate support, but held on a closing basis last week Note initial resistance has come from the 117.81 118.25 07-Mar high so far –there is a good chance that s/term rallies will prove temporary ahead of further bear activity. The interest is as much in the longer term charts at present.

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USD/CAD Finds Support at Fibonacci Area

Since May last year the USD/CAD chart has been drifting lower, eventually breaking support from a 76.4% retracement level. In the FX Specialist Guide we have been keeping an eye on certain Fibo projections, which have now been reached.

• WEEKLY CHART Our Fibo projection at 0.9485 has now been tested. Initial support has been seen, but we currently await a better reaction around here.
• DAILY CHART Recent losses have tested a different Fibo projection on the Daily chart at 0.9430, not much below the level on the Weekly chart. Initial reaction here has been positive but a recovery above the 0.9973 15-Mar high is needed to provide a clear bull signal. This represents key resistance, coinciding with a 38.2% retracement (our Fibo projection is related to this fact). Meanwhile the downtrend must still command respect.

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Copper Nearing Key Support Once More

In our last Copper Update (16thFeb) Copper was in the process of testing long term resistance. The market has drifted back since then, with key support coming under scrutiny.

• WEEKLY CHART -CONTINUATION The upmove earlier found resistance from the bull channel top projection. Our higher targets remain out of reach for now. Note first support has come from a 38.2% pullback at 3.9000 on the continuation chart. Lower support is offered by the 3.6295 Apr-10 high and channel base.
• DAILY CHART –Jul-11: Initial support in Mar came ahead of the Nov-10 high. More key, though, are the projected channel base around 4.0000 and slightly lower 3.9500 38.2% pullback level. Temporary support from this area would not surprise. In the Commodity Specialist Guide we already hold a bear stance, and a break through these supports in due course would provide a boost to the bear view, and call for lower targets.

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Sterling Euro and parity!

The Euro has emerged over recent weeks as one of the strongest of the major currencies and this has been felt particularly acutely against Sterling. This time last year the Euro zone was engulfed in the early stages of the Sovereign debt crisis. Pundits, analysts, economists and almost anyone with a view on the Euro zone was queuing up to forecast the death of the Euro and break up of the Euro zone. What's changed?

TECHNICALS:

WEEKLY CHART

The market has completed a bull falling wedge – using the bull momentum from a completed Head and Shoulders reversal…..if the market can establish itself above the Prior High at 0.8955 that would act to drive the market on further still.

DAILY CHART

The violent bear move of today broke back through both the 0.8955 support and the 0.8922 support….

But the bull diagonal support is in place and beneath that the neckline support at 0.8780 or so.

We remain bulls of the Euro.

FUNDAMENTALS:

The Euro has emerged over recent weeks as one of the strongest of the major currencies and this has been felt particularly acutely against Sterling.

This time last year the Euro zone was engulfed in the early stages of the Sovereign debt crisis. Pundits, analysts, economists and almost anyone with a view on the Euro zone was queuing up to forecast the death of the Euro and break up of the Euro zone.

One year later, the Sovereign debt crisis goes on, with no end in sight, but people are no longer forecasting the Euros death, to the contrary, it is enjoying a period of strength.

The transformation is all the more amazing when contrasted with Sterling and the way the UK government has decided to deal with the UK debt build up under the previous Labour administration.

In the Euro zone countries have adopted a degree of fiscal rectitude, especially those seeking financial rescue, but sometimes at the expense of growth.

In the UK, the coalition government has put in place one of the harshest peace time fiscal tightening's of modern times in an attempt to reduce the budget deficit and reduce the debt to GDP ratio.

Their rationale was; the Country was living well beyond its means and judged action was needed before the rating agencies downgraded the UK’s sovereign debt and Bond markets forced UK long term yields up to levels that would make the debt difficult to service.

At first glance one would think the Pound would garner support from such a policy, but no. The government knew there was a risk the economy would weaken, even slip back into recession, but judged the gamble unavoidable, and although the economy hasn’t slipped into recession, it has clearly weakened and this is undermining the Pound.

Traders are worried that if the economy weakens much more from here there are few policy levers available to add support. Interest rates at 0.5% are already rock bottom, and the Bank of England seems set to leave policy on hold for several months yet, even as inflation stands at double the mandated target level. But what else can they do?

They cannot reduce rates any further to support growth, but neither dare they raise them to fight inflation for fear of inducing a recession. The Pound indeed looks beleaguered.

In the Euro zone, the ECB has decided to leave the Euro zone’s fiscal crisis to the politicians and focus instead on controlling inflation, which at 2.8% is also above target. The ECB’s response has been to tighten policy, with further hikes expected.

Unlike the UK economy, the Euro zone economy is being pulled along by a dynamic German expansion, so although several weaker peripheral economies are still struggling to grow, the strength of the German economy is masking this.

In short the Pound is hobbled by a sluggish fragile recovery and impotent Central Bank. The Euro is strengthened by strong German and French growth and a Central Bank already taking action to control inflation. Widening interest rate differentials look like testing parity in Sterling Euro before too long.

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