The fairy tale of German superiority

The fairy tale of German superiority. Time and again Germany’s trade surplus is mentioned as the main reason behind other countries external imbalances. If the ECB would start verbal interventions to avoid the periphery being strangled by a strong euro German exporters would benefit unintended. Concerns that this would increase the cause of the periphery weakness are not justified.

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EUR plunges on ECB ‘surprise’

The EUR fell sharply at the end of last week after the ECB cut key interest rates and as the US economy showed surprisingly strong momentum. The main catalyst for the EUR/USD’s plunge to 1.33 on late Thursday was the decision by the ECB to cut its main refinance rate to 0.25% as we had expected it might. Most of the markets, however, were surprised by the move, and took it to mean that the ECB is becoming more concerned about deflationary risks across the Eurozone economy, with the possibility that more measures will still have to be introduced to shore up demand. ECB President Draghi acknowledged that inflation will remain low for a prolonged period, although he was at pains to point out that it was not at risk of entering a period of deflation. Although the EUR managed to recover back above 1.34, it sold-off again on Friday following the strong US October employment report, and after France’s credit rating was cut by S&P to AA from AA+ on account of its poor fiscal position

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EUR/CZK – Monthly Chart

EUR/CZK’s break through the 1999-2013 downtrend line leads to the 27.00/10 area being eyed

Today’s EUR/CZK rise has taken us by surprise with it so far having shot up to 26.92, having broken right through its 1999-2013 downtrend line at 25.84 earlier today.

We expect the 27.00/10 resistance area to be reached. It is where the Czech Central Bank stated it would like to keep the Koruna and also ties in with the 38.2% Fibonacci retracement of the 2008-2009 rally and the June 2009 high.
In the 27.00/10 region we expect the currency pair to struggle from a technical perspective.

Should the 27.00/10 resistance area give way, we will have to allow for the 61.8% Fibonacci retracement of the 2009- 2011 decline at 27.48 to be reached.

Support is seen around the 26.62 October 2009 high and also in the 26.29/28 zone where the 50% retracement of the 2008-2009 advance and the May 2010 high meet.

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S&P GSCI Total Return Index

Has sold off to the 4 year uptrend at 4670.

The S&P GSCI Total Return Index has seen another aggressive sell off and has sold off towards its 4 year uptrend at 4670. While we would allow for this to hold the initial test, it is not expected to provoke reversal. Currently
rebounds from this trend line are indicated to terminate ahead of 4840/4894 (55 and 200 day ma).

A negative bias will persist while capped here. A weekly close below 4670 would be very negative and target initially the 4493.50 2013 low

Only a move above 4941 (mid October high) would neutralise the chart and our bearish view as this would imply recovery to 114/5185.

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NZD/USD – Daily Chart

Strongly bounces off the key .8232/.8164 support zone and eyes the .8437 September high

NZD/USD is strongly bouncing off the .8232/.8106 significant support zone where the October lows, 200 day moving average and the August peak can be seen.

The currency pair now targets the September peak at .8437 around which it is likely to struggle again, though.

In case of an unexpected rise above the October high at .8545 being seen, the .8588 late April high and the 2011-13 resistance line at .8621 could also be reached. This we do not expect to happen at the moment, though.

Only a drop through and daily close below the .8193 October low will point to a reversal being formed with the .7800/.7683 region
then being back in the picture.

Further range trading between the .8500 mark and the .8200 level seems to be on the cards for the days ahead.

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Potential rising wedge (bearish pattern) on EUR/JPY will complete on a close below 132.01 and introduce scope to 122.80

EUR/JPY we are viewing the pattern developing on the chart as a potential rising wedge pattern,
this offers resistance at 135.67 and support at 132.01. These patterns are well documented reversal patterns and this one will complete on a weekly close below 132.01. We would also highlight the large bearish divergence of the weekly RSI on it recent move to a new high of 135.52 and highlight that the market recently reversed from its very long term retracement at 135.33 (23.6% retracement of the move down from the 1979 high). We look for this to now act as tough overhead resistance. All of these factors are bearish.

A weekly close below the 132.01 level should be enough to complete the pattern and introduce scope to 122.80. (See weekly chart attached).

Near term the market is seeing a small rebound from its 55 day ma at 132.68. We look for this to be tepid. Initial resistance lies 133.65.

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Gold – Daily Chart

The jury is still out as to which direction the medium term trend will take

Gold rose to but was then capped by the 2013 resistance line, now at 1353.06, and thus remains in a longer term downtrend.

As stated before, for our short- and medium term outlook to once again become bullish we would like to see at least two daily closes above the 2013 resistance line at 1353.06 and above the October peak at 1362.23 being made.

In this case the late September high at 1375.37 should also be overcome with the 200 day moving average at 1417.70 and the August peak at 1434.05 as well as the 2012-13 resistance line at 1459.18 being back on the map.

Should a daily close below the current November low at 1305.98 be seen, though, our short term forecast will become bearish with the five month support line at 1265.52 and the October low at 1251.58 then being back on the map. Failure at the latter level will make us medium term bearish as well. We slightly favour this bearish outlook.

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Misguided reaction of EUR-USD to low euro zone inflation?

Misguided reaction of EUR-USD to low euro zone inflation? Misguided reaction of EUR-USD to low euro zone inflation? We argue that the euro-positive effect of lower inflation will dominate the negative effect of potential rate cuts in the long run. In that sense low EUR prices are a buying opportunity – regardless of the ECB reaction next Thursday.

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EUR/PLN – Daily Chart

Stays sidelined above the 2008-13 uptrend line at 4.1585 and the 4.1443 September low

EUR/PLN is still hovering above the 2008-13 uptrend line at 4.1585 and the 4.1443 September low
but at the same time remains below the 200 day moving average at 4.2050 and thus continues to look weak.

Further range trading, mostly with a negative bias, should be seen into year end with the currency pair expected to stay below the 4.3098 September high.

As long as this is the case the odds favour a retest of the September low at 4.1443. Failure there on a weekly basis will mean that a top has been formed with the 200 week moving average at 4.1200 then being in focus. It should be reached by the end of the
first quarter of 2014.

Good resistance above the 200 day moving average at 4.2050 can be seen between the 55 day moving average at 4.2154 and the late September high at 4.2403.

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Commodity Spotlight Energy

Plentiful supply dampens oil price outlook

The global oil market should remain amply supplied in 2014, since non-OPEC supply will rise faster than global oil demand, according to estimates of the oil agencies. This is largely thanks to the significant expansion of oil production in the USA, which should force OPEC to reduce supply in order to keep the oil market in balance. We have therefore lowered our oil price forecast for next year to an average of 106 USD per barrel. Numerous geopolitical risks still stand in the way of a larger price decline.

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EUR gains unravel

The end of last week saw a sharp reversal in EUR/USD undoing all of the strength it received in the past fortnight on the back of the US October government shutdown. The move down followed a less dovish tone taken by the Fed following its latest FOMC meeting, but more importantly it reflected a sharp deterioration in Eurozone economic data, with inflation, unemployment and sales data in the single currency area all disappointing markedly and putting another ECB rate cut at this week’s Council meeting into play. Increasingly investors have been viewing EUR/USD purely through the prism of the US economy alone, ignoring the broader themes and risks associated with the Eurozone. These are concerns and risks which we have we have frequently highlighted, however, despite the EUR’s rally, and having closed last week at 1.3486 EUR/USD is now back within striking distance of our one-month forecast of 1.34.

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EUR/USD – signals suggest risk of failure ahead of 1.40 is high

EUR/USD has seen a sharp move higher over the past 3 months; it has risen from a low of 1.2755 to a high last week of 1.3833, a rally of approximately 8.5%. It has now reached the 61.8% retracement of the move down from the 2011 peak, this is located at 1.3833.

We would also highlight that we have a 13 count on the weekly chart, which is something we have not seen since 2008. Directly overhead lies the 2008-2013 resistance line at 1.4002 and the 1.3958/50% retracement of the move down from the 2008 peak.

With such a dense band of resistance, 13 counts on the daily and weekly charts and the weekly Elliot wave count, which also indicates that this is likely to be the end of a wave 4 move, the risk of failure here has increased.

We have a short term support zone circa 1.3646/1.3577 (October high), but to confirm that the market has topped we would like to see failure at and a close below the 3 month up channel at 1.3405. This should be enough to signal a slide back to the 1.3104 September low and eventually back to the 1.2755 July low.

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NZD/USD – Daily Chart

Probes the significant .8232/.8106 support zone where it is likely to level out this week

NZD/USD continues to come off the .8500 region and currently probes the .8232/.8106 significant support zone. It is where the October lows, 200 day moving average and the August peak as well as the July high are to be found. Here the currency pair should level out in the days to come.

Only a drop through and daily close below the .8106 level will point to a reversal being formed with the .7800/.7683 region then being back in the picture.

Minor resistance can be seen around the .8352 early October high and more important resistance at the .8437 September peak.

In case of an unexpected rise above the current October high at .8545 being seen, the .8588 late April high and the 2011-13 resistance line at .8623 could also be reached. This we do not expect to happen at the moment, though.

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S&P GSCI Total Return Index

Held initial test of 6 month uptrend.

The S&P GSCI Total Return Index has sold off towards and recovered just ahead of the 6 month uptrend at 4738.

Rallies are indicated to terminate circa 4848/77. We suspect that the market will now remain capped by the 4990/5000 region, and we should see a retest of the 4738 6 month uptrend.

This remains the break down point to key support, which remains the 4 year uptrend at 4664. We would expect to see this hold the initial test.

Only a move above 5185 would imply ongoing strength to the 5400 2012 high. Currently we are neutral to negative – the market is sidelined longer term. A weekly close below the 4 year uptrend would be required to alter this.

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Gold – Daily Chart

Only the break of the 2013 resistance line at 1359.52 will confirm that another up leg is made

Gold continues its recent ascent, albeit with less vigour than before.

For our short- and medium term outlook to once again become bullish we would like to see at least two daily closes above the 2013 resistance line at 1359.52 being made this week.

In this case the late September high at 1375.37 should soon also be overcome with the 200 day moving average at 1428.03 and the August peak at 1434.05 as well as the 2012-13 resistance line at 1466.35 being back on the map.

Immediate upside pressure will be maintained while the gold price remains above the 1329.85 October 19 low on a daily chart closing basis.

Only a, for now less likely, slip to below the next lower 1310 October 22 low would reinstate a short term bearish view.

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EUR/PLN – Daily Chart

Still hovers above the 4.1443 September low which remains in focus

EUR/PLN is still hovering above the 4.1443 September low but at the same time remains below the 200 day moving average at 4.2048 and thus continues to look weak. We also note the presence of the 2011-2013 uptrend at 4.1563.

Further range trading, mostly with a negative bias, should be seen into year end with the currency pair expected to stay below the 4.3098 September high.

As long as this is the case the odds favour a retest of the September low at 4.1443.

Failure there on a weekly basis will mean that a top has been formed with the 200 week moving average at 4.1193 then being in focus. It should be reached by the end of the first quarter of 2014.

Good resistance above the 200 day moving average at 4.2048 can be seen between the 55 day moving average at 4.2185 and the late September high at 4.2403.

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Taking stock of the USD

It is three weeks since our last FX Week publication in which we noted that the USD was holding up surprisingly well considering the uncertain economic and fiscal circumstances in the US. While some of those macro and policy related uncertainties that prevailed in early October appear to have lifted, the USD has still succumbed to accumulating pressures, with its recent losses catching up to some extent with gloomy concerns and realities. Despite the agreement in Washington DC to lift the debt ceiling until February 7th and to fund the government until January 15 next year this offers only a temporary solution and it also raises the possibility of another fiscal standoff in early 2014. In this light US monetary policy is also likely to remain paralyzed for the foreseeable future, with no chance of any reduction in QE at the upcoming FOMC meeting this week.

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Italy VS Spain 10Y spread

Long Italy 10Y short Spain 10Y trend in place above -10/-9.85 2013 March high

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EUR/TRY – Monthly Chart

Made a new all-time high at 2.7691 during August

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NZD/USD – Daily Chart

Negative divergence points to a short term trend reversal while .8545 is not being bettered

NZD/USD reached and is now coming off the .8500 region as previously forecast.

The negative divergence seen with the daily RSI points to at least a short term sell-off which is why long positions should be exited and why we have neutralised our medium term outlook.

Immediate downside targets are the .8352 early October high and then the .8232/.8164 significant support zone. It is where the October lows, 200 day moving average and the
August peak are to be found.

In case of an unexpected rise above the current October high at .8545 being seen, the .8588 late April high and the 2011-13 resistance line at .8625 could also be reached. This we do not expect to happen at the moment, though.

Only a drop through .8164 would skew the technical picture back towards the .7800/.7683 region.

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