Commodity Spotlight Precious Metals

From West to East: gold demand is shifting

Overshadowed by the investment boom in the West, As ia’s gold demand has been enjoying strong growth for years. It was only the massive outflows from gold ETFs in the first half of the year, however, that revealed that China has meanwhile established itself as a key player on the gold market alongside India. Even if Indian gold demand may falter somewhat in the short term, the growing Asian interest in gold will doubtless become an increasingly important driver on the gold market in the medium term and thus lend support to the price recovery we anticipate in the coming year. Silver should then also be able to make significant gains in gold’s slipstream.

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Foreign Exchange

AUD/USD strength remains corrective only

The rebound seen from the end of August from the .8848/93 supports has been fairly solid, but remains well within the confines of a correction only. The rally will shortly encounter the previous break down point at .9388/.9404. This represents the November 2009 high, the April 2010 high and the October 2011 low, it is considered to be tough resistance and our favoured view is that we will see failure between here and the 0.9510/38.2% retracement of the move that we have seen this year so far.

We note that the daily chart is suggesting that the sideways to higher corrective move which has been evident since the beginning of August is in fact an ‘a-b-c’ correction which is nearing completion. We do have a another Elliot wave count on the weekly chart, which suggests that the correction could reach the 50% retracement resistance at .9715, however this is less favoured.
Longer term the market completed a large top in June 2013 (1.1080-.9388), which offers a downside measured target to approximately 0.7700. This top and target will remain entrenched while capped by the 0.9715 resistance.
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Tapering – What’s priced in for the USD?

Markets have priced in the Fed tapering by a small amount. The risk is not just that they do more rather than less but also a change of forward guidance criteria.

Coming into the Fed’s meeting this week markets have priced in a modest tapering of QE3. 10 Yr yields have rallied over the summer and now trade around 2.80%. The USD has been given the benefit of the doubt by markets (Chart 2) and trades at levels below what might be sug-gested on the basis of relative liquidity policy. The decision to taper is not based on an im-provement in US economic data alone. Fed members are no doubt concerned about the risks posed by a balance sheet that is now coming close to $3.4 trillion. Tapering in this sense is clearly justified and expected. There are two dynamics to consider: one is if the Fed does more than the market expects (they could hardly do less!) and the second is a change in forward guidance criteria.

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NZD/USD – Daily Chart

Has reached the 200 day moving average around which it may soon lose upside momentum

NZD/USD’s swift rally off its .7721 late August low has so far taken it to .8232, to marginally above the 200 day moving average at .8180. We continue to believe that upside momentum will diminish around it and below the 61.8% Fibonacci retracement of the April-to-June decline at .8298.

As long as this level does indeed cap on a daily closing basis, we will expect NZD/USD to head back down towards the .7721/.7683 major support zone which encompasses the June-to-August lows. If fallen through, our downside target zone, made up of the .7456/.7371 May 2012 low and November 2011 low, will be back in play.

Should .8298 be exceeded, however, the .8361 April low will be back in focus. Above it lies the 78.6% Fibonacci retracement at .8465.
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S&P GSCI Total Return Index – Daily Chart

Market has failed ahead of 5165/85 as expected and is heading back to its 200 day ma at 4848

The S&P GSCI Total Return Index has recently failed just ahead of 5165/85 and has spent the past week merely consolidating sideways to lower to leave our outlook unchanged. The 5165/85 band is the location of the 61.8% retracement of the move down from 2011. Near term risks are for a slide back to the 4848 200 day moving average, where we would expect to see some consolidation.

We recently reverted to neutral – the market has seen very little follow through on a break of a significant downtrend and this has all the hallmarks of a false break. Failure at the 200 day ma at 4848 would see prices slump to the 4 month support line at 4674.

Only a move above 5185 would imply ongoing strength to the 5400 2012 high, and failure would see the market head back to the previous range circa 4800. We are biased to the latter scenario and suspect we will see the market ease lower in its range.

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Gold – Daily Chart

Our first downside targets have been hit but the 1200/1180 region remains in focus

In the past couple of weeks the gold price has reasserted its downtrend and has so far hit the 50% retracement of the June-to-August rally at 1307.04 and nearly also the 50% retracement of the 2008-11 advance at 1301.12.

Both of these should be fallen through this week with the 1272.56 August low then being targeted.

Failure at the 1272.56 August low will confirm that another interim top has been formed.
In such a scenario the 1200/1100 region will be back in play as well.
Only an unexpected rise above the 1434.05 August peak would void this forecast and target resistance at 1487.62/1488.17 instead.
Resistance now comes in around the 1350 level and along the breached support (now resistance) line at 1365.
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EUR/PLN – Daily Chart

Last week’s swift sell-off has neutralised our medium term view; eyes support at 4.1807/4.1698

Last week’s EUR/PLN decline was more impulsive than we had anticipated which is why we have neutralised our medium term forecast and changed our short term one to being bearish.

The significant 4.1807/4.1698 support area is expected to be probed this week. It consists of the August low, 2008-13 uptrend line and the 55 week moving average.

Failure there would put the 78.6% Fibonacci retracement of the April-to-June rise at 4.1523 and also the 200 week moving average at 4.1175 on the map. If the latter level were to be also fallen through, the April trough at 4.0928 will again be in focus.

We will maintain our short term bearish forecast while EUR/PLN remains below the 55 day moving average at 4.2495 and the 38.2% Fibonacci retracement at 4.2646. Key for the medium term trend is the 4.3098 current September peak.

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Commodity Spotlight Agriculturals

Supply situation sets the trend for prices of soft commodities

Whilst the trend in cocoa prices in London is up, sugar and coffee prices in New York have yet to recover. Prospects of a deficit on the cocoa market in the current season and concerns about Western African supply in 2013/14 have pushed cocoa quotations to a one-year high. High Brazilian harvests, in contrast, are mainly responsible for the lower prices for Arabica coffee and sugar, especially since the weak real is having asimilar effect. Political initiatives and competition from ethanol should nevertheless lead to a moderate price increase.

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Chart Watch – FX Markets

AUD/USD – Maintain a negative bias below .9388/.9404 = 2009 high and 2011 low

AUD/USD is probing the July peak at .9318. Key resistance remains at .9388/.9404 (2011 low and 2009 high) and we look for this to continue to cap the topside and we look for failure in and around this zone. We have minor support at .9225/33 and below here should trigger a slide to the 55 day ma at .9117.

A slide below .9110/17 should be enough to alleviate upside pressure and cast attention back to the .8848 recent low. We remain bearish longer term and longer term targets remain to be seen at .8550, the 50% retracement of the move up from 2008. Our longer term downside target measured from the top is .7700.

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US 2-10Y Swap Curve – Daily Chart

Widens back to its August 2.525 high but is likely to struggle below the 2.59 June 2011 peak

During August the US 2-10Y swap curve widened to the minor psychological 2.50 level and reached a high of 2.525 before narrowing slightly. This high is now back within grasping distance.

Above 2.52 lurks the 2.55 March 2011 low and the 2.59 June 2011 high, both of which should be reached before the end of the year but are likely to cap in the days ahead.
Further up the 2010 and 2011 peaks can be seen at 2.73 and also at 2.81.
We will retain our long term widening bias while the swap curve remains above the 2.155 late June low.
Over the next few weeks some renewed narrowing back towards the 55 day moving average at 2.33 is likely to be seen.
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NZD/USD – Daily Chart

In view of the recent sharp rally we have had to neutralise our outlook

NZD/USD’s swift rally off its .7721 late August low has taken it back to the 2013 resistance line at .8069.

In view of the impulsive nature of this rise we feel compelled to neutralise both our short- and medium-term forecasts and allow for the .8106/87 resistance area to be retested. It is made up of the July peak, August high and the 200 day moving average at .8187 and it should cap.
Should this not be the case, a bottom will have been formed with the 61.8% Fibonacci retracement of the April-to-June decline at .8298 being targeted. This is not our preferred scenario, though.
Instead we expect the currency pair to run out of steam in the .8106/87 region and for it to then head back down towards the .7721/.7683 major support zone which encompasses the June-to-August lows. If fallen through, our downside target zone, made up of the .7456/.7371 May 2012 low and November 2011 low, will be in focus.
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S&P GSCI Total Return Index – Daily Chart

Market has failed ahead of 5165/85 as expected and is heading back to its 200 day ma at 4847

The S&P GSCI Total Return Index is showing signs of failure ahead of 5165/85 as expected. This is the location of the 61.8% retracement of the move down from 2011. Near term risks are for a slide back to the 4847 200 day moving average, where we would expect to see some consolidation.
We recently reverted to neutral – the market has seen very little follow through on a break of a significant downtrend and this has all the hallmarks of a false break. Failure at the 200 day ma would see prices slump to the 4 month support line at 4674.
Only a move above 5185 would imply ongoing strength to the 5400 2012 high, and failure would see the market head back to the previous range circa 4800. We are biased to the latter scenario and suspect we will see the market ease lower in its range.
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Cause and effect

Recent price action in Emerging Market currencies represents a mere lull in what is likely to be a more prolonged and sustained period of EMFX weakness.

EM currencies were able to stop their downward trend of late, though they failed to pare the significant losses recorded since May. Friday’s US labour market report was neither fish nor fowl. However, looking at the volatilities of NFP and unemployment rate shows that the drop in the latter to 7.3 % might weigh more than the disap pointing NFP figures. So it should not surprise that most of the market participants still expect the Fed to start tapering in September. Against this backdrop the latest stabilization of EM currencies could be seen as a signal that this time the countries will not be hit as hard as in the 1997 Asian crisis. Or will the situation in the respective countries deteriorate further?

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Gold – Daily Chart

We will stick to our bearish view while gold trades below the 1434.05 August high

Over the past few month the gold price has risen in three corrective Elliott abc waves which have most likely culminated at the 1434.05 August high.

Therefore, while no daily chart close above this high is seen, we expect the gold price to fall back to an beyond this year’s 1180.04 June low. This level could be reached by the end of this year or the beginning of next year.

Our first downside target is the 1351.86/1321.50 support area which consists of a support line, the July high, April and May lows and the 55 day moving average. Below it lies the 1272.56 August low which is also being targeted.
Failure at the 1272.56 August low would confirm that another interim top has been formed. In such a scenario the 1200/1100 region would be back in play instead.
An unexpected rise above 1434.05 would void this forecast and target resistance at 1487.62/1488.17 instead.
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EUR/PLN – Daily Chart

Should range trade below last week’s high at 4.3098 before resuming its medium term uptrend

Last week EUR/PLN shot up to 4.3098 before retracing lower again and hitting the 50% retracement of the June-to-August decline at 4.2757.

While it stays below the current September high at 4.3098, the current September low at 4.2478 and the 4.2208 August 23 low will remain in play. Between the 4.2200 region and this year’s support line at 4.2046 the currency pair should then find support, though.
The August uptrend will only resume once the 4.3098 high has been bettered. Then the currency pair will probably once again head up towards the 4.35/37 region in which the June and July highs were made.
We will retain our medium term bullish forecast while the currency pair stays above its 4.1807 August low on a daily closing basis. Minor support above this level comes in around the 200 day moving average at 4.1875.
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FX Week

USD steady despite payrolls disappointment

Despite some ambiguity in the US August employment report released on Friday, the USD corrected only part of the gains it had made over the week as a whole. This is probably because the 169,000 rise in non-farm payrolls, while softer than expected, was probably not weak enough to cast doubts on the likelihood of Fed QE tapering being announced next week. Even with the downward revisions to July and August, knocking a combined 74,000 jobs off previous estimates, another fall in the unemployment rate to 7.3% was probably sufficient to keep a Fed ‘tapering’ in prospect, especially in the light of other strong ISM activity reports as well as ongoing declines in weekly jobless claims.

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FX – The Euro has come under pressure and we would prepare for further weakness

EUR/GBP has severed its 2012-2013 uptrend

EUR/GBP came under increasing downside pressure throughout August and this has culminated in a break below the 2012-2013 up trend at 0.8523. We have seen the market head back to its 200 day ma at 0.8481 and while it is possible that we will see some consolidation around this zone, the recent move lower has been damaging.

The market appears to have recently failed at the top of a 4 year down channel, which is currently located at .8750. This coupled with the break of the 2012-2013 uptrend is viewed as extremely negative from a longer term perspective.
Beyond some consolidation, the risks have increased that we will see further weakness. The initial downside target is the 0.8399/0.8367 zone, this is the low that we saw in April and the 200 week moving average. Just above here at .8402 is the 38.2% retracement of the move up from the 0.7757. This .8402/0.8366 zone is expected to act as a major break down zone. Failure here will trigger losses to 0.8155 and eventually head back to the 2012 low at 0.7757 and potentially to the base of the channel, currently at 0.7590. The 2012 low of approximately 0.7750 is achievable by the end of 2014.
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FX – The Euro has come under pressure and we would prepare for further weakness

EUR/GBP has severed its 2012-2013 uptrend

EUR/GBP came under increasing downside pressure throughout August and this has culminated in a break below the 2012-2013 up trend at 0.8523. We have seen the market head back to its 200 day ma at 0.8481 and while it is possible that we will see some consolidation around this zone, the recent move lower has been damaging.
The market appears to have recently failed at the top of a 4 year down channel, which is currently located at .8750. This coupled with the break of the 2012-2013 uptrend is viewed as extremely negative from a longer term perspective.

Beyond some consolidation, the risks have increased that we will see further weakness. The initial downside target is the 0.8399/0.8367 zone, this is the low that we saw in April and the 200 week moving average. Just above here at .8402 is the 38.2% retracement of the move up from the 0.7757. This .8402/0.8366 zone is expected to act as a major break down zone. Failure here will trigger losses to 0.8155 and eventually head back to the 2012 low at 0.7757 and potentially to the base of the channel, currently at 0.7590. The 2012 low of approximately 0.7750 is achievable by the end of 2014.

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NZD/USD – Daily Chart

Is still expected to fall through the .7700/.7664 support zone in the next few of weeks

NZD/USD tumbled from its.8164 August high to .7721 last week. This was marginally above the major.7700/.7664 support area which is made up of the three month and 2011-13 support lines and several daily lows seen since June. This support area is expected to eventually give way.

Once fallen through, our medium term downside target zone, made up of the .7456/.7371 May 2012 low and November 2011 low, will be in focus. It will remain our downside target for the months to come but will only be properly back on the map once the June low at .7683 has been fallen through.

Minor resistance above the 55 day moving average at .7881 and the 50% retracement at .7923 comes in around the 38.2% Fibonacci retracement at .7980.
More significant resistance can be seen at the July and August highs at .8107/64. While trading below the latter, our medium term bearish view will be maintained.
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The end of Risk on – Risk off

Although all eyes are focussed upon current account risks in emerging markets, within the G10 complex there has been a complete breakdown of the risk on – risk off regime

Over the last 6 years investors in G10 have become used to the risk on – risk off trading regime where higher yielders outperform during periods of increasing risk appetite whilst lower yielding currencies tended to depreciate and vice versa. What is notable is that there was little differen-tiation of such currencies along fundamental lines; higher yielders simply appreciated en mass, while lower yielding currencies lost ground. The cause of this dynamic lay with central bank liquidity policies. By flooding markets with abundant liquidity and effectively mitigating tail risks (think of the ECB’s LTRO policy) volatility term structures flattened to lower and lower levels with consequent appreciation of higher yielding currencies. Investors did not have to concern themselves with differentiation. Until now that is.

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