Monthly Insights

Macro developments over the past month have been overshadowed to some extent by the geopolitical tension related to Russia’s stand-off with the West over Ukraine. Oil prices which rose briefly on the dispute have since fallen back, but risks remain that a more drawn out crisis could still see them move higher again posing risks for nascent recoveries, particularly in the Eurozone.

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EUR/HUF and USD/ZAR– Daily and Weekly Charts

Emerging Market currencies are back under pressure and should underperform further still

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JPY: No light at the end of the tunnel

JPY: No light at the end of the tunnel. With adjusted -588 billion JPY in January a permanent Japanese current account deficit is closer than ever before. We show that it is not driven by temporary factors in the trade balance. The trade deficit is likely to worsen – with effects for USD-JPY.

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NZD/USD – Daily Chart

Is getting ever closer to the .8527/45 October highs and resistance area; above it lies .8587

NZD/USD once again tries to reach the .8527/45 resistance area which is made up of the October highs. We still believe that a top will be formed in the coming days.

Should a daily close above .8545 be made, though, the 2011-14 resistance line at .8587 will be in focus but should cap. If not, the 2013 peak at .8678 would be back in play.

Bullish upside pressure will be maintained while the currency pair trades above the five week support line at .8407.

Minor support can be seen around the .8394 mid-February high and then at the .8343 march 3 low. Only unexpected failure there would alleviate current upside pressure.

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Gold – Daily Chart

While the late February low at 1319.25 underpins the 1362/85 area remains in focus

The gold price continues to consolidate below its current March high at 1355.11 but while the late February low at 1319.25 underpins, upside pressure will remain in place.

Even though we remain medium term bullish we still have to allow for the possibility of a small correction lower unfolding since the last few weeks’ highs have been accompanied by negative divergence on the daily RSI.

Only an unexpected drop below the February 20 low at 1307.27 and the 200 day moving average at 1300.53 on a daily chart closing basis, would make us neutralise our medium term bullish view.

As long as 1300.53 underpins, the 2012-14 resistance line at 1353.98 and the October highs at 1362.23/1375.37 will remain in focus, together with the 78.6% Fibonacci retracement and August 19 high at 1380.59/1385.00. There the gold price could struggle, though.

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EUR/PLN – Daily Chart

Once again flirts with the 200 day moving average at 4.2124 and should soon overcome it

EUR/PLN’s rise from the 4.1397 February low is taking it back towards the 200 day moving average at 4.2124 and the current March peak at 4.2278.

While the currency pair remains above the 55 day moving average and last week’s low at 4.1740/26, recent upside pressure should be maintained.

We remain medium term neutral to bullish while the next lower 4.1517/4.1283 major support area underpins. It is where the September, November, December and January lows were made.

Once the 4.2278 current March high has been bettered, the long term resistance line at 4.2476 and the 50% retracement at 4.2495 will be in focus as well as the January peak at 4.2648. Unexpected failure at the 4.1283 December low, would put the April 2013 trough at 4.0928 and the December 2012 low at 4.0541 back on the map.

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Steps forward, steps back

Events of the last week have reinforced some of our key FX views while some of our others have been partially undermined or at least challenged. To begin with the positives, the recent data from the US has encouraged our view that the slowdown in the US economy will prove temporary, thus lending support to our forecasts looking for a medium-term USD recovery. Most prominently of course, the February US employment report was surprisingly solid, with 175k non-farm jobs created during the month despite the continuation of bad weather during that month. Although the unemployment rate ticked higher to 6.7% and the hours worked fell, this does not meaningfully take away from the strength in payrolls, which came after two months when they rose on average by only 115k. With other indicators also suggesting reviving momentum it should not be long before the ‘weather effect’ is behind us. That being the case, the Fed looks very likely to keep tapering in coming months, starting next week when another USD10bn reduction in QE is expected. Although tapering has so far had a limited effect in terms of providing the USD with strength, we expect its impact to increase as QE gets closer to being completely wound down, with the market then likely to begin considering the timetable for possible interest rate hikes.

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Russia, Ukraine & the EU: Interdependent

Russia and Ukraine play a key role not only in the energy markets but also in certain
agricultural and metal markets as suppliers and as transit countries. The West should
be able to cope with short-term supply disruptions. However, longer-lasting shortfalls
would have serious consequences and cause prices to rise sharply. Yet dependence
is not a one-way street: EU countries are the main customers for Russia’s highly
commodity-dependent export trade. It is therefore in the interest of both sides to
avoid further escalation.

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USD/CAD – maintain positive bias as correction appears to have already terminated at 1.0912.

Looking for 1.1189/1.1244 resistance to be re-tested

Our initial upside target of 1.1187/1.1244 has been met, this is the 1991 low and the 50% retracement of the move down from 2009-2011. The setback that we have seen from here is viewed as an ‘a-b- c’ correction which terminated at 1.0912. We believe the USD/CAD chart is well placed to resume its bull move and will do so once the 1.1244 resistance is taken out.

We maintain that the USD/CAD chart is bullish longer term. It has completed a large base between 1.0660 and 0.9403, this base took almost 3 years to complete, and the pattern broke higher earlier this year. It offers an upside measured target to 1.19 longer term. Given that the base took 3 years to complete, this target is achievable in approximately half of that time, i.e. by Q2 2015. We should therefore see the Canadian Dollar come under pressure throughout much of this year.

Below 1.0850 would trigger a deeper sell off to the previous high charted in 2011 at 1.0660, however key support remains the 1.0418 2012-2014 uptrend – while above here a longer term upside bias is maintained.

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NZD/USD – Daily Chart

Pushes hard into the .8428/37 resistance area which is likely to at least briefly give way

NZD/USD once again probes the .8428/37 resistance area which is made up of the September, January and February highs.

It is likely that it will at least briefly give way in the next few days with the .8500 region then likely to be revisited.

Further up lies the October peak at .8545 below which the currency pair will probably struggle again
Bullish upside pressure will be maintained while the currency pair trades above the 55 day moving average and the February 20 low at .8273/42.

Only unexpected failure there would change our short term outlook from neutral to bearish with the 200 day moving average, 2013-14 support line and the February low at .8051 then being in focus. Such a slip we do not expect to see, though, and instead short term upside pressure should be maintained.

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S&P GSCI Total Return Index

Market is breaking up from a 2 year converging range.

The S&P GSCI Total Return Index has started to erode the 2012-2014 downtrend at 5015, the gap above here does seem quite directional and the market is in the process of breaking up out of a 2 year contracting range.

Clearly we would likely to see this break confirmed on a weekly closing basis, but currently we are inclined to just go with it.

The break has introduced scope for a move to the 5400 2012 high.

It remains immediately bid above the 4925 28th February low ahead of 4840, the short term uptrend.

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Why the RUB will remain weak

Why the RUB will remain weak. Irrespective of geo-political concerns RUB is likely to weaken due to the continuing deterioration of the Russian economy.

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Gold – Daily Chart

While the late February low at 1319.25 underpins the 1362/85 area remains in focus

The gold price has reached the 55 week moving average at 1354.87 but not yet the 1362.23 October peak.

Even though we remain medium term bullish we still have to allow for the possibility of a small correction lower unfolding since the last few weeks’ highs have been accompanied by negative divergence on the daily RSI.

While the gold price remains above the late February high at 1319.25 on a daily chart closing basis, though, immediate upside pressure should be maintained.

Only an unexpected drop below the February 20 low at 1307.27 and the 200 day moving average at 1301.65 on a daily chart closing basis, would make us neutralise our medium term bullish view. As long as 1301.65 underpins, the 2012-14 resistance line at 1358.76 and the October highs at 1362.23/1375.37 will remain in focus, together with the 78.6% Fibonacci retracement and August 19 high at 1380.59/1385.00. There the gold price could struggle.

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No rapid transformation on the power exchange

Electricity is costing the consumer more and more, but power prices on the exchange
have been under pressure for three years now. This has happened because of a sharp fall in coal prices, lower carbon prices and the expansion of renewable energy. We expect the slide to end soon, as carbon prices in emission trading are starting to rise, and growth of renewable energy is loosing some of its pace. No strong rally seems
likely though in the near term, given that coal remains cheap for some time, and its prices will probably only recover gradually in view of ample supplies./p>
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EUR/PLN – Daily Chart

Bounces off the 4.1517/4.1283 support zone and could reach the 200 dma at 4.2138

EUR/PLN’s sharp decline from its 4.2648 January high has taken it all the way back to the 4.1397 level before bouncing back to 4.1905 last week.

This level and the January 10 high at 4.1926 we expect to be overcome this week with the 200 day moving average at 4.2138 and the 38.2% Fibonacci retracement of the June- to-December decline at 4.2209 being targeted.

We remain neutral while the 4.1517/4.1283 major support area underpins. It is where the September, November, December and January lows were made.

While the currency pair stays sidelined between the 4.2209 and 4.1283 levels on a daily chart closing basis our view will remain neutral.

For now unexpected failure at the 4.1283 December low, would put the April 2013 trough at 4.0928 and the December 2012 low at 4.0541 back on the map.

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Political risk keeps safe havens favoured

The new week will begin against the backdrop of heightened political risk in eastern Europe, with tensions between Ukraine and Russia running very high. Clearly the risk of war between Ukraine and Russia is not insignificant, with both countries mobilizing troops over the weekend, which is likely to keep safe haven currencies such as the JPY and the CHF supported in the first instance. The USD would ordinarily be a beneficiary of such tensions as well, although with relations between Russia and the US also being tested over the crisis, the USD may not be the preferred choice on this occasion, at least not initially.

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Weather factors cause turbulence on agricultural markets

Several agricultural markets have experienced a pronounced swing of sentiment in February, with price changes accordingly. Arabica coffee prices have rocketed and wheat and sugar prices have also changed direction and risen again lately. In this report, we discuss the factors leading to these strong price movements and how we estimate the future price trend. For markets moving in calmer waters or where the price trend has been less of a surprise at least, we update our assessment in short paragraphs.

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NZD/USD – Daily Chart

Remains sidelined while capped by the .8394/.8437 resistance area and supported by .8051

NZD/USD remains sidelined below the .8394/.8437 resistance area which is made up of the September, November, January and current February highs.

Minor support is seen between the 55 day moving average at .8262 and the February 20 low at .8242. Should it give way the next lower January 10 low at .8206 is likely to hold.

Strong support can be seen between the 200 day moving average at .8136 and the current February low at .8051.
We expect to see further range trading between the .8437 level and the .8051 significant support level and thus keep our neutral outlook.

In case of a daily close above .8437 being made, we will have to allow for the .8500 region and the October peak at .8545 to be revisited. A fall through the .8084/.51 support area would turn us bearish, and eye the psychological .8000 mark instead. We expect to see range trading.

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J. P Morgan Asia Dollar Index – failing at its 9 month downtrend

The JP Morgan Asia Dollar Index rallied to and failed at its 2013-2014 downtrend, which is currently located at 115.95. The market tested this resistance 3 times last week and is now showing signs of significant failure; it is also reinforced by the 200 day m.a. at 115.85. We assume that the market is resuming its longer term bear trend and look for a slide back to the January low at 114.82. It remains medium term bearish while trading below its January high at 116.18.

Once the January low at 114.82 has been fallen through, the 114.00/113.58 support area will be back in play. This is where minor support and the August low are to be found.

Further down lies the April 2010 high at 113.29 and also the 38.2% Fibonacci retracement of the 2009-2011 advance at 112.91
.
Longer term the 50% retracement at 110.65 is also being targeted.

Weakness in the Asian currencies pairs is particularly noticeable for the USD/CNY (for the currency pair, the one year and one month non deliverable forward charts also). These have all eroded 2012-2014 downtrends and 55 day ma and all shot higher. USD/CNY has already cleared its 55 week ma at 6.1195. This together with the September 2013 high at 6.1209 should act as solid near term resistance. Above here would introduce scope to the 6.1568 June 2013 high. Dips lower should remain well supported 6.08/07.

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Gold – Daily Chart

While the 200 day moving average at 1302.82 underpins the 1362/85 area remains in focus

The gold price has reached the 61.8% Fibonacci retracement of the August-to-December decline at 1338.62 which caps it at present.

We have to allow for at least a small correction lower since this week’s high has been accompanied by negative divergence of the daily RSI.

While the gold price remains above the February 20 low at 1307.27 and the 200 day moving average at 1302.82 on a daily chart closing basis, we will retain our medium term bullish view even though we have neutralised our short term outlook.

As long as 1302.82 underpins, the July peak at 1349.31 and the mid-September and October highs at 1362.23/1375.37 will remain in focus, together with the 2012-14 resistance line at 1364.74 and the 78.6% Fibonacci retracement and August 19 high at 1380.59/1385.00.

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