Some thoughts outside the box

Some thoughts outside the box. Is there a risk that the Renminbi is not going appreciate but to come under pressure due to the problems in the shadow banking system? We paint a non
mainstream picture.

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S&P GSCI Total Return Index

Market is approaching the top of the converging range at 5019

The S&P GSCI Total Return Index has taken out the 4908 December 2013 peak and the 4923/61.8% retracement of the move down from August and is now approaching the top of the converging trading range at 5019, where we suspect that it will stall and slump back into the range.

In this vicinity also lies the 78.6% retracement of the move down from August at 5007. We have a support line at 4809 and while above here there will remain an upside bias.

A break below the support line is necessary to signal a slide back to the 4615 January low.

From a longer term perspective the market is trading in the midst of a large converging range between the limits of 4576 and 5019 and is therefore considered to be neutral.

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EUR/PLN – Daily Chart

Once again probes the 4.1517/4.1283 support zone which we still expect to hold

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 4.1866 last week, only to then slip back to the 4.1500 region.

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

Minor resistance is seen around the 4.1926 January 10 high with more resistance being seen between the 200 day moving average at 4.2143 and the November peak and 38.2% Fibonacci retracement of the June-to-December decline at 4.2204/09.

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. Failure at 4.1283, would put the April 2013 low at 4.0928 and the December 2012 low at 4.0541 back on the map, though.

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G20 endorses normalization

The G20 communique offered tacit USD support by arguing that the normalization of US monetary policy is appropriate, even though some EM countries have called on the Fed to be less aggressive in tapering QE. Indeed, even as EM countries are undergoing another bout of pressure due to weak Chinese PMI data last week, and with political volatility back on the rise, the developed countries appear confident enough to rebuff these demands, instead calling on EM countries to take more responsibility for their own affairs by implementing more reforms.

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USD/CAD – maintain longer term bullish bias

Near term weakness viewed as corrective only.

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.

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 corrective only and we look for the slide to terminate between 1.0930 and 1.0750 and the market to resume its bull move (these are Elliott wave counts taken off the daily and weekly charts). The previous high charted in 2011 at 1.0660 is expected to offer strong support also, however key support remains the 1.0408 2012-2014 uptrend – while above here a longer term upside bias is maintained.

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Gold – Daily Chart

TD perfected set up suggests small retracement ahead of further gains

The gold price appears to be stalling at the 1333 level very near term. We note the TD perfected set up on the daily chart and this alerts to a small retracement back towards the1268.28/1279.13 band which consists of the December and January highs. This is reinforced by the 2 month uptrend at 1266.

We favour recovery from 1279/68 and rallies will encounter the July peak at 1349.31 and the mid-September and October highs at 1362.23/1375.3. Beyond here lies the 78.6% Fibonacci retracement and August 19 high at 1380.59/1385.00.

While underpinned by 1266, our short term outlook will remain bullish even if longer term we still expect the 1225.00/1211.57 early December lows to be revisited at some stage later this year.

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NZD/USD – Daily Chart

Showing signs of failure ahead of .8400, allow for slippage back into the 4 month trading range

NZD/USD has we suspect failed just ahead of the .8400 resistance, we note the minor resistance line at .8392 coupled with a TD perfected set up and directly overhead we have the tougher resistance offered by various peaks between .8408/37. Failure here will reinforce the trading range mentality and suggest losses back to the .8084 November low and the .8051 February low.

We therefore expect to see further range trading between the .8408/37 resistance area and the .8084/51 significant support zone and thus keep our neutral outlook.

In case of a daily close above .8437 being made (not favoured), 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.

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Taking Stock

Taking Stock. The German Constitutional Court’s referral of the ECB’s OMT programme to the ECJ means that the ECB have to ensure that OMT is never used. They can only do this via further expansionary measures.

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EUR/PLN – Daily Chart

Retests the 4.1517/4.1283 support zone which should continue to underpin. Favour a rebound

EUR/PLN’s sharp decline from its 4.2648 January high has taken it all the way back to the 4.1424 level, which is within the 4.1517/4.1283 major support area which we still expect to underpin. It is where the September, November, December and January lows were made.

In case of unexpected failure at 4.1283, the April low at 4.0928 would be back in the picture.

Minor resistance is seen around the 4.1890/4.1926 January 10 high with more resistance being seen between the 200 day moving average at 4.2148 and the November peak and 38.2% Fibonacci retracement of the June-to-December decline at 4.2204/09.

We no longer believe that the 61.8% Fibonacci retracement of the June-to-December decline at 4.2782 and the 4.3000 region will be reached.

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S&P GSCI Total Return Index

Market is approaching tougher resistance at 4908/23, bid above 4771

The S&P GSCI Total Return Index has continued to grind higher, and is now approaching much tougher resistance offered by the 4908 December 2013 peak. This resistance is reinforced by the 4923/61.8% retracement of the move down from August. While this is expected to hold the initial test, the risk has now increased that it will be eroded for a move to the top of the converging trading range at 5026, where we suspect that it will fail.

It is considered to be well bid while it trades above the 200 day ma at 48042 and the short term uptrend at 4771. Only a move below here would alleviate immediate upside pressure enough to signal a slide back to the 4615 January low.

From a longer term perspective the market is trading in the midst of a large converging range between the limits of 4568 and 5026 and is therefore considered to be neutral.

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Gold – Daily Chart

This year’s uptrend has further to run with the 1362/85 region being targeted next

The gold price finally broke through the 1268.28/1279.13 major resistance zone which consists of the December and January highs and currently probes the 50% retracement of the August-to-December decline at 1309.14.

Further up are the July peak at 1349.31 and the mid- September and October highs at 1362.23/1375.37 which are also in focus, together with the 2012-14 resistance line at 1373.11 and the 78.6% Fibonacci retracement and August 19 high at 1380.59/1385.00.

Strong support can be seen at the previous resistance zone, because of inverse polarity, now support area, at 1279.13/1268.28.

While it underpins, our short term outlook will remain bullish even if longer term we still expect the 1225.00/1211.57 early December lows to be revisited at some stage later this year.

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AUD/NZD – Daily Chart

Dips lower is viewed as corrective, maintain bullish bias

AUD/NZD’s reversal off the major support area at 1.0501/1.0434, made up of the 1995 and 2005 lows, has so far taken it to its current February high at 1.0948.

Buying dips down towards the 1.0731 December low, now support, should be considered by those who have missed the recent rally since we believe that further upside is in store for the months to come.

Further support can be seen around the 1.0707 January 20 high. We will keep our bullish view while AUD/NZD trades above the January low at 1.0493 on a daily closing basis.

Once the 1.0948 current February high has been bettered, the 2013-14 resistance line at 1.1096 and then the August and September lows at 1.1157/99 will be targeted. There the currency pair is likely to struggle, though.

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What’s the best funding currency?

What’s the best funding currency? Increasing real interest rates could lead to a resurgence in carry trade performance. We ask what is the best funding currency?

G10 Highlights. Inflation Report the key event for GBP. Japanese current account data go unnoticed by investors. Riksbank to stay on hold tomorrow. Be aware of rising inflation in Norway.

FX Metrics. We use correlation forecasts to construct optimized carry trades. Based on this we outline a trade idea on carry trades.

EM Highlights. Central Bank of Russia to refrain from rate increases and isse a rather cautious statement. CEE CPI week.
FX Portfolio Recommendation. We provide a series of thematic and tactical trade sugges-tions across G10 and EM.
Technical Analysis. USD weaker but looking for key supports to hold.

Event calendar. First appearance of new Fed Chairwoman Janet Yellen today. Otherwise, Riksbank rate decision as well as CEE CPIs and GDP data in focus.

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OPEC faces big challenges

So far, any decline in the oil price has been precluded by the cold winter in the US
and major unscheduled production outages. The coming months could see oil supply from Libya and Iran returning to the market, in which case OPEC would be producing much more oil than is needed. We anticipate that Saudi Arabia will scale back its oil production so as to prevent any price fall, meaning that the oil price is likely to remain within its familiar trading band.

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S&P GSCI Total Return Index

Market has eroded the 200 day ma, but struggling to maintain upside pressure

The S&P GSCI Total Return Index has managed to clear the 200 day ma but is already looking a little tired. The Elliott wave count on the 240 minute chart is also implying failure here circa 4850/53. We look for a slide back to the 4615 January low.

A close below 4615 (recent low) would be negative and target initially the 4493.50 2013 low. Failure here will target 4442/47, the 50% retracement of the move from the 2009 low to the 2011 high and the 78.6% retracement of the move from 2012. This represents our medium term downside target.

Above 4853 (Fridays high) we will have to allow for a slightly deeper retracement (4865), this is the 50% retracement of the move down from the August peak and possibly the 4908 end of December peak.

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NZD/USD – Daily Chart

Trades back towards the middle of its recent .8432/.8051 trading range; stays sidelined

NZD/USD’s rejection by the .8408/37 resistance area, made up of the September/November highs, took it all the way to the current February low at .8051. From there it has swiftly shot up, though, and now trades back around the .8300 level, towards the middle of its recent range.

Last week’s rally leads us to believe that the recent descent below the .8084 November low was nothing more than a false breakout to the downside.

We therefore expect to see further range trading between the .8408/37 resistance area and the .8084/51 significant support zone 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.

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Gold – Daily Chart

Key resistance at 1268.28/1272.56 is increasingly under pressure and should soon give way

The gold price once again digs deep into the 1268.28/1279.13 major resistance zone which consists of the December and January highs.

A daily close above the 1279.13 January high looks more and more likely by the day and would make us change our forecast to a bullish one.

In this case the area seen between the 200 day moving average at 1308.87, the July peak at 1349.31 and the mid- September and October highs at 1362.23/1375.37 will be in focus, together with the 2012-14 resistance line at 1377.89.

Only while the gold price remains capped by resistance at 1268.28/1279.13, will a retest of the 1225.00/1211.57 (early December low) support area remain probable.

A daily close below the late January low at 1237.96 will have to be made, for such a decline to become more likely again. Right now a break higher looks to be more probable.

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EUR/BRL – Daily Chart

Has practically hit the October 2008 high at 3.3487 and is seen coming off it in the short term

In late January EUR/BRL came within four ticks of the October 2008 peak at 3.3487 before being rejected by it.

Even though a short term reversal lower is still taking place, we will retain our medium term bullish outlook while the currency pair does not close below the January low at 3.1562 on a daily chart basis.

Support above this level can be seen along the 55 day moving average at 3.2301.

If 3.3487 were to be overcome, the minor psychological 3.4000 region and the 2008 high point at 3.4738 will be in targeted.

Were an unexpected daily chart close below 3.1562 to be seen, the 2013-14 support line at 3.1435 would be eyed but should then underpin.

Our short term view has been neutralised for now.

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EUR/PLN – Daily Chart

In view of recent weakness we have once again neutralised our forecast

EUR/PLN’s sharp decline from its 4.2648 January high has taken it all the way back to the 4.1697 level, effectively neutralising both our short term and medium term outlook.

We therefore expect further range trading to be seen in the weeks to come with the 4.1517/4.1283 major support area expected to underpin. It is where the September, November, December and January lows were made.
Minor resistance is seen around the 4.1926 January 10 high with more resistance being seen between the 200 day moving average at 4.2144 and the November peak and 38.2% Fibonacci retracement of the June-to-December decline at 4.2204/09.
We no longer believe that the 61.8% Fibonacci retracement of the June-to-December decline at 4.2782 and the 4.3000 region will be reached, at least not in the next few weeks.
Above these lies the September high at 4.3098.
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Commodity Spotlight Base Metals

Pricing on iron ore market in state of flux

Swap trading is becoming increasingly popular on the iron ore market. Swaps are being used more and more to hedge against price risks, partly because there is currently no liquid trading of steel futures. In this Commodity Spotlight we will be shedding light on the factors that are influencing the iron ore market and outlining the development of pricing and tradability of iron ore, in which China is playing a key role. The plentiful supply situation means that the iron ore price is unlikely to regain its previous highs.
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