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USDJPY Bounces From Correction Low At 112.85, Sustained Break Above 114.00 To Confirm Reversal

The dollar rallies after pullback from fresh high at 114.81 was contained by rising daily Tenkan-sen at 112.85.

Firmly bullish studies favor further upside and extension above 114.81 peak, towards weekly cloud top at 115.40.

Recovery off 112.85 low needs to return above 114.00 handle to confirm reversal and expose 114.81 pivot. In addition sustained break above 114.28 (Fibo 61.8% of 123.74/98.98 descend) is needed to confirm.

Caution overbought daily studies and bearish divergence on daily RSI / Slow Stochastic. Firm break below daily Tenkan-sen would generate bearish signal.

Res: 114.18, 114.70, 114.81, 115.40
Sup: 113.31, 112.85, 112.04, 111.60

Euro In The Defensive After Italian Referendum

  • Rates: How long will risk-off last this time?
    Risk aversion dominated Asian trading following as the Italian referendum outcome caused PM Renzi to resign. In line with the Brexit-referendum and US elections, we expect such global risk-off to be short-lived. Even the damage on peripheral bond markets could be contained with Thursday’s ECB meeting and possible QE-extension looming.
  • Currencies: Euro in the defensive after Italian referendum
    EUR/USD dropped temporary to the low 1.05 area after the resignation of Italian PM Renzi. The focus for global currency trading will remain on the consequences of the Italian referendum. A cautious risk-off modus might continue to weigh on EUR/USD and cap the topside of USD/JPY, at least temporary
  • US equities ended nearly unchanged as they failed to cling on to (small) gains on a decent, but near-consensus, payrolls report. Overnight, Asian stock markets lose moderate ground in a global risk-off move following the Italian referendum.
  • Matteo Renzi is set to resign after suffering a heavy defeat in a referendum on his flagship constitutional reforms, a result that plunges Italy into political crisis and raises fears of turmoil in its banking system.
  • Austrians voted against an anti-immigrant populist as their next president by a resounding margin, bucking a trend of nationalist electoral successes across the West. Center-left candidate Van der Bellen won with 53.3% of the vote
  • New Zealand PM Key, who won praise for his economic stewardship after the global financial crisis, unexpectedly announced his resignation after eight years in power for personal reasons, backing his finance minister to take the helm.
  • President-elect Trump stepped up his rhetoric about Beijing’s economic and military stances, as senior members of his transition team sought to play down concerns that his phone call with Taiwan’s president heralded a break from longstanding U.S. policy on China.
  • The Chinese Caixin/Markit services (PMI) rose to 53.1 in November from 52.4 in October, a 16-month high though the increase in new orders dipped slightly and business expectations moderated.
  • Oil retreated from a 16-month high overnight, as the Italian referendum led to a risk off move. Brent currently trades around $54/barrel from 54.50 previously.
  • Today’s eco calendar contains EMU final services PMI, UK services PMI. Fed Dudley, Evans and Bullard are scheduled to speak and EMU FM’s hope reach a compromise on Greek reforms at the Eurogroup meeting.

Euro sets new correction low after Italian referendum

On Friday, the focus of global (currency) markets was on the US payrolls report. However, the payrolls were too close to expectations to inspire any directional USD move. It was a non-event for USD trading. EUR/USD closed the session at 1.0664 (from 1.0661 Thursday). USD/JPY lost gradually some ground off the reaction top and closed the session at 113.51 (from 114.10).

Overnight, Asian equities are losing up to 1.5% as the ‘No vote’ in the Italian referendum and the resignation of Italian PM Renzi put global markets in risk-off modus. The losses can be qualified as modest. The euro is the obvious victim of the Italian political uncertainty. EUR/USD set a new correction low in the low 1.05 area early in Asia, but reversed part of the initial losses (currently 1.0565). USD/JPY spiked temporary below 113, but also reversed the initial losses. The pair trades currently again in the mid 113 area. The kiwi dollar dropped to NZD/USD 0.7070 after Prime Minister Key announced to step down, but the pair trades currently again in the 0.71 area

Later today, the final EMU Markit business surveys for November shouldn’t stir markets. The EMU retail sales for October are outdated and not very reliable. In the US, the Non-manufacturing ISM is more interesting. It is expected to have marginally increased in November to 55.5 from 54.8 previously. We have no reasons to distance us from the consensus. However, the focus for global trading will be on consequences of the Italian referendum. The outcome for markets is the worst possible as it might be seen not only as a big “no” to Mr. Renzi and his reform plans, but also as a “yes” for the opposition, especially the outsider Five Star Party. The narrowing of the Italian spread of last week might be undone. The spread between German yields and US yields might also widen further. This is a euro negative. So, the euro might stay in the defensive. Markets will also keep a close eye at Italian bank stocks. A sell-off might cause nervousness in other markets, including the currency market. At the end of last week, the euro basically traded sideways as investors didn’t put additional shorts in place going into the Italian referendum. At the same time; the dollar rally also lost slightly momentum. This morning euro weakness is again the name of the game. There is no reason to expect a trend reversal anytime soon.

For now, USD/JPY is holding up fairly well, but we don’t see much upside shortterm if global sentiment turns risk-off and if the rise in core bond yields takes a breather.

From a technical point of view, EUR/USD cleared intermediate support at 1.0851 and 1.0711 (2016 low). The par set a minor new low below the 1.0524/18 support this morning. So, the cycle low at 1.0458 is again on the radar. We maintain a sell-on-upticks bias for EUR/USD. The 38% retracement from the Trump decline comes in at 1.0817. We don’t expect EUR/USD to regain that level. The technical picture for USD/JPY improved too. The pair took out the key resistance at 111.45/91. Next key resistance at 114.50/115 was tested last week but the test was rejected. The pair is moved well into overbought territory. The rally might be ripe for a modest correction.

EUR/USD is testing last defensive ahead of the 1.0458 correction low

EUR/GBP

EUR/GBP testing next support at 0.8333

On Friday, sterling trading was driven by technical considerations. The UK construction PMI was marginally stronger than expected. BoE’s chief economist Haldane maintained a neutral policy stance, but warned that the BoE shouldn’t tighten policy too hastily. Both factors were no big issue for sterling trading. During the afternoon session, sterling found again a better bid. Some positive comments from UK policy makers on a further cooperation with the EU post Brexit might have played a role. EUR/GBP drifted gradually south reversing Thursday’s late session rebound. The pair closed the session at 0.8389 (from 0.8467). Cable also rebounded sharply as the dollar rally slowed. The pair closed the session at 1.2729.

Today, the UK services PMI is expected slightly softer at 54.00 from 54.5. The report brings important info on the UK economy in the post-Brexit era. However, a big surprise is to have a big impact on sterling trading. The negative euro sentiment after the Italian referendum also weighs on the EUR/GBP cross rate. EUR/GBP is currently testing the 0.8333 support. Last week, EUR/GBP showed tentative signs of a bottoming out process. However, sterling strength is now replaced by euro weakness. So for now there is still no good reason to try to catch the falling knife of EUR/GBP.

EUR/GBP: 0.8333 under heavy pressure.

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Gold Loses To Dollar Amid Safe Haven Run

‘Gold swung after voters in Italy rejected a referendum on constitutional reform, with investors seeking a haven in the dollar rather than the precious metal.’ – Bloomberg

Pair’s Outlook

Gold respected the upper bound of the month-long hourly channel with a red candle, after it opened above the short-term channel trend-line at 1,181.73. The XAU/USD exchange rate could be attempting to re-enter the broken channel to test the latest resistance at 1,170.54. While bearish momentum prevails, we look for the losses to be ultimately cut at 1,158.87 where the four-month trend-line turned channel is bound to take over the trend and could send the pair skyrocketing towards the upper trend-line of the senior channel.

Traders’ Sentiment

Traders are bullish on the commodity with 60% of open positions being long. Pending orders, however, entered deeper negative territory with 66% of SELL commands.

Weekly Review and Outlook: Euro to Take Center Stage With Italy Referendum and ECB

Canadian dollar surged broadly last week as the highly anticipated OPEC meeting finally delivered an agreement on production cut. WTI crude oil surged 51.80 and took the Loonie, as well as stocks higher. The Canadian Dollar was also boosted by better than expectation employment data. Nonetheless, Canadian Dollar was overwhelmed by the strength of Sterling. The British Pound surged on talk that there are rooms for UK to have a softer Brexit. Meanwhile, Japanese Yen ended as the weakest major currency again on strong risk appetite. Dollar followed as the second weakest one. The mixed non-farm payroll report from US didn’t change market’s expectation on a December Fed hike. But the negative monthly wage growth raised doubt on whether Fed would hike again by June.

The immediate focus will turn to Italian referendum on Sunday. With the “no” camp leading in opinion polls, Italian shares and bonds have underperformed of late. The market’s key concern is that a “no” vote leading to resignation of Prime Minister Matteo Renzi would trigger massive selloff in bank shares, forcing the debt-ridden Banca Monte dei Paschi di Siena to suspend plans for a critical 5B euro capital increase and then making other banks, such as UniCredit, to delay similar plains too. Such risks might be contagious, spreading to other peripheral countries and result in another European financial crisis. More in Quick Guide to Italian Referendum on Senate Reform.

ECB meeting will then take center stage next week. The current EUR 80b a month asset purchase program is scheduled to end next March. But the central bank is yet to provide any details on handling it. There has been various speculations on what ECB would be. But for the moment, tapering the bond purchase seems an unlikely option Instead, ECB could opt for extending the program by another six months. In any case, the Euro would likely be rather volatile in the coming week. Meanwhile, RBA and BoC will also meeting this week but bother are expected to keep policies unchanged.

The dollar index stayed in tight range last week as consolidations continued. One of the concerns for Dollar is the sharp pull back in NASDAQ last week, as weighed down by tech stocks. Another is the mild loss of momentum in treasury yields. Such consolidations could extend in near term, till Donal Trump delivers a clear picture on his immediate policies, possibly in January. But overall, outlook in dollar index stays bullish as long as 99.11 resistance turned support holds. The long term up trend is expected to extend to 61.8% projection of 78.90 to 100.39 from 91.91 at 105.19 next.

Regarding trading strategy, we’re holding two short positions in AUD/USD, entered at 0.7550 and 0.7480. In spite of the sharp fall from 0.7496 to 0.7369, AUD/USD quickly recovered. The development raised some doubt on whether the consolidation pattern from 0.7310 would extend. Hence, we’ll extend one short position at market this week first and keep the other with stop at 0.7550. Overall, we’re still favoring the case that medium term consolidation pattern from 0.6826 low should have completed and the larger down trend is ready to resume. Hence, we’re expecting a test on 0.7144 support in near term, as first target. And decisive break there will likely extend the larger down trend through 0.6826 low.

EUR/USD turned into consolidative price actions last week. Initial bias stays neutral this week first. Another recovery cannot be ruled out. But in that case, upside should be limited by 38.2% retracement of 1.1298 to 1.0518 at 1.0816 and bring fall resumption. Below 1.0518 will extend the decline from 1.1615 to 1.0461/0517 key support zone. We’re slightly favoring the case that consolidation pattern from 1.0461 is completed and larger down trend is resuming. Decisive break of 1.0461 will confirm this bearish case.

In the bigger picture, the medium term consolidation pattern from 1.0461 could have completed as a triangle at 1.1298. Decisive break of 1.0461 will confirm resumption of long term down trend from 1.6039 (2008 high). In such case, next medium term target will be 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. This will now be the preferred case as long as 1.1298 resistance holds.

In the long term picture, the down trend from 1.6039 (2008 high) is still in progress and there is no clear sign of completed. We’d expect more downside towards 0.8223 low as long as 1.2042 resistance holds.

EUR/USD 4 Hours Chart

EUR/USD Daily Chart

EUR/USD Weekly Chart

EUR/USD Monthly Chart

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Weekly Focus: ECB and EU Politics Back in the Spotlight

Market movers ahead

Focus is on the Italian referendum held on Sunday. A ‘No’ seems most likely to us but we would not expect this to result in ‘Italexit’ or a major sell-off in Italian government bonds.

The ECB meeting will also attract attention after end-of-easing speculation has increased. We expect a QE extension, which we believe is likely to be perceived as dovish.

In the US, we have a few important data releases, which should still suggest growth has continued above trend in Q4, still driven mainly by private consumption.

A few FOMC members are due to speak ahead of the black-out period.

In the UK, the Supreme Court hearing on the government’s appeal against the High Court ruling that Parliament must vote on triggering Article 50 will begin on Monday.

In Scandi markets, the main release is the Norges Bank regional network report.

Global macro and market themes

The global recovery is gathering pace and is likely to continue in 2017.

Long-term yields are set to increase further with reflation, primarily in the US.

Despite a fragile OPEC deal, oil prices are likely to rise further in 2017.

Position for a stronger USD near term but a rebound in EUR/USD later in 2017.

The stronger global economic outlook is still positive for equities.

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