Quazi: week ahead 20.09.2014

The Week Ahead: Week of September 22nd, 2014

Updated - Sep 19, 2014 1:30:00 PM By By Matt Weller, Kathleen Brooks, Fawad Razaqzada, and Neal Gilbert

Highlights

Market Movers: Weekly Technical Outlook

Technical Developments to Watch:

EUR/USD at 13-month lows, next support is 1.2800
GBP/USD bearish biased below key resistance near 1.6400-50
USD/JPY has gone parabolic, but there is risk of a violent correction
AUD/NZD in play, 1.1030 will be the “line in the sand” this week

* Bias determined by the relationship between price and various EMAs. The following hierarchy determines bias (numbers represent how many EMAs the price closed the week above): 0 – Strongly Bearish, 1 – Slightly Bearish, 2 – Neutral, 3 – Slightly Bullish, 4 – Strongly Bullish.

** All data and comments in this report as of Friday’s European session close **

EUR/USD

EUR/USD dipped to a new 13-month low on Wednesday
Both the MACD and Slow Stochastics are showing signs of turning higher
Bias remains bearish below 20-day EMA at 1.30 and previous support at 1.3100

After a quiet start to the week, EURUSD dipped to a new 13-month low after Wednesday’s optimistic interest rate forecasts from the Federal Reserve. The central bank ratcheted up its anticipated pace of interest rate hikes for next year, though the initial increase is still unlikely to happen until Q2 based on the inclusion of the “considerable time” pledge. On a technical basis, the pair dipped under the 1.2900 handle last week, but both the MACD and Slow Stochastics have started to turn modestly higher. Given the established downtrend, the bias remains to the downside heading into this week, but a move above the 1.30 level would start to shift the odds toward a near-term bounce.

Source: FOREX.com

GBP/USD

GBP/USD rallied on Scottish “No” vote to independence, but lost steam on Friday
Lagging MACD indicator has turned higher but…
…Bearish candlestick pattern and trend line points to dip this week

GBPUSD rallied into the highly anticipated Scottish referendum last week as traders grew increasingly confident that the “NO” voters would prevail. Upon receiving the news that Scotland had rejected independence, though, GBPUSD reversed sharply off converging resistance from its bearish trend line, 20-day EMA, and 38.2% Fib retracement. While the candle is not yet complete as we go to press, the chart is currently showing a Dark Cloud Cover* formation, which shows a shift from buying to selling pressure and often marks a near-term top in the market. For this week, we favor more weakness off the technical resistance at the 1.6400 zone, though a break back above this level could open the door for a larger recovery toward 1.6600.

*A Dark Cloud Cover is formed when one candle opens near the top of the previous candle's range, but sellers step in and push rates down to close in the lower half of the previous candle's range. It suggests a potential trend reversal.

Source: FOREX.com

USD/JPY

USDJPY went parabolic last week, rocketing to six-year highs above 109.00
MACD strongly bullish, Slow Stochastics deeply overbought
Bulls need to see a clean break above 105.45 resistance before waving the all-clear flag

USDJPY rocketed higher on Wednesday after the Fed suggested it could raise rates faster than traders were anticipating next year. The pair, which typically sees a strong reaction to US and Japanese monetary policy decisions, rallied all the way to 109.50 in the wake of the release. As we saw last week, the MACD is showing strong bullish momentum by trending higher above its signal line and the “0” level, but the Slow Stochastics remain in oversold territory, raising the probability of a pullback this week. That said, parabolic moves have a tendency to run further and faster than many traders expect, but they are notoriously vulnerable to violent corrections so bullish traders are encouraged to tread carefully this week.

Source: FOREX.com

AUD/NZD

AUDNZD held near previous-resistance-turned-support at 1.1030 last week
MACD shows bearish momentum, but oversold Slow Stochastics hint at a bounce
The 1.1020-40 zone represents the bull-bear “line in the sand” this week

AUDNZD is our currency pair in play due to a number of high-impact economic reports out of Australia, New Zealand, and China this week (see “Data Highlights” below for more). From a technical perspective, the antipodean currency pair held around its key previous-resistance-turned-support level at 1.1030 last week, and that area will be a critical bull-bear “line in the sand” for this week. As for the secondary indicators, the MACD is showing bearish momentum in the pair, though the Slow Stochastics are in oversold territory, suggesting that we could see a bounce. If the 1.1030 floor gives way, a continuation down toward 1.0900 is likely, whereas a bounce from this level could quickly target 1.1150 or 1.1200 next week.

Source: FOREX.com

GBP Fails to React to the Scottish No Vote

After Scotland’s resounding “no” vote in the independence referendum, some in the market had expected a sharp rise to 1.66 or above. However, that has not been the case, and since the “no” vote was declared, sterling has been sliding. So what is going on and is there further pain to come? The pair has found support at 1.632; below here opens the way to 1.6162—last Tuesday’s low—and then 1.6003, the 50% retracement of the July 2013–July 2014 bull trade.

Life after the referendum

The three leaders of the main UK parties have pledged greater powers for Scotland, known as Devo Max. The UK’s political leaders threw in a lot of devolution measures after polls started to show the “yes” camp gaining ground in the two weeks before the Scottish vote.

Where does this leave the rest of the UK?

Now that the referendum is out of the way, the prospect of devolution is the next political hurdle to get over. The biggest impact of Devo Max could actually be felt in England, as Prime Minister Cameron said that enhanced powers for Scotland can’t be done without looking at the needs of the other regions, including England. Although the devil is the in the details, the legacy of the Scottish referendum could be the slow death of centralised power in Westminster. We don’t know what Devo Max will mean for Scotland or the rest of the UK at this time, but it is likely to include fiscal powers – the ability to raise taxes and control public spending – and it could also create a hierarchy of politicians – for example Scottish MPs may not be able to vote on English issues and vice versa. These are major changes to the UK constitution, so change could still be afoot. But for markets it means political uncertainty in the coming months and years, which could make UK-based assets a less attractive option.

What will Scotland do now?

With 1.6 million people voting “yes” for independence, vs. nearly 2 million people voting “no,” if Westminster does not start Devo Max negotiations in a timely manner then the SNP (Scottish National Party, who led the Yes campaign) could call for a repeat referendum sooner than the 15-year wait they pledged to before the vote.

At this stage there is no outline for devolution in Scotland and the rest of the UK. Thus, the 55% of people who voted “no” in Scotland last week but were told that the status quo would not stay the same essentially do not know what they voted for.

The big issues for investors to digest right now include:

1. How the Scottish referendum vote could impact next year’s UK General Election. If the Tories manage to pull off Devo Max for Scotland and the wider UK, it could boost their popularity in the run up to next year’s election.

2. A boost for the Tory party could spark fears that they may win next year’s election, which could trigger a referendum on the UK’s EU membership in 2017.

The Scottish referendum may have unleashed a wave of democratic intention in the UK and potentially in Europe. If Scotland can hold a referendum on independence why not the Catalan region of Spain? This political uncertainty could limit GBPUSD upside, and the high back in July above 1.71 could well prove to be the peak for this pair.

Source: FOREX.com and Bloomberg

Look Ahead: Equities

The FTSE started Friday around 0.7% higher after Scotland voted to stay in the UK. Unsurprisingly, shares in companies with direct exposure to Scotland jumped to the top of the leader board. RBS, for example, was up 3.4% on the news and after the bank confirmed it would not be moving its registered head office to the south now that the Scottish independence had been rejected, while Lloyds Banking Group said it is “proud of its strong Scottish heritage and remains committed to having a significant presence in Scotland.” The outcome of the Scottish vote has had a larger impact in some of the overseas markets, especially Spain, where the IBEX is up 1.2%. This is because the “no” vote is seen as reducing the probabilities of Catalonians demanding a Scotland-style breakaway.

However, by late afternoon on Friday, the FTSE had come off its best levels. Having chalked up decent gains on Thursday when investors had already started to price in a “no” outcome, this was not a major surprise. Indeed, the pound also saw a similar buy-the-rumour-sell-the-news type of a reaction. But with the independence uncertainty over, money that had been withdrawn from UK equity funds may now start pouring back in which could help to push the FTSE higher over the coming days and weeks. According to the FT, outflows had surged to $1.02 billion in the week to Wednesday. The previous week had already seen outflows of $672 million.

Technical view

The FTSE has so far been unable to break through the 6900 hurdle as we had predicted in our special report last week. But with the global markets also rallying and a major source of uncertainty over the UK markets now lifted, this may be the time for the FTSE to finally break through the 6900 barrier and climb towards and beyond the all-time high of 6950 that was achieved in 1999. The first thing the bulls would like to see now is a daily close above 6900. Once that is achieved, the 6950 mark would be the first logical target, for it also corresponds with the 127.2% Fibonacci extension level of the most recent correction (i.e. from point C to D on the chart). The 161.8% extension of the same move meets the 127.2% of another, larger, correction (i.e. the AB downswing) at around the psychological area of 7000. The 161.8% extension of the latter meanwhile comes in at 7125.

On the other hand, if the FTSE continues to head lower from here then a couple of the important near-term support levels to watch are at 6855 and 6820, which were formerly resistance. But the key support area is further lower around 6760/70, where the 50-day SMA meets the prior lows and the 38.2% Fibonacci retracement of the upswing from the August low (i.e. the BC rally). The 200-day SMA comes in at 6725.

Source: FOREX.com. Please note this product is not available to US clients.

Look Ahead: Commodities

The Fed decided to keep the “considerable time” pledge until the first rate hike in its statement on Wednesday. This boosted stocks, sending the Dow and S&P to fresh record highs. The dollar bulls were also satisfied with the so-called “dot plot” of Fed members’ forecasts for interest rates edging higher. As the dollar and stocks continued to strengthen, so too did the pressure on commodities priced in the US currency. And so as another week draws to a close, both gold and silver are once again falling.

The sell-off has forced the metals to break below some key technical support levels. As a result, fresh sell orders have been triggered which have thus exacerbated the sell-off. In fact, silver has just broken below the 2013 low of $18.20 and at the time of this writing, it looks like more losses are on the way for the grey metal.

For silver, the next potential support is around $17.75/80, a level which corresponds with the 127.2% Fibonacci extension of the last major upswing. The 161.8% extension of that move comes in way down at $16.75. Worryingly for the bulls, the metal has also created a “death crossover” which is another bearish development. This crossover occurs when the 50-day moving average drops below the 200-day SMA.

The bulls will be hoping that the metal may bounce back off its lows and close the day above where it had opened or ideally at an even better level. If that were to happen, it would indicate that there was lack of supply below $18.20 and we would potentially have a false breakdown reversal pattern on the cards. As we go to press, the chances look slim for this scenario, but it is nonetheless a possibility. The RSI meanwhile is also at an extremely oversold level and this also point to a possible bounce. The near-term resistance levels to watch are at $18.20, $18.60, $18.90 and $19.30 – levels that were formerly support.

Source: FOREX.com

Meanwhile, gold has been coming under increased pressure too following the break of the key $1240 level and the subsequent rejection of the rally there. As a result, a move down to $1210/12, where a couple of Fibonacci extension levels converge, could be the next stop – potentially ahead of $1180/5 after that. However, a closing break above $1240 would invalidate this bearish outlook.

Source: FOREX.com

Global Data Highlights

Monday, September 22, 2014

13:00 GMT European Central Bank President Mario Draghi Testifies in Euro Parliament

The Scottish independence referendum results have shown us that despite the trumpeted shouts of “FREEDOM” from William Wallace wannabees Scottish citizens, by and large, would rather stick with the status quo and remain with the UK. The spotlight could now shift toward more pressing matters in the EU, namely the fact that the ECB’s Targeted Long Term Refinancing Operations, or TLTROs, failed to lend out as much money as they were originally intending. The low participation in the program could inevitably lead to questions about Quantitative Easing from the European Parliament, and judging from the market’s reaction after Draghi insinuated QE was close at hand at the last ECB meeting, sizable EUR moves may be in store, especially if he downplays the likelihood of QE at the next ECB meeting.

14:00 GMT US Existing Home Sales (August)

US housing data this past week was less than stellar as Housing Starts and Building Permits each fell back below the 1M figure for the month after posting strong results the previous month. Existing Home Sales have been enjoying a strong run of late though with three straight months of above-expectation results, and may need to do it once again to restore confidence in the sector. Seasonally, September appears to be a strong month for this release as each of the last four Septembers have beat market consensus. If this were to repeat the performance once again, the USD strength we have seen of late could continue.

Tuesday, September 23, 2014

1:45 GMT Chinese HSBC Flash Manufacturing PMI (September)

Storm clouds have appeared on the horizon in China of late as the People’s Bank of China (PBoC) initiated a “stealth” QE program, meaning they started the program without signaling its intention beforehand. The 500B Yuan program was aimed at China’s top 5 banks and is a peculiar action that seemed to come out of nowhere. In response, the AUD rallied off the 0.9000 handle, but couldn’t hold as it dipped below the next day. Is the PBoC trying to warn the market that bad news is around the corner for their economy? If that is the case, the Flash Manufacturing PMI could help to definitively answer in the affirmative if it were to drop below the 50 level which would signal contraction in the sector; last month’s drop from 52.0 to 50.3 is not a confidence-building result.

8:00 GMT Eurozone Markit Flash Manufacturing, Services, and Composite PMIs (September)

Perhaps of greater import to the markets on these releases this day are the PMI figures out of France and Germany in particular over the results for the Eurozone as a whole. The two largest economies in the EU have been suffering of late due to a variety of reasons including low inflation, dwindling confidence, and economically damaging sanctions against Russia. The promise of QE from the ECB and the institution of TLTROs aren’t likely going to have much impact yet as expectations for PMI figures across the board are either below 50 or dangerously close to the demarcation line. Watch for a fall below that figure and even more reasons to feel bearish about the EUR.

8:30 GMT UK BBA Mortgage Approvals (August)

The London housing market has been getting a little hot over the last few months, and the Bank of England may give a sigh of relief if this reading were to pull back slightly. However, many UK data points have been trending toward the positive lately and the BoE is still positioned to be one of the first major central banks to raise rates. Now that the Scottish vote is in the rearview mirror, investors may pay more attention to the actual economic results out of the UK instead of selling the currency based on abject fear of a fractured UK. The relief rally may be taking shape, particularly if this result is viewed positively.

8:30 GMT UK Public Sector Net Borrowing (August)

This release swings wildly from positive to negative on a monthly basis, so the expectations of 10.3B after last month’s -1.1B isn’t something completely out of the ordinary. Regardless of expectations, a positive figure means that more money was borrowed and represents a deficit in spending which is generally a negative for the economy. Many public funds were likely spent on advertising on the run up to the Scottish independence vote, so a high number here may not be too much of a surprise. If it were to fall below expectations, which could be a positive indication and help boost the recovery of the GBP.

12:30 GMT Canadian Retail Sales (July)

Canadian Wholesale Sales of the same month were abysmal as they decline 0.3% on expectations of a 0.6% gain. While Wholesale and Retail Sales don’t always correlate exactly, the last time Wholesale Sales were negative, Retail Sales matched it with a negative of its own. That said, anticipation for this result may be trending more toward the negative heading in to the reveal and could weigh on the CAD ahead of time.

22:45 GMT New Zealand Trade Balance (August)

New Zealand has been trending the wrong way in this department over the previous four months as each result has been less than the month leading in to it. Consensus is expecting that trend to continue with a deficit of 1.125B after last month’s deficit of 692M. As a reference, the last time NZ Trade Balance was in deficit before last month was October 2013, and for a nation that is highly dependent upon its exports, surplus is valued. In addition, general elections will be taking place in the Kiwi nation this weekend which could shake up the currency; particularly if internet tycoon, Kim Dotcom’s, party has any say. If uncertainty reigns in the region after this weekend, the Trade Balance may not help matters.

Wednesday, September 24, 2014

8:00 GMT German IFO Business Climate, Current Assessment, and Expectations (September)

Considering the intimate involvement Germany has had in the Russia/Ukraine conflict with negotiations and sanctions being announced frequently, it wouldn’t take much of a leap in logic to assume German businesses and citizens are growing evermore concerned. The Business Climate aspect of this report in particular has declined four straight months, missing expectations each time, and doesn’t appear to be set for a rebound. Consensus is expecting another fall to 105.9 from 106.3, but the trend has been steeper than that since the decline began which may indicate consensus may not be pessimistic enough in their assessment.

14:00 GMT US New Home Sales (August)

While Existing Home Sales put up a strong showing last month, New Home Sales failed to deliver as it improved upon the previous month’s dismal read, but still missed consensus by 14K. If the Existing measure misses early in the week, this report will be viewed as a supplement and if it also fails to live up to the hype, doubts about the strength of the US recovery may begin to creep in to the social consciousness. If that were to occur, all of the strength that the USD has enjoyed over the last few weeks could be reversed as investors seek the safety of other investments.

Thursday, September 25, 2014

12:30 GMT US Durable Goods Orders (August)

Be prepared for an abnormally negative result here as last month’s 22.6% increase was ridiculously high for even this notoriously difficult-to-predict economic indicator. Consensus is expecting a -17.7% read, but that really wouldn’t be too terrible after last month’s surge. If it were to surprise by keeping the negative figure in the single digits or even *gasp* rising once again, the doom and gloom of our previous paragraph may be full of hot air. Regardless, this figure is one of the most volatile economic releases there is and has been historically difficult for the consensus to nail down, so a surprise may be in store on either side of expectations.

Friday, September 26, 2014

No major events

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