Short-covering around the key 1.3000 level.
EUR/USD is unwinding mildly from oversold conditions, driven by short-covering as the market adjusts to a new bearish paradigm, following the break beneath that all-important psychological level at 1.3000.
Our cycle analysis successfully signalled increased volatility within the first two weeks of December across “risk” proxies, including the equity and commodity markets. Expect some respite ahead of the holiday period.
Watch for a sustained close beneath 1.3000 (psychological level) to resume EUR/USD’s multi-month downtrend into 1.2870 (2011 major low).
Near-term resistance can be found at 1.3215 and potentially even 1.3550(02 Dec high). Any rebound into these levels is likely to be short-lived.
Inversely, the USD Index has extended its recovery higher to new 11-monthhighs, (a move worth over 10% from the summer 2010 lows).
Speculative (net long) liquidity flows is strengthening once again and willcontinue to help resume the USD’s major bull-run from its historic oversold extremes (momentum, sentiment and liquidity).
Hourly price channel broken.
GBP/USD has recently broken above the top of the hourly price channel.This may have marked the final phase of short-term weakness from the1.5780 lower high. However, we watch for a sustained move above this area before initiating a potential buy trade setup.
Demand for sterling is likely to be affected by the movement in selected coreEuro-Zone sovereign markets. In particular we note that Italian 10 year yields are shying away from 7.000%. Daily structure is also suggestive of a return to test 7.000% and higher. A continuation of higher yields may see Sterling being adopted as a safe haven again. This reasoning would likely
help to keep cable within its year long range.
Failure to remain above 1.5423 will see an immediate target at 1.5272 and then potentially trend-line support at 1.5110.
Weakening beneath 78.24 (DeMark™ Level).
USD/JPY is still weak beneath 78.24 (DeMark™ Level), as price continues to hold within a multi-day trading range (see hourly chart below).
Confirmation beneath 77.25 (pivot level) would help trigger a third priceretracement back to pre-intervention levels (PIR III) and potentially even a new post world war record low beneath 75.35 (PINL).
Sentiment in the option markets continues to suggest that USD/JPY buyingpressure remains overcrowded as everyone continues to try and be the first to call the market bottom, within the end of this multi-year contractingpattern (see top chart insert).
This may first inspire a temporary, but dramatic, price spike throughpsychological levels at 75.00 and perhaps even sub-74.00. Such a move would help flush out a number of downside barriers and stop-loss orders, which would create healthy price vacuum for a potential major reversal.
The medium/long-term view remains bullish, as USD/JPY verges toward a major long-term 40-year cycle upside reversal. Expect key cycle inflection points to trigger over the next few weeks, offering a sustained move above
our upside trigger level at 80.00/60, then 82.00 and 83.30.
Encounters resistance close to our first target at 0.9555.
Look to sell higher.
USD/CHF has met resistance close to our initial target in our previous longstrategy into the rise from 0.9176. We view the push under 0.9430 as potentially breaking down the short-term bullish structure. However, while above 0.9342, there remains scope for a further rise back towards 0.9548initially.
Given that the region of the initial target has been tested and with yields continuing to rise in some core Euro-Zone sovereign markets, the trade location is deemed as poor. It is anticipated that a return to 7.000% in Italian 10 year yields is imminent. This may once again pressure USD/CHF to the downside. There is thus potentially a greater opportunity to sell at higher levels.
Referencing Spanish and Italian government bonds back to their respective levels prior to the six party central bank agreement, we note that most of the positive after effects have worn off, with yields trading at 5.698% and 6.824% versus 6.374% and 7.355%, before the agreement. (These yields were trading at 5.699% and 6.685% respectively at the same time
yesterday.)
Unwinding from intraday resistance at 1.0425.
USD/CAD is still unwinding from intraday resistance at 1.0425, which coincided with a short-term DeMark™ exhaustion signal. The move has temporarily breached a multi-day bull-channel (see lower chart) and we prefer to wait for a resumption higher to open a buy trade setup.
The bulls need to push back above 1.0425 and 1.0524 (25 Nov swing high),in order to trigger a breakout from the rate’s major triangle pattern.
In terms of the big picture, a directional confirmation above 1.0680 is still needed to unlock the recovery into 1.0850 plus. This would extend the upside breakout from the rate’s ending triangle pattern, which was part of a major Elliott wave cycle (see top chart insert).
Only a sustained close beneath 1.0200 and 1.0080, then parity unlocks bearish setbacks into the long-term 200-day MA at 0.9879 and 0.9726 (31stAug low).
EUR/CAD is unwinding mildly ahead of the base of an important multi-month distribution pattern. A break beneath 1.3393-79 (19th Sept low/61.8% Fib), signals an important breakdown into 1.3140 and would provide substantial correlation pressure onto EUR/USD.
Strong unwinding from oversold conditions.
AUD/USD is unwinding strongly from oversold conditions, which also coincided with an intraday DeMark™ buy signal (see lower chart).
Even so, we expect this recovery to be short-lived and continue to hold our stop level at 1.0050 for the active model portfolio short position, which is still maintaining a risk-free bias.
The bears must sustain below 1.0000 to further compound downside pressure on the rate’s multi-year uptrend and push back towards 0.9611.
Elsewhere, the Aussie continues to weaken sharply, against the New Zealand dollar. Near-term price activity is mean reverting back into the 200- day MA and we watch for further setbacks over the multi-day/week horizon.
The Aussie dollar is also pairing back its mild recovery against the Japanese yen, while holding above the neck-line of its two-year distribution pattern. Watch for further downside scope into support at 72.00 which would signal further unwinding of global risk appetite.
Channels lower in a possible corrective structure.
GBP/JPY has been largely contained within a falling hourly channel for the majority of December. This structure is seen as being part of a corrective phase with an eventual return to strength anticipated, potentially close to the 120.00 region.
However, the recovery seen from the 116.84 low appears corrective in nature, suggesting scope for a return to 119.38 and then potentially 116.84.
A minor break has taken place under the support of the hourly channel,reaching 120.30. This may now mark a short-term higher low for a fresh swing to the upside targeting both 122.64 and 122.23, before a potential lower high in the medium-term timeframe may develop. This would then return focus back to the structure mentioned in the second bullet point.
Support anticipated close to 100.76.
EUR/JPY saw an extension lower in recent trade following the break under 1.3146 in EUR/USD, particularly in light of the recent static nature of USD/JPY.
We now anticipate a degree of support close to the 100.76 level, from where a recovery may take place
As mentioned in prior reports, the medium-term recovery that we have already witnessed from 100.76 to 111.60 is viewed as the initial leg higher in a larger recovery structure. Even if a lower low were to be printed in the medium-term timeframe, an initial recovery from the 100.76 region is anticipated. With this in mind we look to attempt longs just ahead of the key 100.76 level.
Sustained price activity under continuation to the downside. this level will warn of a much larger.
Retrace back towards old trend-line support sought.
EUR/GBP continues to witness short-term weakness. Although a move to test daily falling channel support near 0.8330 may develop, we prefer to wait for higher levels to sell. We await a re-test of the old trend-line support as resistance ahead of possible short positioning.
Also noted is that 1.3146 has now been broken in EUR/USD, weakening the longer-term outlook there. This may assist a short EUR/GBP bias going forward.
An initial target for the current downswing in the daily timeframe is on the support of the previously mentioned falling channel, currently at 0.8330.
As mentioned in prior reports, the recent six party central bank coordination is in fact a warning sign and a clear weakness, suggesting scope for a credit contractionary phase. We continue to expect a continuation of rising yields in the Euro-Zone and it is within this environment that we see the potential for Sterling to be perceived as a safe haven.
Messy sideways trade continues.
EUR/CHF is currently witnessing a flurry of price activity which has now triggered our filter level at 1.2226 (see below). It thus appears that the possibility of a break over the recent high at 1.2474 is receding.
We reference the Italian 10 year sovereign yield on a daily basis in our USD/CHF commentary. A return to 7.000% and higher is building a recipe for disaster and, should it take place, may well instigate a period in which the Swiss Franc is sought as a safe haven irrespective of little to no yield pick-up. A parallel can be made with the negative yield that was available on short dated US paper during the last crisis. Sometimes return of capital is more important then return on capital.
The 1.2000 level is the only level that the SNB has suggested they will defend. There is thus likely to be a large cluster of stops under this level, which if tiggered, could herald a return towards the 1.0075 level.
Gold remains capped beneath its 200-day average
Gold’s remains capped beneath its 200-day average, which was recently broken for the first time in 3 years. The move was triggered by a multi-month triangle pattern breakout (see both daily and intraday charts).
Downside pressure remains heavy from inter-market weakness across related risk proxies such as EUR/USD and equity markets. Moreover, there is still heightened risk for a much larger decline if we confirm a weekly close beneath $1600 and $1530 (swing low).
A number of “bargain hunting” trend-followers will be watching this benchmark “line in the sand” for repeat support or a potential big squeeze lower into $1300 and perhaps even $1040-1000 (12-year channel–floor/see top chart insert).
Speculative (net long) flows also support this view having recently breached a key downside level which may threaten over 2 years of sizeable long gold positions. This will trigger a temporary, but dramatic setback ultimately offer a unique buying opportunity into summer 2012.
Weak bounce remains capped beneath $30.0000.
Silver’s weak recovery from oversold conditions remains capped beneath key support at $30.0000. Only a sustained close below here would trigger a test of the previous swing low at $26.0700.
Macro price structure continues to focus on the downside risks, following the major sell-off in September. Such a dramatic move traditionally produces volatile trading ranges. This allows the market to have enough time to recover and accumulate renewed buying interest.
Expect a large trading range to hold between $37.0000-26.0700 over the multi-week/month horizon, with downside macro risk into $21.5165 (61.8% Fib-1999 bull market) and $20.0000. This would still maintain silver’s long- term uptrend and help offer a potential buying opportunity for the eventual resumption higher.
Continue to watch the gold-silver “mint” ratio (see top chart insert) which has now accelerated higher by 70%, suggesting further risk aversion over the next few weeks. This also helps explain recent divergences between gold and silver.