Daily Commentary: Dollar Mixed Vs. The EM Currencies

The dollar was little changed Monday morning, gaining against some of the G10 currencies but easing slightly against the three commodity currencies and GBP. It was also mixed vs the EM currencies, ranging from +2.9% against the beleaguered IDR but losing 2.2% vs the similarly troubled INR. The weekend announcement of a rise in China’s official PMI to a 16-month high of 51.0, plus the rebound in the HSBC/Markit PMI to 50.1 from 47.7, restored some confidence in EM, plus the fall in oil prices as the threat of US intervention in Syria recedes has also helped sentiment. As a result most of the Asian currencies were gaining. But the fleeting nature of the recovery can be seen from the fact that four Asian stock markets were already lower by mid-day Asian time (seven higher, and China mixed).

There was some talk over the weekend about whether EM countries were going to put together a fund to defend their currencies. While that plan develops, we could be in for some respite in the EM world, particularly after the better China data. That might help currencies such as HUF, which have been losing ground, and PLN, as well as the Asian currencies. But overall I would expect this week to see continued USD strength. Last week should have been a good one for EUR: consistently strong economic indicators (rising economic confidence, falling unemployment in Italy) plus talk of rate cuts by an ECB member, yet European equities had one of their worst weeks of the year so far and EUR/USD traded below 1.3200 for the first time since Aug. 2nd. The currency movement alone could have been end-of-month reserve rebalancing but the equities suggest that as the summer ends, “today is the tomorrow you worried about yesterday” becomes the slogan. People have been talking for a long time about what might happen after the German elections; now that those elections are almost here, the concern about what will happen afterwards becomes more real. That – plus the expected rise in non-farm payrolls this week – should support the dollar this week, in my view.

The main data for today’s market will be the final reading of the Eurozone manufacturing PMI for August, together with manufacturing PMIs for countries that don’t release preliminary numbers, such as the UK, Italy and the peripheral countries. UK manufacturing PMI in August is forecast to rise at 55.0 from 54.6 previously, which could boost GBP further. The US and Canada are out on holiday today so there are no indicators from there. The US ISM will be released Tuesday.

On Wednesday we get the revised Eurozone Q2 GDP and the final service sector PMIs for August, plus the US trade data for July and the Beige Book. Thursday will be a busy day; in addition to all the central bank meetings, we also get German factory orders, and in the US, the ADP employment report (released one day later than usual because of the Labor Day holiday), factory orders and the service sector PMI. On top of that, the two-day G20 Summit in St. Petersberg begins on Thursday. Finally on Friday, German and UK industrial production will be released as well as the NFP.

The Market

EUR/USD
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• EUR/USD moved lower during Friday’s session, breaking below the 1.3231 (R1) level which was support on Friday (it now switches to resistance). Currently the price is heading towards the 1.3152 (S1) support and a clear break below it should lead us towards the next support at 1.3077 (S2). Moreover, the 20-period moving average has just crossed below the 200-period moving average and alongside with MACD’s reading lying in a bearish territory, they confirm the bearish picture of the pair.

• Support: Support is found at the 1.3152 (S1) level, followed by 1.3077 (S2) and the psychological level of 1.3000 (S3) respectively.

• Resistance: Resistance levels are 1.3231(R1), followed by the psychological levels of 1.3300 (R2) and 1.3400 (R3).

USD/JPY
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• USD/JPY moved higher after several consultative panels backed PM Abe in recommending an increase with the sales tax, coupled with stimulus to offset the blow to consumption. The pair currently lies between the 98.09 (S1) and 99.13 (R1) levels. If buying pressure overcomes selling pressure, I expect the bulls to drive the battle towards the 99.13 (R1) resistance, where an upward break should lead them towards the psychological level of 100.00 (R2). The pair remains in its upward sloping channel marked in blue, and the MACD lies in its bullish territory above zero, adding bullish indications for a further upward movement.

• Support: Support levels are at 98.09(S1), followed by psychological level of 97.00 (S2) and 95.77 (S3).

• Resistance: Resistance levels are 99.13 (R1), followed by the round number of 100.00 (R2) and the 100.84 (R3) level.

GBP/USD
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• GBP/USD moved higher Friday after finding support at the uptrend line and the Fibonacci 38.2% retracement level (1.5482) of the previous upward move. Currently the pair is below the 1.5569 (R1) resistance level and if buying pressure is strong enough to drive the price above it, it would indicate the end of the downward correction and the continuation of the rate’s uptrend. However, MACD’s value is negative, still indicating bearish momentum, and in my opinion we should wait for it to enter its bullish zone in order to confirm the pre mentioned scenario.

• Support: Support levels are at 1.5425 (S1), 1.5296 (S2) and 1.5200 (S3).

• Resistance: Resistance is identified at 1.5569 (R1) followed by 1.5674 (R2) and 1.5752 (R3).

Gold

• Gold moved lower Friday, breaking below the 1394 (R1) level and testing with a candle’s shadow the 1376(S1) support level. Currently the price is lying between the aforementioned levels and if the bears are strong enough to push it lower, I expect them to target the trend line and the support of 1347 (S2). It is worth noting that the MACD oscillator just entered its bearish territory, after being bullish since the 9th of August. For the moment, we consider this downward movement a short term correction of the precious metal, since the price is still above the trend line and the 200-period moving average.

• Support: Support levels are at 1376 (S1), followed by the 1347 (S2) and 1320 (S3).

• Resistance: Resistance is identified at 1394 (R1), followed by 1422 (R2) and 1440 (R3).

Oil

• WTI moved lower on Friday, breaking below the 107.53 (R1) level. The price also achieved a break below the 105.50(S1) with a candle’s shadow, but didn’t manage to maintain below it. However, the WTI remains in its trading range between the 102.62 (S3) and 108.85 (R2), after last week unsuccessful attempt to escape from it, and as a result we should wait for the real exit in order to determine the next trending direction of the price.

• Support: Support levels are at 105.50 (S1), 103.44 (S2) and 102.62 (S3).

• Resistance: Resistance levels are at 107.53 (R1), followed by 108.85 (R2) and 112.14 (R3).

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