It was a rather directionless week as some financial markets are possibly turning into consolidation phase. The Dow edged higher to 16225.72 but closed the week at 16103.30, down -51 pts. S&P 500 also edged higher to 1847.50 and then closed lower at 1836.25, down -2.4 pts. German DAX closed nearly flat at 9656.95. UK FTSE was notably strong and had the biggest weekly gain since July to close at 6838.06. Nikkei also closed higher at 14865.67 but felt some strong resistance below 15000 handle. In treasury markets, both 10 year and 30 year US were stuck in tight range. Gold engaged in sideway trading between 1310 and 1330. Crude oil fail below 104 and retreated back to 102.3 to close the week. Dollar index recovered after brief breach of 80 handle and closed slightly higher at 80.26.
In the currency markets, the Canadian dollar was the weakest currency as recent recovery ended earlier than expected. Swiss Franc and The euro were the strongest. In particular euro has taken out a near term resistance against dollar which indicates reversal. The EUR/GBP also drew strong support ahead from 0.8164 key support level to rebound too. The dollar was the next strongest currency. Sterling was, however, broadly lower after weak economic data. Yen was mixed.
There were some central bank events last week but added little to what markets have known. Here are some reports on RBA, BoJ, BoE and Fed for further readings.
- Few Reasons for Fed to Pause Tapering While Forward Guidance Would Change as 6.5% Jobless Rate Reached Soon
- BOE Members Voted Unanimously to Stand on the Sideline
- BOJ Enhances Lending Facilities
- RBA Reiterated Prudence To Keep Policy Rate Unchanged, Noting Currency Depreciation Supportive Of Economic Recovery
Technically, the euro's strength seems to be promising. 1.3739 in the EUR/USD was broken which confirms completion of pull back from 1.3892 at 1.3476. The EUR/JPY extended recent rebound from 136.22 even though momentum was not too convincing. The EUR/CAD took out recent resistance at 1.4967 to extend the long term up trend. The EUR/AUD also seemed to have defended 1.5 handle and is building momentum for a more sustainable rebound. Going long euro is the preferred choice.
While the USD/CAD's rebound was strong, the pair lost some momentum and retreated sharply ahead of 1.1223 resistance. Thus, we're not too convinced on the weakness of CAD yet. The AUD/USD also held well above 0.8906 minor support level and hence, there is no confirmation of near term reversal. Hence, we don't refer to short commodity currencies yet.
Meanwhile, the EUR/JPY and USD/JPY edged higher last week. But, the USD/JPY struggled to find follow through buying above 102.70. The GBP/JPY also faced some resistance from a near term falling trend line and turned sideway below 171.88. We'd prefer not to short yen at this point for a risk of rebound.
So, considering all factors, we'd prefer to long the EUR/GBP this week. As noted in our weekly report too, 0.8164 was a key support level and the cross has just drew support from it. There were bullish convergence condition in daily MACD. From a chart pattern point of view, the cross could have just completed a three wave correction from 2013 high of 0.8806. Fall from 0.8768 also loomed like a terminal triangle. Hence, the risk reward ratio is attractive for a EUR/GBP long trade. Nonetheless, we'll firstly need stop tight at 0.82. Also, we'll keep an eye on how the cross react when it hits 0.8349 resistance.
Regarding last week's strategy, the USD/CAD short was wrong as the pull back from 1.2230 ended early than expected. It was held at 1.0909, slightly above out target of 1.086 level. But a wrong trade is a wrong trade anyway. The AUD/USD long strategy didn't yield any result yet as the pair turned sideway after hitting 0.9080. We're still favoring the case that the AUD/USD has bottomed at 0.8659 already and thus, will hold on to the long position with stop tight at 0.89. So to conclude, we'll buy the EUR/GBP this week and hold on to AUD/USD long.