Divergence in monetary policy to be continuing theme in 2015
The action Friday showed that divergence in monetary policy, one of the main themes for 2014, will continue apace in 2015.
Two senior ECB officials expressed their concern about negative inflation and their determination to use all possible monetary tools, including quantitative easing, to fight the trend. On the other hand, three Fed presidents indicated that the FOMC intends to begin normalizing policy (= raise rates) in the coming year even if inflation hasn’t returned to their 2% target.
The divergence drove EUR/USD to a new 2014 low Friday, reminiscent of its 2013 high on Dec. 27th that year. This theme of policy divergence is set to run and run and will continue to push the pair lower next year, in my view.
Oil had a fantastic day, with WTI up 6.3% and Brent up 4.8% from Friday’s opening levels, apparently on comments by the Saudi Arabian oil minister that crude prices will rebound as world economic growth boosts demand. Personally, I think this is the lamest excuse for a rally I’ve ever heard, since most economists continue to downgrade their forecasts for world growth next year and also the world is using less and less oil for each increase in growth. I think market participants have simply decided that enough is enough and prices have fallen too far too quickly.
Friday’s Commitment of Traders report shows that speculators increased their long positions in WTI in the week ended Dec.16th and we can presume they increased them further during the rest of the week. I don’t think the fundamentals for the oil market have changed and I don’t think world economic growth is likely to accelerate so quickly next year, but oil may be in for a temporary rebound after the recent plunge as the market tries to find a new equilibrium price where the increased supply balances the expected lower demand. This is likely to impart increased volatility to the commodity currencies. I wouldn’t be surprised to see the oil-related currencies (AUD, CAD and NOK rally today – they have vastly underperformed the other G10 currencies in recent weeks.
Canada’s CPI rate declined to 2% y/y in November, from 2.4% y/y previously, missing expectations of a decline to 2.2% y/y. But the deceleration in core CPI to 2.1% y/y was even more of a surprise as it had been expected to accelerate. That gives little reason for the Bank of Canada to raise rates any time soon. Moreover, the October retail sales report showed the impact of falling energy prices on the Canadian economy as nominal retail sales were largely flat and sales declined in nine of the ten provinces. USD/CAD jumped briefly to touch our 1.1635 resistance line but fell back immediately and this morning opened in Europe around 1.1600.
The failure of buyers to push the rate higher despite the weak economic data raise concerns over their strength and heightens the possibility of a corrective wave down before they seize control again.
Today’s indicators: The calendar is relatively light today.
In the US, we get existing home sales for November. Last week, housing starts and building permits fell in November but the strong revision of the previous figures kept the overall trend consistent with an improving housing market. Thus, the possibility for another strong housing data is high and this could support USD. Chicago Fed national activity index for November is also to be released.
In New Zealand, the trade deficit for November is expected to narrow a bit. This could be NZD positive.
Rest of the week:
Tuesday we get final GDP figures for Q3 from several countries. In France and the UK, the final Q3 GDP data are expected to confirm the preliminary growth figures. In the US, the 3rd estimate of GDP for Q3 is expected to show that the US economy expanded at a faster pace than initially estimated.
The 3rd estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have remained unchanged from the 2nd estimate. The monthly rate of the Core PCE and PCE deflator for November are also coming out. Canada’s GDP for October is also due out.
Wednesday, US initial jobless claims for the week ended Dec. 20 is released a day early because of Christmas.
Thursday will obviously be a very quiet day because of the Christmas holiday. The Bank of Japan releases the minutes from its Nov. 18-19 policy meeting, which is not the most recent meeting but rather the previous one. Considering the fact that at their latest meeting they didn’t introduce any new measures, the minutes of the previous meeting shouldn’t make that much of a stir.
Friday should also be a quiet day as many European centers are still out. The focus will be on the usual end-of-month data dump from Japan. Japan’s national CPI for November is forecast to have decelerated a bit, while Tokyo CPI rate for December is expected to have remained unchanged. Slowing inflation should eventually put pressure on the Bank of Japan to loosen further, but that’s a story for next year. At the same time, Japan’s jobless rate and job offers-to-applicants’ ratio, both for November, are expected to have remained unchanged from October. Preliminary industrial production and retail sales for November are also coming out.
The Market
EUR/USD fell below 1.2250
EUR/USD declined on Friday and fell below our support-turned-into-resistance line of 1.2250 (R1). During early European hours Monday the pair is headed back up and testing that level as a resistance. The failure to breach it could push the rate even lower, probably towards our next support of 1.2160 (S1), the lows of 3rd of August 2012. Looking at our short-term momentum studies, the RSI found resistance at its 30 line, while the MACD, already below its trigger line, moved further into its negative territory. These momentum signs amplify the case for further declines, but I would be cautious for a small correction before the bears take the reins again. In the bigger picture, the rate is still printing lower lows and lower highs below both the 50- and the 200-day moving averages and this keeps the overall path to the downside.
• Support: 1.2160 (S1), 1.2120 (S2), 1.2050 (S3)
• Resistance: 1.2250 (R1), 1.2345 (R2), 1.2410 (R3)
USD/JPY still in a consolidating mode
USD/JPY consolidated on Friday, staying below the psychological level of 120.00 (R1). I would wait for a break above that level to see further advances perhaps towards our next resistance of 121.85 (R2). Looking at our short-term momentum signals, the RSI remained elevated just above the 50 line, while the MACD, already above its trigger line, moved into its positive territory. The momentum signs support the notion for another leg up, at least temporarily, and I would wait for a break above the key 120.00 (R1) level to get confident for further advances. As for the broader trend, the price structure is still higher highs and higher lows above both the 50- and the 200-day moving averages and this keeps the overall path of the pair to the upside.
• Support: 117.35 (S1), 115.45 (S2), 114.700 (S3)
• Resistance: 120.00 (R1), 121.85 (R2), 122.44 (R3)
GBP/USD is moving sideways
GBP/USD moved sideways on Friday gyrating around the 1.5655 level a few pips below the 50-period moving average. With no clear trending direction on the 4-hour chart, I would maintain a neutral stance as far as the short-term picture is concerned. This is supported by our short-term momentum signals. The RSI found resistance near its 50 line, while the MACD is a touch below its trigger line, moving further into its negative territory. As for the broader trend, I still believe that as long as Cable is trading below the 80-day exponential moving average, the overall path remains negative. Our daily momentums however are on a rising mode suggesting that the decline has lost some of its momentum and that we could see an upward correction before the sellers prevail again.
• Support: 1.5550 (S1), 1.5500 (S2), 1.5420 (S3)
• Resistance: 1.5740 (R1), 1.5790 (R2), 1.5830 (R3)
WTI soars, but correction expected to be temporary
WTI firmed up on Friday but the advance was halted few cents below our resistance area of 58.60 (R1) and the 50-period moving average. A break above that resistance level could confirm the break above the double bottom formation seen in the 4-hour chart and could amplify the case for an upside correction move. Looking our short-term momentums this is likely to happen as the RSI moved above its 50 line and is pointing somewhat up, while the MACD already above its trigger line seems willing to enter into its positive territory. Nevertheless, on the daily chart, the overall path remains to the downside therefore I could treat any upside wave as a correction of the longer-term downtrend.
• Support: 56.25 (S1), 54.40 (S2), 52.60 (S3)
• Resistance: 58.60 (R1), 60.00 (R2), 62.00 (R3)
Gold remains capped within 1210 and 1190 levels
Gold consolidated on Friday gyrating around 1200. The price remains capped within the 1210 (R1) resistance zone and
1190 (S1) support level and a decisive break in either direction is probably going to determine the near-term bias. Looking at our short-term momentum signals, the RSI lies just below its 50 line, while the MACD, although in its negative territory, crossed above its trigger line. Both momentum indicators are pointing sideways, reflecting the indecisiveness of the market.
• Support: 1190 (S1), 1186 (S2), 1175 (S3)
• Resistance: 1210 (R1), 1215 (R2), 1235 (R3)
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
