After such a strong risk recovery in the past week, it will be interesting to see how markets now respond to the concerning signals out of China where disappointing trade data will bring back into focus the fears of a global cyclical slowdown. Focus has recently been on whether the US and China can begin to resolve their trade dispute, but evidence of the ongoing economic impact of trade conflict between the world’s two major economic superpowers is revealing. The China trade balance improved sharply to +$57.1bn (+$51.5bn exp, +$44.7bn last), but looking under the hood, the data contains some worrying signals. In December, China exports fell by -4.4% (+3.0% exp, +5.4% last), whilst China imports fell by -7.6% (+5.0% exp, +3.0% last). This slowdown does not bode well for risk today and is impacting across the higher risk commodity major currencies such as the Aussie and Kiwi which are aligned to continuing the Chinese growth engine. A slip back into more of a safe haven bias is being seen today, with the yen performing well, whilst gold is holding up, Treasury yields are lower and equity markets are under pressure.
Wall Street closed all but flat on Friday with the S&P 500 less than a tick lower at 2596, but Wall Street futures are -0.9% lower today. Asian markets are lower, with the China Shanghai Composite -0.7% lower (Nikkei closed for public holiday). European markets are also on the back foot, with FTSE futures and DAX futures both around half a percent off. In forex, there is a risk averse feel to markets, with the yen a key outperformer and the dollar mixed, whilst the Aussie and Kiwi are the laggards. In commodities, there is support for gold, whilst the oil price is slipping back by just over a percent on the demand negative impact of the China trade data.
On a day of limited releases on the economic calendar, Eurozone Industrial Production at 1000GMT could be an interesting read (especially given the declines seen on the major economies last week). Consensus expects a decline of -2.1% in November which would be the worst performance since February 2013.
Chart of the Day – EUR/NZD
The relative improvement in the commodity currencies in the early weeks of 2019 has been a very interesting development and this is shown with the near term technical breakdown on EUR/NZD. The higher low at 1.6850 was broken on Friday (on a decisive closing basis) which effectively completed a small top pattern (implying c. 370 pips of correction). More importantly though there is a continuation of the lower highs and lower lows in the past couple of weeks which means a new bear trend formation. This is reflected in confirmation of the top on the RSI (also below 50), a downward acceleration on the Stochastics and a bear cross on the MACD lines. This suggests that rallies, such as today’s early rebound, should now be a chance to sell, with a near term “sell zone” between 1.6850/1.6945. The lower high at 1.7055 is now a key resistance. A move below initial support at 1.6790 opens the downside.
The breakout to multi-week highs may not have lasted long, but the bulls will continue to look upon corrections as a chance to buy. The hourly chart shows $1.1420 as a near term pivot support and despite the drop back below the breakout support band $1.1475/$1.1500, as long we $1.1420 remains intact there is still a positive outlook developing on EUR/USD. The momentum indicators retain their positive bias with the MACD and Stochastics leaning towards bullish configuration. Once this unwinding move settles, it should prove to be another chance to buy. The hourly chart shows the market has bounced above $1.1420 this morning (from $1.1437) and is again testing $1.1475/$1.1500. Another move above $1.1500 would be a bullish signal now. The overhead resistance is $1.1540 and $1.1570 initially. A close below $1.1400 would see the bulls losing their control of the outlook.
An unexpected upside break on Cable was seen on Friday. The resistance at $1.2800/$1.2815 had been holding back the bulls consistently in the past week and although momentum has been positioning more positively, given difficult newsflow, it was likely that Cable would find upside traction difficult. Despite this, Friday’s bull candle (on rather questionably positive Brexit newsflow) seems to have held a break above $1.2815. The next question is whether this is a move that can be sustained, especially since a similar breakout on EUR/USD last week could not be (and that does not have Brexit to contend with). Despite this though, the support has built around $1.2700 and momentum on the hourly chart would suggest that weakness is a chance to buy. There is also a band of support $1.2775/$1.2800 on the hourly chart as an initial buffer. The problem is that the coming days are likely to be highly volatile (amidst heightened Brexit uncertainty). Initial resistance is $1.2865 and then $1.2920.
In the last couple of sessions it has become evident that there is a consolidation that is building up on USD/JPY. The downtrend of the last four weeks is consistently being tested, by a mild positive candle on Friday and early in today’s session. However, even if the trend is broken (and it is highly possible that this is now underway) it does not necessarily mean imminent recovery on USD/JPY. The support is around 107.75/108.00 and is again coming under pressure this morning. There is a mixed look to momentum forming to reflect the consolidation. There is an improvement on the MACD lines threatening a bull cross, but this comes as RSI and Stochastics are still struggling. The consolidation effectively comes between support at 107.75/108.00 and resistance of the recent rebound high at 109.10. It would probably take a close outside these levels for the next decisive direction to be called.
There seems to be little change to the recent consolidation on gold after a rather mixed looking candle formation on Friday (closing higher on the session but well off the highs of the day). The market continues to trade within the $22 range $1276/$1298 which has actually been in place for the past couple of weeks. There is still a medium term positive configuration on the momentum indicators but there is also the potential that perhaps just two negative candles in a row could flip momentum corrective, (a negative cross on MACD is threatening) however this would still likely be just a near term corrective move and be seen as a medium term chance to buy. Support under $1276 comes in at $1266 this week, whilst the support of the now six week uptrend channel comes in at $1270 today. The hourly chart shows arrange fluctuation and a market awaiting a catalyst. A closing breakout above $1298 is a bullish break but then the $1300/$1310 long term pivot is directly the barrier.
The bulls have just begun to stutter on their run higher as Friday’s mildly corrective candle opens the potential for a near term unwinding move, something which has been backed by an early slip again today. The hourly chart shows a small top pattern below $51.20 which implies around $2.10 of correction. However this is likely to be just an unwinding move into support which can produce the next chance to buy. There is good support in the band $49.40/$50.50 whilst the 23.6% Fibonacci retracement of the bear market at $50.50 adds to the potential for this to be a consolidation point now. The momentum indicators retain a positive configuration on the Stochastics (still above 80) and RSI (above 50), so as yet there is still a bullish outlook for the recovery. Friday’s high at $53.30 is initial resistance under the $54.75 December high.
Dow Jones Industrial Average
We have spoken previously about the top of the resistance band around 24,000. It is interesting to see that for the past three sessions, the bulls have never managed to clear this resistance. This means that the rally is stalling (futures are pointing to a lower open today). So this is going to be a key test for the Dow. Today’s initial move will be to drop back, and the pivot around 23,345 is a key test as if the bulls are going to retain control of this as a recovery, then the support will hold. Momentum indicators are far more positive about the recovery now, but this band of support needs to hold. Initial support at Thursday’s low of 23,703.