It is interesting to see the risk appetite still improving, but this also coming as a dollar rally is finding its legs. Treasury yields appear to be generating upside traction again as the US 10 year rises towards 2.80% again and the 2 year pushes through to three week highs. Yield differentials have turned back in favour of a near term dollar rebound continuing, however there are some key pivot levels to overcome for the dollar to decisively breakout. Watch for EUR/USD below $1.1300, gold below $1276 as two key factors. Although US markets are closed on Monday for Martin Luther King Day, this trend is one to keep an eye on in the coming days. Wall Street continues to accelerate higher as fears of a sharp slowdown in corporate earnings growth seem to have been overplayed. US earnings season has started well, at least for now. Perhaps the calls of the dollar’s demise have come a little premature? However, given the shift in emphasis towards a less hawkish stance across all the recent Fed speakers, focusing more on data dependence in monetary policy, focus on the US numbers will be elevated. This improved risk and stronger dollar is beginning to impact negatively on gold. Away from the US, China’s economic data overnight was broadly in line with market expectations. China GDP growth slipped to 6.4% in 2018 (as forecast) whilst Industrial Production was mildly higher than expected at +5.7% (+5.3% exp), Retail Sales in line at +8.2% and Fixed Asset Investment a shade below at +5.9% (+6.0% exp).
Wall Street closed strongly higher again on Friday with the S&P 500 +1.3%, although the lack of steer due to the public holiday may be an impact today. Asian markets have been broadly positive in response to the Chinese data (Nikkei +0.3%, Shanghai Composite +0.5%). European markets seem to be struggling to replicate this with FTSE futures and DAX futures both a shade lower. In forex, there is a an element of dollar slippage with euro and yen outperformance, but little real direction. In commodities, there is a basis of support forming for gold, whilst oil is a touch higher.
It is Martin Luther King Day public holiday in the US today and a very quiet economic calendar to boot, with no key economic releases today.
Chart of the Day – AUD/JPY
Aussie/Yen is seen as a gauge of market sentiment in the forex world, and with risk appetite seeing a basis of improvement across major markets, we see a key break higher on AUD/JPY. The old breakdown of 78.55 that was seen late in 2018 has been a basis of resistance recently, however, this pivot has been broken in the past couple of sessions (although Friday’s close just shy of 78.75 will have been a shade disappointing. However, this comes with momentum indicators still improving, with the RSI above 50, Stochastics rising in strong configuration and the MACD lines accelerating higher. If initial resistance now at 79.00 can be cleared, there is now a good run higher with upside potential for the pair towards the next key pivot at 80.50. There are a series of higher lows in the past couple of weeks as the recovery has progressed, with 77.75 initial support, whilst the bulls will be looking at the hourly chart which suggests there is an opportunity on any unwind into 78.35/78.55.
Just as it looked as though the bulls were beginning to get a foothold again in the market, a disappointing end to the session on Friday saw another negative candle and the mini trend lower continue. This move lower is now testing the limits of what can considered to be just a minor corrective slip. The market is now trading back below all the moving averages and momentum indicators are beginning to look increasingly negative. An early basis of support again in today’s session is quite similar to how Friday’s session began, so if there is another failure for the bulls then the concerns will really begin to grow. The resistance of the near term pivot at $1.1420 remains a key barrier to overcome. Initial support at Friday’s low of $1.1350 which is protecting a drop back towards the old $1.1300 area again.
The rally that hit $1.3000 last Thursday has unwound via a daily candle that has almost entirely negated the positive aspects of the move. However, there is the breakout support around $1.2800/$1.2815 to prevent this breakout from turning sour. The momentum indicators remain positively configured although they have started to lose their impetus. Despite this, the RSI is still above 50, MACD lines still rising and Stochastics positive above 80. Given the unwinding move from $1.3000, a decisive move below $1.2800 would begin to make the chart look far less strong and question the outlook of medium term improvement. The hourly chart sows resistance at $1.2905 initially.
After four positive candlesticks in a row, the bulls are taking a step back this morning. It is interesting that this is coming around the old 109.75 key reaction low which is a basis of resistance. The upside implied target of a move above 109.10 last week was 110.40 so has not yet been achieved, but given that this still has the air of a bear rally, the prospect of this undershooting the target is elevated. Momentum remains with the rally though for now, with the Stochastics and MACD lines still rising. How the market responds around the breakout support at 109.10 will be interesting. The hourly chart shows momentum has now unwound back to levels where the near term bulls should be taking control again (around 40 on hourly RSI and around neutral on hourly MACD). The initial reaction high of 109.88 is now resistance overhead.
After consolidating for around two weeks in a tight range of $22, Friday’s decisive negative candle will have given the bulls food for thought. This is now a key moment for the outlook. Although the market is yet to breakdown, there is now beginning to show an increasingly corrective configuration on momentum. Is this momentum leading the price lower? We will know if gold closes below the support at $1276. Previously in January slips below $1280 have been bought into above $1276 so if this changes then it could open the gates to a correction. So far, on Friday and again today, the market is still defending $1280. A breach of $1276 would complete a top that would imply $22 of further downside. For now though, there is an uptrend channel supportive at $1279 today whilst the 21 day moving average is a basis of support at $1282. How the gold bulls react to this shot across the bows will be key this week.
The bulls have taken off once more as WTI has pulled above the previous reaction high at $53.30 in a move that opens the way towards a retest of the December highs again at $54.75. Leaving the 23.6% Fib level behind (at $50.50) means that the 38.2% Fib level (at $55.55) is now in prime view. An upside breakout above $54.75 would also be a key change in the medium term outlook and completes a two month base pattern as the recovery continues. Momentum indicators are confirming the upside break with the RSI above 60, the Stochastics rising again above 80 and MACD lines rising towards neutral. The hourly chart shows initial support this morning at $53.30.
Dow Jones Industrial Average
The run higher is accelerating as the bull move has pushed decisively through the barrier of the 50% Fibonacci retracement at 24,333 which opens 61.8% Fib at 24,950. Momentum is increasingly bullish now with the RSI rising above 60, Stochastics consistently camped in bullish territory and MACD lines accelerating higher. The next resistance on the chart is at 24,828 which is a minor old high, before a pivot around 25,000. The 50% Fib at 24,333 now becomes a basis of support for a retreat and with the hourly chart looking stretched initially, there is a real sense that intraday corrections will now be bought into.