Market analysis and trade recommendations by FBS

[FBS]

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[FBS]

Dec. 16: Asian session

MSCI Asian Pacific Index of shares outside of Japan declined by 0.5%. Japanese Nikkei lost 1.2% despite a generally upbeat survey of the country’s business sector.

USD/JPY declined to 102.70 after peaking to 103.90 on Friday. Yen strengthened as investors assess US economic data to see when the Fed will start to taper monetary stimulus. Although QE tapering this week seems quite possible, most of the analysts expect the central bank to keep interest rates close to 0 during the next year.

AUD and NZD dipped early in the Asian trade as HSBC China manufacturing PMI fell to a 3-month low of 50.5 in December (expected 51.0, November reading revised up to 50.8). However, the index remains above 50 for the 5th month in a row. AUD/USD dipped to $0.8920 on the news, but later in the session has recovered some ground. Note the pair holds above the Friday’s low at $0.8910 – it is the lowest level since the end of August.NZD/USD has followed the Aussie and is trading around $0.8275 as of writing. New Zealand Westpac consumer confidence rose from 115.4 to 120.1 in Q4.

EUR/USD rose to $1.3760. GBP/USD is consolidating in the $1.6300 area.

 

[FBS]

Key currency options (Dec. 16)

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (14:00 GMT).

Here are the key options expiring today:

EUR/USD: $1.3650, $1.3700, $1.3705, $1.3720, $1.3725, $1.3745, $1.3750, $1.3755, $1.3800, $1.3820;

GBP/USD: $1.6325, $1.6400;

USD/JPY: 101.50, 102.60, 103.20, 103.50 (large), 104.00 (large);

USD/CHF: 0.8925;

AUD/USD: $0.8900 (large), $0.8950, $0.8965, $0.9100, $0.9120, $0.9125;

USD/CAD: 1.0700;

NZD/USD: 0.8240;

EUR/CHF: 1.2190;

AUD/JPY: 92.55.

 

[FBS]

WSJ: estimating the FOMC outcome

Wall Street Journal correspondent Jon Hilsenrath, an expert on the Fed and its policy, wrote an article on the central bank’s upcoming meeting.

According to Hilsenrath, the improvement in US labor market (job growth averaged 195K a month in the past 12 months compared to 150K a month in the year ended in September 2012 when the bond buying was launched) and economy (better figures, budget deal is to pass Senate this week) is argues for QE tapering this week.

On the other hand, declining inflation argues against tapering: CPI growth is below the Fed’s objective. In addition, the unemployment rate has fallen in part because of people leaving the labor force, while Republicans are preparing for a new fight with President Barack Obama over the need to lift America’s borrowing limit early next year.

According to the WSJ poll, of 43 economists only 11 expected the Fed to cut its bond purchases this week, while 30 said it would wait until early next year.

 

[FBS]

EUR/USD: Elliott waves (Dec. 16)
Weekly. In line with the forecast growth EUR/USD went up last week. Now euro’s forming the wave (y) of [D].

Chart. Weekly EUR/USD

Daily. The wave (y) is a double zigzag w – x – y. At the moment the wave x is being formed and it will likely take form of a plane wave.

Chart. Daily EUR/USD

H4. The wave X took the form of a double zigzag and looks completely formed now. We are seeing the beginning of construction of the downward impulse wave [C]. In the near future we expect the decline to continue to reduce in this wave. It will probably be a bearish week.

 

[FBS]

GBP/USD: Elliott waves (Dec. 16)
Weekly. The pair may have completed the wave [c] of B. In the near future is expected to fall within the new downward wave.

Chart. Weekly GBP/USD


Daily. Here’s the detailed layout. The structure of the last section can be seen in greater detail on H4.

Chart. Daily GBP/USD

H4. The wave (V) took form of an impulse with a powerful wave III. The wave IV, as expected, represented a complex correction in the form of a flat market with a downward bias. The wave V broke above the previous high of the wave III. Now we are seeing construction of a downward impulse wave [1]. In the near term it will be complete and the market will start to rise in the correctional wave [2].

Chart. H4 GBP/USD

 

[FBS]

AUD/USD: Elliott waves (Dec. 16)
Weekly. The pair continues building the wave which takes the form of a zigzag. Now Aussie’s forming a final wave of this zigzag – (C).

Chart Weekly AUD/USD

Daily. At the moment, the wave V of (C) is being formed.

Chart. Daily AUD/USD

H4. The market is declining in wave (5) of [3]. The pair’s likely to keep declining in this wave in the coming days. After that construction of the correctional wave [4] will start.

Chart. H4 AUD/USD

 

[FBS]

EUR/USD: news from the battlefield

EUR/USD has spent some tome under $1.3760 today, but then broke up $1.3774 (top of the Ichimoku Cloud at H4).

French flash manufacturing and services PMIs came lower than expected (47.1 and 47.4 vs. forecasts at 49.1 and 48.9 respectively). German and euro zone’s manufacturing PMIs were better than forecasts, but the services indices disappointed. Later today there will be a bunch of data releases in the US.

There’s a bearish engulfing formed on Thursday on the daily chart and a shooting star on the weekly timeframe. On Friday, however, a hammer-like candle was formed. Support lies at $1.3700, $1.3670 and $1.3625. A flag-like formation allows expecting the retest of the recent highs. Resistance is at $1.3800, $1.3830.

 

[FBS]

USD/JPY lower ahead of the Fed
Kira Iukhtenko, FX BAZOOKA analyst

Early Monday USD/JPY extended the bearish correction from a 5-year high of 103.90, falling ahead of the Federal Reserve meeting on Wednesday. The pair found support at 102.60 and rebounded from here, but for now the upside remains capped by the 103.15 mark. For now the pair still remains in a 2-month bullish channel.

USD/JPY has met significant resistance in the 103.70 area (prior 2013 high), forming a shooting star candle and closing the week at 103.20. The further dynamics of the pair will be defined by the Fed’s announcement on Wednesday. Despite all the tapering talks, we don’t see a high chance for a QE volume reduction in December. That is why the pair could dip lower in the coming week. Break below 102.60 could open the way to the 102.40/20 area (recent lows, 23.6% Fibo from the recent rally) and then to 101.80/60. However, in a longer term we remain bullish for the pair with the next target of 105.55.

 

[FBS]

Dec. 17: Asian session

Asian stock markets went higher on the back of rising US manufacturing output and a jump in euro zone business activity. MSCI Asia-Pacific index of shares outside of Japan advanced by 0.4%. Nikkei 225 climbed by 0.9%. Investors are waiting for the Fed’s 2-day meeting to begin today and also look forward to US inflation data due at 13:30 GMT.

Australia is in the market focus today because of the 2 releases: the RBA December monetary policy meeting minutes and Australian Mid-Year Economic and Fiscal Outlook (MYEFO). The RBA minutes showed the regulator saw the rate cut still on the table. There was nothing new in the release, but in the combination with the RBA Governor Stevens last week’s comments the regulator’s sentiment sounds pretty dovish. The MYEFO sketched a grim outlook for the economy, threatening to lower the consumer and business sentiment in the future. Australia’s Treasury forecasts the budget wouldn’t return to surplus for at least a decade. The budget deficit forecast for the 2013/2014 fiscal year was almost doubled to $42 billion.

Despite all these bad news, the Australian dollar remains surprisingly resilient. AUD/USD is consolidating in the $0.8930/60 area, holding above the 3.5-month low of $0.8909 set on Friday. NZD/USD strengthened from $0.8240 to $0.9280. USD/JPY is trading in the 103.00 area. Yesterday the pair tested 102.70, but managed to close higher.

EUR/USD edged up to $1.3770, but is still below Monday’s high at $1.3798. GBP/USD edged up to $1.6320, but is still below Monday’s high at $1.6348.

 

[FBS]

BOJ Kuroda FT interview

The Bank of Japan’s Governor Kuroda gave interview to the Financial Times. Here are the essential points of his comments:

- Japan is half way with the “three arrows” of Abenomics: inflation rose to 0.9%, but there’s still “a long way to go” to the 2% target.
- There are different views in the BOJ monetary policy Committee on the extent of quantitative easing: a few members think that “even in 2 years’ time, even with this QE, consumer price inflation may not reach 2%”.
- Kuroda supports the idea of the consumption tax hikes. In economic growth slows down in response, the government and BOJ “can do something to ameliorate the situation”.

The FT concludes that it sounds like “the MPC should do even more”.

 

[FBS]

QE taper: what does economy say?

According to Reuters forecast, majority of economists expect the Fed to start tapering QE in March. Still, the recent positive economic figures out of the US create room for doubts.


What exactly do we mean by “positive economic figures”? Analysts at BK Asset Management did a great job by systematizing these figures:

Health of consumer sector: FOR tapering

Labor market: FOR tapering

Inflation: AGAINST tapering

Housing market: neutral

Manufacturing sector: neutral

Growth: FOR tapering

Market indicators: FOR tapering


BK thinks that the Fed will announce small amount of tapering this month ($5 to $10 billion), but won’t commit to further reductions for now, so that the next Chairman Janet Yellen got flexibility for her policymaking. 10-year Treasury yields rose, but are below their September highs, so the market has probably priced in tapering this month or next, but didn’t price in the end of QE next year.

 

[FBS]

Dec. 17: European session

EUR/USD is trading in the $1.3780/45 area. Euro decline ahead of the important European data, but then got support on better than expected ZEW readings (euro zone’s economic sentiment rose from 60.2 to 68.3; German economic sentiment rose from 54.6 to 62.0). Inflation in the monetary union came as expected at 0.9%.

GBP/USD is trading under pressure on Tuesday, testing the $1.6260 support (recent lows). Sterling weakened on the softer-than-expected UK inflation figures. CPI surprised to the downside, slipping from 2.2% to 2.1%. This was the lowest year-on-year CPI growth since 2009. Softer inflation is negative for the pound as it gives the Bank of England more room to keep the rates low. BoE Governor Carney will deliver a speech today at 15:30 GMT.

EUR/JPY is trying to hold above 141.50. EUR/GBP rose to the highest level since November at 0.8460.

 

[FBS]

GBP/USD under pressure
FX BAZOOKA analyst Kira Iukhtenko


Currency markets remain thin on Tuesday as investors hold breath ahead of the tomorrow’s Fed policy announcement. British pound remains range-bound for a second consecutive day, trading in the $1.6280/6350 area.

Great Britain released a bunch of inflation figures today. CPI surprised to the downside, slipping from 2.2% to 2.1%. This was the lowest year-on-year CPI growth since 2009. Cable slipped dipped below the $1.6300 mark on the news. Softer inflation is negative for the pound as it gives the Bank of England more room to keep the rates low.

The pair has clearly slowed the recent bullish trend. Cable stays in a bearish channel after hitting a 2-year high of $1.6465 on Dec. 10.There are some technical bearish signals. However, we still see considerable support for the pair at $1.6240/30 (38.2% Fibo, channel support). The pair needs to fix below here to open the way for a deeper pullback to $.6210/00 and lower. On the other hand, we need a fix above $1.6320 to erase the short-term bearish pressure. In a medium term we concede a rise into the $1.6600 area.

 

[FBS]

EUR/USD: levels to watch

Analysts at ANZ point out that EUR/USD is in the period of prolonged consolidation off 2008’s high ($1.6040) and euro’s rebounds are regarded as corrective. Still, the current outlook is considered cautiously bullish “until there is a clearer sign that the gains are near to completion”.

“The potential test of the $1.3950/1.4000 area and the possibility of extending towards $1.45 are highlighted in the weekly chart. It also highlights that dips need to remain above $1.3575 (ideally $1.3635) to avoid a return to the former bias of a slide back to $1.27,” ANZ projects.

Commerzbank also argues that a break below the uptrend at $1.3586 is needed to reduce upside pressure, while a break above $1.3833 will bring the bulls “formidable resistance” to $1.3940/60 (50% retracement of the move down from 2008 and the 5 year resistance line) where they will likely fell.

JP Morgan is now looking for confirming breaks like a break below $1.3702 (minor 38.2 %) in EUR/USD and equivalent above 80.68 (daily trend) in the USD Index. As long as euro stays above this level, it will have chance to make another attempt to test massive resistance between $1.3887 and $1.3945 (monthly Ichimoku lagging/monthly triangle).

 

[riki143]

EUR/USD: levels to watch

Analysts at ANZ point out that EUR/USD is in the period of prolonged consolidation off 2008’s high ($1.6040) and euro’s rebounds are regarded as corrective. Still, the current outlook is considered cautiously bullish “until there is a clearer sign that the gains are near to completion”.

“The potential test of the $1.3950/1.4000 area and the possibility of extending towards $1.45 are highlighted in the weekly chart. It also highlights that dips need to remain above $1.3575 (ideally $1.3635) to avoid a return to the former bias of a slide back to $1.27,” ANZ projects.

Commerzbank also argues that a break below the uptrend at $1.3586 is needed to reduce upside pressure, while a break above $1.3833 will bring the bulls “formidable resistance” to $1.3940/60 (50% retracement of the move down from 2008 and the 5 year resistance line) where they will likely fell.

JP Morgan is now looking for confirming breaks like a break below $1.3702 (minor 38.2 %) in EUR/USD and equivalent above 80.68 (daily trend) in the USD Index. As long as euro stays above this level, it will have chance to make another attempt to test massive resistance between $1.3887 and $1.3945 (monthly Ichimoku lagging/monthly triangle).

thaNks alot for the analysis. Now is going up.

 

[FBS]

Dec. 18: Asian session

Asian stock market edged up as investors are waiting for the Fed’s meeting results: today we’ll find out whether US central bank decides to start tapering QE or not. The Fed’s quantitative easing has been a major driver for global risk assets in recent years. MSCI’s broadest index of Asia-Pacific shares outside Japan inched up by 0.2%. Japanese Nikkei 225 index climbed by 1.5% as the hedge funds were buying.

USD/JPY found support in the 102.50 area and rose once again to 103.00. Yen fell as Japanese trade deficit widened to the record level of 1.35T yen ($13.1B). AUD/USD is trading at daily lows around $0.8900, up from the yesterday’s 3.5-month low of $0.8880. The pair made a quick bounce to $0.8930 as the RBA Governor Glenn Stevens said there are signs that loose policy is supporting spending. The pair weakened later as Stevens reiterated his commitment to keep the Aussie low: according to him, the regulator still hasn’t intervened in the currency market, but could do that if needed. NZD/USD has also lost some ground, weakening to the $0.8240 support.

EUR/USD rose to $1.3775 after it tested $1.3722 yesterday. GBP/USD went up to $1.6288 after testing $1.6216 yesterday.

 

[FBS]

Key currency options (Dec. 18)

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (14:00 GMT).

Here are the key options expiring today:

EUR/USD: $1.3650, $1.3685, $1.3700, $1.3735, $1.3745, $1.3750, $1.3800;
AUD/USD: $0.8890, $0.8900, $0.8950, $0.8975, $0.9000;
GBP/USD: $1.6145, $1.6300;
USD/JPY: 101.00, 101.25, 102.00, 102.50, 102.80, 102.95, 103.00, 103.20, 103.50, 104.00, 104.20;
NZD/USD: $0.8250, $0.8350;
USD/CAD: 1.0450, 1.0500, 1.0550, 1.0570, 1.0700;
EUR/CHF: 1.2100, 1.2150.

 

[FBS]

MS: trading on the FOMC

Analysts at Morgan Stanley developed scenarios of the FOMC meeting results and supplied them by the suitable course of actions for traders:

Scenario 1: No major policy changes

Actions: Initially sell USD against most currencies; buy risky currencies vs. JPY. Then start looking for lower levels to buy USD as the QE tapering should take place early next year.

Scenario 2: Some tapering without guidance

Actions: Buy USD vs. risky currencies; cautious about USD/JPY longs as yen will likely strengthen in the risk-off environment.

Scenario 3: Forward guidance

Actions: The stronger the forward guidance is, the better performance MS would expect from currencies which are highly sensitive to rate spreads and less sensitive to risk appetite. If we get forward guidance + tapering, GBP and CAD would outperform on the crosses.

 

[FBS]

GBP/USD: how long will the rally last?
Kira Iukhtenko, FX BAZOOKA analyst

As we expected yesterday, the cable met buyers at the lower boundary of the bearish channel at $1.6230 (this is also the 38.2% Fibo retracement from the $1.5850/6450 rally). On Wednesday GBP/USD jumped to $1.6365 (61.8% Fibo of the recent decline), inspired by the upbeat UK employment figures. Jobless claims in Great Britain contracted by 36.7K in November (forecast: -35.2K; prior revised up to -42.8K). Unemployment rate fell from 7.6% to 7.4%, coming closer to the BoE 7.0% target. BoE meeting minutes brought nothing new except for the words that “further substantial appreciation” of GBP may hurt the economic recovery. However, the market didn’t pay too much attention on that.

The question now arises of whether the GBP rally will survive the Fed’s meeting or not. If the Fed tapers and pushes the greenback up, cable can depreciate. However, the market needs too close below $1.6230/00 area to confirm the top at $1.6465. If the Fed disappoints with QE reduction, we can see a rise towards our initial target of $1.6600 in the medium term.