As the currency markets pause ahead of the monthly Non Farm Payroll release due later, I thought it would be a good time to revisit the weekly futures charts for some of the major currency pairs, and to step back a little, following a week of significant news items around the world. This helps to contextualize the NFP data, which whilst important, is simply another release in the economic calendar.
If we start with the Australian dollar the 6A, the picture here is bearish on all sides. If we consider the technical outlook first, the key for this week was to see a move away from the deep platform of support in the 0.8550 region as denoted with the solid blue dotted line. This was a significant region of accumulation, and one which had provided a solid platform in the past having been tested on thirteen previous occasions. As such, the breach last week was significant and this has been duly validated with the deeper move this week as the pair look set to close with another wide spread down candle on the weekly chart. Volumes since September have risen dramatically, with the selling pressure clearly evident under the down candles, and the weakness equally evident in any attempt to rally higher.
The weak technical picture is reinforced with the fundamental, with the RBA now joining other central banks around the world in openly supporting a weaker currency. Following this week’s interest rate statement, the prospect of a cut early next year now looks increasingly likely, and with a possible slowdown in China, this too is adding to the downwards pressure on the Australian dollar. Finally of course the US dollar is yet another driver for the pair accelerating the move lower, and with little in the way of meaningful support below, we could see the pair move through 0.8000 and beyond in the early part of 2015.
Moving to the British pound, the pair here have been trading in a narrow range, testing the very deep resistance overhead in the 1.5800 and simultaneously finding support in the 1.5550 area below. Both of these levels are now taking on increasing significance, and for longer term trend traders, this is one for the patience trade, where patience will be rewarded in due course. Should the pair break below the floor of support outlined above, then this will open the way to a further bearish phase, with a continuation of the longer term trend and a move to test the deeper region of price accumulation in the 1.5100 in the new year. As with other major currency pairs, it is the bullish tone of the US dollar which continues to dominate, and with a mixed picture of economic date for the UK, much will depend on a continuation of dollar strength. Interest rate differentials are now rising in importance, and much will depend on statements from the BOE, their view of 2015, and the economic outlook in the context of any increase in rates. The ones to watch here are inflation expectations, and in the recent Autumn statement the Chancellor has attempted to create a mini housing boom by adjusting stamp duty on UK properties, which have reduced the amount of tax payable on those of lower value with an increasing scale higher. This is likely to help first time buyers in particular and drive demand for housing and consequently house prices. All of this is against the context of an election next year!
For the single currency, yesterday’s statement and comments from ECB President Draghi did little to clarify any likely action from the bank and indeed his explanation of his comments drew laughter from those attending when asked what the terms ‘intended target of expectation’ actually meant! QE will come but we are not sure when! No surprise therefore to see the pair move in a narrow range once again, testing the 1.2500 area to the upside and 1.2300 to the downside, and adding a further week of price consolidation to the recent price action. Longer term the outlook remains weak, and should the ECB act, then we could see a return to the 1.2000 region or lower in 2015. It could all be summed up as one of Shakespeare’s plays – much ado about nothing! With Lithuania joining in January there are a number of procedural changes for 2015. These include policy meetings every 6 weeks and not every month, and there will now be a rotating voting system, so not every central bank will vote at each meeting. This is significant and will make it increasingly difficult to forecast market reaction to decisions which are likely to lack consistency as a result. Lastly, the ECB are considering releasing some kind of document ( not minutes ) but a record of the meeting. In other words a bit of PR!! Clearly they feel the need to raise their profile as did the FED last year.
Finally to the 6C and the Canadian dollar, as last week’s wide spread down candle drove the pair through the minor support level in the 0.8820 area, a level that has been further tested this week and duly held. The next level of potential support now awaits below in the 0.8720 area, a price point tested in October. Whilst the driver here is once again the US dollar, this is coupled with weakness for oil, and with OPEC continuing to adopt a lassiez faire attitude to the current decline, this in turn is impacting the Canadian dollar accordingly. Perhaps more significant are the reasons behind this approach, given the huge shale and sands reserves for both oil and gas. If indeed OPEC policy is an attempt to drive the price of oil lower in an effort to make alternative energy extraction uneconomic, then this indeed could have serious longer term implications for Canada and the broader economic picture. The technical picture continues to remain bearish and any move through 0.8700 is likely to trigger a deeper move down to test the next potential level of support in the 0.8520 area.
By Anna Coulling