Gold testing a key uptrend line - technical outlook

Tracking risk appetite across bipolar asset markets

THURSDAY JANUARY 31, 2013       17:18:00 GMT

Spot gold prices are preparing for their fourth test of a key uptrend line on the daily chart which extends back to May of last year. From a technical perspective there is some evidence of a positive divergence on the MACD chart which suggests that the momentum to break below this trendline may have dissipated. On the contrary the failure to re-enter the cloud formation above the current price is a negative and the daily price has failed already to regain a footing above the 200 day EMA (the green line on the adjacent chart) and the 50 day EMA is approaching the longer term 200 day EMA setting up a possible bearish crossover.

The price performance in the near term is quite significant for the intermediate term outlook for the metal. The most favorable outcome for the bulls would be a successful re-test of the 1625 intraday low seen on January 4th as this coincides with the lower 20 day Bollinger band and also the base of the weekly cloud formation. If that level is broken then a more sizable and enduring correction towards the 1500 level is feasible.

Japan and South Korea on the front line of a currency war

Tracking risk appetite across bipolar asset markets

WEDNESDAY JANUARY 30, 2013       14:44:00 GMT

Following the widespread adoption of "unorthodox monetary policies" it has been apparent to some commentators that central banks have had as a stealth agenda the depreciation of their currencies in a battle for enhanced exports (among other objectives). A Morgan Stanley analyst has now issued a note that the rapid decline of the Japanese yen may have finally galvanized the attention of mainstream analysts to an outright currency war.

The following comment from the analyst is cited here

Japanese policy has changed the game: Japan’s policy-makers now want to end deflation and reinvigorate investment. Given the export-orientation of Japan’s economy, the role of the yen is likely to be much stronger for Japan than the dollar is for the US economy. This creates the risk of bringing into the fray the one, all-important element that was missing before – competitive depreciation. Any further monetary expansion by a major central bank may now prompt Japan’s policy-makers to take retaliatory action to weaken the yen. If they do, EM currency appreciation would be collateral damage.

The adjacent chart depicts one dimension to the consequences of competitive currency debasement. Illustrated is the relative performance of the Nikkei 225, the USD/JPY exchange rate, the EWJ fund which tracks the MSCI Japan Index but which trades in the US and thus includes the currency conversion from yen to dollars (unlike the Nikkei itself which is of course denominated in local currency terms), the KOSPI Composite Index - the benchmark for South Korean equities, and also the iShares sector fund EWY which tracks the MSCI South Korea index (again priced in US dollar terms).

One of the most striking correlations in major financial markets is the inverse relationship between the yen and the Nikkei 225 with weakness in the former resulting in strength in the latter. The underlying variable which would explain the very high degree of negative correlation is the conviction that there will be increased competitiveness of Japanese exports as the yen weakens - even more pertinent at present since Japan has moved from a history of surpluses in its overseas trading account to a significant deficit in 2012.

The Nikkei had a 250 point surge in overnight trading (Jan 30th) and is now above the 11,000 level for the first time since April 2010. Using November 1st of last year as the base date for the assessment of relative performance, the Nikkei has moved up almost 23% while the dollar has strengthened by more than 13% in the same time frame against the yen. Unsurprisingly the EWJ fund - after currency conversion and notwithstanding that the MSCI index composition is slightly different to that of the Nikkei - has registered an almost 10% upward move.

The currency wars dimension which provides a sharp contrast to positive developments for Japanese stock market investors (both domestic and to a lesser degree non-yen based investors) can be seen in the very subdued performance of equities for South Korea, one of Japan's main trading competitors. In local currency terms the KOSPI has only managed a 2.4% increase since November 1st and for the US dollar adjusted sector fund, EWY, this is barely different with a 4% performance during the equivalent period.

The EWJ weekly chart shows that the current price has surpassed cloud resistance and the arrows illustrated would provide feasible targets at $10.50 and $11 for more than 5% and 10% profit potentials from current levels. A more adventurous intermediate term strategy, perhaps with lower outright risk, would be to consider a long EWJ/short EWY strategy.

Updates on recent suggestions

Tracking risk appetite across bipolar asset markets

TUESDAY JANUARY 29, 2013       11:34:00 GMT

Just a follow up on some charts that were discussed here last week. The exchange traded fund, TUR, which tracks Turkish equities was cited as looking over extended with a weekly RSI value above 80 and a weekly ADX reading near 50. Such elevated values are found quite rarely and are good harbingers of the likelihood for corrective price action. Price action during the last two trading sessions has indeed resulted in a more than 5% drop in the stock. The daily RSI chart and the probable support at the 50 day EMA around $66 (also close to the 200 day EMA) suggests that a further drop of another 5% could well ensue. There is no short recommendation at this point, and in fact the preference would be to look at the long side for a trading bounce after the correction has run its course- for an entry keep an eye on a basing pattern to the daily RSI.

EUR/GBP delivered the initial target value of 0.8550 that was discussed here last week and following a short term correction which is now under way I would still be targeting 0.8660 within the next few sessions.

As of Tuesday morning (Jan 29th) EUR/JPY has, after an extended and vigorous bullish phase, also begun to correct but as suggested the underlying dynamics for this pair remain solidly in favor of the long side. It is becoming more apparent that, with benign neglect of its own currency being the preferred stance of the BOJ and Japanese government, USD/JPY is ultimately set for a test of the 100 level. Since I do not see much likelihood of a serious correction to EUR/USD the inference for the euro/yen rate is that a rate in the 130’s remains the intermediate target as suggested here

$TUR - Turkish equities up 62% in last 52 weeks...time for a pause

Tracking risk appetite across bipolar asset markets

FRIDAY JANUARY 25, 2013       12:47:00 GMT

Many emerging market ETF’s at present are showing extremely elevated technical readings - RSI, ADX etc - and the chart for TUR, which tracks Turkish equities is a good example. The weekly RSI value of 85 is quite exceptional as is the weekly ADX reading of 46.

Undoubtedly Turkey is one of the more promising of the emerging markets but a 62% increase in the last twelve months and a 14% rise in just the last 30 days suggests that a lot of very positive sentiment about its prospects is already discounted. In addition yesterday’s closing price is less than $2 from its all time high registered in November 2010.

ZROZ: Be careful what you wish for

Tracking risk appetite across bipolar asset markets

FRIDAY JANUARY 25, 2013       10:45:00 GMT

In an extraordinarily low interest rate environment the greatest risk to fund managers with portfolios overflowing with corporate, high yield and treasury bonds lies with low coupon and long duration paper. That risk is extremely well depicted in the following graphic which shows the ZROZ, a PIMCO sponsored exchange traded fund which tracks extended duration zero coupon instruments - the lowest coupon instruments on offer until someone comes up with the idea of a negative coupon!

The daily chart over the last few months shows several thrusts down for ZROZ followed by retracement patterns which once again are met by renewed downward pressure - a pattern which could be described as a bear flag downward staircase. There is a pattern of descending highs and lower lows and the risk is that the present area of support looks quite fragile.

The old saying be careful what you wish for would seem especially apt with regard to the mania for spikes in risk appetite every time there is positive real economy news. More than ever financial markets are detached from the main street economy and the real risk to enlivened animal spirits is that at some point questions will becoming pressing as to how do policy makers articulate and implement an exit strategy from the entirely artificial financial economy currently being propped up by the unprecedented generosity of Messrs Bernanke, Draghi, Abe and others.

Sterling, yen and FX politics

Tracking risk appetite across bipolar asset markets

WEDNESDAY JANUARY 23, 2013       11:51:00 GMT

After more than a year’s absence I am starting up my commentaries again. This time I intend to take a more flexible and less structured approach; instead of a single daily posting covering a number of topics, I shall make the postings shorter and on some days may publish several items and on others none at all - all depending on the relevance of the material and the pressure of other commitments. The focus in this commentary will be on sterling and the yen, the two currencies which have attracted a lot of recent coverage from analysts and where the technical picture for GBP/JPY pair itself is useful.

The monthly chart illustrates exactly why there is value in following Ichimoku cloud patterns. Resistance has been confronted exactly where it would have been anticipated from this extended time frame perspective. As annotated on the long term chart the GBP/JPY pair has traded within a fairly narrow channel between 120 and 140 for more than two years and I would expect a narrow trading range to persist (quite likely between 130 and 150 in coming months) as both currencies decline together against the dollar.

Trading USD/JPY from the long side has been one of the easiest and most profitable FX trades over the last few weeks and I would not recommend playing the short side on this pair for anything but short term scalping opportunities. An intermediate term target, that is within 3 to 6 months, suggests that the 100 level is an attractor, although another hurdle arises at 94.50, and both seem almost certain to be tested during the coming months.

As the weekly chart reveals a correction has begun just above the 90 level (again this was clearly signalled on the monthly Ichimoku chart) and there could well be a retracement towards the 86 level which would represent a 38% retracement of the move from the breakout in November up to the most recent intraday high, as well as coinciding with the position of the 200 week EMA.

While writing this I have been watching David Cameron’s speech on the UK’s future relationship with the EU. and the commitment to hold an in/out referendum within five years (subject to quite a lot of conditions - such as whether his party wins the next UK election in 2015 which is certainly far from a done deal). The speech is as much about tactical domestic political issues as it is about future EU treaties. One refreshing aspect of the speech is that by offering a referendum to the UK electorate it goes against the tide of the current malaise embedded within the Brussels mindset, well characterized by the phrase "democratic deficit". The speech will also have long term consequences for sterling as well.

GBP/USD has found strong support around $1.58 ($1.5780 is a key level) and there may well be a bounce back towards a test of the $1.6020 level in coming sessions, but longer term a drift lower towards $1.55 is my expectation. However the better intermediate term FX strategic positionining would be to consider the EUR/GBP relationship. From a techical perspective a feasible target for this pair, again from the perspective of the Ichimoku cloud formation, is around 0.8650 which is the top of the monthly cloud and since we are already half way through this cloud the top points to both a target and point of intermediate term resistance.

In addition, as already alluded to there are two fundamental forces which will act to the advantage of the European currency over its UK counterpart. On the one hand the "safe haven" status of sterling which has prevailed over the last three years during the turmoil within the eurozone is diminishing. Whether or not the tail risk from the euro has been eliminated as Mario Draghi has claimed remains to be seen, but certainly there has been a shot in the arm favoring more risk appetite for European securities. Secondly, Cameron’s initiative with respect to a re-negotiation of the UK’s relationship to the EU may well result in some slippage in inward investment to the UK and could further weaken sterling’s appeal as a strategic holding by global asset allocators. Furthermore some within the BOE, including the current governor, appear to favor a weaker currency for macro-economic reasons and will continue to talk the currency down.

From a big picture perspective, given that the yen is likely to remain under pressure, and that sterling will also be weak especially relative to the euro, one of the most appealing long term trends would be a long euro/short yen positioning with an emphasis on adding to positions on EUR/JPY weakness. A target this year of around 128 - which was last seen in February 2010 is a distinct possibility, and an even more ambitious target could put 138 in play which would suggest that Signor Draghi and other ECB cheerleaders may have shot themselves in the foot with regard to removing tail risk and putting the EZ nations at a disadvantage in the race to lowering exchange rates now being pursued by most other central banks.