Investing.com - The pound held gains against the U.S. dollar on Thursday, as positive U.S. jobless claims data lifted the greenback, but the Bank of England's policy statement, released earlier in the day, continued to support to sterling.
Pound remains higher after U.S. jobless claims
GBP/USD hit 1.6498 during U.S. morning trade, the pair's highest since January 2; the pair subsequently consolidated at 1.6471, adding 0.14%.
Cable was likely to find support at 1.6375, Wednesday’s low and resistance at 1.6500.
The dollar strengthened after the U.S. Labor Department said the number of people who filed for unemployment assistance last week fell by 15,000 to 330,000 from the previous week’s revised total of 345,000. Economists had expected jobless claims to decline by 10,000.
The data came after Wednesday’s minutes of the Federal Reserve's December meeting showed that the bank cited a stronger labor market in its decision to cut its asset purchase program by USD10 billion, reducing it to USD75 billion-a-month.
The minutes also showed that officials were keen to stress that further reductions were not on a “preset course” and would be undertaken in “measured” steps.
Earlier in the day, the BoE left rates on hold at 0.5% and announced no change to the size of its GBP375 billion asset purchase program, as was widely expected.
Sterling was steady against the euro, with EUR/GBP dipping 0.01% to 0.8253.
The single currency came under pressure after European Central Bank President Mario Draghi reinforced the bank’s forward guidance on rates and said the bank was still ready to ready to take "further decisive action" if needed.
Draghi reiterated that monetary policy will remain accommodative for as long as is needed in order to assist the economic recovery in the euro area. The ECB expects interest rates to remain at present or lower levels for an extended period of time, he said.
Draghi said the ECB would act if there was unwarranted short term tightening in the money markets, or if the outlook for inflation worsened in the medium term, saying the ECB would consider "all possible instruments" to tackle these contingencies.
The euro area may experience a prolonged period of low inflation, before inflation rises back towards the ECB's target of close to, but below 2% Draghi said. The bank expects inflation to remain around current levels during the coming months.
Draghi said the slowdown in the annual rate of euro zone inflation in December was generally expected, and was due, in part, to changes in German data.
We’ve recently written quite a bit about the current technical situation in precious metals as well as the current bear market compared to past bear markets. Thus we’ve neglected sentiment somewhat. This is a good time to examine sentiment as the sector appears to be bottoming or trying to emerge from a bottom.
The first chart shows the speculative position (for Gold and Silver combined) as a percentage of open interest. The black is a price index comprised of Gold and Silver. At the June low speculators were only 4.6% long as a percentage of open interest. That marked a 12 year low. It is currently 11% and was as high as 52.8% in 2012.
Gold & Silver
Before Christmas, public opinion on Silver was near 20% bulls. That was in the bottom 3% of all readings in the past 20 years. At the same time, the speculative position in Silver was in the bottom 8% of all readings in the past 20 years. (Source: SentimenTrader.com)
This chart from Tiho Brkan, shows the Central Fund of Canada and its premium or discount to NAV. At the June low the discount was 7%. Shortly thereafter, the discount surpassed 8% though CEF did not make a low in price. That was the highest discount to NAV in 12 years! The current discount is 5%.
Assets in the Rydex Precious Metals Fund have evaporated from $370M to $58M. I don’t have the history handy but I believe this is near a ten year low. Even more striking is the decline in assets as a percentage of all sectors. That is down to 4.7% which is well below the 2008-2012 lows.
Sticking with precious metals stocks we see that short interest is very high in GDX. This isn’t necessarily bullish. The shorts have been correct for more than a year. However, short interest surged in November and December and the stocks failed to make new lows in December. If short interest remains high in January and the market continues to firm then its bullish. (Source: Schaeffers Research).
Just like history, sentiment does not pick or ensure a bottom. The best recipe is to wait for a combination of extreme negative sentiment and very strong technical support. We were hoping the precious metals complex would plunge further to that very strong technical support noted in recent editorials. It could still happen. However, we have to listen to the market and its price action. The gold and silver stocks failed to make new lows in December. Last week Gold and Silver tried to make new lows and failed.
If precious metals fail to make new lows when sentiment indicators are at decade extremes then how could they make new lows in the near future? There are some speculative longs in the market (11% of open interest) who could drive it lower temporarily if metals don’t rally soon. As we’ve said, any selloff is likely to be final and would produce a strong rebound. If that doesn’t happen then the market could continue a slow, grinding saucer type of bottom. The longer this drags out then the more likely that is. The age and depth of this bear, extreme negative sentiment, lack of new lows and recent relative strength in the shares lead us to err on the bullish side.
Recovery In USD/JPY Hinges On Fed Minutes And NFP The U.S. dollar traded lower against most of the major currencies Monday in what has been a slow start to a busy week. There is potential for big moves in the forex market this week but volatility may not pick up until Wednesday because the trade balance is the only piece of U.S. data on the calendar Tuesday. This means that the greenback could take its cue from U.S. yields. If 10 year Treasury yields continue to fall, the dollar could slip lower. The December FOMC minutes and non-farm payrolls report are the most important U.S. events on the calendar. While the focus is generally on NFPs, but we believe that the minutes could have a larger impact on the dollar than payrolls because the Federal Reserve laid out their plan to taper asset purchases and wind down Quantitative Easing at their last meeting. Investors are now eager to learn their motivation and level of enthusiasm for tapering.
We know that every FOMC voter with the exception of Rosengren favored the move and Bernanke believes that bond purchases will be reduced by $10 billion at every meeting until the entire program is drawn to a close but remember, this is his suggestion and not an official decision. From February 1 on, Bernanke will not be involved in any monetary policy decisions. If the FOMC minutes show that there was an overwhelming amount of support for tapering before the end of the 2013 their enthusiasm will revive the rally in the dollar and drive USD/JPY back above 105. However if there was significant reluctance and policymakers expressed hesitancy about staying on a predetermined track with bond purchases, then the dollar could come under additional pressure. Boston Fed President Rosengren did not support the move last month because he felt that unemployment is too high and inflation too low. With 1.3 million Americans losing their unemployment insurance at the start of the year, the labor market is still a legitimate headache for the central bank and there are many valid reasons for why some policymakers would prefer to make future tapers data dependent. At the same time, there are Fed Presidents such as Lacker who believe that it would take significantly weaker economic activity to slow tapering. However neither Rosengren nor Lacker are voting members of the FOMC this year. Plosser who is a voter said on Friday that the Fed might have to raise rates aggressively to regain some lost ground after Bernanke brought rates to zero. If the rest of his peers share his view, the dollar could start the New Year off strongly. The bottom line is that the central bank's eagerness to wind down QE and their rationale for tapering in December will largely determine how well the dollar trades this week.
Friday's non-farm payrolls report will also play a big role in shaping expectations for the pace of Fed tapering this year. According to this morning's non-manufacturing ISM report, service sector activity slowed in the month of December but the labor market continued to grow. The non-manufacturing ISM index dropped to 53 from 53.9 but the employment component of the report jumped to 55.8 from 52.5. As a service based economy, this underlying component has a very strong correlation with non-farm payrolls and suggests that Friday's report could surprise to the upside. A good number would create renewed demand for dollars and a much needed recovery for USD/JPY.
EUR: Holds 1.36 On Outlook For Germany The euro rebounded against the U.S. dollar ahead of important German data. Even though Germany's PMI services index was revised slightly lower for the month of December, the Eurozone's largest economy is expected to drive growth for the region in 2014. Manufacturing is the engine of growth for the overall economy and it remains strong with the PMI index rising to its highest level in 2.5 years. New orders have also been on the rise reflecting an increased in external demand and this helped boost business and consumer confidence. Tuesday's German retail sales and unemployment reports should provide further evidence of the country's recovery and give the European Central Bank the confidence to indulge the market in some optimism. Economic activity is expected to improve in the Eurozone this year albeit gradually especially compared other countries around the world. France is going to be a big problem in 2014 so even if the ECB sees a brighter outlook for the region, they will be reluctant to let up on their easing bias or their warnings about an uneven recovery in the region. With the Fed poised to end QE this year, we see the EUR/USD lower especially if this week's FOMC minutes show a strong commitment to tapering and non-farm payrolls surprise to the upside. Yet we can't lose sight of the fact thatEUR/USD will be supported by its record current account surplus so U.S. data needs to be very good in order to do some real damage toEUR/USD. Otherwise we expect brief rallies like the one seen Monday in an overall choppy environment with a lower general bias.
GBP: Temporary December Slowdown?The British pound ended the day unchanged against the U.S. dollar as investors wonder if slowdown at the end of last year will be temporary. The U.K. economy experienced a weak end to a strong year with manufacturing, service and construction sector activity declining in the month of December. While all 3 sectors continued to expand, the pace growth slowed. The PMI services index was released this morning and it dropped to a 6 month low of 58.8 from 60.0. However with the employment and expectations component of the report rising, this may be nothing more than a decline off of lofty levels. The same was true for the manufacturing PMI index which saw an increase in employment and new order growth even though the overall index declined. Construction sector activity expanded at its fastest pace in 6 years prior to last month's small decline. The bottom line is that there is nothing particularly concerning about the recent pullback in PMIs. If the downtrend continues for the next 2 months we will be worried but between now and then, we are still looking for a stronger recovery in the U.K. this year.
AUD: Positioning Overshadows Data The Australian and New Zealand dollars traded higher against the greenback despite weaker than expected economic data. Service sector activity in Australia contracted at its fastest pace in 4 months with the PMI index dropping to 46.1 from 48.9. Both the employment and new orders component of the report fell steeply, a sign that domestic demand is weakening quickly. Economic activity in Australia has been hampered by slower growth in China. Last week we saw evidence of slower manufacturing activity and overnight, the HSBC services PMI index for China dropped to 50.9 from 52.5 in November. The Chinese economy peaked near the end of last year and with growth expected to weaken further in 2014, Australia is poised for a tough year. However the Australian dollar has taken the news in stride for 2 reasons - positioning and gold. The latest CFTC IMM report shows that speculators remain very short AUD, which means that in order for traders to add to their existing short positions, data needs to be very weak. It also means that the currency pair is vulnerable to a short squeeze as it won't take much for speculators to want to bank profits. That's where gold comes into play - the yellow metal started the year strong with its gains lending support to A$. 90 cents is the level to watch for AUD/USD. If the currency pair breaks above this resistance, it could squeeze as high as 0.9150 but fundamentally, we will look at the rally as an opportunity to sell at a higher level. Australia's trade balance is scheduled for release Tuesday but the focus will be on Canada. Mixed inflation numbers drove the Canadian dollar higher against the greenback but these reports are not as important as Tuesday's IVEY PMI index and trade numbers. While Canada is expected to report a small trade deficit for November, manufacturing activity is expected to have improved in December, which could lend support to the currency and keep USD/CAD within a 1.0740-1.0550 range.
USD/JPY: Struggles To Regain Upside Momentum With the Nikkei falling more than 2% overnight and U.S. 10-year Treasury yields dropping below 3%, USD/JPY struggled to recapture 105. Although the currency bounced off its 103.91 low intraday, the lack of support from equities or Treasuries makes it very difficult for the currency pair to rally. The weakness of USD/JPY also put pressure on the other Yen pairs. However from a technical and fundamental perspective, we believe that it is only a matter of time before USD/JPYrises once again. On both Friday and Monday, the currency pair ended the day well off its lows, creating a long wick on the candlestick chart that is generally indicative of a reversal. Fundamentally, we expect this week's FOMC minutes and non-farm payrolls report to be positive for the dollar. The Nikkei should also recover because Japan's economy is gaining momentum. Service activity increased in December with Japan's PMI index rising to 52.1 from 51.8. Solid domestic demand boosted new business and made companies in the service sector more optimistic about future economic activity. With the consumption tax expected to increase in April, consumer demand in Japan should be particularly strong in the first quarter as the Japanese rush to buy before taxes increase. No major Japanese economic reports were scheduled for release Monday evening, which means all eyes will be on Japanese stocks.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Dollar: Fed Minutes Show Commitment to Taper but No Timetable
GBP: Extends Higher Ahead of BoE
CAD: Drop in Oil is Finally Catching Up
AUD: Construction Sector Activity Slows
NZD: Hits 5-Year High Versus Yen
JPY: Aso Says 2015 Tax Hike Hinges on 2014 Third Quarter Growth
Euro: Our January ECB Preview The euro dropped to a 1-month low against the U.S. dollar ahead of the European Central Bank's monetary policy decision. The ECB is not expected to change interest rates but Mario Draghi will be holding his usual post monetary policy meeting press conference and investors will be listening in closely to see if they have become more serious about lowering interest rates. Unfortunately we don't think the central bank's views have changed much since the last meeting. The following table shows how the Eurozone economy performed since the last monetary policy meeting and there have been both improvements as well as deterioration. German and Eurozone retail sales increased strongly in the month of November and consumer confidence is up thanks to healthier activity in the manufacturing sector. Unfortunately the rest of the region is not enjoying the same momentum with Eurozone unemployment at a record high and inflation as measured by core CPI at a record low. EUR/USD is trading slightly lower than where it was on December 5th, easing the pressure on the central bank to act quickly.
So What Will Mario Draghi Say? Thursday, we expect Mario Draghi to say that while further stimulus remains an option, they are comfortable with the current level of monetary policy and are in no rush to ease again. When the central bank last met in December, Draghi downplayed the need for negative rates and we don't think they will resort to this option as long as inflation does not move significantly lower. In other words, the bar for negative rates is remains very high. There has been some talk about a smaller cut to 10bp, which is an option that would send a strong message to the market but the impact on the economy would be limited. Another LTRO is also possible but based on last month's comments, the central bank thinks that the current situation is substantially different than when they introduced LTRO (in a good way) which this implies that there is no urgency to introduce another long term refinancing program when the current one ends. The Eurozone economy is expected to grow gradually this year and if the economy needs further support, they will most likely opt for LTRO, large scale asset purchases or forward guidance before negative rates.
The bottom line is that the ECB is comfortable with the current level of monetary policy and Draghi's comments on Thursday will most likely reinforce this sentiment. While this may not be shocking to EUR/USD traders, it could be enough to trigger a relief rally above 1.36.
EU Data Points
Dollar: Fed Minutes Show Commitment to Taper but No Timetable To our disappointment, the FOMC minutes did not trigger any major movement in the U.S. dollar. Central bank officials saw "waning benefits from monthly bond purchases" and are growing more concerned about the risks that Quantitative Easing poses to stability. Lower unemployment and inflation rate thresholds were discussed but most policymakers felt that it would be more fruitful to retain the current thresholds and to instead provide "qualitative guidance" after the threshold is crossed. In other words, central bankers don't want to box themselves in more than they already have. Ongoing improvements in the labor market gave Fed officials the confidence to reduce asset purchases but the minutes provided very little detail on the future pace of reductions. It did not mention the $10 billion per meeting reduction proposed by Bernanke but did say that policymakers favored tapering in "measured steps." While the minutes showed a commitment to unwinding QE, there was nothing to get investors excited about buying dollars and for this reason, USD/JPY declined slightly after the release. Nonetheless, the greenback still managed to appreciate against all of the major currencies Wednesday except for the sterling. This morning's better than expected ADP report also provided very little support to the U.S. dollar. USD/JPY spiked briefly to 105 but failed to hold its gains and the same was true for EUR/USD, which bounced off 1 month lows. While ADP does not have the best track record of forecasting NFPs, its gap with payrolls is shrinking and there is still a good correlation between the two employment reports. The small increase in ADP last month suggests that payrolls could exceed 200k for the third month in a row. This is consistent with the signal from the non-manufacturing ISM report. While service sector activity slowed in December, the employment component of the report rose to 55.8 from 52.5. This indicates that more jobs were created in the service sector last month, which bodes well for payrolls. Confidence also improved leaving jobless claims as the one major report pointing to weaker job growth. The simultaneous increase in ADP and the employment component of ISM should keep the dollar supported ahead of payrolls.
GBP: Extends Higher Ahead of BoE The British pound traded sharply higher against all of the major currencies Wednesday despite the lack of U.K. data. The rally caught many traders by surprise because the sell-off in stocks means that there was no support from risk appetite. Part of the move was attributed to EUR/GBP flows with traders selling the currency pair down to 1 year lows. Despite Wednesday's decline, the FTSE has been trading very well and this resilience in equities is making U.K. assets more attractive. The Bank of England also has a monetary policy meeting Thursday and like the ECB, they are not expected to make any changes. We are not particularly concerned about the recent decline in PMIs because the underlying components are still relatively healthy. This year, the BoE has a very tough decision to make. The unemployment rate is now only 0.4% away from the central bank's 7% target and while they believe that it will hit this level in the third quarter of 2015, we believe that its realistic for the target to be met this year. In anticipation of this possibility, the central bank has made it clear that 7% unemployment is a threshold and not a trigger for a rate hike but come February when the next BoE Inflation Report and economic projections are scheduled for release, policymakers have a very important decision to make and two of the things they will consider include pulling forward their unemployment rate forecasts and/or lowering the threshold to 6.5%. The key lies in the wage growth. Right now wage growth is lagging behind inflation but if it starts to accelerate, the Bank of England will feel more pressure to raise interest rates. Unlike the Fed whose first step is to reduce asset purchases, the BoE has made it clear that their first move will be a rate hike. The U.K. curve is currently pricing in 50bp of tightening by the end of 2015. If economic data continues to improve and wage growth rises, investors will be looking for an even earlier move.
CAD: Drop in Oil is Finally Catching Up Better than expected U.S. labor market numbers drove USD/CAD to a fresh 3.5 year high. After consolidating for the past month, yesterday's disappointing IVEY PMI report was the straw that broke USD/CAD's back. Since peaking above $100 at the end of last year, oil prices have been falling but it was not until this week that the sell-off caught up to the Canadian dollar. There has also been more upside than downside surprises in U.S. data but significantly weaker Canadian data made investors aware of the challenges facing Canada's economy this year. USD/CAD broke to the upside but so far gains above 1.08 have been limited by the 38.2% Fibonacci retracement of the selloff between 2009 and 2011 that took the currency pair from a high 1.3064 down to a low of 0.9407. If this level is broken, the next level that the rally could stall at is the 2010 high of 1.0854. Meanwhile, the Australian and New Zealand dollars gave up earlier gains to end the North American trading session lower. No economic reports were released from New Zealand or Canada but the AUD continues to be pressured by weaker data. Construction activity grew at its slowest pace in 3 months. As our colleague Boris Schlossberg pointed out, "All three of the country's PMIs have declined in the past month suggesting that growth Down Under continues to decelerate. Wednesday night's Retail Sales data -- expected to match last month's 0.5% gain -- could be the key driver of near-term trade in the unit. If the number misses the forecast indicating that consumer demand is weakening, it may reignite speculation of further rate cuts by the RBA in Q1 of this year."
JPY: Stocks Soar as China Opens Up Game Console Market Between the overnight recovery in the Nikkei and the rise in U.S. yields, USD/JPY traded back above 105. While the currency pair still struggles to maintain its gains above this key level, the fact that Japanese stocks rebounded is good news for the Yen crosses. The recovery in the Nikkei was attributed to the strong U.S. trade data but overseas fund managers are also increasing their exposure to Japanese assets with the economy expected to gain momentum before the consumption tax is increased in April. The Topix, which is a broader measure of trade than the Nikkei rose to its highest level since July 2008. China's decision to temporarily lift a 14-year ban on selling game consoles, provides a huge opportunity for companies like Sony and Nintendo. Back in 2000, China banned consoles because they were worried about the negative impact on the mental health of children. However now they will allow game consoles to be made in Shanghai's free trade zone and then sold after passing the inspection of the government's cultural departments. There is no end date for the suspension of the ban and in all likelihood it will years before they bring it back. While this provides a massive opportunity for some of Japan's largest companies, lower price points in China will be a challenge for console makers. Meanwhile, the Japanese economic calendar remains quiet with no major reports expected over the next 24 hours.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
I've pointed this out several times in recent weeks but a sleeping giant was awoken 9 weeks ago. Natural gas has been on a tear from early November adding $1 move in the futures market from the first week of November until peaking in Mid-December just above $4.50. In the last two weeks February has started to retreat losing 8% currently trading just above the 38.2% Fibonacci levels.
We have seen record draws and while I don't expect injections in the coming weeks with the latest Arctic spell that blanketed the Midwest and Northeast it is possible nat gas futures overreacted. Frigid temps have boosted the usage of this fuel that is used by nearly half of US households as their primary heating source but the forecast is for higher temps moving forward. There are some prognostications forecasting a record draw in supplies next week but there is obviously jockeying for position evident by the recent depreciation. We are seeing technical signs of an interim top with futures flirting with breaking previous support . On a breach of $4.18 in February futures I expect a trade to the 50 day MA (green line) currently at $4.00.
As we approach milder temperatures and we see a reduction in seasonal demand I anticipate seeing pressure in the next 2 months. My suggestion is to work into the trade because we could see spikes in the coming weeks.
Natural Gas Daily
Buy March $4 puts for $1250. 49 days until expiration with a current delta of 35%.
On a spike in the next week look to establish a calendar spread...selling nearby and buying forward contracts. I like buying February 15' and selling February 14'. Current trade is 16 cents premium to 15'. Look to get in closer to even money. On a spike higher we should see this spread narrow and then as prices abate if they abate this spread should widen.
Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.