Weekly Review and Outlook: Risk Aversion Eased But Cannot Last Long

The markets were blessed by easing concerns over geo political tensions for most of last week. DIJA once reached as high as 16775.27 comparing to this month’s low of 16333.78. SP 500 also reached as high as 1964.04 comparing to this month’s low of 1904.78. Stocks tumbled sharply on Friday on news that Ukraine troops has partially destroyed a military convoy that entered from Russia. But overall, the equities ended the week higher. However, the return of risk appetite looked a bit unreal after considering the developments in other markets. That include the sharp fall in US treasury yields and the strength in Swiss Franc. Overall, in the markets, Canadian dollar was the strongest currency last week and was boosted after Canada corrected the July employment data. Other commodity currencies were firm following the rebound in stocks. Sterling was the weakest one as pressured additionally by dovish BoE inflation report.

Both 10 year yield and 30 year yield staged sharp decline on Friday and extended recent down trend. TYX, 30 year yield, tumbled to as low as 3.107 before closing at 3.135. TYX is trending very well below the falling 55 days EMA ad should be targeting 61.8% retracement of 2.452 (2012 low to 3.974 (2013 high) at 3.033.

Similar picture is seen in TNX, 10 year yield, where it extended recent decline to as low as 2.305 before closing at 2.345. It’s also trending well below the 55 days EMA. And it’s on course to 50% retracement of 1.394 (2012 low) to 3.036 (2013 high) at 2.215.

We’ve pointed out last week that SP 500 has bottomed in short term and the index did rebound last week as expected. The strength surprised us as it broke 55 days EMA quite firmly. However, comparative strength was not totally seen in DIJA as it faced some resistance from the 55 days EMA and ended Friday lower, with a sharp intraday-dip. The question for this week is that whether stocks had topped out in near term and it’s quite unsure for the moment. A major focus will be on Friday’s low of 16575.42 and a break there will likely pave the way back to 16333.78 in near term.

An important development last week in the currency market was the rally in Swiss Franc. In particular EUR/CHF powered through 1.2103 low level on Friday which extended the medium term down trend from 1.2649. The sharp fall in GBP/CHF also confirmed that a short term top is at least formed at 1.5432. We’re indeed slightly favoring the case that whole up trend from 2013 low of 1.3973 has completed too, with a diagonal triangle. In any case, we’d likely see deeper fall in near term back to 38.2% retracement of 1.3973 to 1.5432 at 1.4875.

In the currency markets, while Canadian, Australian and New Zealand dollars were the top three gainers last week, we’re not convinced on their strength. USD/CAD is holding on to 38.2% retracement of 1.0708 to 1.0985 at 1.0879 despite a brief break. AUD/USD was held well below 0.9374 near term resistance. NZD/USD was also held below 0.8533 resistance. More importantly, the above analysis suggested that, in spite of the rebound in stocks, markets were still deep in risk averse mode. Rebound in stocks was most likely short covering, corrective rally, rather than reversal. Thus, we won’t be bullish on commodity currencies.

The down trend in sterling looked more solid. Firstly, GBP/USD breached an important support level at 1.6692 and struggled to find enough buying for a meaningful rebound. Sustained trading below 1.6692 would confirm medium term reversal and should at least bring GBP/USD back to 1.63 handle. Euro was relatively weak against most currencies. But even so, EUR/GBP managed to extend recent rebound and breached a near term resistance of 0.8033. EUR/GBP should still be on track for a test on 0.8157 key support turned resistance. Yen was also relatively mixed overall. But then, GBP/JPY edged through 170.69 support on Friday to resume the larger decline from 175.36 and is still on track to test 169.53 key medium term structural support level.

Dollar, euro and yen were mixed last week and all weakened against commodity currencies as well as the Swiss Franc. EUR/USD stayed in tight range above 1.3332 and subsequent range trading was corrective, with 1.3444 resistance intact. Thus, outlook in EUR/USD stayed bearish, giving dollar a mild upper hand over euro. EUR/JPY stayed below 138.02 resistance in spite of the recovery and maintained its bearish outlook. USD/JPY looked rather mixed. As the pair is possibly in the middle stage of medium term sideway trading between 100.75 and 104.12, price actions would likely get even more mixed.

Regarding trading strategies, our GBP/JPY short continued to play out well. The overall bearish view on Sterling and risk aversion remained correct even though it was Swiss Franc that gained more then the Japanese yen last week. After all, we’ll hold on to GBP/JPY short and paid attention to whether there would be loss of downside momentum at it approaches 169.53 key support level.

The USD/CAD long didn’t look well partly due to rebound in stocks, and partly due to the corrected job number from Canada. But the overall outlook didn’t change. Price actions from 1.0985 short term top still looked corrective and rise from 1.0620 is expected to resumer sooner or later. This could be helped by return of risk aversion. Nonetheless, we’ll keep out stop close at 1.0840, which is close to 50% retracement of 1.0708 to 1.0985.

Regarding new trades, firstly, while Swiss Franc was strong, we’re cautious on some central bank intervention as EUR/CHF is now in 1.20/21 zone. Thus, we’d tend not to chase rally in it. It’s not time to short commodity currencies yet as we’d prefer to see clearer sign that stocks heading south again. And, we have USD/CAD long already. Or, should stocks extend recent rally and push commodity currencies higher, we’d finally starting taking the idea of GBP/AUD seriously. Meanwhile, we don’t time it’s time to trade dollar, euro and yen against each other.

Hence, to conclude, we’ll stay with GBP/JPY, with stop now at 172.60. And we’ll stay with USD/CAD long, with stop at 1.0840.

GBP/USD’s fall from 1.7190 extended lower last week and breached 1.6692 support. As noted before, the medium term trend is possibly reversing. Sustained trading below 1.6692 will confirm this bearish case and target 1.6251 cluster support (38.2% retracement of 1.4813 to 1.7190 at 1.6282). On the upside, break of 1.6844 resistance is needed to signal short term bottoming. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. Based on unconvincing medium term momentum, we’d expect strong resistance from 50% retracement from 2.1161 to 1.3503 at 1.7332 to limit upside and bring reversal. Sustained break of 1.6692 will indicate medium term reversal and would turn outlook bearish for 1.4813 support.

In the longer term picture, we’re sticking on to the view that price actions from 1.3503 are forming the fourth wave of the five wave sequence from 2.1161. That means, firstly, 1.3503 shouldn’t be the end point of the downtrend yet and a new low is expected. However, secondly, as the next fall could be the fifth wave, the breach of 1.3503 could be shallow and brief from long term point of view and we’ll then see a more sustainable rebound.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

GBP/USD Weekly Chart

GBP/USD Monthly Chart

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