Weekly technical analysis chart pack 9 nd June 2014 James Brodie Chartered Market Technician EURUSD Within 24 hours of Mario Draghi announcing the ECB s new round of rate cuts and easing policies the EURUSD went from the largest volume spike in over a year, to new multi year low in implied volatility. However, as the second chart shows there has been a clear divergence between the respective EURO area and U.S. 2 year interest rate differentials favouring the US dollar. A break of the key 1.3477 level will confirm a top is in place, with new lower highs and lower lows heralding a new longer term downtrend. The medium term rising wedge is typically a bearish chart formation, again, a break of 1.3477 is key. USDJPY With volatility at such low levels the USDJPY average true range is now back to levels not seen since pre Abenomics. Friday s payroll had the opportunity to upset the market but instead come out dead-on expectations at +217k. 2014 has seen the currency trade in a converging range, a descending triangle. Key resistance comes in at 105.44 from a 16 year resistance line, while support lies at 100.78. A break of one of these two trend lines will hail the start of a new medium term trend. GBPUSD While the medium term trend in GBPUSD is still higher there are now warning lights flashing. The short term trend is now lower, the 1 month trend channel having successive lower highs and lower lows. 1.7000 needs to break to resume the longer term trend higher, while a break below the double bottom 1.6693 will confirm a top is in place. AUDUSD both the long term and medium term trends are lower but for the last 2 months the AUDUSD has been caught in a sideways range. Volatility will be expected to spike on Thursdays employment report, with a break above 94.61 or below 92.03 the key to the next medium term trend. NZDUSD the focus in NZDUSD this week will be on the Reserve Bank s monetary policy decision and subsequent statement on Thursday. The curve prices 80 basis points of hikes
over the next 12 months and a 90% chance a 25bp hike this week, by far the most aggressive G10 central bank. Key resistance is at 0.8780 and support at 0.8402. AUDNZD This is a key week for the AUDNZD cross, with Thursday holding both Australian employment report and the Reserve bank of New Zealand s monetary policy meeting. Although AUDNZD based in January 2014 at 1.0493 and in the last 20 years has based multiple times between 1.05 and 1.0432 (2005) levels, the recent move higher in the cross has yet to be confirmed by the respective interest rate differentials. AUDNZD vs 2 year interest rate differentials the 2014 grind higher in the currency cross has yet to be confirmed by the respective 2 year interest rate differentials which continue to sit at a multi year lows. Thursday s data will be key. EURJPY with ultra easy monetary policy from both the BOJ and the ECB, the EURJPY cross will take its direction largely from the Nikkei equity index. The two are highly correlated and although the short term direction of the cross is lower the 137.98 level needs to break to confirm a longer term down trend. Above 145.69 and the long term Abenomics uptrend will be back in play. Eurodollar Interest rate futures September 2015 (EDU5) The market continues to focus on the front of the yield curve and pre-empt the first hike in rates by the U.S. Federal Reserve. The June 2015 FOMC meeting currently has 6 basis points of hikes priced in by the market, and the September 2015 3 month futures contract (EDU5) currently sits just above a 3 year support line. A break below 99.27 accompanied with stronger data or central bank rhetoric, will see the market beginning to price a more aggressive tightening policy.
EURUSD EURUSD volume on Thursday 6 th June, the day of the much anticipated ECB meeting was the largest in over 1 year. However within 24 hours the markets expected 30 day volatility was back at decade lows. This correlates highly with equity volatility (S&P) which is also down at low levels not seen since early 2007. So what will move the currency? Clearly the ECB have embarked on a new round of easing and have clearly stated rates will remain lower for longer, so it is the U.S. yield curve that will direct the trends. The chart below shows clearly the recent divergence in the respective 2 year interest rates which strengthens the case for US dollar buying (EURUSD selling), so while the medium term trend grinds higher it will require a break of the key 1.3477 level to confirm a top is in place. 1.4035 trend line (wedge) resistance 1.4000 2014 top 1.3677 April 2014 low, June 2014 high 1.3655 200 day moving average 1.3586 2014 congestion support line 1.3477 **double bottom and 2014 low** 1.3440 Trend line support 1.2746 Double bottom and 2013 low 1.2043 2012 low 1.1877 Multi-year low
EURUSD vs 2 year interest rate differentials While the EURUSD has risen from 1.1877 to 1.3993 over the last two years the difference between the respective EUR and USD 2 year interest rates is now diverging aggressively as Mario Draghi and the ECB announce their new round of rate cuts and easing policies. While the Federal Reserve looks committed to keep tapering from their Quantative Easing policy it will be the U.S. yields that will be the key driver of the EURUSD currency. The U.S. overnight index swap (OIS) which prices Central Bank interest rate movements now implies 6 basis points of hikes by the Federal Reserve at the June 2015 meeting, confirmed by CME Eurodollar futures which are now trending lower. EUR 2 year interest rate yields minus the US 2 year interest rate yields has moved from +12 basis points to -20 in the last 6 months while the currency is back to largely unchanged levels. The divergence in these respective yields should weigh heavily on the EURUSD in the medium term.
USDDJPY While U.S. equity implied volatility is back at levels not seen since 2007, so USDJPY volatility as measure by the average true range is back to its lowest levels since September 2012, pre Abenomics. 2014 has seen the currency trade in an ever narrowing range, a descending triangle. The support and resistance levels from this triangle lie at 100.76 and 103.25. Above here the key resistance level is 105.44, the cycle high, double top from 1 st January 2014, and resistance from 16 year trend line. While a close below the 100.78 level would confirm a top is in place and target 94.00 in the medium term. 105.44 **Cycle high, double top and 16 year resistance line** 104.13 April 2014 short term peak 103.25 Triangle resistance line 102.70 Ichimoku cloud chart resistance 102.55 Long term support/resistance line 102.12 horizontal support/resistance line 101.53 200 day moving average 100.78 **double bottom** 93.95 June 2013 low and 38.2% Fibonacci retracement level
GBPUSD While the medium term trend in GBPUSD is still higher there are now warning lights flashing. The short term trend is now lower, the 1 month trend channel having successive lower highs and lower lows. 1.7000 needs to break to resume the longer term trend higher, while a break below the double bottom 1.6693 will confirm a top is in place. As the market looks for the first hike by the Bank of England any weakness is upcoming data will weigh heavily on the currency. 1.7332 50% Fibonacci retracement level from 2007 peak to 2009 low 1.7043 2009 peak 1.6996 2014 high 1.6840 short term trend channel top 1.6815 trend channel resistance 1.6693 double bottom 1.6460 swing low 1.6427 200 day moving average 1.6252 2014 low and long term support/resistance level 1.4814 2013 low and double bottom
AUDUSD Although the long term and medium term trend in AUDUSD is lower, the currency has been in a sideways range for 2 months now. The price action is currently testing the upper resistance line of a 1 year trend channel, while the key support level is at 92.03 and has held multiple times. The key data this week is Thursday s employment report, a break of 0.9461 resistance or 92.03 support should herald the start of a new medium term trend. 1.0600 Multiple top 0.9758 Swing high 0.9461 2014 peak 0.9359 Medium term trend channel resistance 0.9203 Triple bottow 0.9188 200 day moving average 0.8725 Rising neckline support 0.8660 2013 low and cycle low
NZDUSD The NZDUSD is trying to bounce after its recent sell-off, but the main focus this week will be on Thursday s Reserve Bank of New Zealand monetary policy meeting. The yield curve is pricing 80 basis points of hikes by the central bank over the next 12 months, by far the most aggressive G10 central bank, and a 90% chance of a 25bp hike this week. As this is largely priced by the market the key will be the reaction to RBNZ Governor Wheeler s statement after the rate decision. 0.8843 2011 peak 0.8780 **2014 peak** 0.8544 Short term resistance level 0.8517 April double bottom 0.8402 **June 2014 low** 0.8373 200 day moving average 0.8052 2014 low 0.7684 Quadruple bottom
AUDNZD This is a key week for the AUDNZD cross, with Thursday holding both the Australian employment report and the Reserve bank of New Zealand s monetary policy meeting. Although AUDNZD based in January 2014 at 1.0493 and in the last 20 years has based multiple times between 1.05 and 1.0432 (2005) levels, the recent move higher in the cross has yet to be confirmed by the respective interest rate differentials (see below chart). 1.1920 Long term resistance line 1.1755 Long term Fibonacci retracement level 1.1036 Cycle high 1.0976 200 day moving average 1.0912 Triple top support 1.0870 Trend line support 1.0748 Short term low 1.0495 2014 low 1.0432 Multi-year low.
AUDNZD vs 2 year interest rate differentials Although the AUDNZD cross has turned higher from the 1.0495 2014 low the respective interest rates have yet to confirm this new uptrend. The current rate differential is caught in a range of -120 to -108 basis points, and a convergence back towards parity is required to support the AUDNZD move higher. Thursdays RBNZ monetary policy meeting and Australian employment report will be key.
EURJPY EURJPY continues to trade in a sideways triangle formation. As the range converges and both central banks are in easing mode the key driver of this cross will be the Nikkei Equity Index, which shows a high correlation to the currency. A break of 145.69 resistance or 137.98 support will likely see an aggressive move as traders jump on the breakout of the converging range. 145.69 **Cycle high** 142.47 Triple top 141.90 Trend line resistance 140.40 Trendline resistance 138.65 200 day moving average 137.98 **Double bottom support** 136.23 2014 low 131.15 Double bottom
Eurodollar interest rate futures SEP 2015 contract (EDU5) As the U.S. Federal reserve continues to taper the market is increasingly focusing on the front of the yield curve to identify the timing of the first 25bp rate hike. The yield curve will be critical in the months ahead with so many asset classes dependent on it; FX, equities, commodities, housing and of course emerging markets. The market is currently pricing 6 basis points of hikes into the June 2015 meeting. Eurodollar futures sold off on Friday night after the US non-farm payroll data and if data continues to improve and the 3 year support line can be broken (currently 99.27) then the market will quickly re-price a more aggressive FED in 2015. 2.82% and 3.05% continue to be the key resistance levels in the US 10 year government bond yield. A break above here we see a rapid rise in yields to 4.00%. 99.395 Double top and all time high 99.345 Friday payroll peak 99.315 Previous triple top 99.27 3 year support line 99.155 May low 99.04 Triple bottom 99.985 2014 low 98.365 Taper tantrum low
James Brodie C.M.T. CIO, The Sherpa Funds Board member, Market Technicians Association (1 st July 2014) Email: james.brodie@thesherpafunds.com Twitter: jamesrbrodie The views and opinions expressed in this report reflect the personal observations and views of individual Sherpa Funds traders which may differ from or be inconsistent with proprietary positions of The Sherpa Funds. Traders at The Sherpa Funds may have taken trading positions for The Sherpa Funds in any currencies or securities mentioned herein in advance of disseminating these views and opinions. This report is for information only and is not a specific offer or solicitation to buy or sell. Historic performance is not indicative of future returns. Facts and data provided are from sources the trader believes to be reliable, but neither the trader nor The Sherpa Funds can guarantee they are complete or accurate. The Sherpa Funds will not be liable for any damages or losses in any way related to this report. The Sherpa Funds is regulated by the Monetary Authority of Singapore under Singaporean laws. All charts sourced from Bloomberg.