THE BIG PICTURE
Technicals on the driving seat: With the initial jobless claims released yesterday in the U.S. climbing to a six week high, and with the continuous claims figure also missing estimates, one would have expected the dollar to have weakened yesterday, since the labour market weaknesses will likely postpone the Fed’s tapering off of QE. Dollar bearish news, though, came from other fronts as well, as April’s housing starts also missed forecasts, being the least since November, and the Philadelphia Fed Manufacturing Survey reinforced the negative picture painted by the Empire State Index on Wednesday, thus hinting to a disappointing future ISM Manufacturing reading. However, this burst of negative U.S. data left the dollar index virtually unchanged from yesterday morning. As a matter of fact it was up by 0.08%, greatly due to the euro’s and the yen’s inability to capitalise on the news, with both losing 0.06% versus the greenback since yesterday morning, with the commodity currencies plunging (NZD, AUD, and CAD down 1.73%, 1.23% and 0.54% respectively), despite the mixed picture on the commodities (crude, copper and palladium gain, with the other precious metals losing).
Indeed, not all news from the U.S. was dollar negative yesterday, as the continuous jobless claims showed the second lowest reading since April 2008, with April’s building permits, a leading indicator, being the most since the pre-Lehman era. The euro’s inability yesterday to effectively gain versus the dollar, though, adds to a similar phenomenon witnessed on Wednesday, with the euro underperforming versus the other majors on the announcement of dollar bearish news. The movement of the EUR/USD 50-day Moving Average below the 200-day MA, which signals a technical “death cross” that is bearish for the pair, and the pair’s inability to rebound off the neckline of a head-and-shoulders formation, which holds since September 2012, also add to the euro’s apparent difficulty to gain versus the dollar.
U.S. equity index traders may want to note that the indices closed slightly lower yesterday, with the SPX and the NYA indices closing lower for only the second time in more than two weeks. However, with the McClellan Oscillator, a breadth indicator based on a Moving Average of the number of shares rising with those falling, downward-sloping on the NYA since May 8th, it is on the verge of turning bearish lying slightly above zero. A negative reading usually signals a limit to the up move potential with a correction taking place.
In the US, the U of Michigan consumer confidence indicator is forecast to rise to 78.0 from 76.4. The leading indicators are forecast to be up 0.2% vs a -0.1% decline in March. Is this important? A 1998 study by the Fed found that the Conference Board’s indicators “have both economically and statistically significant explanatory power for several categories of consumer spending.” But they found that “by contrast, measures available from the University of Michigan generally exhibit weaker forecasting power for most categories of spending.”1 A 2003 study of the two indices by the Congressional Research Service found that “These indicators are not, apparently, insignificant. On their own and in concert with other economic variables they have been shown to contribute to forecasts of future consumer spending and hence of overall economic growth. But their contribution may be somewhat more modest than the attention they get would suggest.”2 Nonetheless, so long as the FX market pays attention to them, you do too.
Elsewhere today, Canada’s CPI for April is forecast to be unchanged mom (vs +0.2%) while the Bank of Canada’s core CPI is forecast to be up 0.2% mom, the same as in March.
The eurozone’s CPI figures did not affect the pair as they came in line with expectations, as is usually the case. The weak U.S. data, however, caused a rebound from the 1.2855 head-and-shoulders neckline, with trendline resistance coming at 1.2920, with the pair shedding 45 pips soon after resistance was hit, with a rebound that followed failing to challenge resistance again driving the pair to the 1.2855 – 1.2875 support area. A breakdown from the support neckline may have the pair finding brief support at 1.2795, with 1.2750 being the March low following the February plunge and with 1.2680, being a 6-month low and the 61.8% retracement level of the July 2012 – February 2013 bull run. Resistance today may come lower, around 1.2915, with further resistance at 1.2980.
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