Oil Collapse Intensifies Global Deflation Risk

GBPUSD – technical overview

Although the downtrend remains firmly intact after recently breaking to yet another 2014 low at 1.5590, the market has been content on deferring to a minor period of correction. But the market will need to break back above 1.5826 to keep the correction alive or risk a more immediate retest of the 1.5590 low and fresh downside extension towards 1.5000.

• R2 1.5945 – 11Nov high – Strong
• R1 1.5826 - 27Nov high – Medium
• S1 1.5649 – 25Nov low – Medium
• S2 1.5590 – 19Nov/2014 low – Strong

GBPUSD – fundamental overview

Sterling is back under pressure on Friday, as currencies on the whole retreat against the US Dollar. The rapid decline in oil prices have highlighted global deflation risk and the ongoing divergence in Fed central bank policy with the rest of the world. Also seen weighing on the Pound is some second tier local data, with UK GfK consumer confidence and Nationwide house prices coming in on the softer side of expectation.

USDJPY – technical overview

Although the overall outlook remains highly constructive, there are signs of the formation of some form of a top, in favour of a period of correction and consolidation. Daily, weekly, and monthly studies are overbought and long overdue for a healthy retreat. But a break and daily close back under 116.80 would now be required to take the immediate pressure off the topside and confirm the onset of a correction.

• R2 120.00 – Psychological – Strong
• R1 118.98 – 20Nov/2014 high – Medium
• S1 116.80 – 19Nov low – Medium
• S2 115.45 – 17Nov low – Strong

USDJPY – fundamental overview

USDJPY has regained a bit of a bid tone on Friday, with the major pair rallying back above 118.00. A batch of Friday data hasn’t really factored into the price action, though the much weaker than expected Japan retail sales print, drop in household spending and softer core nationwide CPI could be propping the pair a bit. The primary catalyst for this latest rally has been the decline in oil prices and the added pressure this will put on the Bank of Japan in its battle against deflation. Also seen factoring into price action has been chatter out of China the PBOC will look to cut its RRR over the coming weeks, ahead of two or three more rate cuts.

EURCHF – technical overview

Though the overall pressure remains on the downside, with critical psychological barriers at 1.2000 in sight, there are signs of potential recovery. Look for a break and daily close back above 1.2045 to confirm recovery prospects and take the immediate pressure off the downside. Inability to establish back above 1.2045 would however suggest a 1.2000 retest is still in the cards.

• R2 1.2080 – 15Oct high – Strong
• R1 1.2045 – Previous base – Medium
• S1 1.2009 – 19Nov/2014 low – Weak
• S2 1.2000 – Psychological – Very Strong

EURCHF – fundamental overview

There is some major Swiss event risk over the weekend, in the form of Sunday’s “Save Our Swiss Gold” referendum. A Yes vote would force the SNB to increase its gold holdings to 20%, and limit the central bank’s power to defend the EURCHF 1.2000 floor. The referendum has had a weighing influence on the EURCHF rate over the past several weeks, though all polls show the No vote winning out. Look for confirmation of a No vote to open the door for an early jump in EURCHF on Monday. As highlighted by recent Zurbruegg comments, the SNB remains firmly committed to aggressively defending the 1.2000 floor.

AUDUSD – technical overview

The market has broken to a fresh 2014 low this week, with the break below 0.8541 confirming a fresh lower top at 0.8796 and setting the stage for the next major downside extension towards critical psychological barriers at 0.8000. Any rallies should now be very well capped ahead of 0.8700, while ultimately, only back above 0.8911 would compromise the bearish structure.

• R2 0.8723 – 21Nov high – Strong
• R1 0.8615 - 27Nov high – Medium
• S1 0.8480 – 26Nov/2014 low – Weak
• S2 0.8400 – Figure – Medium

AUDUSD – fundamental overview

It should come as no surprise Aussie has taken big hit, dropping back into fresh 2014 low territory, on the back of the ongoing commodity slide. While the oil liquidation is weighing on most currencies, the Australian Dollar is contending with declines in other commodities as well. The drop in iron ore prices is another example of the stress on the Australian export economy, and with China slowing down as well, this puts additional downside pressure on the correlated Australian Dollar. There has been a lot of talk about potential RBA rate cuts in the pipeline, and more colour will be offered next week with the RBA scheduled to meet on Tuesday.

USDCAD – technical overview

The market has entered a period of correction after establishing fresh 2014 highs at 1.1467 several days back. However, the uptrend remains firmly intact and any setbacks are expected to be well supported, ideally in favour of a fresh higher low above 1.1122 and bullish resumption beyond 1.1467. Ultimately, only below 1.1122 would delay the bullish structure.

• R2 1.1467 – 5Nov/2014 high – Strong
• R1 1.1402- 11Nov high – Medium
• S1 1.1191 – 21Nov low – Medium
• S2 1.1122 – 29Oct low – Strong

USDCAD – fundamental overview

Over the past several days, we have seen some really impressive economic data out of Canada. This has been highlighted by a blowout employment report, solid manufacturing, a hotter CPI print and healthy retail sales. Nevertheless, in the grand scheme, the Canadian Dollar hasn’t been able to really extend gains all that much, with solid US economic data and rapidly declining oil prices to fresh 4-year lows offsetting. This should ultimately keep interest rate differentials tilted in the US Dollar’s favour. There are plenty of good USDCAD buyers into the current dip, with fresh bids all the way down towards 1.1100. Watch out for some added volatility on the exchange today, with the US market mostly off and Canada traders taking in local GDP.

NZDUSD – technical overview

The latest corrective rally has stalled out, with the market poised for bearish resumption and looking to carve a lower top at 0.7975 in favour of a drop back below the recent 2014 low at 0.7660. The overall structure remains quite bearish, and only a break above 0.8035 would compromise the outlook. Intraday rallies are expected to continue to be well capped, with a break back below 0.7766 to accelerate declines towards 0.7660.

• R2 0.8035 – 21Oct high – Strong
• R1 0.7975 - 17Nov high – Medium
• S1 0.7766 – 25Nov low – Medium
• S2 0.7660 – 7Nov/2014 low – Strong

NZDUSD – fundamental overview

Some better than expected NZ business confidence readings were no match for the heavy slide in oil prices and the negative impact on correlated currencies. Kiwi has come back under pressure in recent trade and is expected to continue to be well capped on rallies as the commodity slide highlights global deflationary threats and an ongoing divergence between central banks and the Fed. Interestingly enough, the RBNZ only sold NZ$1M in October, down from NZ$30M in September and compared to August, when the central bank sold a massive NZ$521M, the most since July 2007. But the RBNZ has maintained its stance the current NZD level is “unjustified & unsustainable” and still expects a further significant depreciation. This suggests the RBNZ won’t hesitate to intervene in the market once again and should keep the current rally well capped.

US SPX 500 – technical overview

While the market continues to surge to fresh record high, an intense surge of well over 10% since mid-October is a red flag for near-term exhaustion and topping. At some point over the coming sessions the market should look for a healthy retreat. The key level to watch below comes in at 2052, with a break and close below to trigger the onset of a correction and open a deeper drop towards 2030 and then 2002 further down. However, inability to take out 2052 will keep the immediate pressure on the topside, with the focus on a test of the next major psychological barrier at 2100.

• R2 2100.00 – Psychological – Strong
• R1 2077.00 – 26Nov/Record high – Medium
• S1 2052.00 – 21Nov low – Medium
• S2 2030.00 – 17Nov low – Strong

US SPX 500 – fundamental overview

US equity markets could soon be at risk for reversal off fresh record highs, following impressive gains post ramped up BOJ, ECB and China easing measures, and the latest slide in oil prices. Though central banks have moved further into accommodation on the back of deflation risk, the Fed has ended QE and is now on a path towards tightening. While we haven’t seen any signs of reversal just yet, major stock market corrections were seen at the end of QE1 and QE2, and with QE3 done, this pattern could play out again. Given the massive gains since mid-October, traders may start thinking about profit taking into year-end, particularly with so much uncertainty surrounding the global growth outlook and effectiveness of quantitative easing as a stimulatory measure over the long-term. US equities close early on Friday.

GOLD (SPOT) – technical overview

The latest recovery rally off 4-year lows at 1131 could finally be on the verge of stalling out, with the market looking like it wants to carve a lower top after a brief stint above 1200. Key short-term support comes in at 1175, and a break below would strengthen the bearish resumption case, exposing a retest of the 1131 base. Ultimately, the bearish structure remains intact while below 1256.

• R2 1256.00 – 21Oct high – Strong
• R1 1208.00 – 21Nov high – Medium
• S1 1175.00 – 19Nov low – Medium
• S2 1131.00 – 7Nov/2014 low – Strong

GOLD (SPOT) – fundamental overview

Though the market has come back under pressure, weighed on sliding oil prices and renewed US Dollar demand, the metal’s safe haven status should not be discounted. The global economy is looking more fragile and massive currency depreciations are underway as central banks away from the US battle deflation. This should be an offsetting gold supportive theme with good demand now expected on dips. Perhaps some of the latest selling comes on  a pricing in of what looks like it will be a NO vote in the Sunday Swiss referendum that would require the SNB to increase its gold reserves.

Feature – technical overview

US OIL (spot) has collapsed to a fresh 4-year low, with the market easily breaking down through psychological barriers at 70.00 and trading towards the 2010 base at 67.15. At this point, technical studies are overextended and though the intense downtrend remains firmly intact, there are risks for a correction over the coming sessions to allow for studies to unwind. Look for additional declines to be well supported on a close basis above 67.00.

• R2 73.25 – 14Nov low – Strong
• R1 70.00 – Psychological – Weak
• S1 67.75 – 27Nov/2014 low – Medium
• S2 67.15 - 2010 Low – Medium

Feature – fundamental overview

The oil market is having a very hard time catching a break, with the price deteriorating further, towards the 2010 base. The latest slide comes after OPEC refused to bow to pressures of the US shale boom, leaving its production quotas unchanged. This has been the big story over the past 24 hours, with many now fearing the implications and trying to determine where the bottom will be. A lot of chatter that with the Saudis not moving and their budget somewhere around the $45 mark, this slide could still have a good way to go. The price action is further contributing to the global deflation equation and easy money central bank monetary policy. At the same time, the price declines are keeping global equities supported on the assumption it will boost consumer spending and trigger a pickup in growth and inflation.