Talking Points

• Crude Oil, Copper Sold on Greece Woes – Fed Minutes Key Ahead
• Gold and Silver Vulnerable if Fed Minutes Dent QE3 Expectations

Commodity prices are trading broadly lower in European hours as risk aversion grips financial markets, weighing on sentiment-linked crude oil and copper prices while boosting the safe-haven US Dollar to put de-facto downward pressure on gold and silver. The sour mood comes after continued gridlock in Greece spurred the country’s lawmakers to call for new elections, which traders fear may produce a ruling majority for anti-austerity parties (and in particular, Syriza). This threatens to lead Athens to renege on its obligations under the EU/IMF bailout agreement, which may ultimately see the country leave the Eurozone.

Looking ahead, the spotlight turns to theFederal Reserve as the central bank publishes minutes from its late-April policy meeting. As we discussed previously, markets seized on Chairman Bernanke saying the bank was “prepared to do more” to help the economy if growth faltered, singling out additional QE as still “on the table” and boosting risk appetite in the process. However, the Fed chief likewise said that it would be “very reckless” to allow higher inflation for the sake of reducing unemployment while his colleagues upgraded bets on US jobs, employment and price growth.

This painted a rather different picture, wherein the Fed kept its options open just in case but was broadly leaning against further asset purchases. Risk aversion may find a further catalyst if that side of the story reemerges in the minutes and finally gets its chance to be thoroughly priced in, driving crude oil and copper lower still. Such an outcome is also likely to punish precious metals as demand for alternative stores of value evaporates along with fading US Dollar dilution fears.

WTI Crude Oil (NY Close): $93.98 // -0.80 // -0.84%

Prices are testing support at 92.51, the December 16 low, with a break below that on a daily closing basis exposing the next layer of support at 90.49. Near-term resistance is at 95.41, the February 2 session low.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1544.21 // -12.51 // -0.80%

Prices surpassed the measured target of a Triangle chart pattern carved out since late March at 1548.21 to probe below support at 1543.98, the 76.4% Fibonacci expansion. A break below this boundary sees supports at 1532.45 and 1522.50, the September 26 and December 29 spike lows respectively, followed by the 100% expansion at 1502.15. Initial resistance lines up at 1569.99, the 61.8% Fib.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $27.73 // -0.42 // -1.50%

Prices are testing support at 27.06 marked by the December 28 session close. A break below this boundary exposes the 26.05-15 area marked by the September 26 and December 29 spike lows. Near-term resistance is at 28.70.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.518 // -0.036 // -1.01%

Prices broke support at 3.516, the 61.8% Fibonacci retracement, with sellers now targeting the 76.4% boundary at 3.404. The 61.8% Fib has been recast as near-term resistance.

Daily Chart – Created Using FXCM Marketscope 2.0

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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• Ongoing turmoil in Greece pressures markets lower
• Fear of contagion to larger EX economies weighing
• Technical studies are however stretched
• Investors looking to retest Euro 2012 lows
• Looking for technical bounce before trend continuation

The latest bout of intensified selling in the Euro has been attributed to the ongoing political turmoil in the Eurozone.Currencies in general have followed suit, and are under pressure against the buck. With no clear resolution in sight for Greece, and new elections on the horizon, many now fear the worst and the possibility of a Greek exit is looking more realistic with every passing day. However, while the possibility is increasing and panic and uncertainty are running high on threat of contagion to larger Eurozone economies. We still do not see the markets at risk for a material sell-off from current levels before a technical correction.

We contend that the latest bout of risk-off trade has been driven more by technical selling, resulting from a daily close below 1.3000 in the Euro several days back, which now has traders setting sights set on a retest of the 2012 lows from January at 1.2625. However, given how severely overextended markets are at present, there should soon be some relief, at least for a little while, before risk liquidation continues. We often find that the middle of the week brings a reversal during periods of intense volatility, and we suspect that the US Dollar may find a top today before selling off into the remainder of this week and the next. Looking ahead, there is a good deal of economic data on tap, although we suspect attention will be focused to the FOMC Minutes due out later in the day.

Technical outlook:

EURUSD – The market remains under intense pressure and the focus for now is squarely on a retest of the 2012 lows from January at 1.2625. While we would not rule out a possibility of a test of this level over the coming sessions, short-term technical studies are well oversold and are showing a need for some form of a corrective bounce from where a fresh lower top is sought out. Ultimately however, any rallies should now be very well capped by previous support turned resistance at 1.3000 in favor of additional weakness over the medium-term that projects deeper setbacks into the lower 1.2000′s.

USDJPY – The market continues to consolidate around 80.00 and is in the process of looking for a medium-term higher low ahead of the next major upside extension back above the yearly highs at 84.20 and towards 90.00 further up. However, for the time being it remains in question whether the market will still head lower towards the 200-Day SMA by 78.50 before ultimately reversing higher. The key level to watch above comes in by 80.60, and a break and close above this level will officially alleviate downside pressures and suggest that a higher low has now been carved in the 79.00′s.

GBPUSD – The latest daily close below 1.6050 now opens the door for an acceleration of declines over the coming days back down towards next key support in the 1.5800′s. At this point, look for any intraday rallies to be very well capped ahead of 1.6200, while only back above 1.6300 would negate outlook and give reason for pause.

USDCHF – Overall the structure remains highly constructive and we continue to project additional upside over the coming months back above parity. For now, the latest break and close above 0.9335 is expected to accelerate gains for a retest of the yearly highs by 0.9600, while any intraday pullbacks should be very well supported ahead of 0.9200. Ultimately, only back under 0.9000 would negate outlook and give reason for pause.

• Dollar Wins its Highest Close Since January 2011, Buckle Up
• Euro: GDP Readings Beat Forecasts, Outlook Still Painful
• British Pound Looks for a Return to Volatility on BoE Report
• Japanese Yen Assess the Potential Impact for 1Q GDP
• Australian Dollar Rallies Against All but the Greenback
• New Zealand Takes a Hit Across the Board
• Gold: Do or Die Time at Serious Support

Dollar Wins its Highest Close Since January 2011, Buckle Up

Considering benchmark pairs like EURUSD and AUDUSD were already forging serious headway in their dollar-bullish trends, it was only a matter of time before the Dow Jones FXCM Dollar Index finally made the mark of real progress. That score was made with Tuesday’s close as the Dollar Index stamped its daily bar at 10093 – the highest close for the benchmark since January 12, 2011. On this basis alone, it looks like we have crossed a significant threshold of sentiment whereby bullish interests can finally build momentum. However, both technical and fundamental traders should see the need for caution in moving too hastily on moving full tilt behind the dollar.

For the technical trader, the close at this height is certainly significant; but making it to the vicinity of consistent 10,100-resistance does not guarantee follow through. Bulls learned that lesson back in March when on the 14th of the month, the greenback set its highest close since the previous October but ultimately failed to capitalize on the move. To make that critical transition from breakout to follow through – which seems so tantalizingly close – is the right fundamental encouragement. There is little doubt that the dollar has gained a lot of ground under its own power, but it has also capitalized on the weakness of counterparts to get to this point. After the exceptional run that has already been put in (the USDollar Index is up over 280 points from its swing low at the beginning of the month), the dollar needs to generate its own power.

To leverage a true bull trend, the greenback has one of two options – become more competitive on a return basis (not likely given the Fed’s stance on rates) or play to the benchmark’s absolute safe haven status. For this, I keep switching back and forth between the Dollar Index and S&P 500 charts. One of the benefactor of absolute liquidity demand and the other is the stimulus-fortified representation of passive growth investment. We need to tip that balance on underlying sentiment. That said, our biggest catalyst to this point for risk aversion may start running out of steam. The European crisis is progressing, but the tangible deteriorate may ease somewhat as the next milestones in the slow motion crash could be further down the road (more on that below). If the market strains its eyes, perhaps a ‘no QE3’ read from the minutes will do.

Euro: GDP Readings Beat Forecasts, Outlook Still Painful

We have cleared another wave of critical event risk for the Euro. Looking at the aftermath of the euro’s performance, it should seem obvious how the data was interpreted; but some may still be confused. Didn’t many of the 1Q GDP readings for the Euro Zone end up beating their respective forecasts? Indeed, they did. If the general tone for the capital markets were one of optimism, a beat on these important economic readings could have offered a boost; but that is not the hand we have been dealt. Fear reigns and bears are in charge. Though the Euro Zone, German, French and Portuguese GDP readings managed to meet or beat their respective projections; they are all still on a downward trajectory – and 2Q isn’t shaping up so well. Nevertheless, we have passed this threat for now, and we won’t have growth updates for some time. Furthermore, the time frame for a second Greek election is a ways out while Spain’s financial troubles seem to be on ice after a nationalization and mass cajas merger. The euro is already limping, so it wouldn’t take much of a push to drive the euro again. That said, we still need a push.

British Pound Looks for a Return to Volatility on BoE Report

The sterling has held out against the storm of many different fundamental waves thanks to its separation from the immediate Euro Zone troubles as well as its ambiguous monetary policy bearing. That stability is already starting to breakdown however. This past session, the pound tumbled against the dollar as Euro-region fears started to trickle through the EU lines. The upcoming session my find the sterling determining its own future. The shift from unwavering BoE dove Posen not long ago was influential enough to keep the currency on a bullish track even through the news of a double dip recession. That good will may be at risk though with the upcoming Quarterly Inflation report. Watch for dovish forecasts.

Japanese Yen Assess the Potential Impact for 1Q GDP

Though Asian equity benchmarks were extending their bear trends beyond merely ‘catching up to the US market’s decline’, the Japanese yen was still showing losses against the US dollar, euro and even Australian dollar early Wednesday morning. This carry unwind pause could be a leading sign that risk trends could level off; but regardless, the timidity to the move won’t last. Early tomorrow morning Tokyo time, yen and equity traders should watch for the impact from the Japanese 1Q GDP reading. Is the world’s third largest economy keeping up its corner.

Australian Dollar Rallies Against All but the Greenback

It was an interesting development. Despite the distinct risk aversion drive through Tuesday’s session, the Australian dollar managed to advance against all but the most extreme safe haven (and possibly still undervalued) – the US dollar. Clearly, risk trends hadn’t improved to give the currency a yield advantage on the day. Perhaps this is a sign that we have found a level for the Aussie dollar that fully reflects the negative interest rate expectations moving forward. That doesn’t mean the decline is over – it would just require a heavy risk aversion flow.

New Zealand Takes a Hit Across the Board

The exact contrast of its Australian counterpart, the New Zealand dollar tumbled against every one of its most liquid counterparts. If we run on the same background information as its high-yield comrade, we know risk trends were still retreating. Yet, where the Aussie dollar has numbed itself to more restrained carry deleveraging efforts, the New Zealand currency is still exposed as its own interest rate outlook is still attempting to hang on to its neutral/hawkish outlook. Keep an eye on rate forecasts, which now price in a 42 percent chance of a 25bp cut next meeting.

Gold: Do or Die Time at Serious Support

A third consecutive decline (and the ninth in the past 11 active trading sessions) has ushered gold down to another critical level. Having broke the trendline that kept the metal in a comfortable bull trend for three years last week, we are now upon the 1550/25 zone of support going back to July. To break a level of this magnitude, we need to see serious dollar or liquidity interests that circumvent the metal’s safe haven status.

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— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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