The biggest talking point from the week gone by has been the Federal Open Market Committee rate decision.
As expected, the Fed kept US rates unchanged but hinted at a tightening schedule starting from October. The plan is to reduce the current US$4.5 trillion balance sheet by tranches of $10 billion per quarter. The announcement ultimately saw buying support in the US dollar, after the currency dropped to 91.22 levels against a basket of its major counterparts. The upside was limited however with the Greenback facing resistance in the channel between the 92 to 92.50 levels.
What will be interesting to note going forward is the level of volatility once the Fed ultimately begins their asset wind down. Historically, the VIX (a measure of volatility in US asset classes) tends to pick up following a period of tightening, and with volatility currently at historic lows, we expect to see it pick up across the board through the fourth quarter.
Despite the Fed announcement, the response by the dollar has been poor. The Dubai Gold & Commodities Exchange (DGCX) Euro contract continues consolidation above 1.19 levels and we expect strong weekly support at 1.1876 at which point long positions can be considered.
The recent German elections saw a bit of weakness underpinning Euro assets, but overall the current economic climate in the Euro-area supports our view of continued long positions in Euro crosses, particularly with the EUR/USD. With the Fed making their announcement last week, this will put the onus on European Central Bank (ECB) president Mario Draghi to announce similar measures at the next ECB rate decision meeting on October 26. Until then, upsides in DGCX’s EUR/USD contract should be capped at 1.21 levels.
Perhaps the biggest loser has been gold which has dropped more than 3 per cent in the past two weeks. The precious metal has retraced 50 per cent of the upside move from $1,254 (the week of July 23) to $1,346 (the week of September 3) and we see the next support coming in at $1,280 levels. The gold trade is heavily reliant on the performance of the dollar going forward and there seems to be more opportunities for a bull squeeze before the October Fed meeting. Entry levels at $1,280 followed by $1,260 seem the most conservative medium term view in the precious metal.
In the commodity segment, crude also continues to consolidate above $50 a barrel. With no fundamentals directing the markets, we identify some key technical indicators which suggest further consolidation at current levels with a slight bullish bias. The crude chart shows that following the breakout in crude prices of the weekly cloud (the week of September 10), support now comes in at $49.94 levels on a weekly basis.
Crude prices have been shrugging off the weekly US inventories released every Wednesday and instead are benefitting from positive developments from Opec such as the compliance from various members in observation of the agreed output levels.
The current political posturing between the US and North Korea are also doing their part to keep crude prices favourable through September – a conservative approach would be triggering long positions in DGCX’s crude contract in the channel between $49.50 to $50 followed by $48.60.
Some of the key data points to look out for in the next two weeks include, US/GDP due out this Thursday ; second quarter GDP is expected to grow at 3 per cent, however downsides in this print would not be surprising considering the recent hurricanes and the US payrolls report due out on October 6 (expected to show payroll growth at $140,000 versus a previous reading of $150,000).
Despite the flood of US data expected, long positions in the dollar seem very risky with a move back towards 91 levels in the US Dollar index. Considering this, we also find opportunities for long positions in DGCX’s Australian Dollar. Look for support to hold at 0.79 levels in the former.
Gaurav Kashyap is a market strategist at EGM Futures