Absence of Major Buyers Keeps Lid on Equity Markets

James Hyerczyk from ForexHound.com at 01/07/10

The absence of major buyers ahead of this week’s U.S. Non-Farm Payrolls Report was evident today as stock markets weakened following friendly jobs and service data.  In addition, today’s Fed minutes weakened the Dollar because of greater demand for higher yielding currencies, but this weakness in the Greenback failed to turn into greater demand for equities. Usually the first week of January sees an increase in cash from institutions and mutual funds, but this year, this buying power has remained on the sidelines while the major players await this week’s employment data. 

After trading lower overnight, March Treasury Bonds tried to mount a recovery but failed. Today’s early economic reports indicated the U.S. economy was gaining strength, but this afternoon’s minutes showed that the Fed was still concerned about the pace of the recovery. Treasury traders seem to be content with keeping the T-Bonds and T-Notes in a range until more clarity is established. This may mean more sideways action tomorrow.

Yesterday the main trend turned up on the daily chart.  The chart pattern suggests that a rally back to 117’15 is possible if upside momentum can continue.  At this time, the market is correcting the short-term range of 114’16 to 116’05. 

February Gold surged to the upside following the break in the Dollar. The chart pattern suggests that this market is well on its way to completing a major 50% retracement of the $1227.50 to $1075.20 range at $1151.30. 

March Crude Oil rallied sharply higher after earlier weakness.  Today’s action took out the October high at 83.60.  More signs that the economy is recovering is driving speculators to anticipate a strong increase in demand.

The Dollar finished the day near its low as a late session report from the Federal Reserve helped diminish expectations for an interest rate hike.  Today’s Federal Reserve minutes showed that officials were unconvinced about the strength of the recovery and that inflation should remain under control for now. 

Although the Fed had forecast growth for 2010 and 2011, it stated that a faster paced recovery should not be strong enough to quickly turnaround the unemployment rate.  In regards to last month’s positive change in the unemployment rate, the minutes said that Fed officials believe that “more than one good report would be needed to provide convincing evidence of recovery in the labor markets”. 

In summary, the current action in the Dollar seems to indicate that the recent signs of an improving economy will not sway Fed officials from their belief that the recovery would be gradual relative to past recoveries and that inflation would remain subdued.  This leads me to conclude that the Fed will not be raising rates soon, and that it is not concerned about inflation.

In other news, traders shifted their interest once again to higher yielding currencies and assets as the ADP jobs report showed that the jobs lost in the private sector fell at a slower pace than expected.  Another report showed that the service sector of the economy improved. Both reports contributed to a sell-off in the Dollar which is a strong indication that risk sentiment is shifting again.

Wednesday’s weakness took place after the U.S. Dollar rallied overnight following yesterday’s closing price reversal bottom.  The first objective was met at 77.77 early in the evening, but upside momentum took the market to the upper end of the retracement range at 77.93 where it met strong selling pressure.  Today’s weak close indicates a possible resumption of the downtrend with 76.31 to 75.80 the next downside objectives.

The March Japanese Yen lost ground on Wednesday as traders placed bets on a friendly Non-Farm Payroll report this Friday.  This market should be watched carefully the next few days to see if there is a noticeable shift in risk sentiment among traders which could pressure the Dollar.

Earlier today, this currency pair completed a retracement of the 1.0731 to 1.0964 range at 1.0848. Fundamentally, traders reacted slightly to an improving global economy while expectations remain for the Japanese economy to remain under pressure.  News of Finance Minister Fujii’s resignation but a little pressure on the market as this event seemed to have been already priced in.

The March Euro weakened into a retracement area at 1.4350 to 1.4319 before holding and beginning a strong rally. The close over this zone is a positive development which should put the Euro back on pace to challenge a major retracement zone at 1.4680 to 1.4790. Traders will be watching for news regarding a possible bailout of Greece.  The Euro could strengthen if it becomes clear the European Union will not bail Greece out of its budget difficulties.

The main trend remains down in the March British Pound but it looks like this market is trying to establish support inside of a retracement zone at 1.6036 to 1.5988.  This is a critical area which must hold and attract buyers.  If buyers step in and begin to support the Pound, then look for the start of a rally back to 1.6355 over the short-run.

On Thursday the Bank of England will hold its first meeting of the year. Expectations are for the BoE to hold interest rates steady while continuing to provide stimulus to the economy in hopes of the start of a recovery.

The March Swiss Franc showed strength on Wednesday following a test of a 50% price at .9840, but the break seemed tentative as traders may be anticipating intervention action from the Swiss National Bank.

Look for the strength to continue as long as this market remains over .9640, but be careful adding to longs as the market nears a key retracement area at .9806 to .9873. 

The uptrend in the March Canadian Dollar resumed late in the trading session after trading in a tight range overnight.  The direction of gold and crude oil will continue to exert the biggest influence on this currency pair.  Wednesday’s rally in gold is helping to underpin the Canadian Dollar. Today’s downside action suggests this market is well on its way to a test of an old main top at .9741. Upside momentum may slow as the market approaches this level on concerns the Bank of Canada may try to weaken its currency.