1. Greece bailout and FOMC statement to set the tone for the week - hawkish "surprises" will set the stage for stronger dollar and pullback in risk appetite.
2. S&P500 at major resistance level. Break above 1150 expected to be capped at 1166. The more likely scenario, is sideways consolidation or a pullback to key support (1130, 1112).
3. Expect a limited euro rally but capped at 1.3850 or 1.4000.
4. GPB priced in for a worst case scenario - as such, counter-trend bounce should not surprise but capped at 1.5550
5. Japanese hints of intervention and easing concerns over Greece, should keep yen on the decline. Any yen rallies should be limited.
6. Canadian dollar set for another swing at parity with USD.
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Beware the Ides of March
OK - clearly not the most original headline for a blog post on March 14 but a fitting one nonetheless. As we enter the second half of March, we find the Market in a precarious position and the bulls and the bears at an impasse. This time last year was fortuitous for market participants holding long positions in stocks and high yielding bonds and currencies. After a seven month free-fall, the downside risk was limited, if only by the end-of-the-world sentiment that was baked into cake. When perception changed and market participants realized the end of the world was not quite ready to manifest itself, a dramatic rally in "risky" assets ensued fueled further by massive, unprecedented amounts of cheap money pumped into the global economy.
But after twelve months of remarkable gains, the stock market rally is more mature and its momentum has waned due to lingering concerns over sovereign debt, commercial RE, tentative consumer demand, the eventuality of monetary tightening and the uncertain consequences of central banks' exit strategies. Clearly, this year the risk is more to the downside or, at least some sideways consolidation. Even a breakout above 1150 is no guarantee for extended rally. In fact, strong resistance zones loom just above the 1150 level. And 1225 is a major resistance zone marking a confluence of technical analysis elements (resistance lines, 68.8% Fibonacci retracement level, major moving averages). The combination of technical resistance and questionable fundamentals will no doubt keep risk appetite at bay.
Whether or not we will see the S&P break decisively above 1150 is impossible to predict. However, it is safe to assume that a major move will not take place prior to the FOMC statement on Tuesday. From the data we have, we can expect a more hawkish remarks that may spook the market. We will find out if others at the Fed adopted Mr. Hoenig's hawkish views. Actually, we should expect some hawkish "surprise".
Of course, hawkish remarks from the Fed could be interpreted as a sign of strength and a validation of the recovery - but this is the least likely scenario. Over the past months one could have observed on numerous occasions the close link between the risk trade and loose monetary policies. So where does that leave us?
S&P 500 - The Trend is Your Friend (until it ends)
To get a better understanding, we must zoom out and look at the bigger picture. First, let's look at the weekly chart. Despite a slight negative divergence with the RSI, the chart still looks bullish and a break above 1150 is still within reach.
But what if we break above 1150? For that answer, we must look back to September 2008, the last time the S&P held such lofty levels. We can see from the chart below (the image is spliced to fit the screen) that the real supply zone looms at the 1166 level - the origin of a huge move down. 1166 is as critical (if not more) as 1150 and we are only a few points away.
Bottom line, the S&P is still in "the mouth of the dragon" with sideways consolidation and/or limited pullback to key support areas (1130, 1112)being the most likely scenario. Any upward moves are likely to be capped at 1166.
USD - Time to Move
As expected, the DXY pulled back slightly, stopping just shy of our 79.50 target. After 34 days of sideways consolidation, we can expect the dollar to choose a clear direction. The dollar index COT graphs reveal sustained elevated levels of net long positions. This is inline with the sustained extreme net-short positions for the euro and GBP. In recent weeks, we referred to the USD as win-win on the notion that both highly positive or highly negative economic readings could send the dollar higher. In the short term, we can expect the dollar index to pull back on better than expected economic readings which may ease fears in the EU and the UK while worse than expected readings and/or hawkish Fed statement will send the dollar higher against all but the yen. Key support level for the DXY remains at 79.50
Euro - Shelter from the Storm?
FT reported this weekend that a EU bailout for Greece was in the works. Details are still scarce but we should know more by tomorrow (Monday). A bailout for Greece may provide the euro brief reprieve but rallies expected to be shallow and capped at 1.3850-1.4000. Obviously any bailout from Germany will be contingent upon austerity measures which have already stirred massive strikes and demonstrations across Greece. Euro sentiment remains bearish and the high probability trades would be to short the euro against the US dollar at key resistance levels (1.3850, 1.4000)
GBP -
The worst performing major currency seems to be priced for a worst case scenario. As such, it will not be surprising to see the pound staging a little bounce - especially if we get a dovish Fed statement. GBPUSD could be a good long if it comes back to test 1.4880 or on a break above 1.5230. Just like the euro, GBP sentiment is still bearish and rallies are likely to meet renewed selling pressure. 1.5550, 1.5350, and 1.5200 look like decent levels to short GBPUSD
Yen - Deja Vu All Over Again
Last week we noted our expectation for the yen to weaken against the strong aussie and loonie. That scenario played out nicely. Surprisingly, the yen decline vs. the US dollar was a lot milder as USDJPY finished the week only slightly up. Also, we noted surprising net-long positions among the Commercials both in the recent COT report and last week's. This could be reflecting expectations for temporary yen strength due to repatriation or a bet on a risk aversion sentiment. Whatever the case may be, going long yen may be perilous. Japanese officials already made commented on the yen's recent strength. Any hints of intervention may be enough to cause temporary but sharp declines in the yen.
And the Oscar Goes to....the Loonie!
The Canadian dollar finished another impressive week with gains across the board. Similar to the Aussie, the Canadian dollar has enjoyed the surge in commodity prices (namely, gold and oil). But unlike Australia, Canada's interest rates have yet to be tightened. In addition, further Chinese tightening are perceived to pose greater risk to Australia than to Canada. USDCAD broke a major support last week (1.0200) and is well on its way for parity, its next resistance level.
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