EUR/USD Rebounds From 1.1045, Gold Hits Resistance Near 1200

London (May 6)  Usually there is a consistent theme throughout the financial markets. It’s hard to explain what’s going on now however. The most notable point is that bond prices are crashing everywhere. But why? Usually bond prices fall (interest rates rise) when inflation is rising or when growth is accelerating. But inflation is no threat anywhere, growth if anything is disappointing on the downside (at least in the US), and the ECB continues to buy boatloads of bonds. With short-term yields remaining at or below zero, yield curves around the world are steepening sharply. That’s usually a harbinger of stronger growth to come. In that case, why are equities down across the board, too?

Perhaps the rebound in energy prices has something to do with it. Oil prices remain over $60/bbl as Libyan output slowed, Saudi Arabia raised its prices to Asia, and this week’s API figures showed the first net drawdown of US crude oil inventories in eight weeks. This is pushing gasoline prices up in the US and raising inflation expectations. A rise in oil prices due to a reduction in supply would be bad for growth, unlike a rise in prices caused by an increase in demand. It could be that the markets are starting to sense mild stagflation – a recovery in inflation before a recovery in growth. That would be bad for all markets.

China’s service sector is expandingThe HSBC China services PMI rose to 52.9 in April from 52.3 the previous month, This softened the decline in the composite PMI to 51.3, down from 51.8. This is the kind of restructuring that the Chinese government wants to see as it attempts to steer the economy away from investment-led growth to consumption-led growth.

In theory that should be good for New Zealand’s exports of food products relative to Australia’s exports of industrial materials, but prices at Tuesday’s milk auction fell once again nonetheless. Plus the country’s unemployment rate unexpectedly rose to 5.8% from 5.7% -- the market had been expecting a decline to 5.5% -- even while the participation rate declined slightly. Not good! Wage growth also slowed. The news gives the Reserve Bank of New Zealand further reason to remain on hold or even ease rates. The news from Australia wasn’t that great – retail sales slowed in March, although they were still positive – but that was better than the news from New Zealand and AUD/NZD rose even further away from the parity that so many of us had expected – now at 1.0640, parity seems a long way away.

Today’s highlights: During the European day, we get the final service-sector PMIs for April from the countries we got the manufacturing data for on Monday. As usual, the final forecasts for France, Germany and Eurozone are the same as the initial estimates. Eurozone’s retail sales for March are coming out as well.

The ECB holds its regular weekly meeting, at which it will decide on the provision of liquidity to Greek banks. There is the possibility that they might increase the “haircut” on collateral that Greek banks put up for loans, which would severely constrain the Greek banking system.

The UK service-sector PMI is forecast to have slid to 58.5 in April from 58.9 in March. After the declines in the country’s manufacturing and construction PMIs for April, a slide in the service-sector PMI is very likely. This would be an additional evidence that the UK economy is losing momentum.

The main indicator for the day is the US ADP employment change for Apr, two days ahead of the nonfarm payroll release. The ADP report is expected to show that the private sector gained more jobs in April than it did in the previous month. Even though the ADP has relatively little predictive power for the initial payrolls figure, the market tends to treat it as if it’s a reliable indicator and so a figure like that would be taken as USD-bullish.

From Canada, Ivey PMI for April is to be released. The RBC manufacturing PMI released last Friday rose a bit, but stayed below the 50 level that divides contraction from expansion. The same is expected to happen to the more-closely-watched Ivey PMI. The index is forecast to have risen to 49.2 from 47.9 previously. Although the rise may support CAD, a failure to break above the 50 level could cause the effect to be minimal.

We have five speakers scheduled on Wednesday. During the European day, Fed Chair Janet Yellen and IMF Managing Director Christine Lagarde speak at a conference on finance and society. We also have speeches from Kansas City Fed President Esther George and Atlanta Fed President Dennis Lockhart. Riksbank Governor Stefan Ingves speaks as well.

The Market

EUR/USD rebounded from slightly above 1.1045 (S3) and is currently headed for another test at the resistance territory of 1.1260 (R1). This adds to my view that the short-term picture stays positive. However, I still prefer to see a clear close above the 1.1260 (R1) zone before I get more confident on the upside. Such a break could set the stage for extensions towards our next obstacle of 1.1375 (R2), defined by the peak of the 26th of February. Our momentum studies support the case for further advances, at least for another test at the 1.1260 (R1) area. The RSI rebounded from its 50 line and is now pointing north, while the MACD, already positive, has bottomed and could move above its trigger line soon. On the daily chart, the break above 1.1045 (S3) signaled the completion of a possible double bottom formation, something that could carry larger bullish implications.