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Market instability boosts safe haven assets

17 March, 2014

The market has started the week with inherent risk aversion primarily linked to the uncertainty around the Ukraine-Crimea crisis and the concerns that the West will impose heavy sanctions on Russia. With the weekend’s referendum condemned as illegal by the US and EU, the markets reflected their concerns regarding instability in the region with a move to safe haven investments such as gold and the Japanese yen. The aversion to risk has not been helped by last week’s concerning growth figures from China that showed the Chinese economy is not growing as fast as expected.

Investors are now turning their attention to this week’s announcements and the primary focus will be on Wednesday’s release of the minutes from the US policy making committee, the FOMC. Close attention will be paid to whether Chairwoman Janet Yellen will give any indications as to whether the value of the tapering program will be maintained or reduced. Yellen has brushed off recent economic growth data as being heavily influenced by the difficult winter much of the country has endured, but there may be a case to pause the tapering until April if it becomes apparent that the weakening data has roots deeper than poor weather conditions. If the message from the FOMC minutes is hawkish, we expect to see some strengthening of the US dollar.

US dollar traders should tune in to the announcement of the Core Consumer Price Index on Tuesday, which reflects the change in the price of goods and services purchased by consumers, excluding food and energy. While the consensus is that the core CPI will remain unchanged at 1.6%, high volatility is expected on USD pairs during this release. Likewise, USD/CAD traders should monitor Friday’s announcement of Canada’s Core Consumer Price Index as high volatility is expected during this period. USD/CAD pivot point is 1.1099, with resistance at 1.1104, 1.1113 and 1.1118; and support levels of 1.1090, 1.1085 and 1.1076.

The euro enjoyed a good end to the week, hitting a high of 1.3913 against the USD on the back of comments from European Central Bank President Mario Draghi, who said that a strong euro is responsible for the low inflation in the region. While there are no major data announcements scheduled for the Eurozone this week, EUR/USD may be influenced by the ZEW Institute Economic Sentiment data scheduled for release on Tuesday. This survey of German institutional investors and analysts reflects the economic outlook for Germany, the eurozone’s dominant economy. This month’s reading is expected to be slightly weaker and thus some pressure may be applied to EUR/USD. The pivot point for EUR/USD is 1.3910, with resistance levels of 1.3916, 1.3922 and 1.3928; with supports at 1.3904, 1.3898 and 1.3892.

The UK is also gearing up for the release of the latest Bank of England (BoE) minutes on Wednesday, which will also coincide with the latest unemployment data release. While the unemployment rate is expected to remain largely static at 7.2%, any change to this would be expected to generate volatility in GBP pairs. BoE Governor Carney will also be speaking on Tuesday at Cass Business School’s annual high profile Mais Lecture which may provide clues as to his future monetary policy and his outlook for the UK economy. High volatility on GBP pairs is expected throughout Carney’s speech. The GBP/USD pivot point is 1.6641, with resistance levels at 1.6650, 1.6658 and 1.6667; and support levels at 1.6633, 1.6624 and 1.6616.

In Asia-Pacific trading, the Japanese yen continues to attract traders looking for a safe haven for their investments and it enjoyed strength at the end of last week, however it shrank by 0.2% on early trading on Monday morning. Yen traders will be closely monitoring Tuesday’s trade balance figures which are expected to shrink, and also anticipating Thursday where Bank of Japan Governor Kuroda is delivering a speech at the Japan Chamber of Commerce and Industry. The USD/JPY pivot point is 101.36, with resistance at 101.44, 101.52 and 101.60; with support at 101.28, 101.20 and 101.12.

Last week, the Reserve Bank of New Zealand (RBNZ) was the first central bank of developed economies to raise interest rates since the global financial crisis hit, and commentators are now speculating as to whether this will spark the beginning of a trend to boost interest rates once again. This Wednesday will see the latest GDP announcement from New Zealand which will highlight just how strongly the economy is growing, and is expected to be a volatile trading period for NZ dollar pairs. The NZD/USD pivot point is 0.8533 with resistance levels at 0.8541, 0.8548 and 0.8556; and supports at 0.8526, 0.8518 and 0.8511.

What to Watch this Week: The USD pairs are likely to offer the most opportunities this week, but both GBP and NZD pairs may provide limited opportunities during the aforementioned local data announcements.

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