The Swing Overview - Week 49
The VIX Volatility Index is above 30, indicating that nervousness has returned to the markets. After the corrections that stock indexes formed last week, investors are wondering if the indexes will fall further and if so, then by how much. The uncertainty is fuelled by factors such as rising inflation, Omicron variant of the coronavirus, lockdowns in some European countries and tapering in the US.
The markets are therefore once again in the grip of the coronavirus and further developments will depend on information about the danger of the Omicron variant. We can expect an answer to this within the next two weeks.
Data from the US economy
The initial unemployment claims reached 222,000 for the week ending November 27, up from 194,000 in the previous week. The key data from the labor market will come on Friday, December 3, when NFP data for the past month will be reported. The ISM manufacturing managers' index reached 61.1 in November and continues to confirm the improving trend.
The important news of the week was Fed chief Jerome Powell's announcement regarding inflation. He acknowledged that higher prices may last for an extended period until at least half of 2022. This raises the pressure to accelerate tapering and will be discussed by the Fed at its next meeting in mid-December. This is positive for the US dollar.
But concerns over the Omicron coronavirus variant have dampened US dollar gains for a simple reason. If Omicron begins to spread significantly in the US, speculation will begin about how the government will respond to the situation and whether consumers will begin to cut down their purchases. Some caution on the part of consumers has been indicated by the Consumer Confidence Index, which came in at 109.5 in November, down from 111.6 in October.
The SP500 has reached strong support
Figure 1: The SP 500 on 4H and D1 chart
The uptrend on the SP 500 index is still in place even though there was a correction last week. But this is good opportunity for many investors to buy a dip. Price on the SP 500 index has reached strong support on the daily chart, which is the SMA 100 moving average. The first support is therefore in the area around 4,500. The next strong support is at 4,400.
German DAX index
The weakening on the DAX was stronger than on the SP 500. The reasons for this are the lockdowns of the European countries. The DAX was also pressured by higher inflation data in the Eurozone, which came in at 4.9% in November (previous month it was 4.1%.
Figure 2: DAX on H4 and daily chart
In terms of technical analysis, the Dax broke through three support levels and stopped at around 14,900 - 15,000, where there is significant support. The nearest resistance is at 15,400 - 15,500.
A correction of the downtrend in EUR/USD
The euro was strengthening over the past week, which is surprising given that European countries are the ones with raising restrictions. Austria and Slovakia already have lockdowns in place, Belgium and Portugal have announced new restrictions, while France requires masks for all indoor activities. Pressure to tighten restrictions is also growing in Germany.
However, stronger inflation data in the euro area and the German labour market have supported the euro's growth. Overall the euro remains in a downtrend against the US dollar. The correction that occurred last week sent the euro to the resistance level that can be identified on the H4 chart, where the price stopped at the SMA 100 moving average. The price has also reached the trend line which serves as a resistance.
Figure 3: The EURUSD on H4 and daily chart
Support is in the area around 1.12. Current resistance is in the area between 1.136 - 1.1380. The next resistance is then at 1.1500.
The Canadian dollar is weakening strongly
Growing nervousness in markets is manifesting itself in commodity and risk currencies sell-off. The Canadian dollar is one of them.
The Canadian dollar is correlated with oil prices. But over the past month, the price of oil has fallen from $85 a barrel to $62.7, where oil last traded in August. Falling oil then hit the Canadian dollar hard. Also negative for the Canadian dollar is the fact that Omicron is already in Canada.
Figure 4: The USDCAD on H4 and daily chart
The USDCAD pair is moving in a rising channel, which we can identify on the H4 chart. The price has now reached the area of strong resistance around 1.2850-1.2890.
The signal for the Canadian dollar strengthening will be sent after the lower boundary of the trend channel is broken. However, the fall in oil prices combined with the demand for US dollars is currently keeping the Canadian dollar under pressure.
The EURNZD at resistance
Another commodity currency weakening in times of uncertainty is the NZD. The weakening of the New Zealand dollar is reflected in the EURNZD pair's rise. This pair reached an interesting resistance on the daily chart last week, where the price reached the SMA 100 moving average. The price is also at the Fibonacci retracement of 61.8.
Figure 5: The EURNZD on H4 and daily chart
If the currently available vaccines are confirmed to be effective against Omicron, then we can expect the EURNZD to fall back to support, which is at 1.61. This is a potential of 500 pips. If the Omicron news sparks another wave of concern, then it is possible that the EURNZD will break the current resistance in the 1.6650-1.6700 range. The next resistance is then at 1.6900.