Volatility Drops as Markets Look for Next Fundamental Driver; Oil Trades above 105.40

Volatility slowed during the Asian session as markets consolidate the latest rallies and investors look for the next fundamental driver to guide sentiment overall.  Comments from Bank of Japan (BoJ) Governor Shirakawa were released, which explained that the actions taken during the central bank’s last monetary policy meeting were meant to stimulate retail sales and lift investor sentiment.  The comments also showed that the BoJ plans to keep monetary policy accommodative until the consumer inflation target of 1 percent is achieved.  There are apparently no dissenting viewpoints within the central bank, so it look unlikely that we will hear anything different from other BoJ members any time soon.

A lack of headlines out of the Eurozone is giving traders a reason to focus more on macroeconomic data releases, and in Wednesday trade we saw weaker US housing numbers than were expected by the consensus and the numbers for December were also revised lower.  Additional signs of weakness are seen in the mortgage markets as the Mortgage Purchase index dropped by 2.9 percent.  The housing market is one of the most significant areas of the economy for the US Federal Reserve, so continued declines in these areas will lead some analysts to speculate on the possibility of another round of quantitative easing stimulus.

Macro data for Thursday will be seen with the German IFO survey and this will be given special consideration as markets look for signs on resilience in the Euro economy.  Essentially, investors need some evidence to believe that the ECB’s Long Term Refinancing Operation (LTRO) has actually had some effect now that it has had 2 months to influence the economy.  In the US, the main reports will be the initial claims numbers, with markets is looking for a modest rise to 355,000 from the 348,000 print seen last week.

In the UK, the main story was the minutes from the last Bank of England, which showed a 7-2 vote to increase their quantitative easing program (by 50 billion GBP).  The dissenting votes were the most dovish on the committee and called for an increase of 75 billion GBP.  Their main argument for the additional QE was that eventhough markets have shown signs of stabilization and improvement, there are still potential contagion effects from the Eurozone debt crisis.  Expect volatility to slow during today’s session unless we see some significant surprises in macro data.

Technical Analysis:

Epoch Times Photo

The rally in the AUD/USD is starting to show slowing momentum on the daily charts and it is looking as though prices will need to see some retracement before we can see another attempted run higher.  We are looking for a retracement to the 38.2% level as it matches well with resistance turned support and we will probably see some bounce there on first test.  A downside break here, however, would be very ominous and signal that a long term top is place at the highs of the year.

Epoch Times Photo

Oil prices have made some significant breaks in the last week, with prices reaching new highs above 105.40.  There were some key psychological breaks that are very bullish in the long run but prices are oversold on the lower term time frames, so we will probably need to see a retracement to 101.30 to work off the oversold conditions on the indicators. This is the initial buy zone in oil, as we will probably also have moving average support if prices approach this area.