Monday, June 27, 2016

EUA Dec16 under pressure from outcome of UK referendum result

Expectations for and result of the UK referendum defined the direction of the EUA price last week.

As the odds for a Brexit declined during last weekend, markets cheered Monday morning. The EUA Dec16 opened 1 cent above the settlement price of the Friday before and rallied until the 20DMA at 5.95 euro. The price was also supported by the German front year power which hit a new 2016 high at 28.80 EUR per MWh. The benchmark contract closed at 5.86 euro, 19 cents (3.4%) above the previous settlement.

Despite the rally on Monday commodities fell sharply on Tuesday. Although plummeting coal prices lifted the dark spread higher during the day, the EUA Dec16 preferred taking direction from the front year German power which gave back all of its Monday gains. The benchmark carbon contract fell to a 2-month low at 5.53 euro (the 100DMA exactly) and closed just marginally higher at 5.56 euro (-5.1%).

Despite the positive signals from surrounding markets (German power, Brent and equities) the price of the EUA Dec16 remained under pressure on Wednesday. It fell to a new 2-month low at 5.50 euro in the afternoon after the publication of the crude inventory data and the new UK poll. In the last 10 minutes of trading, however, bulls (and maybe holders of expiring options) invaded the trading floor and lifted the price higher by some 10 cents. As a consequence, the benchmark carbon contract closed 2.3% higher.

After opening 5 cents above Wednesday’s settlement price, the EUA Dec16 slipped to an intra-day low at 5.56 euro. It recovered slightly later during the day, but it was not able to climb into positive territory and closed the day 4 cents lower. The volume of 9.1 million was lower than the June average of 13 million indicating that traders preferred closing positions and staying at the side-lines instead of opening new ones.

Shocked traders pushed down the price to 4.69 euro Friday morning (-17% d/d) in the first 10 minutes of trading, but still the price didn’t hit a new 2016 low. It recovered later on and consolidated around 5 euro. The price left a gap between 5.24 and 5.65 euro. Gaps generally work as support and resistance levels (this case it will be a resistance limiting gains).
Looking at the bright side, the price didn’t hit a new 2016 low. (The benchmark carbon contract fell to 4.62 euro in February.)

The relative strength index (RSI) fell to 28 on Friday, signalling that the price is oversold. The price also fell below the lower Bollinger band at 5.33 euro which might make traders more optimistic about a recovery.

Support levels are Friday’s low at 4.69 euro and the 2016 low at 4.62 euro.

Should the price climb higher, it has to retest Friday’s high at 5.24 euro and try to fill in the gap. 

Source: Bloomberg L.P.

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