Monday, August 8, 2016

EUA Dec16: First week with low auction volume lifted the price

Last week was the first in August with a reduced auction volume. The lower supply lifted the price of the EUA Dec16 by 6.77% in a weekly comparison. The benchmark carbon contract also received support from the correction in Brent.
After a relatively strong start, the EUA Dec16 turned lower Monday morning. The support level at 4.38 euro halted the decline at the time of the auction and the price climbed slightly higher. Sellers, however, pushed down the price in the last minutes of trading to the intra-day low at 4.38 euro. This was also the price where the benchmark contract closed the first trading day of the week.
As Brent gave back its morning gains and the WTI fell below 40 USD per barrel on Tuesday again, the EUA Dec16 turned lower as well. The price hit a new one month low at 4.30 euro, just 2 cents above the 2016 low. The price started recovering after the press conference of the Japanese PM with the governor of the Bank of Japan when they announced new measures to boost their economy. The announcement reversed the Brent which helped the EUA price. Tuesday’s candle was a long legged doji which often signals a shift in trend.
The EUA Dec16 opened 2 cents below Tuesday’s settlement price and fell quickly to an intra-day low at 4.37 euro on Wednesday, but it climbed higher in tandem with correcting Brent. The rally fastened when traders realised that there was no EUA auction on Wednesday. The price hit an intra-day high at 4.65 euro, a level not seen since 28 July and it closed just one cent below that level. It also climbed above the short term declining trend line, although with a very low volume of 8.7 million allowances.
Near 4.65 euro there were the 20 and 30DMAs and a Fibonacci retracements which together represented a strong resistance on Wednesday, but were all broken on Thursday when the carbon price received support from the reduced auction volume, the improving dark spread and the rate cut of the Bank of England.
On Friday, the contract opened at 4.66 euro on Friday, 4 cents below Thursday’s settlement, but increased continuously during the day. The appreciation intensified after the strong German auction. The price hit an intra-day high at 4.85 euro, a level not seen since 19 July. More than 1% of the gains could be kept until the market closed and the price remained above the declining trend line.
Another positive signal is that the 20DMA crossed the 30DMA.
The price might get further support from the reduced auction volume next week. Should the correction in the price of Brent continue, it might be another positive factor for the EUA price. 
In a positive scenario, the price has to break last Friday's high at 4.85 euro first. After this level, the next resistance is the Fibonacci level at 4.87 euro. If the price proves strong enough to climb above 5 euro this week, it could even retest the intra-day high at 5.08 euro from 18 July.
On the negative side, it’s worth mentioning that the dark spread is still too low to motivate utilities. Should the price fall back, it could find support from a Fibonacci line at 4.65 euro, the 20DMA at 4.64 euro and the 30DMA at 4.63 euro. If these three supports are not strong enough to halt declines, the price could retest last week's low at 4.30 euro.

Source: Bloomberg L.P.

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