Monday, August 22, 2016

EUA Dec16: What is the reduced auction volume enough for?

As most of the market participants were on holidays, the EUA Dec16 remained within a narrow range of 6 cents between 4.87 and 4.93 euro in the first half of last Monday. The decline fastened in the last hour of trading and the price fell to 4.75 euro. It seemed that there was nobody to support the price with purchases. The traded volume also reflected holiday mood with 6 million allowances trading in the benchmark contract compared to the August average of 8.4 million. By the end of the day the price managed to recover and closed at 4.81 euro, 1.8% below the settlement price of the Friday before. The closing price was below the 61.8% Fibonacci retracement.
Although only Monday was a public holiday in many European countries, investors remained in a holiday mood on Tuesday as well. The EUA Dec16 moved like on the first day of the week: in a narrow range until the last hour of trading and then declining sharply to hit an intra-day low at 4.69 euro and to close just one cent above this level. The price fell below the 50.0% Fibonacci level at 4.76 euro.
The EUA Dec16 intensified its decline on Wednesday. Despite opening 2 cents above Tuesday’s settlement price, the benchmark contract declined continuously during the day. Not even the better than expected US crude oil inventory data could stop the fall. The price plummeted to an intra-day low at 4.48 euro, meaning that it fell below the 20 and 30DMAs and also below the 38.2% and 23.6% Fibonacci levels. It lost 4.5% in a daily comparison.
In the first three days of last week the price broke below four Fibonacci retracements. The movement might have been too fast and a correction followed in the last two days of the week.
The depreciation of the first three days of the week was followed by a correction on Thursday. Helped by the improving dark spread and the Brent price above 50 USD, the EUA Dec16 appreciated by 4.5% (20 cents). It climbed above the 20 and 30DMAs in the afternoon.
The price rally continued on Friday, when the price hit an intra-day high at 4.85 euro. The EUA Dec16 was, however, not able to maintain its gains and fell back to close at 4.78 euro (+1.9%).
The rally of the last two days cancelled the losses of Wednesday and Tuesday, but the benchmark carbon contract was not able to climb back to Monday's opening levels. As a consequence, the EUA Dec16 lost 2.7% in a weekly comparison.
The relative strength index (RSI) remained in the neutral territory, but the rally of the last two days of the week lifted the MACD close to the zero line.
As EU auctions have been cancelled, there will be only two auctions this week. The UK will offer 1.7 million allowances on Wednesday on ICE and Germany auctions a similar volume on Friday on EEX.

The benchmark carbon contract might receive support from the auction volume falling by more than 50% this week. 
On the other hand, it's worth mentioning that the market participants had enough time to price in the missing auction volume and we might miss a significant reaction. In addition, there are some downside risks from the fundamental side.
The price of Brent rallied almost 20% since the end of July on speculation, oil exporting countries might agree on joint action in September.  It's getting more and more clear, however, that even if the countries manage to agree on a production freeze, it would mean leaving production near record levels. A similar agreement was expected, but not reached in April, because Iran did just start increasing its production after sanctions against the country had been lifted in January. The vanishing hopes for an agreement or a simple profit taking from the recent rally might push the price of Brent back below 50 USD per barrel and the EUA might slip in tandem.
Thanks to the weak performance of the front year German power, its MACD slipped into negative territory decreasing the chances that the benchmark power contract could support the carbon price. 
From the macro side, all eyes are on the central bankers (especially Mrs. Yellen from the US Federal Reserve speaking on Friday) meeting end of this week in Jackson Hole. Any indication of a rate hike in the US might support the USD versus the euro and have a negative impact on the carbon price as well.
All in all, we  don't expect a huge rally from the reduced auction volume and remain rather neutral on the carbon price for this week. Our base range is between 4.50 and 5.10 euro with the first support seen in the 4.65-4.69 range where two moving averages (the 20 and 30DMAs) and a Fibonacci level meet. The next support is last week's low at 4.46 euro (also a Fibonacci level is near there). 
On the positive side, the first resistance is around 4.85 euro, last week's high and also a Fibonacci level at 4.87 euro. Should the support of the reduced auction volume prove strong enough to pull the EUA price above these levels, the price could retest the 5 euro level.

Source: Bloomberg L.P.

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