Monday, September 19, 2016

EUA Dec16: Short covering lifted MACD above signal curve

Thanks to the rally in the last two days of last week, the EUA Dec16 gained 7% on a weekly basis. 
All markets opened in a negative mood last Monday after Fed members increased the likelihood of a September rate hike. The carbon market was no exception. The first trades still lifted the price to 4.12 euro, but soon the price turned lower and fell below 4 euro. The price received an additional negative impact from the weak auction that cleared at a significant discount to the secondary market price. From the intra-day low at 3.94 euro the price recovered in the afternoon when US markets opened. By the end of the day the price climbed back above 4 euro and closed at 4.03 euro, still 5 cents below the settlement price of the Friday before.
The benchmark carbon contract had a quiet day on Tuesday. It opened 3 cents above Monday’s settlement price, but only increased to 4.07 euro. After the weak auction cover ratio it even visited levels below the 4 euro level, but it recovered by the end of the day to close unchanged in a daily comparison at 4.03 euro.
After some initial hesitation, the EUA Dec16 opened at Tuesday’s settlement level on Wednesday. After jumping to an intra-day high at 4.08 euro the price fell continuously until reaching 3.96 euro. The price was not able to recover by the end of the day and closed at 3.98 euro, below the critical 4 euro level for the first time since 5 September.
Finally, the benchmark carbon market had a positive day on Thursday. It opened at 4 euro, two cents above Wednesday’s settlement price, fell briefly to an intra-day low at 3.95 euro, but turned back higher in the second half of the day. The last minutes of trading saw a spectacular rally and the price jumped to 4.16 euro. The price managed to keep its gains until the market closed and it settled at 4.14 euro (+4.0%). The price broke the resistance of 4.07 euro and this might have triggered some short covering as volume also jumped at the breakthrough.
The rally continued on Friday when the EUA Dec16 gained 22 cents or 5.3%. The appreciation started after the strong German auction and accelerated when the price broke the 4.28 euro resistance level which triggered many short sellers to close their positions. The price also broke the 20DMA at 4.33 euro, but was halted by the 30DMA at 4.48 euro. 
The rally lifted the MACD above the signal curve which is a bullish signal, although both (the MACD and the signal curve) are still in the negative territory. The price also broke out from the narrow range it was moving in in the first half of September.
Although it seems that most of last week's rally happened thanks to the closing of short positions, it might also happen that the market started to cautiously price in the leaked post-2020 reform proposals that show increased ambition to cut GHG emissions (linear reduction factor of 2.4% instead of the 2.2% as proposed by the European Commission, rebasing the cap from 2021). 
The relative strength index (RSI) reached 50 on Friday leaving some room for further appreciation. Should the rally continue, the first resistance is the 30DMA at 4.46 euro, followed by 4.78 euro, the level from which the price turned down 30 August.
Despite the nice rally last week, we have to emphasise the risks that might limit further gains.
1. Most importantly, there will be five auctions this week increasing the supply of allowances by 24% in a weekly comparison. 
2. Volatility in Brent and other related commodities might increase with the International Energy Forum in Algiers (26-28 September 2016) approaching and different participants commenting about a possible agreement of oil producing countries about coordinated action.
3. Main focus will be on the Fed rate decision and the following press conference of Wednesday. No change in the current rates is expected by the market, but should the Fed surprise investors with a rate hike, it might affect negatively commodity and stock prices.
In the case of a correction, earlier resistances will work as supports (the earlier 2016 low at 4.28 euro, the psychologically important 4 euro and the new 2016 low at 3.87 euro).

Source: Bloomberg L.P.

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