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Iron ore breaks $90 level

Four markets in focus today: Fortescue Metals Group, GBP/CAD, USD/CHF and Germany 30.

Iron ore mining
Source: Bloomberg

Fortescue Metals (FMG)

Iron ore broke the $90 yesterday for the first time since 2012 and given inventories at Chinese ports rose 0.1% last week to 106.56 million tons it’s hard to make a case for a quick snap back anytime soon. 68% of open positions on FMG held by IG clients may be long, but the trend in iron ore is lower and traders are now keen to see if the spot price can trade through the 2012 low of $86.70. We have seen a number of investment banks cutting their iron ore forecasts of late, with Deutsche lowering their call yesterday to average $104 this year and $96 in 2015. As a result of these changes they now feel the net present value (NPV) of FMG is $4.18, so it doesn’t seem like FMG is good buying at current levels if you look purely at valuation. Going on Deutsche’s NPV alone then RIO would be the pick in the iron ore space, with a healthier 49% upside.

GBP/CAD

The BoE minutes this week could be very interesting given Mark Carney’s Mansion House speech last week, while there have been others on board calling for a normalisation of interest rates. Signs of dissent could support.  Still, there are signs that sterling could undergo moderate profit-taking, especially given the pace of UK house price appreciation (as seen in yesterday’s Rightmove data) seems to be slowing. GBP/CAD could be interesting way of playing sterling, especially with UK CPI in play today at 6.30pm. The market expects a slight pullback in CPI to 1.7% (yoy), which could help ease GBP/CAD towards the 1.8380 level, a level which I feel could represent a good entry point for short-term long positions. Downtrend resistance drawn from the March 20 high intersects at 1.8500, so a break above here would also be positive for sterling bulls.

USD/CHF

In US trade we get the May US CPI print. The Fed prefers to look at core PCE (personal consumption expenditure), however the market seems to actually put more emphasis on tonight’s inflation print. As thing stand the market expects core CPI to increase 10 basis points (0.1%) to 1.9%, which would be the highest level since March 2013. The short term trend here is higher, so if we get a better-than-forecast print and we could see a better sell-off in the bond market and USD strength.

Germany 30 (DAX)

At 7pm we get the latest ZEW business survey and the market is expecting a slight improvement in the three sub-surveys. The German index has started to show some vulnerability of late, printing a bearish weekly reversal last week, while on the daily chart we have seen the MACD cross below the signal line. A good number in today’s ZEW survey could provide support, however it seems likely the market will be governed by price action in the oil markets.

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