Vertis – Despite hitting the highest level in 2 years at 7.72 euro last week, the EUA Dec17 finished the week 1.7% lower in a weekly comparison.

After the news from last weekend about MEPs planning measures to reduce the negative effects of Brexit on the carbon price, the EUA Dec17 opened in a positive mood on Monday. The first transaction of the day cleared at a 4 cents gap up from previous Friday’s settlement price. After hitting a new 2-year high at 7.20 euro, traders took profit and pushed the price below 7 euro, to a daily minimum of 6.71 euro. The price recovered slightly by the end of the day, but it remained below 7 euro and in the negative territory.

Forecasts of abundant wind power supply, position reduction before key political events and profit taking from the recent rally pushed the price of the EUA Dec17 intraday 5% lower on Tuesday to hit a daily minimum at 6.52 euro. In the last two hours of trading, however, buyers returned to the market and lifted the price back to Monday’s closing levels. The benchmark contract settled with a marginal loss of 0.1%. The daily candle looked like a hammer trying to find a bottom. Opening and closing prices were close to each other, indicating that the price is looking for a direction.

Supported by a strong energy mix (German front year power hit a new record), the benchmark carbon contract climbed continuously higher on Wednesday to hit a new 2.5 year high at 7.22 euro. Although the price fell back slightly by the end of the day, it still closed with a gain of 3.3%.

EU legislators apparently are on the path to adopt reforms that make the EU ETS more effective and EUAs more expensive. The EUA Dec17 opened therefore with a 5 cents gap up on Thursday and jumped to a new 2 year high at 7.72 euro, a level not seen since January 2016. The price turned lower in the last hours of trading to close at 7.10 euro, flat to Wednesday (shooting star / gravestone candlestick). The traded volume of 30 million was the highest of the week.

On Friday, the benchmark carbon contract seemed to have lost its steam. It opened 1 cent below Thursday’s settlement and although it was able to close the gap, it slipped lower during the day to end the day with a loss of 2.1%.

At the end of the week we could see a correction starting in both German front year power and carbon. After being overbought for weeks, the relative strength index of these instruments returned to 70 again. (In the case of German front year power to 74.)

The EUA Dec17 also returned below the upper Bollinger band.

This week, the carbon market might take direction from the five auction results and the broader energy mix. This week some 22.6 million allowances will be offered, some 10.8% less than last week. Last week’s volumes were increased by the cancelled auction 7 September, while this week only Monday’s auction volume will be increased.

After last week’s vote in the plenary of the European Parliament and the trilogue meeting about the reform of the EU ETS, this week the political agenda is more exciting from the macroeconomic perspective. The US Federal Reserve holds a rate setting meeting on Wednesday. Although no changes to the current interest rates are expected, the communication during the press conference later in the day might be decisive for the EUR / USD, if the Fed Chair Yellen hints on future policy tightening.

On Friday, UK PM May holds a speech about Brexit in Florence. The event is watched by the market as there has been no real progress in the negotiations until now.

And last but not least, Germany elects a new parliament on Sunday. Polls suggest that market shouldn’t expect any major changes in the current composition of the parliament and the government, but investors might remain risk-off remembering the disappointment after the Brexit referendum and the US presidential elections.

All in all, we expect the carbon market to consolidate near the 7 euro level this week with a somewhat lower volatility than we saw in the last two weeks.

Source: Bloomberg, ICE