Global FX Weekly 12th Dec - Where is the smart money?

Forex Market Commentary  

Can anybody out there read the tea leaves?

Consistently, week in, week out, over the years currency traders have asked me where does the smart money actually go? Now, if anybody knew that answer then they would have a fortune as great as the good king Solomon.  But actually let me give my readers a parallel and the answer becomes pretty self-evident. In 2004 when the massive earthquake in Indonesia caused tsunami waves to crash into Indonesia, Thailand and Sri lanka, in the early hours of the morning, even before the waters alarmingly receded, there were reports of birds flying away in droves and even elephants, deer and leopards were spotted in movement together or more acutely as one small boy noted, all the ants were scurrying everywhere to dig deep and carrying food and eggs as fast as possible.  Why is it that such animals could sense the changes in wind and air-pressure and instinctively act on that immediate data with recourse to primeval danger signals buried within the subconscious of the animal brain ans then as I recall tourists in Thailand were actually standing on the beach frozen and taking pictures of 15 feet high waves hurling towards them? The answer is natural instinct.

Here's an interesting exercise: stretch your 2 hands out into the air and with an imaginary pencil write freely and quickly in the air - "a cat sat on the mat'

You will notice something very intriguing. I'm not going to give you the answer but I want  you to notice what happened when you wrote the sentence and so coming back to the markets the brains of the trader become torn with information overload without the kind of 6th sense union of different brain areas to synergettically work out the best path forwards.

So coming back to my topic - where is the smart money at the moment?  Well since 2014 the EUR/ USD plunged from the 1.34 level to Jan 2015 where it stood at the 1.20 region and 2015 has been the story of the Dollar march pushing the Euro from 1.20 down to 1.5 in March 2015 and then with 3 top side pushes to 1.15 the euro once again fell down recently to the 1.05 region this month.The march of the USD was amplified by the retreat of crude oil WTI from 65 Dollars in Jan 2015 to lows of 40 dollars in august and December 2015 and the retreat of gold bullion from 1300 highs in February 2015 to the 1050 region of the present. In this same period of January to December 2015 the Dow Jones went from 18,000 in January to a dramatic swoon in August to the 15,700 and then back up to the near 18,000 mark to reflect the tension in equities over US interest rates. Actually, and curiously, looking at the US 10yr Treasury, the market in January 2015 went from 124 to 128 highs in April and October only to fall back to the 126 region for the present reflecting mildly lower yields and mildly higher prices over the course of the year.

In summary the smart money for 2015 sold the Euro and bought the Dollar, exited US bonds and equities, but re-entered long positions the last 3 months whilst shorting crude oil and gold bullion.

Within this settings of global macro-economics small traders either buy signal newsletters and swing trade or trade data releases and often get hurt in the process as can be amplified by last week NFP which was very good but led to a EUR/ USD bounce that small traders had not anticipated. Why did this happen? Because a small trader needs to listen with all his senses and combine his senses to smell it in the air where the smart money is going.

Following the illustration of a bell curve quite simply put the USD long and crude oil and gold bullion short has run out of steam and now a law of diminishing returns sets in.  without further ado do not expect the smart money to take larger and larger shorts against the EUR/ USD. Even if a rate hike occurs officially in Us markets even in a strong economic setting i do not expect to see another rate hike till were way into Q2. Over in Euro land in the equities markets and across in Asia, particularly China, the smart money senses opportunity. This opportunity sensing becomes the price opportunity that pushes the large specs into action. So finally coming back to the EUR/ USD expect strong commercial bank buying at 1.05 and large specs eventually making large currency purchases to acquire Euro equities. 

If anything 2016 will not become a story of official US rate hikes as everyone expects; indeed not. No way will the Fed chair risk plunging the Dow and irking every US household with higher mortgage payments or stand-by whilst Boeing and General Electric and Apple start to hemorrhage. On the contrary 2016 may flat-line gold bullion, creep up crude and rather startlingly see the EUR/ USD bounce back over 1.10 as the smart money looks for the next new thing to push a market in waves and then get out before every tiny trader piles in on the coat-tails. Investments in Euro and Chinese equities could put severe pressure on the USD.

Smart money always goes where the ordinary trader cannot see it. Smart money is often contrarian to the surface thinking. But use your senses and you can see the tell-tale signs that nature offers. Otherwise; it wouldn't really be called smart money now wouldn't it? Nobody expected the EUR/ USD to fall so far down with crude oil and gold but the smart traders who made their money are already leaving the room for the next smart trade.

Now coming to this weeks action traders were waiting for the US sales data release.  Friday US retail sales rose 0.2% but was shy of  the 0.35 expected and so US consumer confidence is seen to be rising. Turning to the 15 min chart swing traders hoping for action once again got a nasty surprise and this is why I try to enlighten my readers that the key of understanding is usually in the formation of the 2-3 successive 15 min bars that followed the critical 15 min bar on data release. In the case of yesterday's price action the initial 80 pip drop was followed by a 50% retracement over the next 3 15 min bars and once again the EUR/ USD refused to go down.

Source: Oanda

The smart money has left the room on the Dollar trades and given my analysis of 2 further rate hikes in Q2 and Q3 to peak at 75 basis points then that gives the EUR/USD an increasing chance of a real bloody fight at the 1.00 - 1.05 area. On the daily chart below the 1.06 is outlines as the fierce area of contention.

Source: Oanda

 Notably this week the Dow seemed unimpressed and nervousness among equity traders saw the Dow shave off 300 points to close at 17,265.21 as a harbinger on this apparent US consumer confidence data release. Crude oil has slipped to a year low in the 35 area with concerns over China demand and gold bullion rises with the Euro currency.


Important data:

Equities:

Asia:
Nikkei 225  19,230.48   + 183.93(0.97%)
SSE Composite 3,434.58   - 20.91 (0.61%)    
Hang Seng 21,464.05      - 240.56 (1.11%)
 
Europe: 
DAX 10,340.06     - 258.87 (2.44%)
CAC 4,549.56    - 85.50 (1.84%)

USA:
Dow 17,265.21   - 309.54 (1.76%)

Fixed Income Markets:
US Federal Reserve -  +0.25%    
ECB Base rate 0.050 % 
Chinese interest rate PBC     China     4.60 % 
Japanese interest rate (BoJ)    0.10 % 

Important moving averages:

USDX  above the 50 day m.at 97.5
EUR/ USD at the 50  day m.a at 1.095
Crude Oil WTI below the 50 day m.a. at 45
Gold below 50 day m.a. at 1135
US - 30 DAY FED FUND below 50 day m.a. at 99.68
US - 10 YEAR T-NOTES below 50 day m.a at 127.1
    

In speaking of moving averages; markets are not rational and daily price action volatile, but in the longer run trader expectation and negative sentiment can be collectively summed up through the 50 day moving average. Always  look to support and resistance band lines as the key to understanding  in the long and short term where prices are converging. Professional  technical traders use 50 day and 200 day medium and slow moving averages  as fundamental cornerstones for interpreting the direction of price  action.

USDX

US Dollar 
97.582     -0.349 -0.45%       
Support 96.848     Resistance 98.094
Forward 1 year - 98.69s.

EUR/ USD

1.099300     +0.006165 +0.56%
Support   1.08707        Resistance 1.11091
Forward 1 year - 1.1100s.  

Crude Oil  WTI

35.36     -1.40 -3.83%

Support 34.30 Resistance 38.40

Forward 1 year - 44.43s.

Gold

1074.605     +7.975 +0.75%
Support  1,067.2    Resistance 1,092.3
Forward 1 year  - 1,089.0s.

Pieter Bergli - DeLoren Trust Holdings

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