Global FX Weekly 5th Dec 2015. EUR/USD consolidates at 1.08

Forex Market Commentary  

EUR/ USD sees strong bounce this week.

Actually as discussed in last week's weekly report the EUR/ USD witnessed some pretty hefty commercial bank buying at the 1.05 area. Just a word of warning here for technicians; the 1.05 lows got to about 1.0530 before heavy commercial bank spot and forwards kicked into action. Please note that the support at 1.480 was not broken and as soon as traders short spec at 1.07 began to realise this they ran for cover. Heavy bank dealer action booking spot/ forwad EUR/ USD on Thursday sent the the currency pair soaring. Then the market quickly became a rout on a Thursday most currency specs short the market will likely want to forget. Overall it was much less to do with the ECB because and that's surprising because quite frankly the ECB stewardship has not been deft and articulate over monetary policy and the specter of negative yields and price deflation. By the end of Thursday 3rd December, the EUR/ USD climbed a massive 300 pip move to climb back up to the 1.09 level and this was the biggest one day gain of the EUR/ USD in the last 6 years posting a 3% gain on the day. USD was heavily topside and vulnerable to any US economic data that could not match the October stellar US NFP report and traders followed commercial banks knowing that the October report would not be matched.

US Bureau of Labor Statistics Nov NFP data came in on Friday at plus 211,00 gain which was better than expected and just as important as the Oct NFP data at a mamoth271,000 gain initially and revised upwards to plus 298 in final for the strongest month of job creation for 2015. Initially the first 15 minutes after the 8.30am data release NY time saw the pair plunge but only a mere 30 pips. Now for day traders following their candlesticks it is always key to watch the 2nd and 3rd bars on the 15 minute candle charts for confirmation of a direction within the context of the longer term day chart.

On the 15 minute chart note how a bearish dark cloud cover became a false alert as the first 15 minute red color candle bar after the data release was succeeded by a second candle with a green color bullish retracement and a third green topside candle to take the topside action to 1.0950 before plunging back down to 1.0840 and then to eventually settle near the median at the 1.080 region a slight tad off the pre-data release tussle for price action. this contrasts with the data release in November 1st week which saw the EUR/ USD slide 130 pips in the first 15 minutes before consolidation. The fact that the market ended more or less within the trading range of the first 15 minute bar following the data release shows a reluctance for large scale probes further south for the time being.

Source: OANDA

 


Within the context of the daily chart following the same price action we have seen 3 concerted topside actions where the mid august rapid 3 day session climbed retraced before 2 more more muted attempts in September to lift the pair at the 1.18. Of course this was the moment ECB chief Mario Draghi came out with strong words of pain that brought the EUR/ USD rapidly down to a more tolerable 1.10 region. Thereafter the EUR/ USD drifted down and didn't really spark any mammoth price changes with the stellar October US NFP data because commercial banks were well prepared to buy EUR/ USD as fair value for now for their customers who import and export and need the currency. Moreover 25 basis points increment in US rates was a given.

Source: OANDA

Now for the moment all U.S. economic indicators are strong: the economy is at full employment and upward revisions to GDP growth all point to a confirmation of a rate hike in December 15. But anything after this is new territory. 25-50 basis points by Jan 16 is a given with the EUR/ USD in equilibrium at 1.08. But how 2016 shapes up is pure conjecture albeit probability skews in favor of a strong US and weakening Euro economic outlook. Goldman Sachs remark that they expect the first 25 basis points hike officially to be followed quickly by 3 successive increments of 25 basis points over the next 3 quarters of 2016 to take US rates to 125 basis points by December 2016. Well, anything can happen. Goldman Sachs expected crude oil WTi to hit 20 dollars by Dec 16. That didn't happen. But then again it's not a perfect world and human socio-economic phenomena are largely unpredictable.

Read on Bloomberg how analysts get it wrong:

http://www.bloomberg.com/news/articles/2015-12-04/ten-years-of-failure-and-counting-analysts-misjudge-yen-aussie 

In my view the slow down in US corporate earnings and the hurting US manufacturing and export sectors will eventually show by Q2 16 and drag the US economy to slower economic growth and I cannot justify more than 75 basis points for US rates within this context. 2016 is an election year in the Us and the Fed is acutely sensitive to the needs of the top companies as represented by the Dow Jones Industrial Average index. Since 2008 Fed Chairman Bernanke and now Fed Chair Yellen have been sensitive to the top 30 companies that drive the US economy. The NFP data today resulted in a plus 300 point surge in the Dow with the knowledge that rates would hold at 25 basis points for the foreseeable future. Go tell the CEO's of Apple Inc, Boeing, Chevron and General Electric that rates will go 125 basis points in 2016 and you would probably cause a lot more than the customary swoon. half of the Dow 30 companies depend on manufacturing and exports and need a lower US dollar to report strong earnings.  It is for this reason that Fed Chair Yellen has delayed so long the first official rate hike. Given this need for the Dow 30 to prosper it would be a rational assumption to call for 75 basis points tops 2016 with a view of catering to the Dow 30 companies whilst tempering any potential of excess for retail inflation. Given that crude oil can provide the largest impetus to in imported inflation and that OPEC is in a state of continuous unlimited production it is hard to see crude oil top 50 dollars a barrel 2016, therefore the threat of commodity inflation is manageable and therefore the call for 125 basis points seems more than excessive. The Dow Jones is valiantly trying to pierce the 18,000 mark in spite of the strong Dollar. Would the Fed Chair remove all conscience to initiate a Bear market in Us equities and wipe of billions of Dollars in shareholder value and throw US pensions into disarray? Would the US Fed allow the US housing market to come under fire again just as new home sales start to look buoyant again? I think not. The US Fed has a tight act of balancing all sector interests to keep inflation down whilst leaving cheap credit for future economic growth. Since January 2009 the US Fed has done everything in it's power to nurture the Dow rising from 7,500 points to it's lofty peak today in the 17,000 region with a low interest rate climate thus creating over a trillion dollars in shareholder value. Raise rates to 125 basis points when half the Dow 30 are hurting with the high Dollar value and for sure a swift Bear market will follow in US equities and that would be political suicide. 

The flapping of the wings of a butterfly in Tokyo can cause a tsunami in New York. Would the US Fed move to kill off it's golden child and the feel good factor with the ripples of interest rate uncertainty? The macroeconomic interpretation would be for 75 basis points 2016 as sufficient to hold down domestic headline inflation below 2%, maintain the 5% unemployment model with EUR/USD  at parity by end 2016 and USDX value at 105 mark as the upper threshold to cool off and yet maintain a mild growing US economy 2016. Should this scenario come into play then this would indeed become an incredible story of US monetary policy and the steady Federal Reserve  stewardship from the crisis years of 2008-2009 to the present 2016. 

Economic equilibrium and the demand and supply for money works in time lags. What we are seeing now in the NFP is more to do with seasonal Q3 employment and does not justify further large increments to the employment pool. Over to the bond markets who would contain himself at the chance of earning higher yields in the USD? Bond market yield expectations saw some strong buyers in the US Treasury markets this week as a confirmation of this speculative action for higher US rates and further yield divergence of US Treasuries to German Bunds becomes clearer as Euro bonds came under pressure this weak in a sell off pending further Euro Q.E. Currently 10yr Bunds are trading at 0.68% yield vs US 10 year 2.27%. This may become a probable cause for US bond investors to purchase more USD and sell EUR to push the pair back to the 1.05 test again in Q1 16. The International Monetary Market (IMM) shows net short EUR positions have increased once again this week to 40% of total open interest as the ECB talked the EUR lower with the prospect of increased QE. On the flip side Euro equities are looking extremely attractive to invest in whereas the Dow is looking very shaky and set for a decline. so the Yin and the Yang of investors piling into US bonds and Euro equities will pretty much ensure that the EUR/ USD will not see a rapid decline in value. Short term traders take note of the daily charts and watch for the next marker being the FOMC data release which should see the current 1.09 area slide in the next 2 weeks to 1.05 once again.

The law of diminishing returns - every action has a reaction; every expansion is followed by a contraction. should the cycles of economic activity follow a simple geometrical pattern to be illustrated mathematically as the shape of a bell curve then a trader would grasp very quickly that eventually the long positive action runs out of steam before a pull back. The long march from 1.34 has effectively hit a law of diminishing returns on the EUR/ USD. Should a a bear market emerge in US equities the sell-off would result in a readjustment of the USD value to the downside. so there are a lot of issues at play in 2016 in a very tight balancing act for the US Fed. Small traders will have to realize that history often does not repeat itself in the short run and that 2016 can be a very different trading arena for the EUR/ USD give all these issues of growing concern in US equities. The first probe at the 1.05 hit a massive resistance of commercial bank buying as we saw this week and now that we are trading within this 1.05  - 1.10 range as a set pattern at a given US 25-50 basis points, every point fought on the short is not going to come without a bloody nose. Small day traders for 2016 will have to come to grips with smaller and tighter 100 pip trading range opportunities and re-strategize probable outcomes. The follow the wave trades of 2015 will not longer become applicable in 2016 as the USD slams into a wall of trouble brewing ahead in US equities. The 1.05 to parity is going to be a very bloody battle indeed and given 75 basis points as the probable end of the current US interest rate cycle parity should appear by end Q1 or Q2 but with higher daily whipsaw action for the shorts to deal with.

Technically,  1.1453 caps the EUR/ USD rise and strong support lies at the 1.0504 area (21/03/2003 low).

Elsewhere US Index retreats from the 100 perch to the 98 region and Gold bullion has risen on the back of the Dollar retreat and WTI cash crude hovers at the 39 Dollar in a strong position.  

2016 will be an important year in the international currency markets. IMF Managing Director Christine Lagarde stated that the China Yuan will be included to the Special drawing rights (SDR) with effect from Oct. 1st 2016. Citing the strong performance of Chinese monetary authorities in grappling with the inclusion of China into the SDR would be a strong recognition of China's role in the global economy. Currently the basket of SDR is made up of USD, EUR, GBP and JPY and the Yuan inclusion will be the first change to the SDR's composition since 1999.

I would like to add that since I first decided to write some commentaries the basis of such a writing was to offer readers a far larger perspective of what's going on in the international currency markets within the context of the global economy. Conventional wisdom tells us to listen to the guru and follow his signals to the pin-point to make some money. Nothing can be further than the truth. Put 100 economists in a single room and come out with 101 theories. Reality is that the small trader can match the professional money man and sometimes even better his opinions and make a good living by not calling some of the expensive newsletters loaded with signals. Do not feel intimidated at all by the professional guru; you have your own senses to draw your own conclusions. Such parity with the guru can be achieved only through constant learning and reaching a more comprehensive and holistic approach encompassing technical studies through candlestick charts as I prefer with fundamental data watch, as well as an all encompassing deeper insight into how large speculators and commercial banks behave in the dealer market. Stick with a few currency pairs such as SDR and thrive even in tight conditions rather than hang your neck out for market signals and big moves in any market. Don't jump on the band wagon; learn to feel the wind of direction as it turns in a few select markets and you can thrive.

Coming now to our global macro-economic summary as the basis for our studies in the EUR/ USD here are a few important points below from equities to bonds to commodities: 


        
Important data:

Equities: 
Asia:
Nikkei 225   19,504.48   - 435.42 (2.18%)
SSE Composite 3,524.99   - 59.83 (1.67%)    
Hang Seng 22,235.89      - 181.12 (0.81%)
Europe: 
DAX 10,752.10     - 37.14 (0.34%)
CAC 4,714.79    - 15.42 (0.33%)

USA:
Dow 17,847.63    + 369.96 (2.12%)

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 
98.315     +0.397 +0.51%      
Support 98.848     Resistance 99.094
Forward 1 year - 98.69s.

EUR/ USD

1.08842     +0.00002 0.00%
Support   1.07707        Resistance 1.10091
Forward 1 year - 1.10100s.  

Crude Oil  WTI

39.97     -0.95 -2.37%

Support 39.30 Resistance 42.40

Forward 1 year - 47.43s.

Gold

1086.300     +23.795 +2.19%
Support  1,067.2    Resistance 1,097.3
Forward 1 year  - 1,089.0s.

Pieter Bergli - DeLoren Trust Holdings

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