- Chart of interest - USD Index (DXY)
- Chart of interest - EUR/JPY
- Chart of interest - AUD/EUR (the sleeper trade of 2013?)
- Charts of Interest - Copper & the USD Index
- Hopeful for Gold and Silver
- Important theme - Loving that EUR v the rest
- EUR/USD - The break higher is underway
- Chart of interest - perfect night for 'risk on' view
- USD Pairs - All lined up?
- EUR poised for higher
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Viewing entries tagged with 'EUR'
How strong is the USD ? Is the strength likely to last?
These two questions obviously go to the heart of matters at the moment and if the answer can be found then we can potentially unlock great profits.
After years of being shunned it appears that the U.S. is once again a preferred destination of investment. Since the start of the century, and accelerated by the onset of the GFC, investment funds flew out of the U.S. and headed for emerging markets. Such was the magnitude of the drive to exit ‘old’ for ‘emerging’ that a new term was coined. The rise of the BRIC’s (Brazil, Russia, India and China) was on everyone’s radar ……largely at the expense of the U.S.
However the U.S. has always been an early mover and we must admire them for the significant policy responses that were implemented in the wake of the GFC (compared to say the Japanese after their stock market collapse in 1989 which even until today was never adequately dealt with). These actions appear to now be bearing fruit just at a time when the BRIC’s, particularly China are slowing a touch.
Thus the massive flow of funds from old to new now looks to be slowing or even reversing.
Looking at the DXY chart this theme is strongly borne out.
The monthly chart of the USD Index is particularly revealing. Firstly there appears to be a long term ‘rounding bottom’ formation of some 10 years in the making. And significantly we are on the cusp of 2 bullish engulfing months within the last 4. To me that speaks volumes to the amount of USD buying presently going on. If history generally repeats, then the implications of a close to the month for the USD at these levels, implies multiple months of further USD gains.
The USD Index can be traded via the standard Futures contract or a CFD, both available on your BBY Online platforms. Or you may wish to simply spread USD risk through some of our old favourites in currency land, AUD, NZD, EUR, GBP and JPY. Indeed CHF could be added to this mix as a number of high profile analysts are calling for some serious weakness in CHF going forward, which makes Thursday evenings GDP release for Switzerland a must watch event (6.45pm NZT).
After a mammoth rally from 94.00 to nearly 128 since mid-2012 the EURJPY cross is showing signs of fatigue.
Breaking down the component legs, the JPY has weakened massively (USD/JPY 78 to 97) over the same period, firstly on expectations that new PM Abe would gain power and bring with him super easy monetary policy ideas and then a secondary rally on expectations that Abe would install the like-minded Kuroda as his BOJ Governor. Since the inception of Kuroda the same sounds bites regarding easy policy have been forthcoming but the JPY has actually strengthened. Is this the biggest ever example of the old adage ‘buy the rumour, sell the fact’?
Looking at the EUR leg, the EUR simply looks awful. The Cyprus ‘precedent’ hangs heavily, manufacturing indexes remain mired in heavily negative territory and constant growth downgrades have been forthcoming. Indeed ratings agency S&P today lowered the Eurozone growth forecast to -0.5%, increasing the recessionary outlook.
Moving to the charts, the brief rally on the Cyprus resolution Monday was quickly reversed, the price action tracing out the bearish engulfing day which augurs strongly for more losses ahead. Supporting the bearish stance the 10/20 day moving average are crossing over to a negative alignment. On the shorter timeframes my ‘model’ has done a stellar job of capping gains and is currently pushing down suggesting strong resistance lies at 122.70/123.20 and falling.
This is one of my dead set favourite trades.
Since the onset of the GFC the Australian dollar has appreciated against the EUR, almost doubling in value as the market sought refuge from the beleaguered EuroZone and finding haven in the high yield, proxy to China growth, AAA rated Australian dollar. What an incredible run.
However late last year things began to change with the Troika providing enough funds, and therefore time, for the EuroZone politicians to make the required fiscal changes i.e. labour market, pension reform etc. Meanwhile the RBA forecast an earlier peak in mining investment and resumed cutting rates.
It is my belief that the NZD and AUD currencies are vulnerable to their own success of the last few years (the cure for a high currency is a high currency – eventually it’ll hurt). I think too that Eurozone data will surprise to the topside in as much as it surely can’t get worse.
Technically the picture looks intriguing. We had the ‘head and shoulders’ break down below the neckline and then, as so often happens the retest. Now we look likely to resume the move that should head towards 0.7000
In the wake of the FED’s FOMC announcement this morning these charts bear close scrutiny.
The FED have pledged to keep the money spigots wide open, to pay for their US$85 bio per month of various securities purchases, until the labour market improves to 6.5% unemployed goal. i.e. the song remains the same.
We know that the majority of data from around the world, last night’s U.S. GDP excepted, has been strongly on the improve lately so is Dr. Copper (recall Gartman says it has a PHD in economics), ready to break higher just as the USD Index drops below support?
With the EUR/USD rampaging higher, Gold and Silver again looking strong I suspect these support/resistance areas will be broken in due course and create very tradable moves.
Recently Gold and Silver have been bucking the trend of a weaker USD, failing to rise despite the moves up in NZD, AUD, EUR and Copper etc.
I find this action rather strange given the background of the FED’s supportive action but you never know if, say for example, the IMF are selling Gold to send bailout money somewhere or if a large gold miner has to put on a hedge due to their treasury policy.
So with the above situation I have been stalking a reason to resume being long Gold and Silver. The action overnight hints that the precious metals may be worth a buy here with stop loss orders below the overnight lows.
1) Gold daily – recall the big picture. Gold has been in a brilliant uptrend since 2001 and in August broke higher out of a multi-year consolidation triangle
A closer look at Gold – support apparent now at the overnight low
2) Silver has a number of similar technical attributes including stopping at the important Fibonacci number, 61.8% decline of the last rise. Also Silver probed below, but closed above, the 4 month major trend line support.
There is definitely a building of EUR positive sentiment among the ‘professional’ part of the market.
Understand that when Italian and Spanish debt interest rates fall is that because parties are buying the bonds and if those parties reside out of the Eurozone then they have to buy the currency.
To that end more stressed EZ debt buying was seen last night after the generous Greek bond buyback (mentioned in my OPI’s this morning). Risk-seeking hedge funds are hoovering these things up because a) they have great yields in a world starved of decent interest rate returns and b) they feel the biggest default risks have passed.
Now add to that all the short covering EUR buying that will be forced upon the EUR perma–bears (short and caught!). You know I could count on my hand the number of EUR longs we have on our books. Our client base just will not buy EUR…………………..which says it all to me.
As I warned in my output of Thursday (Charts of Interest – perfect night for ‘risk on’) the EUR/USD today appears to be confirming the attempted break higher of Friday.
The ‘Inverse Head and Shoulders’ pattern documented in the chart below should now come into effect suggesting a rise as high as 1.4300 can unfold in the weeks/months ahead.
Understand this ! – that the previous Eurozone ‘Crisis Indicators’ …the outright cost of borrowing for Spain and Italy (and the cost relative to safe haven Germany) are now at their lowest levels in 7 months. The so called troika (ECB, IMF and the European Commission) has done its job and created cheap enough funding now so that Greece and other stressed countries can safely battle through for the next 2 years, time for their governments to implement the necessary fundamental reforms.
1) The 18 month trend line is now broken
2) A closer looks shows that Friday’s failed attempt has been overcome paving the way for the new move.
This morning there are numerous charts suggesting we could be on the verge of some very healthy moves higher i.e. risk on.
At the very least the overnight moves gives some very clear parameters to trade against, particularly if you hold a (extremely) bullish view as I do. I always have to check myself when my sentiment is so strong, however I will not be ‘falling in love’ with any positions. My stop loss levels will be clearly defined and my risk taking appropriate for the size of my account. It’s not a crime to be wrong but it is to stay wrong!
Ok here we go.
1) Dow Jones Index - Opened 1% down, ended up 0.85%. Essentially a bullish engulfing day with huge rejection tail.
2) EUR/USD – Butting up against 18 month trend line resistance. Down again or explode up through it…..what’s your call?
3) EUR/USD – A closer look. Its abundantly clear that a MASSIVE battle is taking place between bulls and bears right now given the price action of the last two days. I like to view it in somewhat barbaric terms. A battle is on and to the victor….the spoils! For whichever camp prevails in this battle the rewards will be quite long lasting I think.
4) NZD/JPY – As suggested in yesterday’s piece ‘Part 2 – NZD/JPY – a pause?’ when moves are strong the 10/20 day ‘river’ is a great indicator and overnight it did a nice job (as did my short term model) so I suspect that NZD/JPY should now not go under 67.00
There are a myriad of charts that all look the same but obviously there’s no point reproducing them all here. So I’m very bullish and have clear parameters to trade against. It’s an exciting prospect for a trader.
I note a number of currency pairs against the USD are all poised neatly below short term resistances. After a long period of (boring) consolidation I wonder will these levels hold once again, confining us to familiar ranges, or are we on the cusp of a break out and a decent trend?
I still expect a resumption of USD weakness on the basis of, all other things being equal, that QE3 will weaken the USD just as the prior installations did. Also I expect Chinese PMI’s out tomorrow to confirm that the worst is behind for the Chinese economy.
I will be buying these pairs (on strength) on a 1 hour hold above the seemingly co-ordinated trend lines.
Fig 1 – NZD/USD
Fig 2 – AUD/USD
Fig 3 – EUR/USD
Fig 4 – GBP/USD
Base case is that the (almost co-ordinated) central bank actions of the last few weeks support the market like the previous QE programs have.
Under that scenario we would then expect to see ‘risk’ higher.
EUR/USD moved strongly higher in anticipation of the FED and ECB programs so I view this 8 day pull back since the announcement as nothing more than a profit taking correction (buy the rumour, sell the fact).
Yesterday the EUR/USD appears to have reversed (key day reversal – lower low, higher high and close) and the 8 day gentle downtrend appears to have been broken to the top side.
This should be an important indicator for all pairs against USD suggestive that we will see NZD, AUD, GBP, Gold and Silver all (significantly?) higher in coming weeks.
Fig 1 – Daily EUR/USD chart
Fig 2 – A closer look at the downtrend line via the hourly chart
The last confirming level to cement my view will be if/when the EUR/USD lifts above my model level which is currently falling mildly at 1.2965.