Historical Analysis of Italy and Its Relations with the EU

History of the European Union

The origins of the European Union can be traced to the period after WW2, with the main driver being the achievement and preservation of peace. The post-war period was particularly difficult – with Europe being badly damaged after two world wars – and as a result, the vision of a European Union was born as a natural step in the aftermath.

After the fall of the Berlin wall in 1989, work began on integrating European countries in terms of four ‘freedoms’: movement of goodsservicespeople and money. This integration would bring down the traditional boundaries between countries and create a continent-wide area of seamlessly integrated markets. The rationale and vision for creating such a union were undoubtedly justified and ambitious.

The Maastricht treaty was finally signed in 1992 by the founding member-states. As it currently stands, the EU is a political union of 28 member-states, having started in 1998 with 11 member-states meeting a number of euro convergence criteria:

  • Inflation
  • Budget Deficit
  • Debt-To-GDP ratio
  • Exchange rate stability
  • Long-term interest rates

It is also a monetary union of 19 member-states, having started on the 1st January 1999 and with physical coins & notes being introduced on the 1st January 2002. It should be noted that there are more countries scheduled to be added to the EU in the upcoming years.

The motivation for joining the European Union has always been very strong, with many obvious benefits for member-states. EU-funded subsidies provide a great incentive for weaker countries to join the union, as they can be used for infrastructure development and other projects. As a result, there have been some serious questions regarding the validity of the criteria for certain countries prior to joining (the most obvious one being the Budget Deficit and Debt-To-GDP ratio of Greece).

Current Structure of the European Union

Twenty years after its inception, the European Union has morphed into something much heavier and more complex than originally envisaged or possibly intended. Below is a non-exhaustive list of some of the major functions and issues of the EU:

  • The European Central Bank (ECB) sets the monetary policy.
  • The Eurogroup (represented by countries’ finance ministers) makes political decisions regarding the eurozone and the euro.
  • The European Union Court of Justice is the chief judicial authority of the EU and oversees the uniform application and interpretation of European Union law.
  • There are specific EU Departments for the Environment, Communications, Competition, Data Protection, Migration, Trade, Energy and many others.
  • There is fiscal integration, where there is a peer review of each country’s national budgets, although a particular country cannot be forced to apply criteria dictated by other countries.
  • Technically there is no provision for a country to exit the Eurozone (it is ‘irreversible and irrevocable’). However, in 2009, an ECB study argued that expulsion remains conceivable.
  • The European Union has developed complex policies & regulation on things like agriculture, fisheries, livestock, manufacturing, financial services etc.
  • There is increased talk (most recently by French PM Macron) about forming a common European Union army, which has been met with broad criticism and concern.

Current Problems Faced by the European Union

The biggest problem within the EU is probably the vast divide between the north and south countries, in terms of mentality, productivity, and fiscal prudence. This is a structural problem that existed from day one, but which hadn’t surfaced while the Eurozone was still nascent and growing. It was always going to be a herculean task to integrate such diverse countries within one economic and currency union. The divergence in productivity between countries like Germany and Greece is huge, as is their attitude towards budget balance and public sector operation. This translates in persistent and considerable deficits in southern countries, while northern countries manage to run a much tighter ship.

This is a problem that already existed for many decades, and which traditionally has been overcome by weak countries using their exchange rates. Countries like Greece, Portugal, and Italy would devalue their currencies every decade or so, issue more debt and kick the can further along. With interest rates in their sole control, southern countries could effectively inflate their debt away, slowly reducing the purchasing power of their currency (and their citizens).

With the European Union as it currently stands, this option no longer exists for individual countries. They all now have the same currency – the Euro – and their ability (and cost) of issuing debt is dictated solely by the markets themselves. As we have seen with Greece’s case, when a country is in distress it becomes practically impossible to access the debt markets for funding, and so the country needs to be bailed-out (or indeed bailed-in by its own depositors). In contrast to the United States of America, there is no possibility of free transfer of funds from surplus states to deficit states. This means that countries like Greece, Portugal, and Italy are left to their own devices when it comes to making ends meet.

It’s also very difficult to have one single interest rate strategy for a wide range of countries with very different characteristics. The ECB obviously tries the best it can, given the constraints, but it’s a particularly difficult task to follow an interest rate path that satisfies member states which might be in an expansionary phase and others which are in recession.

The net result of these structural differences between European countries – and something that was clearly evident in the recent European crisis – is that downturns are much more severe in southern countries. In the past few years, Germany only experienced a mild slowdown, while southern economies were crippled. Youth unemployment, one of the most important forward-looking indicators, plummeted in countries like Portugal (20%) and Greece (>50%). Unfunded liabilities have rocketed higher, making them a ticking time-bomb. Low GDP per capita and extremely low wages were a natural result, as the countries faltered.

The Future?

So, what’s the solution to this conundrum? Is there a solution?

Yes, there is – if governments engage in a fiscally prudent manner, after the initial period of difficulty, the resulting surpluses should bolster their economies and bring stability & optimism. Where there are stability and sound fundamentals, investment (both internal and external) follows. Unemployment drops and productivity rises, in a virtuous circle.

The Italian government’s approach to the current situation, however, is quite different. Their rhetoric is strongly on the populist side, promising a lot but unable to demonstrate how it will be executed or funded. They insist on a higher than normal budget deficit, hoping that this would kick-start the Italian economy and be the spark that initiates an economic recovery. The EU wants to see a deficit well below 2%, but the Italian government is pushing for 2.4% (and perhaps more). The ECB currently sees the Italian budget deficit reaching 3% by 2020, a fact that’s very worrying indeed.

But can the Italian government just choose an arbitrary large deficit level in hope that this will help them reach their goals? The answer is no because deficits need to be funded. Future unfunded liabilities also need to be serviced. As Italy no longer has the option of printing its own currency, it will have to access the debt markets, running the same risks that Greece did in 2012. If its loose fiscal policy doesn’t yield quick results, chances are that it will face the same financial distress as Greece did.

Finally, as many politicians are quick to point out, ‘Italy is not Greece’. That statement is correct! Italy is a much bigger country than Greece, in every way. Their total government debt is approaching 2.5 trillion Euros, and that’s not a number that can be bailed-out like Greece’s was. If the Italian situation gets out of hand and confidence drops dramatically, this problem could be like a nuclear bomb to the foundations of the Euro itself.

It’s not all doom and gloom, however. If the Italian government manages to successfully bring the country back into a solid growth trajectory, that would be a great boost for the country and the Eurozone as a whole. The next crisis could well end up bolstering the European Union and pushing the Eurozone countries towards a more integrated and constructive future.

Euro Index (EXY) Weekly Chart
Euro Index (EXY) Weekly Chart

Looking at a long-term chart of the Euro Index (EXY), we can see that it’s been in a broad downward channel since the 2008 Global Financial Crisis. We are currently on the confluence of the neckline of an apparent head & shoulders pattern and the 200WMA. The Euro now has to make a big decision and the Italian developments will no doubt play a big role in this.

This article was written by Forex Analytix

EUR/USD, Where to From Here?

The EUR/USD has been quite erratic since early 2015. The Greek crisis caused the pair to drop from 1.40 to near parity, all in the space of 10 months, and that was a brutal move lower which destroyed longs. Since then, the pair has range traded between 1.04 and 1.24, spending some time near both these extremes.

EURUSD Weekly Chart
EURUSD Weekly Chart

Let’s try to ascertain what the main drivers are for this pair, and how things could evolve going forward.

The Euro has managed to successfully negotiate (thus far) a number of potential dangers such as the Greek debt problem, the new unpredictable Italian government, and the situation in Catalonia. The Eurozone economy has been showing signs of promise, with inflation finally hitting the 2% target and growth remaining decent. Unemployment is falling, although the periphery’s elevated levels keep it higher than many other western economies. All these factors have enabled the ECB to start talking about tightening and feeling confident about the prospect of a continued recovery. QE is planned to stop at the end of 2018 and tightening is projected to start after the summer of 2019, although that is obviously subject to change.

On the US side, the Fed continued on its hiking path with more hikes priced into the remainder of 2018 and 2019. The Fed’s favorite inflation metric – Core PCE – has also hit the magic 2% mark, but the effect of the past rate hikes should now start to become visible. Unemployment is near all-time lows, but so is the labor participation rate, and it’s worth noting that the quality of employment in the US has been deteriorating. Finally, GDP growth remains robust and is expected to remain relatively strong going forward.

So, what are the potential risks for this pair? For the Euro, things seem to be recovering well but the main danger remains the possibility of a ‘black swan’ event such as the ones mentioned above. The fundamental problem of the Eurozone remains, which is the north/south divide in terms of economic strength, unemployment, and productivity. For the Dollar, the main concern in the short term is the Trump administration’s aggressive trade policy. They are starting fights with some very powerful opponents such as China, and such moves can damage future US potential. The NAFTA talks are progressing but that’s also not a given, in terms of achieving a positive result. Finally, we are now starting to see some of the effects of the past two years’ rate hikes, as the US economy starts producing some hit-and-miss economic releases.

From a fundamental perspective, it’s actually quite difficult to have a firm view on EURUSD. There are risks on both sides and although the most likely short-term direction is higher, there are far too many unknowns that could push it aggressively towards either direction.

Stelios Kontogoulas

The Basic Technical Analysis Perspective

The EUR/USD is finally breaking above the descending T/L resistance which is also the neckline of an inverted H&S formation. The next upside target is the 1.1840 horizontal resistance area but I have my eyes set to the confluence of resistance at 1.1930 get tested (50% Fib from the 1.2556 high to the 1.13 low and 200DMA). It is interesting to note that the inverted H&S target confluences almost perfectly with the 61.8% Fib at 1.2077 and a well established horizontal resistance area. Do I think that the pair will make it up there? It is not my main case scenario but I would definitely not exclude the possibility given the fact that the ECB has “space” to surprise to the hawkish side which is quite the opposite of what I think that the FED can do.

EURUSD Daily Chart
EURUSD Daily Chart

The Elliott Wave Perspective

 EURUSD came down very sharply and impulsively from February highs which I believe it’s a top in place for this year. The reasons are a five wave drop out of an upward channel that is definitely the most important evidence of a bearish reversal. We know that when the market makes such an aggressive turn in five waves, then this leg belongs to a bigger bearish structure, so I am looking and expecting more downside after a corrective rally which is already underway. I labeled this as two options; wave 2 or wave B since I do not want to predict price moves too far into the future. But I know that market should be headed lower anyhow after the rally is completed, ideally from around 1.190-1.20 resistance area.

I love this resistance also because of a bearish H&S pattern that I am tracking.  In H&S pattern sometimes shoulders can be very similar in length, so I see room for more upside within current right shoulder that can be underway to the upper parallel neckline.

Generally speaking; EURUSD is headed higher short-term I believe, but prices can be much lower by the end of the year, or early in 2019.

Are Precious Metals Due for a Relief Rally?

The Macro Perspective

Precious metals have exhibited broad weakness in the past six months, seemingly contrary to what market conditions might suggest. In the midst of trade wars and Emerging Markets worries, they should – in theory at least – have performed better. But can we identify any fundamental reasons for that? Let’s take a step back and analyze gold’s price action from the global financial crisis onwards.
Gold Weekly Chart
Gold Weekly Chart

From around $600 in 2007, gold went on a parabolic rise to a peak of over $1900 in 2011, reflecting the worsening global economic conditions. Precious metals were one of the main “go-to” safe haven assets, and as such, they outperformed most other asset classes. Interest rates were slashed and bond yields fell dramatically, while equities found some support after the initial drop in 2008. However, that parabolic rise was never going to be sustainable, and so a big drop started in mid-2011 for both metals. Silver, in particular, has now lost over 70% of its value from the peak, in a spectacular sustained drop.

What are the potential reasons for the precious metals moves?

  • The US Dollar has seen some strength since February 2018, with the DXY index, in particular, bouncing over 8% from the lows. Precious metals have always had a negative correlation with the Dollar (at least in the short term), and this has potentially been a reason for their weakness in 2018. Having said that, it’s worth noting that the Dollar weakened substantially in 2017 but precious metals didn’t manage to rally at all during that period.
  • Global inflation has been steadily rising towards the widely-adopted 2% YoY target. The US and Eurozone are now at the target, while the UK has been well above 2% for a fair amount of time already. As a result, the Fed has been tightening rates for the past two years, and even the Bank of England hiked twice – despite the ongoing Brexit fears. On the other hand, the ECB hasn’t hiked yet but is expected to do so in mid-2019. While inflation is rising, so are rates, and it’s a well-known fact that PMs are sensitive to change in real rates (interest rate minus inflation). Real rates have in fact remained relatively constant at historically low levels, so effectively the argument that rising rates have damaged PMs doesn’t necessarily stand.
  • Supply and demand for gold and silver have been broadly constant over the past years, with gold, in particular, is extremely stable. Silver, being an industrial metal, has seen some fluctuation due to changing demand and advance in technology (for example, miniaturization). However, the advance in technology also means that there are now more devices than ever which use silver, and furthermore, its use in areas such as photovoltaics and medicine is constantly growing. So, one could say that natural supply and demand (i.e. non-speculative) has been relatively constant.
  • Global geopolitical events have been a source of volatility is most asset classes. Events such as the US-China trade wars, Emerging Markets chaos (Venezuela, Turkey, and Argentina to name a few) and the ongoing Middle-East situation are valid reasons for flight-to-safety flows to PMs, but this has not materialized. In fact, actions such as Turkey’s decision to sell gold in order to support the Lira have been greeted as price negative. But is this true? When a country is in crisis, its first line of defense is often gold, with its steady value and liquid market. If gold was not a useful and valuable asset, surely it would be one of the last tools a country would use to defend itself. It’s probably safe to say that global geopolitical dangers are not the reason for PM weakness, in fact, they should theoretically have provided support.
  • Money supply is directly linked to the price of PMs, given their finite supply and difficulty in extraction from the ground. The Fed’s and ECB’s slow reversal of their quantitative easing programs will reduce supply, but that’s just one part of the equation. The constant generation of deficits by all major western economies (with the US leading the way at nearly $1trn annually), more than counterbalances this effect and causes money & credit supply to continuously increase globally.
  • Bitcoin and other crypto-currencies have been hailed as precious metal “replacements” when it comes to finding assets that can be used as a store of value. Their convenience and lack of storage need make them worthy alternatives for sure, and as such, they have probably been adopted by many. On the other hand, they remain assets with practically no intrinsic value – they are simply digital assets that have been manufactured out of thin air, based on a specific computer code. This fact bears many dangers and has been a constant stumbling block for skeptics.
  • Speculative selling has been a much-heated debate when it comes to precious metals. Whenever gold and silver have tried to overcome major technical levels (such as the 200DMA in silver), they have been met with violent selling in the futures market, with no other obvious prevailing reason. The moves have been sudden, relentless, and very effective. These speculative selling flows have seemingly been the main reason for gold and silver weakness over the past few years.
Gold-Silver Spread 1M
Gold-Silver Spread 1M

So, what’s the possible macro direction going forward? Well, even though PMs have been particularly weak in the past few years, the reasons for that move are not totally clear. Fundamentals suggest that they are now substantially undervalued and should be close to a major turn. The Gold / Silver ratio is also flashing the warning light, as it has reached lofty levels which most often signify the beginning of a broad bull market. Silver always outperforms gold on a rally and with the ratio near 85 we’re getting a strong indication that the rally may be coming soon.

Stelios Kontogoulas

The Basic Technical Analysis Perspective

Two weeks ago, Gold had a mini “capitulation” in Asian trade that took the precious metal below $1160 before reversing aggressively the following days. And currently, we are trading well above that low as Silver continues to grind out a new cycle/trend low. In the event Silver bounces, the risk for a gold rally is high. We have a bull flag from the lows and the RSI is also developing a bull flag formation. At this time, a break above the $1200 level in the spot price could cause a short squeeze towards the $1240 level, being the breakdown point which was the lows from December 2017.

Gold Daily Chart
Gold Daily Chart

Silver is depreciating within a descending channel after breaking below the L/T symmetrical triangle at the end of June but we are finally starting to see the first signs of divergence. The RSI reached almost 20 at the previous low ($14.30) but is currently above 30 despite the metal trading lower while at the same time gold is failing to follow silver lower and to register a new low (cross-market divergence). We are watching $13.91 (the flash crash low) and $13.63 (the 9 year low) for support while a break above $14.50 and the descending channel resistance will indicate that a corrective bounce is underway. A breach of the 1st target brings $15.20 and $15.70 in the scope.

Silver Daily Chart
Silver Daily Chart

The Elliott Waves Perspective

 If we ignore the lower time frame charts on gold and focus on a weekly timeframe instead, we can actually notice that metal did not make any clear directional movement since 2015. All that we see are big swings in $1050-$1400 range. Normally this type of a price action represents a correction rather than impulse. So if we want to understand in which direction the market can break out once consolidation is done, then we have to look back to see where the market came from.

Well, we can see a very strong five wave fall from above $1900 level; it’s called an impulse that represents wave A as only one part of a big decline from 2011 highs. So if we are on the right track, then a new drop below $1000 will follow, maybe later this year or at the start of 2019 once corrective wave B is finished that we see it making a triangle. This is a five wave pattern and ideally now in the final piece of the puzzle; wave E which may see resistance at $1240-$1300 area. What should be important as well, it’s Dollar Index that is making a five wave recovery since January which means more upside on DXY equals to more weakness on gold. If you are a member of our ForexAnalytix service with an Elliott Wave package, then you exactly know what I am talking about.

This article was written by Forex Analytix

UK Politics in Turmoil, What’s Next?

The Macro Perspective

The UK narrowly voted to leave the European Union in 2016, by a vote of roughly 52% to 48%. Given that mandate, the UK government (and the whole nation) has since been divided into the “hard Brexit” and “soft Brexit” camps, with the two sides each trying to get control. It’s generally accepted that between the two scenarios, “hard Brexit” is bearish for Sterling while “soft Brexit” is bullish.

On late Friday, PM May secured an agreement within her cabinet for the direction of Brexit negotiations moving forward. May has always been on the “soft Brexit” side, having actually initially supported the “Remain” movement. The agreement includes among others:

• A “Mobility framework” to be set up which will allow UK and EU citizens to travel, study & work in both areas.
• A “Common rulebook for all goods” within the EU, including agricultural products. The UK will apply domestic tariffs & policies for goods intended for the UK, but charge EU tariffs for goods that end up heading into the EU.
• “Co-operative agreements” to be established between UK & EU competition regulators.
• A “Joint institutional framework” when it comes to courts of justice (done in the UK by UK courts, and in EU by EU courts).

We must note that this agreement is just the UK’s preferred way of moving forward. It still needs to be reviewed and agreed by the EU, and it’s merely the first small step towards reaching an agreement between the UK and EU. If the EU reject this proposed agreement then we will be back to square one, but until then we should treat this as a positive development.

David Davis, the head of Brexit negotiations, was always considered to be more on the “hard Brexit” side (as was his deputy Steve Baker). As a result of this cabinet agreement – and the other side effectively taking control of the process – Davis resigned along with his deputy. This move has been characterized as a “hammer blow” for May, and generally a very negative event, but it was practically unavoidable following the cabinet vote – so we don’t think it should be a big surprise. Davis is replaced by Dominic Raab, a pro-Brexit supporter, and former housing minister. He seems to have good support from May and the cabinet, and we now need to wait and see what his approach is.

As if the above developments weren’t enough, we saw yet another important move on Monday as Foreign Secretary Boris Johnson also resigned. Johnson had also been a vocal advocate for a “hard Brexit”, constantly claiming that the UK would need to have a clean break from the EU as dictated by the British people via the referendum. Again, this shouldn’t have been a big shock, and neither should we think that it will be the last resignation within May’s government. As the two camps remain divided and the “soft Brexit” route seems to have been chosen going forward, the “hard Brexit” supporters will likely feel increasingly uneasy with their position.

The big risk will undoubtedly be that May’s slender majority gets eroded and a new round of elections is forced. In such a scenario, what would the most possible election outcome be? Jeremy Corbyn’s Labour party has been slowly gaining ground, but the Conservatives would probably be victorious once again – let’s not forget that for the past 2 years the British people have had an opportunity to further assess the potential “hard Brexit” impact, and it’s quite possible that there has been a realisation that it could be particularly damaging for the UK.

The chances of a Conservative election victory would probably increase substantially if PM May stepped down and a new PM was appointed in her place. In fact, such a move would probably be the best way to restore confidence in the Conservative party after May’s undoubtedly poor handling of the Brexit process so far. Her approval ratings are at all-time lows and she may be forced to make such a move in the very near future. If such a move is made, then the selection of a new leader would be absolutely crucial for them.

Now, where does all this leave us? Let’s think about the two potential scenarios that were always going to be in play: the “soft Brexit” and the “hard Brexit”. What we have seen unfold in the past few days is the beginning of the “soft Brexit” scenario. So, I find it very difficult to turn bearish GBP on the back of what has just transpired, even with the increased political uncertainty.

I remain bullish as the main source of GBP weakness since 2016 has been Brexit uncertainty, and specifically the “hard Brexit” scenario (the BoE has repeatedly stated this in the past year). What we are now seeing is the first step aiming at removing this uncertainty, and this, in my opinion, can only be a positive for the Pound.

Stelios Kontogoulas

The Technical Analysis Perspective

The GBPUSD has retraced nearly 50% of the post BREXIT lows to the highs this spring. The recent double top completed when we traded towards the 1.3050 level and has since bounced higher out of a descending wedge. This is constructive near term as long as we are above the 1.3050 level, but please note we just stopped on the 9th of July at the 24% retracement at 1.3360.

GBP/USD Daily Chart
GBP/USD Daily Chart

This article was written by Forex Analytix

Is the Market’s Fixation on Bonds Justified?

The Macro Perspective

Global bond markets had been in a bull market for around 2 decades, having had arguably their best run in history. This has been a prolonged and strong trend, which at times looked unstoppable. Many benchmark government bonds yielded zero or negative, something unheard of a few years back. In the past few months, however, it looks like we may be seeing signs of what could be interpreted as the start of a major reversal.

One of the main themes of late 2017 and early 2018 has been that of rising inflation, as it started to creep higher in many major economies. There are many reasons why inflation was always going to eventually reverse from ultra-low levels. Nearly a decade of extraordinarily loose monetary policy after the Global Financial Crisis, inflation and interest rates remained near all-time lows. However, the prolonged ZIRP & QE made money very cheap and this encouraged risk-taking and leverage. As a result, most asset classes (including equities, bonds, real estate etc) saw strong rallies. Such a rise in asset prices would inevitably lead to a rise in demand-based inflation.

The UK saw a sharp depreciation of the Pound (~15% vs. majors) following the EU referendum and the ensuing uncertainty. This currency depreciation gave rise to a different kind of inflation, but it nevertheless was increased inflation. The UK YoY CPI now stands at 3.0% – a full percentage point above the BoE’s mandate – and this has forced the BoE to start raising rates to counter it. The US will probably experience a similar inflation move as the USD depreciated a similar amount since early 2017. We’re already starting to see this manifest itself in PPI levels, and chances are that this will spill over to headline inflation as well. We must remember that the only major obstacle that makes the Fed cautious about continuing to steadily raise rates has been below-target inflation. It’s likely that inflation will now pick up and surpass the 2% target, and this will make it much easier for the Fed to keep going.

Finally, we mustn’t forget oil and energy. After the big 2014 crash where WTI dropped $80 from the $107 highs within 2 years (a near 75% loss!), we finally started to see a good run higher in mid-2017. Oil price rose from $45 to over $60 and, since oil is a major price element of most industries, rising energy prices always filter through to end product prices.

So, turning to 10y USTs and 10y Bunds in particular, what are we seeing on a macro level? There’s little doubt that we are turning the page on zero and negative yields. As described above, inflation is likely to continue rising globally and this will pile the pressure on bonds. It will take a huge crisis (like the 2008 global financial crisis) for bond yields and inflation to drop significantly again. On a technical level, both TSYs and Bunds have broken important levels and look vulnerable.

It’s likely that both TSYs and Bunds will have a near-term pullback higher to retest the broken technical levels, but the medium-term macro view is firmly bearish.

TNX 1M Chart
TNX 1M Chart

 

Bund Weekly Chart
Bund Weekly Chart

The Technical Analysis Perspective

10Y Treasuries

Treasuries found a top in July 2016 and have been moving lower since. The 9-month rebound that we saw during 2017 is clearly a corrective move that took the form of an ascending wedge and the break below 126 and the 200DMA confirmed that the D/S momentum was ready to accelerate. Given the prolonged nature of the bull market, the potential for the move lower to extend much more is there in the long term. However, a look at the short-term structure of the market shows that we might first need to experience a sharp recovery. The market has hit the 161.8% extension of the corrective move higher and has formed a descending wedge which we are finally breaking to the upside today (Feb. 23rd). Also, notice that RSI is diverging on the daily and we have formed a tweezer bottom on the weekly chart. Given that both sentiment and positioning are very bearish for the specific market the potential for a squeeze higher towards the 123 area is high and we would caution against attempting short positions from current levels since the risks are asymmetric in comparison to the potential reward.

10Y Note Weekly Chart
10Y Note Weekly Chart

 

10Y Note Daily Chart
10Y Note Daily Chart

10Y Bunds

The BUNDS have been in a relentless, channeled bull market since mid 2008 that lasted for exactly 8 years (we found a top in June 2016). Ever since we have seen a move that looked corrective in nature (flat bottom triangle) until in the end of January we actually broke below both the triangle’s support (159.25) and the ascending channel’s support T/L. Obviously, such a technical event did not go unnoticed and built even higher expectations of follow-through to the D/S. Unfortunately, the S/T market structure does not agree with such an interpretation since the last leg of the move lower was contained in a channel – and within the channel, Bunds formed a descending wedge which broke higher last week. Today (Feb. 23rd) we also broke above the descending channel’s resistance and the breakdown area of 159.25 putting in danger the thesis that the BUNDS have snapped. Given that the false break lower might have gotten a lot of traders trapped in weak short positions the possibility of a strong rebound before a continuation lower has increased. Bottom line, we do see the potential of a larger move to the D/S to unfold during the next few months but in the S/T the risks are tilted to the upside for a S/T rebound towards at least 160.50 (previous bearish consolidation area).

BUND Weekly Chart
BUND Weekly Chart
BUND Daily Chart
BUND Daily Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Bitcoin, the Future or Just a Gamble?

Does the break above the psychological $10,000 level, validate the Cryptocurrency?

This week we saw Bitcoin breach the $10,000 mark and continue in a near-vertical ascent that has some people scratching their heads and others celebrating their incredible gains. We’ve covered Bitcoin in January 2017 and many of the fundamental points covered are still valid. We tackled supply and security – two of the main issues – and the associated arguments, so it’s worth revisiting that post as a reminder.

As certain countries in the world experience crises of various types, cryptos and Bitcoin, in particular, emerge as top choices for protection. There has been considerable flows from countries like Russia and China, where cryptos have been used as a vehicle to take funds out of the banking system and essentially make them vanish. Pretty much from their inception, cryptos have been one of the easiest avenues when it comes to such needs, and also for the dark web (the infamous Silk Road website is a prime example of that). There have also been cases where rampant inflation makes having fiat money a particularly bad carry trade, with obvious examples being countries such as Venezuela and Turkey.

So, there have been good reasons why cryptos have been the target of funds over the past few years and why they have experienced this monster rally. To put some perspective, here is an interesting table of Bitcoin price progression:

  • $0000 – $1000: 1789 days
  • $1000 – $2000: 1271 days
  • $2000 – $3000: 23 days
  • $3000 – $4000: 62 days
  • $4000 – $5000: 61 days
  • $5000 – $6000: 8 days
  • $6000 – $7000: 13 days
  • $7000 – $8000: 14 days
  • $8000 – $9000: 9 days
  • $9000 – $10000: 3 days
  • $10000 – $11000: 1 day
Bitcoin Daily Chart
Bitcoin Daily Chart

This kind of price action is very rare and as a result, there have been varied reactions to it. The disbelievers call Bitcoin a bubble and are adamant that there is no fundamental reason why it’s going parabolic. Bitcoin price action actually resembles the Dutch Tulip mania of the 17th century, and this is something they often refer to in order to justify their negative view. They are usually particularly offended by people saying that “Bitcoin is backed by mathematics” and setting massive arbitrary price targets.

On the other side of the fence, we have the hardcore crypto fans who believe that total crypto-currency market capitalization should be in the tens or even hundreds of trillions of dollars. They think that blockchain technology and cryptos are the future and that potentially they will eventually replace fiat currencies. They accumulate cryptos (the ultimate goal is to accumulate Bitcoins in particular) and are on a buy-and-hold to infinity mode.

Then there are the people in the middle who are open to the concept of cryptos and understand the value of the technology, but who also find it very difficult to assign a price to this product. I myself am in this last category; I’ve been watching Bitcoin’s rise in amazement but I never got certain enough of it in order to trade it. I have well and truly missed this trade and I accept that. I personally believe that blockchain technology is here to stay and crypto-currencies could be the future of money. However, I’m still not convinced that the current crypto-currencies are the ones that will survive. As total crypto market capitalization rises, governments and central banks start to take notice. It’s possible that we will see government-backed cryptos in the future that could well take a big chunk of the total market cap. As a currency, Bitcoin has severe limitations when it comes to transaction capability. The recent hard fork with Bitcoin Cash seems to take care of that problem but it’s still unclear how well it’s equipped to properly take on established fiat currencies.

So, what do I think will happen to crypto prices – and Bitcoin in particular – in the near future? Its price has taken off and is breaking ATHs practically on a daily basis and this is something that I would never want to go against, so I wouldn’t be shorting it here. An interesting development that will affect Bitcoin price is the introduction of Bitcoin futures on the CME. This has been discussed extensively in the marketplace and once again there are two differing opinions on it.

One view is that this is a bearish development, as it will provide an easy way for traders to short it. There are currently ways to short Bitcoin, but they are not as simple as shorting a futures contract. I can see the logic in this, but I personally think that there is a much bigger reason why Bitcoin futures will actually push the price higher:

There have been many individuals who want to invest in Bitcoin but who are put off by the complexity involved, and also by the security risk. You need to get a digital wallet, preferably a physical piece of hardware. Then you need to get very good anti-virus protection and make sure you have backups. Do all that and you could still potentially be vulnerable to hacking. Cases, where cryptos are hacked or stolen, are multiplying and this is surely putting people off. Bitcoin futures will provide a platform where getting long Bitcoin becomes extremely simple, and for this reason, I believe that the initial reaction to the introduction of this future will probably be bullish. It’s my opinion that Bitcoin will continue to rise going into year-end, as the CME future gets introduced. However, there will have to be a point where there will be a major correction. Bitcoin price will no longer be subjective and driven purely from the capital flow, but it will also have to somehow represent intrinsic value. This is something that Bitcoin longs need to be very careful of, and plan their contingency strategy accordingly.

The Harmonics point of view

The whole market has been talking about when bitcoin would reach 10,000 but the weekly Fibonacci resistance was at 11400. It is very common in Bitcoin at big levels that the market is expecting to pause just below it or at it and suggest it has stopped going up.
Then longs start to sell and some even short sell and then bitcoin pushes through the level, everyone thinks it is a breakout, jumps in long. And then the market reverses straight back through the level. This is a very bearish reversal signal. Trend support is the 0.236 Fibonacci retrace level from 2015 low and then below that, we are in a bigger correction and can look to 7132 and the 0.382 retrace next. In terms of harmonic patterns, we are looking for a three-wave (two swings lower) move before we see bitcoin turn higher again.

Bitcoin Weekly Chart
Bitcoin Weekly Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Will the Pound Fall Off a Cliff?

The Elliott Wave Approach to one of the toughest markets

Cable is making a nice drop from the 1.3650 September high which can prove to be the start of a new bearish trend if we consider that the move higher from January of this year is most probably an ending diagonal. Wedge patterns such as this normally cause very strong turns, so we really have to be aware of more weakness in the weeks ahead as the pair may be headed much lower into a wave V) based on Elliott Wave cycles. A breach of the indicated support line may indicate that wave three is in play, targeting the 1.2600 area in the next few weeks.
GBP/USD Daily Chart
GBP/USD Daily Chart

Another interesting point worth mentioning is that recovery on cable since 2016 has stopped at the 1.3500 region which was a swing low back from 2008 as well as trendline resistance connected down from the 1.7190 high. As long this region holds I believe that the pair remains in a downtrend.

GBP/USD Monthly Chart
GBP/USD Monthly Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

EUR Pairs Heavy or at Resistance

A Technical view of the market with the use of Harmonics Analysis

Ahead of Thursday’s ECB meeting and with a crisis brewing in Spanish Catalonia the EUR is trading heavy or at significant resistance in some crosses which are worth watching for bearish reversals.

EURUSD failed at the 50% retrace of the decline from the September high and is looking for another leg lower.  1.1668 is major support and a break below targets 1.1482 and potentially but less likely 1.13.

EUR/USD Daily Chart
EUR/USD Daily Chart

EURCHF is at important daily Fibonacci resistance. The 1.618 of 2016 high to low correction and where the rally from the February 2017 low is 0.618 of the sharp rally from the 2015 lows which is very common in corrections. Watching for a bearish reversal and pullback at 1.1550-1.16 zone. EURGBP has failed again at the 50% retrace of the decline from the August highs. Holding above 0.8743 keeps the bigger uptrend intact and this level is about to be retested.

EUR/CHF Daily Chart
EUR/CHF Daily Chart

EURAUD is testing the top of a long-term parallel channel and after a false break higher on 11 October the path of least resistance is likely lower and below 1.4927 is a bearish trigger and targets a return to the July lows next at 1.4416 and the 200 day MA.

EUR/AUD Daily Chart
EUR/AUD Daily Chart

EURNZD has reached harmonic pattern resistance at 1.6825-1.6937 and we are watching for a bearish reversal.  A daily close above 1.70 would be a bullish continuation and next target is 1.7208 and 1.7365.

EUR/NZD Daily Chart

Will the Catalonia Effect Sink the EUR?

The Backstory

Tensions have been recently rising in Spain, particularly in the run-up to the Catalonia independence referendum. The Spanish constitution explicitly forbids such a referendum, but this didn’t stop the Catalans from trying to have it. The day of the referendum was a particularly eventful one, as the Spanish government tried hard to prevent it from happening. They were heavily criticised for deploying the police (with particular force, on occasion) against mostly peaceful and unarmed Catalans.

Those events didn’t do them any favors and have now led to a potentially explosive situation. The Catalan leader will address the parliament and many are tipping him to declare the birth of a new republic. Given the government’s approach so far, it’s possible that any potential bridges have now been burnt, and hence a compromise from both sides is looking more unlikely.

Catalonia numbers around 7.5 million people, which represents roughly 16% of the Spanish population. That’s a significant portion of the country and a large number in its own right – 7.5 million is nearly the size of Switzerland or Austria, and larger than Serbia, Denmark, Finland or Slovakia. Of those people, around 43% managed to vote and the result was a resounding “Leave” with 90% of the vote. Clearly, the Catalans feel very strongly about their independence and we should assume that their leader would echo that strength. On the other hand, the Spanish government wants to diffuse the situation simply by not accepting the legitimacy of the referendum. The Economy Minister Luis De Guindos said recently that he hoped “common sense” would prevail.

What does this mean for the Euro in the medium term? Such developments can certainly not be considered as being good for Europe. The Euro has actually been very resilient in the past couple of weeks, which may reflect the market’s disbelief that anything major will materialize. It’s not pricing in a Catalan independence, that’s for sure.

In the event of a Catalan compromise, the Euro will probably see short-term strength; however such precedents will probably only weaken Europe’s unity and future growth potential. Conversely, if the Catalan leader proclaims independence it could be the trigger for a prolonged spell of Euro weakness as uncertainty will reach new highs.

A Technical Analysis Overview

When you take the actual macro view of what is happening in Catalonia, you have to ask yourself “how can this be good for the EUR and for Europe?” I’m not sure of the ‘whys’ but the EURUSD has technically held a key support level. The EURUSD has also firmed up the last few sessions following the US Non-Farm Payrolls where the USD should have gone higher, and the EURUSD lower. But instead, we held the key Fibonacci support at 1.1700 (approximate) and have bolted higher. The daily RSI has worked off overbought conditions and the RSI has based and may be poised to rejoin the uptrend.

This does pose a bigger problem for the pair, especially if you are bearish. Shallow retracements or bounces in a move usually lead to fairly explosive continuations. So, a move above the 1.2100 level could mean further EUR strength or more USD weakness. So, perhaps with everything happening in the US (rates, global tensions, political turmoil) the EUR may be the least dirty shirt in the hamper.

EUR/USD Daily Chart
EUR/USD Daily Chart

Going to a 4h chart we can see that the EURUSD has broken a descending wedge (typically a reversal pattern) and is now pushing again towards the H&S neckline at 1.1850 – 1.1860. If the Catalonian leader does not escalate the situation to an extreme, we can expect push above that level which would signal the resumption of the uptrend.

EUR/USD 4H chart
EUR/USD 4H chart

From a technical perspective, the USDCHF is also reversing from a mirror pattern (ascending wedge) but we have to stress here that an EUR positive development from the Catalonia front should help the CHF weaken which means that EURUSD should react more to the upside than the USDCHF to the downside in such a case.

USD/CHF 4H Chart
USD/CHF 4H Chart

Speaking of the EURCHF we can see that after a correction lower that got triggered from the North Korean jitters it found support at the confluence of the broken triangle’s T/L’s and is once again pushing towards the highs. From a technical perspective, there is no real resistance until the 1.20 major level (for years the SNB’s imposed floor).

EUR/CHF Daily Chart
EUR/CHF Daily Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

The USD Index Cycle and the USDCNH

The Elliott Wave Perspective

If you are a subscriber of ForexAnalytix you already know that we are still expecting another leg up on USD Index to complete bullish cycle from 2011. We think that the USD index is now at some very interesting levels near 90.00, a strong support from where uptrend may resume. Well, some USD-based currency pairs will form tops or bottoms earlier than others, and become signals for upcoming turning points. We consider USDCNH to be one of them; it’s pair that has been in a nice uptrend since 2013; clearly defined in five waves followed by a three waves set-back to the area of a former wave four. We have seen a nice bounce from that region in the last three weeks which can prove to be important evidence for more upside. If that’s the case then USD Index may also experience equivalent bullish price action by the end of the year, especially if we also consider that the “corrective cycle” since 2015 may be nearly complete based on past two cycles that ended in 2011 and 2014.

USD/CNH Weekly Chart
USD/CNH Weekly Chart

 

USD/CNH-DXY Daily Chart
USD/CNH-DXY Daily Chart
USD/IDX Monthly Chart
USD/IDX Monthly Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

King Dollar No More?

Recent US Dollar Performance

The US Dollar has experienced a prolonged and material decline in 2017. The DXY index has dropped from 102.80 (2nd January) to 91.33 (8th September), which roughly represents an 11% loss.

This decline has come in 7 consecutive monthly black candles, an extremely rare occurrence and a substantial move for a major currency such as the USD. Let’s now try to determine what the main drivers of USD weakness have been.

Firstly, US economic data has started to disappoint. Following a strong stint in 2016, this year has seen many hit-and-miss indicators. GDP and unemployment are still robust, even though the quality of jobs has deteriorated and the labour force participation rate is at 40-year lows. The main problem for the Fed, however, is persistently low inflation. CPI remains stubbornly below target with no real indication that it will turn higher. Janet Yellen now finds herself in the difficult situation of delivering rate hikes into a weakening economy with low inflation, knowing full well that more tightening will further put on the brakes.

Secondly, it’s been common knowledge that Donald Trump favours a weak Dollar policy. His administration has confirmed this and he himself often criticises other countries (mainly China) for pursuing a weak currency policy. The US has already joined the currency war with the other major economies in an effort to make exports more attractive and is likely to continue to do so.

Thirdly, sentiment and positioning on the Dollar had been bullish for a long time, and near record bearish on US Treasuries. Positioning has taken a while to reverse and this has kept the pressure on the USD.

What’s Next?

At this juncture, what do we think is next for the Dollar? The medium term picture remains bearish as US fundamentals deteriorate. However, it’s most likely that there will be a bounce in the near term, potentially significant in magnitude. There are two main reasons for this argument:

  • The market has gone from pricing between 100 and 125bp hikes until the end of 2018, to only pricing 20bps (Dec2018 Fed Fund Futures closed at 98.645 on the 8th September). Given the Fed’s past rhetoric and general comments, they still seem relatively committed to continuing on their hiking cycle. It will only take a few hawkish comments or a couple of strong economic data releases for sentiment to change and shake up the market – we can easily go back to pricing 40-50bps and this will send the Dollar higher.
  • The Daily Sentiment Index (DSI) for the Dollar is now at practically never before seen levels, registering a reading of 7 on a 1-100 scale. This means that if the Dollar finds reasons for a bounce, this extreme bearish reading will cause the resulting spike to be more sudden and violent. For comparison, the Euro DSI index stands at 93, at the other extreme of the spectrum. It feels almost inevitable that the EURUSD will see a leg lower in the short term.
DXY Monthly Chart
DXY Monthly Chart

In conclusion, we believe that the US economy is going to continue to stall and the USD will suffer more as a result. The 50% retracement of the 2001-2008 drop (87.26) may well be tested eventually but it’s likely that we will first see a sharp bounce towards 96 as shorts get shaken off and positioning returns to more “normal” levels. Risk/reward is now looking quite favourable for entering short-term long USD positions vs. some major currencies which have recently outperformed, such as the EUR, JPY and CAD.

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

USDJPY Traders Should Watch the S&P500

The USDJPY had a strong bounce from 108, what to keep an eye on now

The USDJPY had a strong bounce off the 108.00 level this week and the reaction has sparked a lot of interest in the pair. As you can imagine, bonds have dropped and yields moved up adding to the tailwind of the USDJPY rally (not pictured here).

USD/JPY Weekly Chart
USD/JPY Weekly Chart

I’m in the camp that the USDJPY continues higher near term, but we are in a longer term triangle at the moment, so upside may be limited to the 113.50/114.00 range as we hit the longer term downtrend line and range highs.

However, to assist managing risk, I am also focused on the SPX, since the USDJPY and SPX have had a strong correlation over the years. What you will notice is the last year, the SPX has pushed higher without the USDJPY, but the day to day correlations are still fairly strong.

USD/JPY vs SPX Weekly Chart
USD/JPY vs SPX Weekly Chart

The SPX has been grinding higher up a trend line all of 2017, as you can see below. But what is glaringly obvious is the RSI is very divergent and not following the price higher:

SPX Daily Chart
SPX Daily Chart

In the next chart, we look at the weekly SPX and what is highlighted are the fall months (boxed) for the last several years. Typically, the fall is not the best time for the equity markets, but seasonality kicks in around the November time frame that allows for a move higher through the Christmas holidays (also known as the Santa Claus rally). Since we have been in a prolonged uptrend, the last few years have been more receptive to the fall pullback (last 5 out of 6 years) and considering we find ourselves back at all time highs, this year is at risk of following the same pattern.

SPX Weekly Chart
SPX Weekly Chart

If trading the long side of the USDJPY, I think it makes sense to follow the SPX as well, to manage downside risk. If the SPX breaks the 2420 level, and especially the 2400 level, the USDJPY will probably be trading closer to 108.00 than 110.00. But as long as the SPX continues to push higher, the 113.50/114.00 level looks likely to be tested once again.

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Is the Euro’s 2017 Rally sustainable?

The Euro has been one of the star performers of 2017. We will now try to determine its main drivers of strength, as well as its potential outlook going forward.

Drivers of Strength

  1. Euro sentiment had been on the bearish side for a prolonged period of time. This was due to a combination of factors such as weak economic data, the Greek crisis and the rise of far-right political parties. This bearish sentiment has now shifted towards the bullish end of the spectrum, resulting in Euro strength.
  2. Eurozone economic data are improving. Germany is no longer the main force behind EZ strength; in fact, while Germany seems to be reaching a plateau, other EZ countries are emerging and picking up the baton.
  3. ECB governor Mario Draghi has recently been less dovish than usual. During the 2017 Jackson Hole Symposium he shared an optimistic outlook and didn’t talk down the Euro’s recent appreciation. This was a departure from his usual stance, which was seen by the markets as being hawkish.
  4. ECB members are already discussing the possibility of tightening monetary conditions in the near future. This will probably involve gradual balance sheet reduction as well as interest rate hikes.
  5. The danger of Greece – or another country – leaving the Eurozone has diminished substantially. Just a few years ago the possibility of Grexit was looming large, along with the potential domino effect that could even lead to a Eurozone collapse in some extreme scenarios. Today, such events carry an extremely low probability and there seems to be broad stability in the EZ.
  6. When the UK voted to leave the European Union, there was uncertainty on both sides of the equation. As Brexit negotiations began, it’s become evident that the UK government is on the back foot. Risks exist on both sides but it seems that the EU is in control of the negotiations at this point.
  7. The US Dollar has been weakening markedly in 2017, for a variety of reasons. The most broadly traded & liquid FX pair is EURUSD and it has rallied around 1500 pips from the lows. This EURUSD move has a side effect of pushing other Euro crosses higher (e.g. EURGBP, EURAUD, EURNZD etc) and sending out a picture of broad Euro strength.
  8. The combination of rising global geopolitical tensions with US Dollar weakness are sending safe haven flows into the Euro, among other “safe” currencies.

Future Outlook

Following its recent strong run, where does the Euro go from here based on fundamentals? Let’s take each point in turn.

  1. As the Euro rallied in 2017, sentiment has become more and more bullish. In fact, the DSI index has now flipped to the other extreme, registering a 93 reading on the 28th
  2. The Eurozone’s recovery is still relatively fragile overall, just like other major economies around the world. Inflation is still stubbornly below the ECB’s target and it’s hard to see the ECB tightening substantially while inflation remains subdued.
  3. Mario Draghi’s tone may have recently turned more hawkish than usual, but central bankers are renowned for being unreliable in such ways. Draghi is well aware that the Eurozone’s exports suffer as the Euro strengthens, so it’s just as probable that he will be dovish again soon.
  4. The ECB members’ hawkish speak has created expectations which must now be met.
  5. Greece is not a country that’s been “fixed”. Serious structural, fiscal and political problems remain and they will inevitably resurface in due course. Unless the country’s problems are comprehensively addressed, the exit scenario may resurface to haunt the Euro.
  6. Brexit negotiations may seem to have the EU in control, but it’s still very early days. EU officials need to make an example of the UK, in order to deter other countries from leaving. On the other hand, the UK is in the top 3 European countries by GDP and an important trading partner to EU countries. Ultimately there will likely be an acceptable compromise for both sides.
  7. The DXY has lost around 10% and is bouncing off big support at around 91.5. For the Dollar to lose more ground, the US economy needs to show continued weakness that will warrant ending the current hiking cycle. There is always the possibility of a sustained Dollar bounce and such a move will put pressure on the Euro.
  8. Geopolitical tensions are at elevated levels, with the North Korean situation being particularly worrying. However, it’s likely that these are simply political games that will be resolved with politics, with the ensuing risk-on market reaction reversing some of the recent Euro moves.
EUR/USD Weekly Chart
EUR/USD Weekly Chart

It’s undeniable that the Euro has had a stellar run in 2017. Looking into the fundamentals reasons behind this move, however, it’s hard to identify solid reasons why its strength should persist significantly. Having said that, the trend is intact and momentum is strong. The EURUSD, in particular, is now at a crossroad that will dictate which way the next 500 pips are going.

From a macro viewpoint, we think that it’s too late to enter long Euro positions. If strength continues further than the accumulation of short Euro positions will start making a lot of sense.

Technical Analysis Outlook

The EURUSD bottomed at the 1st day of this year (unsurprisingly since we have made plenty of mentions to the importance of seasonality) and rallied almost 17% since. During this rally, it has broken above multiple resistance levels with the most important one being the confluence of the large descending channel that held it in a range since the beginning of 2015 and the horizontal resistance at 1.1450 (look at the weekly chart). Yesterday we popped above the 127% Fib from the last move lower (May 2016 to the low) and came near to testing the ascending T/L resistance that has guided the uptrend since March 2017 before turning around and posting a key reversal candlestick. Today’s continuation is forming an evening star formation which adds credibility to the corrective scenario. The 1st support area is at 1.1730 which is the confluence of the broken bull flag resistance (expected to

Yesterday we popped above the 127% Fib from the last move lower (May 2016 to the low) and came near to testing the ascending T/L resistance that has guided the uptrend since March 2017 before turning around and posting a key reversal candlestick. Today’s continuation is forming an evening star formation which adds credibility to the corrective scenario. The 1st support area is at 1.1730 which is the confluence of the broken bull flag resistance (expected to be supported) and the ascending T/L support. As long as we trade above 1.1450 we expect the move lower to prove corrective.

EUR/USD Daily Chart
EUR/USD Daily Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Takeaways from the August Super Thursday, Maybe not So Dovish

The Bank of England’s Monetary Policy Committee met last week and there were some interesting developments. We will try to sieve through the plethora of information and pick what we think were the salient points.

First of all, we start with the interest rate decision. The July meeting’s split was 5-3 (5 to keep rates on hold, 3 to hike 25bps) but last week’s split widened to 6-2. This was broadly expected as Kristin Forbes – a well known BoE hawk – has since left the committee. There were some pre-meeting whispers about Andy Haldane (the BoE’s chief economist) switching to a hike, but that was always a low probability event. All in all, the interest rate decision sprung no surprises at all.

August is one of the four months where the BoE deliver their Quarterly Inflation Report (QIR). On this QIR, they lowered their growth forecasts slightly: 0.2% lower to 1.7% for 2017 and 0.1% lower to 1.6% for 2018. What do these forecasts really tell us though? They show that the BoE is slightly more cautious for the next couple of years, but for all intents and purposes the forecasts are broadly unchanged. After all, central bank forecasting accuracy certainly isn’t as good as 0.1% on a 1 to 2 year forward horizon.

The QIR also shows an inflation forecast where the peak is to be reached very soon and then it reduces gradually towards the 2% target. The BoE members clearly think that the latest drop in inflation (from 2.9% YoY down to 2.6% YoY) is the start of a general trend lower. This is not a foregone conclusion and the Pound’s depreciation may continue to drive inflation higher for longer; this remains to be seen.

Lastly, Mark Carney’s speech was interesting because even though it didn’t spring any big surprises, some of the things he said gave us some insight on how the BoE approaches the main issues. Here are some of his quotes which we thought were key:

  • Rising inflation is only due to the depreciating currency”. It’s true that a depreciating currency drives inflation higher but it’s not the only reason. This should be read as a dovish comment, as it shows that there is reduced urgency to raise rates due to high inflation.
  • We may need to tighten more than the markets currently expect”. This is obviously a hawkish statement, as the BoE are aware what the market is implying in terms of rate hikes (from sources like short sterling futures or OIS swaps). It’s worth noting that the BoE have been saying this for a couple of years now, so perhaps there should be less weight attached to these words.
  • Brexit uncertainty is hitting businesses” and “some bosses are refusing pay rises because of Brexit”. These are important statements, as they are most likely true. At first glance these statements may sound dovish but there is a hidden hawkish side to them. If businesses are being hit and refusing pay rises due to the uncertainty, we must consider what might happen when Brexit negotiations start yielding results and uncertainty gets slowly lifted. There will be considerable trapped potential ready to be unleashed onto the economy with obvious positive effects.

All in all, the market took the BoE as dovish and the Pound got hit around 1% vs. most major currencies. Uncertainty remains – that cannot be denied – but my macro view is that the market may still be too pessimistic on the Pound.

We need to ask ourselves this question: is the current state of the UK economy so terrible that it justifies 0.25% base rate – the lowest in history – and QE? Let’s not forget that this monetary policy is supposed to be of an “emergency” nature. We’ve argued in the past that prolonged ZIRP & QE are actually deflationary, as they create asset bubbles and essentially reduce the average person’s disposable income. Our view is that the UK economy may not be firing on all cylinders, but it’s definitely good enough to not require these extraordinary measures. Some interest rate normalization – starting with the reversal of the post-referendum rate cut – should begin as soon as possible.

I am looking to enter long GBP macro positions vs. the Euro and the Dollar if Sterling weakens further from here. My preferred entry points are the previous spike highs for EUR/GBP (short entry at 0.9225) and the long-term support TL lows for GBP/USD (long entry at 1.2680).

EUR/GBP Weekly Chart
EUR/GBP Weekly Chart
GBP/USD Weekly Chart
GBP/USD Weekly Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Are the Benchmark Bonds Ready to Resume their Move Lower?

Global bond markets have experienced a monstrous multi-year rally, mainly fuelled by unprecedented easing in central bank monetary policy. Most major central banks have engaged in Quantitative Easing and ZIRP/NIRP since the global financial crisis. As a result, leverage and risk-taking were greatly encouraged, as the cost of funds became extremely cheap. This led to very high valuations for a wide range of risk assets, with many market participants characterizing them as bubbles.

10 year US Treasuries in particular have been in a very well-defined downward channel which spans well over 20 years – 10yr yields that have fallen in a near straight line from 8% to around 1.5% lows.

10 Year T-Note Chart
10 Year T-Note Chart

Where does this bond monster run end? How long can ultra loose monetary policy go on for? After nearly a decade of relentless easing, the first signs of its end are slowly emerging. It’s most likely that the world is heading back to higher yields although it’s unlikely we will see neutral yield levels like in the 80s, 90s and 00s. The new normal will probably mean around 2% base rates and 3-5% 10year bonds for majors – such a move should bring relief to markets and asset values.

The Fed, having been criticized for not hiking a couple of years back when economic data started to show promise, didn’t make the same mistake again in 2016. They commenced their hiking cycle in December 2016 and continued with more in 2017. However, they now face a tough dilemma as they are hiking into a weakening economy. Tightening monetary conditions will eventually affect the economy’s recovery path and this is already starting to show.

The good news for the Fed is that they’re not alone in their fight towards higher rates. The ECB have already strongly hinted about reducing their balance sheet and eventual rate hikes. The Bank of Canada already hiked once and could follow up soon. Even the Bank of England, amid all the Brexit-related uncertainty, are talking about reversing some of the ultra loose policy with 3 hiking votes in the last MPC meeting. In a fitting metaphor, central banks are like Tour de France cyclists: the Fed has spent a lot of time at the front of the peloton doing all the hard work while others streamlined behind them. Now it’s their turn to move back and let the others take over.

On a macro level, we think that the global yield landscape has changed. Bonds have been very rich for very long as risk premiums were practically eliminated. The recent bond sell-off was probably the precursor to a bigger move lower around the corner.

The Technical Analysis Perspective on the Bund

The Bund found a top last September but has been trading within a large triangle since February 2016. The last rejection from the triangle’s resistance came just above the 165 level and after a strong push lower the Bund corrected higher in a bear flag consisted of 2 equal legs (an A-B-C according to Elliott Waves Theory and an A-B-C-D according to Harmonics). It finally rolled over after retracing almost 50% of the prior move lower and is now breaking below the bear flag that has a theoretical target of 157.54 which is coincidentally very close to where the triangle’s support is. The closest support zone is at 159.70 and as long as we hold the 162.70 area we remain bearish looking for the move lower to accelerate.

Bund Daily Chart
Bund Daily Chart

The Elliott Waves Perspective on the 10Y Note

10 year US notes are in a bullish mode since the start of the year but the recovery on the daily chart is clearly measured in three waves. In Elliott Wave theory that represents a corrective price action, labeled with A-B-C letters. It’s seen as a counter-trend move that can be fully retraced once it is completed. Based on the latest sell-off from June 13 2017 high, we think that more weakness is on the cards, at least towards the lower side of a corrective channel, down to 124’00. If the 10 year US note stays in bearish mode then we can expect an important bearish turn for the EURUSD as well, since we notice the positive relationship between the 10 year US note and the EURUSD since the start of July.

10 Year T-Note Daily Chart - Elliot Wave
10 Year T-Note Daily Chart – Elliot Wave

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Has the EUR/GBP run out of steam?

The Technical Analysis Perspective

The EURGBP has been moving higher since the middle of April but we have good reasons to believe that upside momentum has stalled and in fact we are reversing lower. This is the part that we need to remind our readers that trying to time reversals is a low probability but high reward “game” which you need to know how to “play” to come out on top.

The key element is having a well defined R/R ratio and a confluence of technical levels that show that a reversal is likely. In this case the signals are A) a key reversal outside black candlestick on the weekly chart (strong reversal candles on the weekly chart are to be respected), B) an ascending wedge formation that broke to the D/S, C) a discrete RSI divergence and D) a key reversal on the daily chart the past Wednesday. Today the pair is re-testing the broken wedge support as resistance by posting an inside white candle and if this level fails to reject the reaction then we are monitoring 0.8870 (the 61.8% Fib) as a possible resistance zone.

A break and close above 0.89 obviously invalidates our view. The minimum R/R is better than 1:1 since our 1st target is at 0.8650 while the pair is currently trading at 0.88.

EUR/GBP Daily Chart
EUR/GBP Daily Chart
EUR/GBP Weekly Chart
EUR/GBP Weekly Chart

Technically, the EUR/GBP produced an interesting development during the past couple of days. The pair had rallied through a bunch of horizontal resistance and a key Fibonacci level at .8875 (which is the 61.8 retracement level) and looked like we were on our way to .9000. Then, the following day, we reversed sharply and the RSI posted a divergent reading. Since then, the EUR/GBP has been trading somewhat “heavy” and now with all the sellers “stopped out” and fresh longs finding themselves on the wrong side, the risk is tilted to the downside. The fact that we never made it to .9000, may end up putting some downside pressure on, especially should any positive Brexit developments emerge.

EUR/GBP Daily Chart
EUR/GBP Daily Chart

The Elliott Waves Perspective

EURGBP turned sharply lower at the end of last year, and formed a nice spike at 0.9600 area which appears to be a significant top as a much deeper correction can be taking place if we consider the impulsive 1300 pip drop down to 0.8300 in December 2016. We see that move as a wave A, the first leg of a three wave drop that is expected to continue to much lower levels by the end of 2017. We anticipate a decline into the third leg of wave C that can still be in the early stages if we consider the recent turn down from 0.8950 and beneath the channel support line. Based on the E.W. principle there is room for a sizable move to 0.8100 area or even 0.7760 in the month ahead, while the market is trading beneath the October 2016 highs.

EUR/GBP Daily Chart
EUR/GBP Daily Chart
EUR/GBP 4H Chart
EUR/GBP 4H Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

Are Precious Metals Breaking Down, or Are We Setting up for a Big Rally?

The Macroeconomic Perspective

Gold and Silver are assets which have been of great importance for thousands of years. Up until a few decades ago, gold was explicitly linked to currencies (such as the US$) and was broadly used as money. In the past few decades – particularly following Nixon’s decoupling of the gold/dollar convertibility – precious metals have been greatly criticized by leading academics and investors alike. Warren Buffet famously called gold a “barbarous relic”, but is he right?

Gold’s scarcity and physical characteristics (longevity, divisibility etc) allowed it to become the main form of money for centuries. However, technology advances and continuing financial innovation have taken away a big part of its appeal. Silver’s monetary role always played second fiddle to gold, but it compensates by having extensive industrial use.

Precious metals have been historically correlated with long-term real interest rates (interest rate minus inflation) and this is quite a consistent indicator for short-term performance. However we must note that this is not always the case, for example the 1980s-1990s bear market happened while real rates were at historically low levels. In today’s markets, following a major 10-year rally in global bonds, yields are now starting to rise and that has brought downward pressure to metals.

PMs are priced in US Dollars so naturally the Dollar itself is another important price driver. Bulls are especially concerned about recent price action in this respect. The DXY index has fallen over 5% during the past 2-3 months but Gold has also dropped 5%. Furthermore, silver has crashed nearly 20% lower during that same time period! In light of this, PM bulls must surely wonder how much lower they will go once the Dollar finally starts to bounce.

Another price driver that has surfaced in the recent 2-3 years are crypto-currencies. Cryptos have been specifically designed to mimic some of the positive characteristics of precious metals, without their drawbacks. Like gold & silver, they are also “mined” with progressive difficulty. They seem to solve the inflation problem by having a finite supply by design, although critics refute this argument by pointing out that there are hundreds of different crypto-currencies and hence supply is theoretically infinite. The 10 most popular crypto-currencies currently have a combined market capitalization of just under $80 billion, so they are definitely a factor to watch closely.

Finally, precious metals (particularly Gold) are hoarded and used simply as a store of value. The vast majority of the world’s physical gold is kept unused within vaults or safes. As the purchasing power of most major fiat currencies falls, individuals increase their demand levels for physical metals. Having said that, central banks also often get involved in the physical gold market and produce significant price moves (the most famous example is probably Gordon Grown selling UK gold between 1999 and 2002, at $250-$300 just before gold’s biggest bull run to date).

All the above price drivers are interesting and valid for sure. However, one could argue that there is only one consistent and overpowering driver: money/credit/debt supply. The rationale is simple: if there are $100 dollars in existence and 100 ounces of physical gold, a reasonable price could be $1 per ounce of gold. If, however, the supply of dollars increases exponentially (as it has) and the supply of gold increases at a steady pace (again, as it has), then it only follows logic that gold price will follow a general trend higher. This theory would be valid as long as gold’s use (and hence demand) had not experienced any major changes. Although it could never be an exact match, the following chart illustrates this quite well:

Chart 1: Gold price vs. US Federal Debt (source: FRED)
Chart 1: Gold price vs. US Federal Debt (source: FRED)

All the above analysis is based on efficient markets that operate with normal supply & demand characteristics. It may sound controversial, but it can be argued that gold & silver markets no longer meet that requirement.

There have been repeated events where large orders have been executed in the futures market, exhibiting the same characteristics:

  • They are sell orders in the leveraged futures market (i.e. paper, non-physical).
  • They are of large size.
  • They are executed during an illiquid time of day (usually outside European and US trading hours).
  • They are executed with no apparent desire for best execution; they are done in one go, taking out many levels below current price.
  • They seem to have only one goal: to lower the asset price as much as possible, as quickly as possible.
  • They are often attributed to “fat finger” trades.

The most recent such example is the two June/July silver flash-crashes. They occurred 9 trading days apart, had all the above characteristics and their immediate damage to silver price was 6% and 10% respectively. Such dramatic and inexplicable price moves shake peoples’ confidence in these markets and can cause big shifts in positioning & sentiment.

From a macro perspective, making meaningful conclusions on Gold & Silver is a difficult task. We can identify several important economic drivers that can be used to meaningfully explain price action. However, all these pale in insignificance when the markets experience the dramatic price moves described above. It’s important for investors to be fully aware of these when deciding entry & exit points and – most importantly – size and leverage.

The Technical Analysis Perspective

It’s hard not to notice the selling pressure gold and silver have been under the last few weeks, but in order to get a good picture of what is happening, you have to take a step back and look at the last 10+ years of price action. Gold’s longer term view shows a very large triangle pattern which could allow for a strong bounce as we approach $1150. See below.

Taking a shorter term view on the daily chart, we had a couple key events happen:

  1. The false breakout of the triangle.
  2. A possible double top.

Both of those events should allow for some near term weakness, however that possible breakdown towards $1150 may stop short of completing the double top as we hit longer term trend line support. If I was a bull, I would be looking there ($1150) for a good risk/reward long.

Gold Weekly Chart
Gold Weekly Chart
Gold Daily Chart
Gold Daily Chart

Silver spent 15 months building a base at around $14, from December 2014 since February 2016. That period was followed by a rebound that took silver above $21 exactly a year ago and since then the metal has been steadily depreciating with last week’s flash crash bringing it back to retest the same zone once again. As long as the $16 level caps the price action silver is in danger of dripping back to $14 while a break below that level would bring it to 8 year lows. A weekly close above $16 is required to relief the pressure but even then $18.50 is the level that has to be breached for silver to regain its shine and become bullish. There is only 1 thing at the moment that gives hope to gold and silver bulls and that is the extreme readings of DSI (daily sentiment index) and the COT’s that show that investors are extremely bearish the metals both from a positioning and a sentiment standpoint. These are usually great contrarian indicators.  To summarize, the risks are significant and unless we see a strong reversal and a change of behavior we cannot turn bullish.

Silver Daily Chart
Silver Daily Chart
Silver Weekly Chart
Silver Weekly Chart

The Harmonics Perspective

Gold has retraced to 50% of the rally from the December 2016 lows, something it failed to reach in the early May decline.  If Gold can recover the 1228 level and trade back above the 200 day MA then the rally from December 2016 to April 2017 may just have been the first leg in a bigger ABCD pattern and I see a bearish Gartley pattern at 1320 which is also where the rally would be 0.618 of the length of the December-April rally.

Gold Daily Chart
Gold Daily Chart

The 0.236 Fibonacci retrace level from the 2011 highs in silver is at 22.158. It was unusual that we did not reach it in the rally from the December 2016 lows. It sets up a second leg of an ABCD pattern (or EW ABC) correction to this level.
The sharp sell off in silver futures last week reached the 0.886 Fibonacci retrace level from the 2016 lows. The 0.886 Fibonacci retrace and 1.13 Fibonacci extension are really good harmonic pattern levels. This sets up a text book ABC rally to the 0.236 Fibonacci level at 22.15. Confirmation that this pattern is setting up will be trading above 15.892 and then the 200 day moving average.

Gold Daily Chart
Silver Daily Chart

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.

The Mexican Peso (USD/MXN) is Reversing Once Again

The Technical View

It was on this blog that we posted on the 22nd of January a post called “USDMXN: Multiple signs point to a reversal” and predicted that the USDMXN was finally about to reverse the 3.5 year old wild uptrend that brought it up, all the way to the 22 handle. Consider this blog post another “warning” that the Peso’s move is actually now mature enough to expect at least a correction to the move lower that followed our 1st post.

USD/MXN Daily Chart
USD/MXN Daily Chart

The USDMXN has spent the past 3 months forming a descending wedge that is currently breaking to the upside. The initial signs were already there and included a momentum slow down and a false break below the 1 year low before reversing higher as well as an apparent RSI divergence on the daily chart. We also want to stress out that a daily close above 18.31 will mark a higher high after a long time. An optimistic objective for this reversal is a retest of the 19.40 level which is in the middle of a support / resistance area that has proved its significance multiple times in the past. The R/R under such a scenario is extremely appealing to ignore and enough for us to consider an attempt to “catch a falling knife” worthwhile.

USD/MXN Daily Chart
USD/MXN Daily Chart

The Macro Perspective

The Mexican Peso has been in the spotlight for over a year now, since it started becoming apparent that Trump actually had a chance of winning the US elections. His views regarding Mexico were controversial to say the least and he was always very vocal about his neighboring country.

The week after the election result the USDMXN spike nearly 15%. Trump’s pre-election campaign was filled with “war on Mexico” promises and this led to a natural decline in the Peso. Companies like Ford jumped on the bandwagon and announced production moves from Mexico to the US, much to the President’s approval. However, the Trump administration has so far failed to follow through on its promises and there have been no concrete steps taken. This has led USDMXN to give back practically all of the post-election gains.

It’s worth noting that the Mexican central bank is quick to respond when it needs to defend its currency. Proof of this is Banxico’s frequent FX interventions following the US election, but also its interest rate hikes in 2017. Having said that, the markets are not expecting Banxico to tighten much further from here, so this should be it rate-wise in the short term.

We now stand at an important crossroad for USDMXN. The Peso has recovered but is still vulnerable as the Dollar tries to turn on its recent drop. Attention has shifted away from the US-Mexico relationship but as we well know it only takes one Trump tweet to get sentiment to move from one extreme to the other. Tread carefully when trading the Peso as shifts in sentiment – and potentially in fundamentals – can happen very quickly.

This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.