AUD/USD broke its long standing and much written line at 0.7821 and traded 57 pips to 0.7877. Above 0.7821, AUD/USD ranges between 0.7821 to the 10 year average at 0.8305 or 484 pips. Below 0.7821, AUD/USD trades 0.7821 to 0.7308 or 513 pips. Below 0.7821 exists 0.7605.
DXY last week maintained its 148 pip range between 89.95 to 91.43. Above 91.43 next targets 92.78 in a 135 pip range.
GBP as written in the last post maintains deep overbought status across all GBP pairs except GBP/NZD. Watch 1.9136 this week for best moves.
EUR/USD opens in fairly perfect neutrality however ranges continue to compress. Problem pair EUR/JPY and all JPY cross pairs maintain deeply overbought status for week 4. EUR/CAD, EUR/NZD and EUR/AUD open the week massive oversold. EUR/CAD and EUR/AUD will provide the best moves.
Stand clear EUR/CHF as AUD/CHF and NZD/CHF will provide better movements.
NZD/USD 0.7267 then 0.7356 Vs 0.7267 and 0.7990. NZD/CAD is overbought while NZD/JPY heading into week 4 maintains richter scale overbought status.
Overall, NZD/USD traded 200 pips from 0.7100’s to 0.7300’s for the past 2 months and provided support to GBP and AUD to allow both to move higher. Explains the divergence seen in EUR/NZD Vs GBP/NZD this week.
USD/JPY watch 104.97 and USD/CAD 1.2587 Vs 1.2826.
EUR/USD most significant high/ low point is located at 1.2026. A break however at 1.2020 represent a wholesale trend change for a lower EUR/USD. Current EUR/USD trades above 1.2026.
USD/JPY on the other side trades above its significant high/ low point at 104.72. Both EUR/USD and USD/JPY are mis aligned. Either USD/JPY remains above 104.72 and trades higher or EUR/USD must break below 1.2026 and 1.2020 to trade much lower to 1.1700’s. In the interim, both pairs are in a standoff.
Noted from USD/JPY constituents, USD/CAD trades below its high / low point at 1.2867 and USD/CHF below 0.8980. USD/JPY remains the outlier USD pair for the past two weeks.
From the January 3rd long term forecasts, the next major USD/JPY inflection point is located at 106.00 exactly and USD/JPY traded to 105.75 then dropped. While 106.00 above represents the next break, below is located the 10 year average at 103.33 and a 267 pip range.
EUR/USD however must break below its 10 year average at 1.2107 to target the vital breaks at 1.2026 and 1.2020. Above is located the 14 year average at 1.2625. As EUR/USD trades above 1.2107 then the wide range becomes 1.2625 to 1.2107 and a 518 pip range. EUR/USD overall hasn’t changed its 518 pip range since January 8 as important MA’s are dropping simultaneously.
Most important point at 1.2625 however is dropping ever so slowly week to week as is 1.2107. A much lower EUR/USD is ahead in weeks to come.
Between 1.2107 and 1.2624 exists minor daily and weekly trade points.
USD/JPY however above 106.00 exists a vital average every 100 pips until the 5 year average at 109.09. USD/JPY’s counterpart due to the exact same pair is CHF/JPY and it trades above 116.20.
For USD/JPY today, best shorts are located at 105.37 and 105.30 to target 104.90. Longs are located at 104.31 and 104.37 to target 104.64. The break at 104.72 however represents a lower USD/JPY next week.
EUR/USD close price today is forecast at 1.2109 and below 1.2137. This places EUR/USD next week between 1.2082 to 1.2137 for next week.
USD/JPY above 104.72 represents a problem for AUD/JPY as it trades above its 5 year average at 79.70 and NZD/JPY trades above its 10 year average at 75.42. Both are mandatory breaks for AUD/USD to trade lower and break its vital MA at its rising line at 0.7557 and NZD/USD 0.7070.
Any price today for AUD/JPY ar 81.57 is a good short to target 81.17 and today’s close price is forecast at 80.96.
Not only are all JPY cross pairs richter scale overbought but most trade near vital inflection points. EUR/JPY 128.24 is next above Vs below at 125.93 or a 231 pip range. Close price forecast today for EUR/JPY at 126.83 places EUR/JPY at perfect neutral to begin next week.
GBP/JPY trades deeply overbought between vital 5 and 10 year averages at 142.47 and 148.27. Good short today is found at 145.26 to target the close price forecast at 144.08. Quite a distance for a Friday. Above 144.08 then GBP/JPY remains deeply overbought heading into next week.
Overbought GBP/USD forecast close price is located at 1.3741. Shorts today are located at 1,.3866 and 1.3857 to target 1.3772 then 1.3741.
For oversold EUR/CAD, next week 1.5471 high/ low point we’re watching closely.
For high flyer and wide ranger GBP/AUD net week 1.7900 represents the big break. 1.7900 broke this week and traded to 1.7785. EUR/AUD and GBP/AUD’s counterpart must break 1.5923 to trade higher. GBP/AUD break at 1.7900 represents an alignment to EUR/AUD as both now trade below respective MA’s.
For oversold USD/CAD, close price today is forecast 1.2753. Shorts today are located at 1.2787 and 1.2773 to target 1.2731 then 1.2696.
Oversold EUR/GBP trades just above its 5 year average at 0.8725.
S&P bottom and long entry is located at 3896.71 and just ahead of 3861.36. Long target is located at 3906.58 for a quick 10 point trade today.
DAX today must trade back to at least 13970.70. Note most vital today at 13926.28 then 14029.00, 14084.78 then 14156.47. Above 13970.70 targets 14029.00.
Tuesday brings us significant weakness of the Canadian Dollar, which is quite surprising as this movement has no clear fundamental background. Usually technical analysis cooperates with fundamentals but this time, the movement is almost entirely technical, at least from my point of view.
Let’s start with the EURCAD, where the common currency is moving higher, testing an absolutely crucial horizontal resistance level. I mentioned this resistance in one of my previous short videos. The 1.544 level on the EURCAD was an upper border of the sideways trend, present here since April. The price closing the day above the yellow line will be a super strong, long-term buy signal.
Next up is the CADCHF, which we also mentioned recently. The price here is in a full pessimistic mode after the bearish breakout from the flag and bearish breakout from the descending triangle pattern. The CADCHF closing the day below the lower line of the triangle will bring us a proper sell signal.
Lastly, I will mention the USDCAD, which was about to create the right shoulder of the head and shoulders pattern but the weakness of the CAD delayed those plans. Currently, the right shoulder is being transferred into a small inverse head and shoulder with the price testing the neckline as we speak. The price closing above the 1.362 level, can give us a 90-pips-buy-signal.
Another bearish chance for a bigger drop has been wasted. Yesterday, sellers were hoping for a bigger slide on global indices, coming from the bearish breakout from the good-looking symmetric triangle pattern. Hopes faded at the end of the European session and the beginning of the American one, when the DAX and SP500 surged back inside the triangle. In theory, that leaves us with a false bearish breakout, which is usually considered a strong signal in the opposite direction, so in our case – north.
Let’s start with the SP500. You can clearly see the false breakout here and then a nice pullback above the lower line of the triangle. The European session however, didn’t start well and it’s negatively affecting futures on the SP500. The price is correcting the bullish movement from yesterday and is testing the lower line of the triangle again but this time from above. Long story short, as long as the price stays above the lower line of the triangle, sentiment is positive.
Short update about the EURUSD, which is currently forming a flag formation. The flag is a trend continuation pattern, which in this case promotes further rise. In the past few days, the price was making higher lows, supported by the blue up trendline. This may indicate a willingness for a bigger upswing. In the mid-term, as long as the price stays inside the flag, buyers can still have hope for a bigger upswing.
When mentioning the Euro, we have to talk about the EURCAD, which is ahead of a bigger movement. The thing is we don’t know the direction yet. After the flag patten, the price created a rectangle formation. So, simply speaking, the price is currently in a tight range. The way price action enthusiast trade this is by buying when the price breaks the upper line of this pattern and selling when the price breaks its lower line.
The new week begins with a complete risk-off mode in the market. Stock bears have finally caught their breath and their short positions are no longer negative. What’s the reason behind this sharp reversal? It may be the last week’s Federal Open Market Committee (FOMC) meeting. It could also be growing fears about a new COVID wave in China, or it may be the fear of a bursting bubble as 10-year-olds become day traders on the Robin Hood app. There are always factors behind every movement.
But in our analysis the focus isn’t about analyzing the ‘why’ instead we focus on analyzing the ‘what’, as in, what’s happening to the price and where is it heading.
So, with the ‘what’ in mind, let’s take a look at the DAX which started to drop with a head and shoulders pattern. The broken neckline gave the green light for the drop while the broken mid-term up trendline increased the bearish momentum. From that, we can see that 23.6% of the post-corona-reversal has been retraced. In my opinion, as long as the price stays above the 38.2% Fibonacci level, sentiment is bullish. What about a breakout? Well, that can get ugly.
The NZDUSD, which we mentioned last week, referring to its weekly chart, was creating a shooting star on the long-term down trendline. The shooting star pattern developed into a slightly bigger, but also bearish candlestick pattern. The price did indeed bounce from the downtrend line, giving us a very handsome sell signal.
Today we’re finishing up with an update on the EURCAD, which we mentioned at the beginning of June. We’d said that the 1.505 support level looked strong and should help buyers initiate a proper upswing, breaking the upper line of the flag. That’s why I’m not surprised by the fact that the price did exactly that! As long as the price stays above the upper line of the flag, sentiment remains positive.
There is little doubt the Fed was dovish, and the gravy train is going nowhere with future asset purchases continuing at the current pace of $80b p/m and MBS $60b p/m, which should underpin risk for some time. Judging by the bank’s economic projections (and dot plot) interest rates are not going up well past 2023, and the conversation on yield curve control (YCC) was certainly explored a few times, something Powell said was still “an open question”.
One suspects if they are going to announce YCC it will take place in the September meeting, and that meeting will be a biggy as it will give them a decent stretch to see how their many programs, not to mention economics, are evolving and the impact they are having on getting them towards its mandate.
When we consider YCC, I would expect the Fed to focus on the 3-5-year Treasury curve, more akin to what the RBA is doing than the BoJ, although there are a ton of questions around its commitment and of course what level (of yield) would they target.
Real Treasury yields promoting a bid in gold
For now, though we see a solid move lower in nominal yields, with the Fed importantly managing to generate a positive move higher in inflation expectations, with 5-yr Breakeven rates moving +3bp and above 1% for the first time since 9 March. This has resulted in US 5-year real Treasury yields collapsing 11bp to -70bp. For gold traders, this is all that matters and for gold bulls, it is the perfect storm, especially when married with such as the bearish trend in the USD.
Gold has been happy to track the 1750 to 1650 range since mid-April, and I have argued many times, the answer lies in the bond market and it appears to be playing out – Is this the time we finally see a solid break of the range?
The move in bond yields has propelled the NAS100, which will feed off lower yields every day, with the Fed keeping the punchbowl in the mix for as long as it takes. On the other hand, the dour economic projections have really made it clear that the Fed sees the prospect of a V-shaped recovery as incredibly low, so we’ve seen the Russell 2000 lower by 2.6%, while the S&P500 fell 0.5%, held back by financials (thanks to the flatter yield curve), and energy (crude fell 2.2%). Asia is feeding off these leads and risk is under pressure, with traders taking a bit off the top.
The USD is heading lower longer-term
If we consider the Russell 2000 is more reflective of inward factors and the US economy, it perhaps tells us why the USD is also being further shunned. The US is no longer the standout and almost isolated destination for global savings that it has been in recent years, and investors now have a choice and have redistributed capital accordingly. Lower yields are certainly incentivising an offer in the USD too, especially with raised prospects of YCC the months ahead. Why? Because if the Fed is going to add an extra measure to further increase its balance sheet through unlimited bond purchases, to fix a specific parts of the Treasury curve at a given yield, then it just increases the prospect of deeper negative real yields and an ever bigger balance sheet.
After a big move in the USD – Trading FX from a tactical standpoint
From a tactical perspective, the USD may still in the doghouse, but if the S&P500 is looking at the Fed’s dour economic projections, the index could find a few headwinds in the near-term. Despite liquidity, if the S&P500 tracks lower then global growth proxies such as AUD, CAD and MXN may also struggle near-term. It makes the currency crosses become a more attractive trading vehicle.
I am watching EURCAD. After some messy price action, the buyers are starting to get a better say here and should crude come off further and we start to see a few more sellers in the S&P500 then the funding currencies (EUR, JPY, CHF) will outperform. Whether this starts to trend is questionable, but the battle lines are drawn.
If playing the USD, AUDUSD is looking more vulnerable, but EURUSD is still strong and would be a preference if keeping the USD in play.
We see price still holding the 5-day EMA and there are few reasons to be short with any genuine conviction on current price action – happy to stay bullish here, where a close above 1.1383 would open up 1.1500. Will turn more neutral on a break of 1.1321.
New week starts without any excessive fireworks. Risk ON mode continues, so safe havens are trading lower and global indices are flirting with the new mid-term highs. Optimism can be widely seen across the globe. If we could name a one reason why it is all happening, we would say: NFP. The Friday’s number shocked and probably killed all the remaining bears (if they were still any left).
SP500 starts this week on the front foot. We have a small sideways movement but it should not concern the buyers. Bears probably can see a head and shoulders pattern here but we had so many of them on this chart that I guess, that no one believes in them anymore. In general, they are great, trustworthy formations but in order to trade them, one should wait for the breakout of the neckline, which was not happening here.
Quick update about the EURCAD, which we mentioned few days ago. We were above crucial support on the 1.505 and we said, that from this point, the upswing should start. It did but unfortunately it did not last long. Buyers managed only to test the upper line of the flag and that was it. Currently, the price is about to test the 1.505 again and for the range traders, this can be an interesting mid-term buying opportunity, again.
Interesting situation can be seen on our very own Swiss Franc index, which perfectly shows you the sentiment towards the CHF. Last few weeks are terrible but it seems that Franc has found a place to rest. This is the long-term up trendline connecting higher lows since the April 2019. We have also one horizontal support, which worked for some time but was eventually broken on Friday. Comeback above the orange area can be an interesting buying opportunity.
Are there still any bears on the market? Will, we will give them some rest and time to reflect on the decisions they made in the past few weeks. In our videos, we warned them many times not to go against the FED. We said that they should not seek for logic or sense out there. Trading these days is crazy and we just have to adjust to the fact that markets and the strict macroeconomic approach are broken.
In today’s analysis, we will focus on the Euro, where traders have been enjoying a flawless upswing.
On the weekly chart the EURJPY created a double bottom formation, which looks very promising for long-term buyers. One long-term down trendline was already broken and currently buyers are aiming for a second one. Before they get there, they’ll have to break the horizontal resistance at the 38,2% level, which has been extremely powerful so far. Powerful enough to initiate a bearish reversal, or at least a small correction.
Next is the EURCAD, where the price is inside a long-term flag formation. It seems like that flag is coming to an end as the price doesn’t want to go lower than 1.505, which is currently a crucial support. As long, as the price stays above this area, the sentiment is positive and traders can think about a great risk to reward ratio.
We’ll end this with the EURCHF, which has been enjoying three great weeks. The price broke two crucial down trendlines and is currently aiming at a strong horizontal resistance, created by two Fibonacci levels: 23,6% and 38,2%. Furthermore, this area is strengthened by 2019 lows, so it seems like a great occasion to take profit action, for some at least.
In today’s analysis, we will focus on the EUR as we have a nice depreciation movement here caused by one of the ECB members. In his interview, Olli Rehn from European Central Bank said, the ECB “will announce a package of stimulus measures at its next policy meeting in September that should overshoot investors’ expectations.” That was enough for the Euro bears to increase their selling activities. EUR plunged.
We were expecting bigger movement on EURUSD on Wednesday. Everything thanks to the sideways trend locked inside of the triangle pattern. EURUSD decided to brake the lower line of this pattern, which was in line with those fundamental comments from the ECB official. Yesterday, we got a small flag and another leg down. Currently, the price paused but considering the general sentiment, we are anticipating a further slide here.
EURGBP was going up for the past 14 weeks in a row! Seems that the time for a correction has finally come. We do have a good place for that as we are on the long-term horizontal resistance. Sellers obviously got a boost from the comments from the ECB and they needed that as the situation on the GBP was not encouraging to purchase Sterling. Correction should aim the mid-term support around 0.91
Last one is EURCAD, where we do also have a good bearish setup. Few days ago, the price successfully tested the combination of horizontal and dynamic resistances. The price went down, giving us a sell signal. In addition to that, EURCAD is currently attacking a mid-term support around 1.477. Once the price will close a day below the yellow area, the sell signal will be triggered.
First instrument in this video will be the USDCHF, where You can clearly see the strength of the Swiss Frank. It all started at the beginning of the month, when the price made a false breakout from the pennant. Proper sell signal was triggered on the 10th of May, when the USDCHF broke two major long-term supports. Yesterday, the price renewed the sell signal by breaking the lower line of the flag and mid-term dynamic support. Current target for this drop is the long-term up trendline connecting higher lows since the February 2018.
Now, EURUSD, which made a significant reversal and created a strong bullish candle with a long tail and large green body. This can be a proper double bottom formation but the buy signal will be triggered only when the price will beat this month’s highs.
EURCAD is also having a good time. Here, it all started with a false breakout of the lower line of the symmetric triangle pattern. Currently, buyers are on the run and they have high chances of reaching the upper line of this formation, which would mean a mid-term buy signal.
Yesterday, we had few interesting movements but I think that the most important one, happened on the EURUSD.
With yesterday’s upswing. The main pair, managed to break the upper line of the symmetric triangle, which was a mid-term, dynamic resistance. In addition to that, we broke the horizontal resistance, which was with us, since the 2nd of May. Today, buyers successfully used that line as a support. With this kind of movement, the sentiment is positive.
Next instrument is the EURCAD, which yesterday went higher in line with the EURUSD, but today, the price is going down. The drop is still fresh and was caused by the better employment data from Canada. Both setups were very similar but it seems that in this case, the breakout will be false, which will be a great occasion to sell.
Now, two pairs with RUB. Both of them are one step from a major buy signal. USDRUB has a flag bouncing from the support and EURRUB has a bullish rectangle. In both cases, price closing a day above the upper lines of those patterns, will be an invitation to go long.
Having reversed from 1.3325-15 resistance, the USDCAD is declining towards 1.3210 but the ten-week old ascending support-line, at 1.3185, could confine the pair’s downside then after. Should prices continue trading southwards past-1.3185, the 1.3125 and the 1.3080 may offer intermediate halts during the pair’s slip to 1.3055. If at all the pair manage to surpass the 1.3325 upside barrier, the 1.3380 & the 1.3420 can please buyers prior to challenging them with 1.3440-45 resistance-region. Given the pair’s ability to cross the 1.3445 mark, the 1.3500 & the 1.3565 might gain market attention.
Alike USDCAD, the EURCAD is also gradually slipping in direction to a TL support, at 1.5060, which if broken highlights the importance of 1.5000 psychological magnet. During the pair’s sustained dip beneath 1.5000, the 1.4950 & the 1.4900 seem to be buffers ahead of fetching the quote to 1.4845 support. Alternatively, the 1.5170 trend-line resistance can limit the pair’s nearby advances, breaking which 1.5180 & 1.5240 could appear on Bulls’ radars. However, the 1.5300-1.5310 horizontal-zone may restrict the pair’s rally above 1.5240, if not then 1.5400 can come back on the chart.
Failure to overcome the 0.9075-85 resistance-area presently drags the NZDCAD to 0.8950 support-line, breaking which the 0.8930, the 0.8915 and the 0.8900 may entertain the sellers. Though, pair’s refrain to respect the 0.8900 round-figure might not hesitate calling the 61.8% FE level of 0.8870 as a quote. Meanwhile, the 0.9000 & the 0.9030 can act as adjacent resistances for the pair before fueling it to the 0.9060 resistance-line. Should prices surge past-0.9060, the 0.9075-85 and the 0.9110 can become optimists favorites.
The demand for risky assets is gradually recovering, supported by the US-China’s “trade truce” which is not in hurry to ends. Futures on S&P500 rose by 0.4% this morning, after growth by 0.8% the day earlier. The Shanghai A50 is growing by more than 2% in hope of Chinese government stimulus.
Positive dynamics of stock markets caused the US Dollar to be rolled back from monthly highs on DXY. EURUSD has received the local support near 1.1300 levels yesterday.
Over the past month, the pair fluctuations’ amplitude has decreased noticeably, but it looks more likely to squeezed spring, rather than calm.
Today, in the EU markets’ focus is the ECB meeting, which often causes strong volatility. Mario Draghi is expected to confirm that the Central Bank will finally stop buying assets by the end of this year. For EUR, definitely, the vital impact will be from any comments on the monetary policy prospects.
Earlier, the ECB was about to start raising rates next autumn at least, but now these dates are in risk to move after the Fed’s rhetoric softening and general slowdown of the world economy. In this case, the euro can be hit, so that the technical factors will come into play.
Falling below 1.13 mark, which was an important support previously, can launch a new wave of decline. Two previous stages of the retreat were turned into the 7%- and 5%- fall of the single currency.
Commensurate with the previous two, the new downward spiral may send EURUSD below 1.08. More distant bearish targets and news key support are possible as well: as low as to 1.05 on the chart.
Note that the ECB tone mitigation seems the most likely to take place.
Also, we can not exclude completely that Draghi will prefer to take a wait and observe how the things unfold: confidence in the EU economic growth and the inflationary pressure build-up will significantly reduce the difference between the ECB and the Fed policies. Under these conditions, EURUSD will be able to rebound to the upper boundary of the November’s trading range near 1.15. Growth above this mark will display clearly a significant outlook revision and, perhaps, become a pivot point of the recent trend.
Five-week old “Rising-Wedge” is again at test with the USDCAD’s latest dip beneath the formation support. If the pair sustains recent breakdown, it confirms the bearish chart pattern that theoretically signal its plunge to 1.2770, which is below October lows. However, the 1.3000 and the 1.2930-25 could offer immediate supports to the pair prior to fetching it to the 1.2885-80 horizontal rest-zone. In case prices continue declining past-1.2880, the 1.2840 & 1.2800 are likely buffers that may be availed ahead of visiting the aforesaid 1.2770 mark. Meanwhile, an uptick beyond 1.3070 support-turned-resistance can put the Bearish formation on hold and push the quote towards 1.3110 & 1.3150 barriers to north before making it confront the 1.3170 resistance-line. Assuming the pair’s successful rise above 1.3170, the 1.3200, the 1.3225 and the 1.3290 might entertain the Bulls.
Unlike USDCAD, the EURCAD still struggles with 1.4950-40 area, breaking which it can surge to the 1.5000 round-figure but a downward slanting TL, at 1.5015 may limit the pair’s further advances. Given the pair’s ability to surpass the 1.5015 hurdle, the 1.5050 & the 1.5090 can act as intermediate halts during its rally to 1.5130-35 horizontal-region. Alternatively, the 1.4900 and an ascending trend-line, at 1.4865, might confine the pair’s short-term downturn, which if broken highlights the importance of 1.4840 support-level. Should sellers refrain to respect the 1.4840 mark, the 1.4800 & the 1.4750 could flash in their radars to target.
Having clearly breached the 50-day SMA & descending trend-line confluence around 0.9325-20, the AUDCAD is expected to aim at 100-day SMA level of 0.9510. If at all the pair continue being favorite to buyers after 0.9510, the 0.9550, the 0.9590 and the 200-day SMA level of 0.9680 could be their next bets. On the downside, the 0.9365 seem nearby support for the pair prior to retesting the 0.9325-20 support-confluence. It should also be noted that the pair’s D1 close below 0.9320 may again highlight the 0.9290, the 0.9220 and the 0.9190 for Bears to observe.
Though there is a significant amount of disagreement regarding the politics of controlling an economy, there are still a few things that fundamentally all economists can agree on: high employment is generally desirable, low inflation is generally desirable, and—perhaps above all else—a stable economy is one that can operate in a predictable way. Any time a national economy deviates from these objectives—and possesses high levels of unemployment and general economic instability—there ought to be at least some reason for outside speculators to be concerned.
Less than one decade ago, the Greek economy experienced one of the worst depressions to ever occur in the developed world. In an incredibly short amount of time, unemployment dramatically increased, the interest rate on government bonds skyrocketed, and seemingly all other economic metrics inspired panic to some degree.
Few economists were able to correctly predict just how bad the Greek economic crisis would actually be, but—especially with 20/20 hindsight—the existence of this crisis still remains relatively unsurprising. When compared to other countries tied to the Euro, the Greek economy had been measurably underperforming for quite some time.
Now, roughly six years following the peak of Greece’s economic crisis, Italy finds themselves in a situation that is all too familiar. In this article, we will briefly compare and contrast the economic situations of Greece and Italy, and also discuss ways active investors can potentially exploit the current situation to their advantage.
Similarities between the Situation in Greece and Italy
In order to understand the risks presented by the Italian economy, it is important to recognize why the situation in 2018 is so familiar to what we witnessed in 2011. Both Southern European nations have experienced relatively high rates of unemployment, though Italy’s current unemployment (about 10.2%) is nowhere near as bad as Greece was during its recent peak (27.9%).
Both nations have also experienced tremendously high amounts of national debt (Italy currently has a national debt over 2.3 trillion EUR, 131% of GDP), which have triggered talks of austerity measures and even declaring independence from the Euro. In 2011, Greece began to impose various austerity measures which—at least according to Keynesian economics—seems to have been the incorrect move for a country that was already tremendously low on working capital.
Consequently, austerity measures in Greece witnessed the government become even more desperate for funds and increase 10-year bond yields from roughly 5% to nearly 40% in less than one year. Italy’s reaction to its current economic situation is yet to be seen, but an increased interest in populist politics (5 Star) and Euro-skepticism suggests that it may be moving in the same direction that Greece once was.
Differences between the Situation in Greece and Italy
The details involved in international economics can be quite complex and comparing Greece to Italy will naturally involve a more nuanced and comprehensive approach. There are still some things that make Greece and Italy significantly different and the effects of these differences will vary tremendously.
Though Italy is suffering from many of the same economic woes that Greece experienced a decade earlier, the degree to which they are suffering is not nearly as bad. The Debt-GDP ratio is more sustainable (suggesting that austerity might not be necessary), unemployment is lower, and Italian bonds have experienced comparatively little volatility. All of these figures suggest that if there is a “tipping point” that caused the Greek economy to collapse, then Italy has not passed it (yet).
One difference that should be more concerning, however, is the scale at which the Italian economy operates. While, in terms of nominal GDP, the Greek economy is only 53rd largest in the world, the Italian economy ranks 9th (and is the 4th largest in Europe). This means that the relations between Italy and the rest of the economic world will be significantly more important. Furthermore, while Greece’s crisis took place in a “pre-Brexit” world, the fact that Europe has already witnessed one major power (slowly) begin the process of leaving suggests the Italians may consider a similar route as well.
Opportunities for Investment
Though, as a collective, we should be rooting for the world economy to fare well, there is still no doubt that any sign of systematic volatility means there will be opportunities for some highly rewarding (and risky) investments. In response to what has been happening in Italy, there are several good chances to earn a return on your investment:
Exploit the likelihood of increased bond yields by shorting Italian 10-year issues
Monitor the situation in Italy and invest heavily in other currencies as soon as the Euro begins to lose value
Buy the Italian/German bond spread to take advantage of the likely widening differences between them
Wait until the Italian economy reaches its probable low-point (likely in the next few years) and then invest heavily in Italian stocks
These are just a few of the potential options you have available. The investment that makes the most sense for you will depend on your risk tolerance and overall portfolio strategy.
The obvious weaknesses in the Italian economy are reminding investors of similar conditions in Greece not so long ago. Though the probability of a total economic collapse is small, the high probability of there being at least some economic turmoil gives investors a wide range of opportunities to act.
The EUR/CAD has formed a flat top triangle below the trend line that coincides with both Murrey Math and Camarilla bearish levels.
The price is below W H3 and trend line, while at the same time is rejecting the 5/8 Murrey Math Sell zone. A successful rejection should target 1.4892 followed by 1.4840-30 confluence point. The target confluence is W L3 and 3/8 zone. The MACD indicator also signals a possible downtrend cont based on MTF calculations.
Traders like central bank meetings as they drive markets a lot. It doesn’t matter whether it is a rate hike or just clues on the economic conditions, the currency suffers a high volatility. The Bank of Canada will release the interest rate on October 24. The market is looking for the rate hike. As a result, the Canadian dollar is anticipated to appreciate against other currencies. Let’s consider currency pairs that will be affected by the decision of the BOC the most.
It is logical to start with the USD/CAD pair. Last week, the Canadian dollar suffered because of the negative figures of two the most important indicators such as CPI (consumer price index) that reflects the inflation level and core retail sales data. However, the rate hike may support the CAD.
How to trade the pair?
On Tuesday, USD/CAD keeps rising. But ahead of the rate hike, the CAD will be able to recover and the pair may break the support at 1.3050 (100-day MA). The next the support is at 1.3014.
One small tip: as traders are sure that the BOC will increase the interest rate, this decision will be priced in. So be ready, that after the release, the CAD will weaken. Don’t try to catch a signal to sell after the BOC decision.
But what if the BOC doesn’t raise the interest rate?
This scenario is unlikely, however, traders should be ready for any possibilities. In this case, the CAD won’t avoid a great plunge. As a result, the pair will rise significantly. The USD/CAD pair will appear above the trendline at 1.3117. The next resistance will be at 1.3185.
The British pound is under big pressure as the Brexit deal is far from its logical end. At the beginning of the week, the British currency plunged because of the risks that Theresa May could face a vote of no confidence. Up to now, the GBP has been recovering, pushing the GBP/CAD pair up.
On Wednesday, we can anticipate a fall of the pair as the traders will buy the Canadian dollar. Important support levels will lie at 1.6929 and 1.6863. After the release of the rate, we can anticipate that the pair will keep trading within the horizontal channel of 1.6988-1.7088, as MAs are moving in the horizontal channel and the RSI indicator is between 30 and 70 levels.
What if there is no hike?
A cancellation of the rate hike will boost the pair up. As a result, GBP/CAD will be able to break the resistance at 1.7088 (pivot point and 100-day MA) and move further up to 1.7213.
The EUR is still under threat because of Italy’s budget issue. The level of debt overcomes the European Union limit more than twice. Italy has already denied compromising on its economic targets. However, the EU won’t be happy with this budget prospects as well. As a result, risks of the prolonged discussions are increasing.
EUR/CAD has been trying to recover. However, the rate hike will pull the pair down. The first support is at 1.4961. After the interest rate is released, the pair may recover. The market is waiting for the comments from the ECB on Thursday. If traders are satisfied with the mood of the central bank, the euro will recover. The pair will continue trading within the channel of 1.4961-1.5125.
What if the BOC changes its decision?
The pair will move directly to the resistance at 1.5125.
Making a conclusion, we can say that if the BOC satisfies the market expectations, the CAD will rise and as a result, all three pairs will move in the favor of the Canadian dollar. If the BOC surprises with the cancellation of the rate hike (that is unlikely), the CAD will plunge.
Despite narrowing in the last few days, the spread between the yield on German and Italian bonds remains at its highest levels since early 2013. The spread narrowed to 282 bps from 306 two days earlier as risk appetite returned to markets.
Italy’s 10-year bonds now yield 3.63%, just 1.02% below Greece. German 10-year yields are 0.54% despite almost doubling this year.
The spread has widened over the course of the year amidst growing concerns over Italy’s fiscal position and the fact that the European Commission is unlikely to accept Italy’s budget proposals. The Italian Finance Minister most recently proposed raising the budget deficit to 2.4% of GDP next year – something the European Commission has so far flatly rejected.
In early September, Fitch lowered Italy’s credit rating, highlighting the weakness of the country’s fiscal position.
The proposed budget includes growth assumptions of 1.5% in 2019, 1.6% in 2020 and 1.4% in 2021. This is ahead of the forecasts made by a Bloomberg survey of economists which had a median forecast of 1.2%.
Furthermore, it is feared the situation is putting pressure on the fragile coalition between Italy’s Lega Norda and the 5-Star Movement that governs Italy.
While the situation is a long way from the full-blown crisis that threatened the Eurozone’s existence in 2011 and 2012, predictably the market is nervous that it could escalate. Already some politicians have stated that if Italy had its own currency these problems wouldn’t exist.
Adding fuel to the fire is the fact that European Central Bank is winding down its monthly asset purchase program and will be reducing its bond purchases by 50% in October. This will remove an underpin supporting Italian bond prices.
EUR/USD traders will want to keep an eye on the spread between Italian and German bond yields as it may well dominate the market narrative in the months to come. Even if the actual economic impact is limited, it will give substance to the effects growing populism could have on European economic policy. It could also create further tension between the European countries with strong economies and those with weaker balance sheets.
The Euro has lost ground against the USD since the FOMC meeting last week, and further losses are likely if the situation escalates. After reaffirming resistance above 1.18, the EUR/USD pair has fallen sharply. The pair is now trying to reclaim support at 1.1454. If it can’t hold this level, the immediate target is the major low at 1.1301 recorded in August.
The narrow price action over the past two days suggests an impending larger move in one direction or another early next week. The current consolidation has support at 1.1394 and resistance at 1.1592, although those levels could be tested further before we see a convincing move.
In the absence of news flow, the Euro is very oversold, and a bounce to at least the midpoint of the downtrend (1.1632) is highly likely. Beyond that, we will need to look at the strength of the USD. Gold, which also highly affected by rising bonds yields, is trading in a bearish sentiment since the bond market crash.
However, given the technical picture, any news flow, particularly comments from European or Italian leaders, could trigger a sharp reaction. For now, traders should watch the consolidation range carefully, especially the price action at the upper end of the range.
Having breached five-month long ascending trend-line, the USDCAD seems well inclined to test the 200-day SMA level of 1.2865, which if broken could open the door for the pair’s drop to 1.2810-2800 support-zone. In case sellers refrain to respect the 1.2800 mark, the 1.2730, the 1.2700 and the 1.2620 are likely following numbers to appear on the chart. Should prices witness pullback from present levels, the support-turned-resistance line near 1.2955 and the 1.3000 round-figure could entertain short-term buyers prior to challenging them with 1.3050, comprising 100-day SMA. Moreover, pair’s sustained trading beyond 1.3050 can avail 1.3100 as an intermediate halt while aiming the 1.3170 TL resistance.
EURCAD’s bounce off the 1.5060-5050 support-zone can help it revisit the 1.5140 and the 1.5170 resistance but immediate downward slanting TL, at 1.5230, may limit the pair’s further upside. Even if the pair manage to surpass the 1.5230 barrier, it could only target 1.5300 level as a bit longer resistance-line, at 1.5345, might confine the quote’s additional rise. Meanwhile, a downside break of 1.5050 highlights the importance of 1.5000 psychological magnet, breaking which 1.4940 and the 1.4900 can please the Bears. Given the pair’s extended downturn beneath 1.4900, the 1.4840 and the 1.4800 may gain market attention.
In spite of the GBPCAD’s recent U-turn, the pair might find it hard to justify its strength unless clearing the 1.7165-70 resistance-confluence, including 100-day SMA & six-month descending trend-line. If at all there is a D1 close beyond 1.7170 by the pair, the 1.7280 and the 200-day SMA level of 1.7385 can become Bulls’ favorites. Alternatively, 1.6920-10 can offer nearby support to the pair during its decline, which if broken could drag it to 1.6825 and the 1.6720 numbers. Additionally, the 1.6590 and the 61.8% FE level of 1.6450 might appear in the pessimists radar past-1.6720 break.
With the adjacent upward slanting trend-line indicating AUDCAD’s strength, the pair is likely heading towards 0.9430 resistance-line but overbought RSI might disappoint optimists then. In case the pair crosses the 0.9430 upside hurdle, the 0.9475, the 0.9515 and the 0.9560 should be watched carefully while holding long positions. On the downside, 0.9370 TL and the 0.9330 can act as buffers ahead of visiting the 0.9315 rest-point. However, pair’s dip beneath the 0.9315 might not hesitate recalling the 0.9270 and the 0.9215, encompassing 61.8% FE, as quotes.
Mario Draghi, President of the European Central Bank (ECB) has long recognized the significance of rising inflation. Ever since monetary policy easing – through cutting rates and buying bonds in the quantitative easing programme – he believed that cheap money – and lots of it – can somehow trigger rising inflation. Theoretically, yes, it’s possible. Printing money always leads to monetary inflation – the more Euros printed, the smaller the value of the currency.
However, for underlying inflation – known as core inflation – tends to lag as it’s not influenced as much by the cheap money printed by central banks, or, in this case, by the ECB. The normal CPI measure contains prices of energies, food, and alcohol. These prices are driven mainly by the supply of money as they are hard assets. If there is an accommodative monetary policy, investors – and people – will buy hard assets such as commodities to protect themselves from inflation and these prices will go up. This gauge of inflation therefore usually rises much faster than the core inflation, when stripped of food, alcohol, and energies.
Monday’s inflation data for the month of August confirmed this theory – the Eurozone’s CPI inflation rose to 2.0%, but the core CPI stayed at 1.0%, well below the ECB’s target of 2.0%. The CPI rate has been rising steadily since the start of QE in 2015 and recently reached 2%. However, the core inflation has been stuck between 0.8% – 1.0% in the same period.
Nevertheless, in his most recent speech this week, Mario Draghi reiterated to everybody that he expects the underlying inflation to rise steadily in the next months to reach the goal of 2%. How exactly is this going to happen? Nobody knows, especially when the QE programme is about to end and the ECB could start lifting rates a year from now. Moreover, it would appear that the economic momentum in the Eurozone has reached its peak and – heading into 2019 – it may slow. One wonders how the Eurozone will achieve higher core inflation if monetary policy slowly tightens and the economic activity slows. Should the Euro appreciate and get back above, say, the 1.20 mark against the greenback, it will be even harder for inflation to accelerate.
Draghi is something of a dreamer, and we can’t take that away from him. However, the current reality doesn’t correspond to his dreams, so it appears it will be up to his successor to live up to them and make them happen.
This article was written by Peter Bukov, one of TeleTrade’s leading analysts.