We definitely got swings this week. Back and forth within in a range in the euro (the key proxy for global markets), only to finish in the middle of it.
For EURUSD, January finished with 9 out of 10 days of higher closes. And, in early February, we now have consolidation in a range of 1.3234 on top and 1.3026 on the bottom.
And if we take an average of the last five closes (assuming it closes around here) we get 1.3138. That’s right about where the market sits – pretty darn close to spot on, in the middle of this consolidation range of 1.3234 and 1.3026.
The Greek debt deal has yet to reach agreement. It’s been said to be very, very near – but nothing yet. And don’t forget this deal that’s been said to be close to done has been going on now for weeks — where private investors are being bullied to an agreement that would entail huge “voluntary” losses on their Greek debt holdings. And its the deal, that has been key fuel in supporting the euro’s lift from the 1.26 area.
But as time passes, it becomes more probable that these talks fall apart, and that the issues in Greece come to a head.
With that in mind, we now know how the Fed stands – a new big influence on the big picture, adding to the European sovereign debt crisis story and a slowing China risk. The Fed is considerably more bearish on things than people had expected, and clearly forewarning of more easy policies to come.
The question is: Do we get the same outcome for global asset prices this time, with more Fed easy money policies (particularly more QE). The world is a different place now. Europe is on the ropes. The ECB has ballooned its balance sheet.
So it’s not a slam dunk to sell the dollar and buy global asset prices (which include stocks, commodities, global currencies) like it was for QE1 and QE2. That outcome is driven by people’s fear of inflation (due to those policies).
It’s now been proven though, that the global economy is too depressed to ignite inflation — even if central bankers try.
So the risk to the conventional wisdom here is that the dollar actually rallies on this, as people are unwilling to take risk with their capital.
Either way, we may get a clear indication next week. To be sure, a European shock outweighs any type of monetary policy driven influence on currencies by the Fed. And rumors on Friday were that the Greek Prime Minister that’s just been in office since November (since taking over for the last PM that hit the eject button) could be stepping down next week himself, because he will be unable to get support from his party leaders to pass further reforms required by EU/IMF officials — and that puts Greece further along the path of default/ leave the euro risk.
On that scenario (clearly bearish euros) we would need a clean break of this bottom part of the range — 1.3026 (the bottom of the green channel in the chart below). And then the downside opens up for a move back to the bottom part of this long term channel (the red channel) which comes in below 1.2500
The bullish scenario for the euro would be a Greek debt deal is reached. Although, it doesn’t help with the March default risk of Greece, it’s enough in the mean time to keep people happy, and follow the tide of risk-on … lower dollar, higher asset prices. That scenario continues to squeeze the very large short euro position in the market. If we get a break and a couple daily closes above the 1.3234 area, it opens up for an extension to the top of this red channel (1.36 area) by the end of Feb….just prior to the big debt rollover dates for Greece that come in March.
Here’s a look at the weekly chart in the EURUSD. This chart is pretty interesting. This next chart and the chart following it, argue for the euro bearish scenario – because the technical resistance above looks pretty stiff, relative to what the technical setup looks like to the downside.
This blue trendline (in the above chart) comes in right near the top of the past two weeks (resistance) … pivot level on this weekly chart. And the EURUSD made a double top on the weekly at 1.3234 (more resistance).
Adding to the resistance up here at the highs…. we have the 38.2% retracement of the move from 1.4247 in late October, down to the Jan lows of 1.2624 (shown in the chart below).
Next, here’s a look at the daily chart on the GBPUSD …
The pound has had a similarly strong ascent since mid January.
The pound had 13 out of 15 higher closes in the end of January, including the first day of Feb.
There’s not a lot to see in terms of resistance up here on the daily chart, ahead of the 200 day mva, which comes in at 1.5948. For guidance here, it’s more about the euro and EURGBP.
This is the chart that’s really dictating the behavior in cable. Eurgbp is a favored trade in the hedge fund community. It put in an outside day on Jan 9 (a key reversal signal) that triggered profit taking. That low still holds, but the trend remains lower and the low is looking vulnerable, with the renewed selling interest this week.
The pound is being favored over the euro, given the blowup risk in Europe and the backstopping by EZ politicians that makes Europe even more vulnerable. Meanwhile, the UK has rejected participating in it all as an EU member (i.e. not partaking in re-writing the rule books).
It’s not just eurgbp….euraud as well. You can see here, euraud broke to new lows this week, taking out that January low.
With QE talk surrounding the dollar and the euro still vulnerable to blowup, it’s a much more palatable trade to sell eur against other currencies, rather than take part in the volatile eurusd pair.
Interesting to note here….while the moving average still remain well bearish currencies like eurusd, gbpusd and bullish usdchf. The commodity currencies are much more mixed… audusd is trading well above its 200 mva now, the shorter term moving averages are rising (making a bullish cross possible in coming weeks).
Same with NZDUSD …
And the same is said for USDCAD – which broke its 200 day moving average on Friday.
EMERGING MARKET CURRENCIES
And we can see the same type of strength in emerging market currencies here …
This white box represents the period since the Fed and other major central banks coordinated to relieve the dollar liquidity crunch that was underway in the European banking system (opening up access to dollars for these banks and relieving the hoarding of dollars).
Broadly, this is now looking like the early stages of a return of the currency wars issues that we had in late 2010 through the middle of 2011 — where the countries with trade surpluses are being bought against trade deficit countries – driving up the value of emerging market currencies, which begins to strangle their economic growth.
And it all takes place under the widely agreed upon premise that the world’s trade imbalances must be corrected …and will be done so through the currency markets.
This currency strength in the surplus countries (mostly emerging market type economies) all assumes that Europe is able to muddle along and avert disaster. In that case, there is a big adjustment yet to take place in these trades.
BUT, in the alternative scenario, where Europe doesn’t keep kicking things along, these currencies will again all fall hard.
For now, the market is accepting of the notion that Europe can keep it all going and avert disaster.
Again, this is all a big picture, long term story told from the charts here.
US 10 YEAR YIELDS
Now … here’s a look at ten year US yields. Obviously, last week the Fed derailed the notions that these yields were headed much higher.
In fact Goldman Sachs made a call a few weeks ago for yields to go up to 2.5% — instead we saw a sharp fall this week and a half, sniffing back toward all-time lows, after the Fed came out with its QE telegraph campaign on Jan 25.
But on Friday the much better employment data and better manufacturing data (and hotter pricing components) gave yields a shot in the arm. Still it’s all about ultra slow global growth, global risks, and ultra easy money policy — so low yields are here for a long time.
BUT the Fed is only QE trigger happy IF deflation is giving them the justification. And while deflationary risks have been rising, the most recent data isn’t supporting that outcome.
The great breakout in usdjpy, which failed this week because of the dovish Fed and returned back within this long term downtrend, looks uninteresting again, given the suppressed US yields. For now, usdjpy returns to “BOJ intervention watch” because it doesn’t appear it’s going to break this downtrend by itself.
But I expect usdjpy intervention will be driven not by usdjpy, but by eurjpy.
For now, usdjpy needs a break of the 200 mva (with a couple of daily closes above) to convince anyone to get interested again.
EURJPY goes out for the week just above 100, below which gets the BOJ very nervous.
Look for weakness below the EURJPY 100 level to create a greater propensity for the BOJ to act, driven by EURJPY rather than USDJPY, because of the vulnerability that Japan’s economy has to a free falling euro from here … (i.e. they are well aware of the risk to a crisis-led sharp drop in the euro).
Finally, a couple of other charts of interest, given the QE theme of in
the markets since the January Fed meeting.
This chart below is of the CRB index, which is a measure of broad commodities. You can see the brief spike after the Fed on Jan 25 … and then it has turned lower.
THE trade in the last round of QE was all about buying commodities. Bernanke hinted toward QE at his Jackson Hole speech in Aug of 2010. The CRB never made a new low after that and went on to rally 41%.
This time around, following the hint of QE3, the CRB jumped, but then quickly retreated to new “post-Fed” lows.
The takeaway: We know the impact of QE1 and QE2. Not much produced in the way of growth nor inflation.
So commodities are giving us a clue that the markets are more in-line with a slow growth, slow recovery environment — rather than an outcome where central banks manufacture global inflation to manufacture growth.
As I pointed out in my end of week analysis last week, the economy is different. Consumers, companies and countries are buried in debt … and more easy money doesn’t help that problem.
This concept of “Fed QE risk” vs. “shock risk in Europe” is tugging at the markets in different directions. And market’s can go longer in one direction than you might think is possible (i.e. the euro retracement of recent weeks), but the bias is for a return to decline … and perhaps this week, given the stiff resistance in the euro. Where the euro goes, expect other currencies to follow.
ETFDN Related Tickers: CurrencyShares Euro Trust (NYSEArca:FXE), PowerShares DB U.S. Dollar Index Bullish (NYSEArca:UUP), Rydex CurrencyShares Japanese Yen (NYSEArca:FXY), ProShares UltraShort Euro (NYSEArca:EUO), Rydex CurrencyShares British Pound (NYSEArca:FXB), Rydex CurrencyShares Canadian Dollar (NYSEArca:FXC).
Bryan Rich is an entrepreneur and an accomplished currency specialist with more than 14-years of experience in trading, research, and consulting in the global foreign exchange markets. He is President of Logic Fund Management, a currency advisory and consulting firm. Bryan began his career as a trader for a $600 million family office hedge fund in London. The macro-oriented fund managed assets for a prominent European family. Later, he was a senior trader for a $750 million leading global macro hedge fund located in South Florida. There, he helped manage and trade a multi-billion dollar foreign exchange options portfolio. His consulting resume includes work for a boutique currency fund in New York, where he developed trading models and strategy for the core investment program of the company. He later joined the company as a partner, based in their Wall Street office. He has a BA from the University of North Florida and an MBA from Rollins College.
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