Anything change on Euro?

EUR/USD did not test the levels at the 1.15 handle. It reversed from the mid 1.14 handle and then got hit by comments out of the ECB, Greece headlines, better-than-expected US housing data, and a story about US Q1 GDP being wrong (“it should be higher” per San Fran Fed).

During the weekend, I was not a fan of buying at those elevated levels, but noted that I was looking to buy dips (see The Battle of 1.15). As long as the pair held the 1.10 handle, it had a chance for further upside. Well, it didn’t take long and the EUR/USD went express to the 1.1100/50 zone. Worth a buy?

German-USD yield differentials did come down along with the EUR/USD decline, so there are no bullish clues there. As for Greece, still nothing new besides your daily negative headline. This continues to be a tail risk for anyone with long EUR/USD positions – you could wake up one day to see the EUR/USD down 3-5%.

On the USD side, we didn’t really get much from the FOMC minutes. As a proxy, the probability for future rate hikes have essentially stayed unchanged. Data has been mixed except for housing starts that surprised to the upside. We get CPI and a Yellen speech tomorrow (Friday), which will be important.

The factors I see supporting the EUR/USD at 1.10 are: a) the Bund with a yield of 50-70bps; and b) oil above the $55 handle (preferably $57).

With the Bund, this regression below from Citi does a good job at showing the situation. When the Bund had been at 60bps, the EUR/USD had been above the 1.20 handle. The 1.10 handle with 65bps on the Bund is definitely a bit off the chart. Not that we can’t have something off the trend, but to me it adds support to the EUR/USD. If the Bund yield remains stable, the lower the EUR/USD goes, the larger this divergence will get (and the more suspicious for a bounce).

BUnd and EURO

As for oil, there’s a clear correlation with the EUR/USD. We can debate the specifics (i.e. why it exists) another time, but the dynamic is there. Thus, if oil can consolidate its gains, I see that as a positive for the Euro. If it breaks above $63, then it’s a bullish factor.

May 20 - Oil Euro Correlation

Overall, I think 1.10 could hold (disclaimer: I’m long). If it doesn’t, and none of the dynamics above change, buying at 1.05 or 1.0700/50 seems like a good risk:reward situation to me, but would have to be re-evaluated when the time comes. Once the Greece issue is over (default or not), it will make things much easier – no need to worry about a binary event that could create wild swings. We’ll then be able to better focus on growth, inflation, and interest rates.

 

The New Zealand Dollar bear trap

Until today, I wasn’t actually bullish the New Zealand Dollar. As fas as I know, not a single soul is bullish the NZD either.

However, since last week, I somehow entered a crusade in favor of the kiwi. Unknowingly, I became its ambassador (ala The Real Fly) – fighting against bogus calls for rate cuts and in search of “the truth”. It happened that in such journey I actually changed my bias.

The market is pricing in a 25bps rate cut by July – less than two months away. It doesn’t make sense to me. Yes, milk prices are down, but the New Zealand economy is doing pretty alright. If the US economy was doing as well, people would be screaming alleluia.

Let’s cover two important factors:

* Annualized GDP Growth Rate in Q4 2014 – 3.5%, which is the highest since 2012.

* Unemployment rate is at 5.8%, which is essentially the lowest since 2010 – and pretty much near the medium area of the last 20 years. Participation rate also just hit a new high going back to the 90s.

Emplyment - NZD

Screw it, let’s cover all the important stuff:

a) NZD terms of trade is only slightly below the highs of 2014, b) Business Confidence has inched down – but it’s steady and strong, c) Capacity Utilization is at 92.3% (highest in a long time; this is important because it means the economy is tight), d) annualized retail sales recently came in at over 7% – the highest since 2006, e) Consumer Confidence is essentially near the peaks of 2014, f) labor costs are steadily increasing, g) productivity is at the highest. Ever. (Rick Santelli would be ecstatic if we had this data point in the US); and h) Manufacturing PMI has come off the 60s, but still expansionary.

The New Zealand economy is essentially on fire. The only thing that’s not “performing” is inflation ex-housing, which is the case for essentially all of the developed industrialized countries. So if the RBNZ could lower housing inflation, maybe it could lower rates – at least that’s the narrative.

Food inflation is between 1-2%, but headline inflation is essentially at zero – which is near multi-decade lows. It’s important to note that this dip has happened in the last six months.

New Zealand Headline inflation

Core inflation is in unchartered territory when looking at data back to the 1990s.

New Zealnd Core Inflation

Housing inflation though, is running at 9.3% y/y in the overall economy and at 18% y/y in Auckland.

This is the RBNZ’s problem. As a result, they announced a few measures to curb this run-away inflation. Wheeler himself said that such measures would likely decrease inflation in the Auckland market by 2-4-%.

Yes, you read that right. Two to four percent. And it only goes into effect in October of this year. So cut now while you implement this thing, that may or may not work, in 5 months.

The government also announced some measures today that will “make it more difficult” for foreigners to purchase homes. The market saw this as a net-positive on the fight against housing inflation. It’s funny though, because you read these headlines and you would think that these new measures actually matter. Not a single major publication cared to note how much of the buying is actually done by foreigners. Well, I did some research, and according to this interview with the current NZD Minister of Finance (from May 2014 and posted on the NZD parliament website)….drum roll…it’s 2-4%. And look at the quote below, which is just breathtaking, because it says that the government’s view is that such buying does not have a large influence on prices.

Hon BILL ENGLISH: It is a matter of imposing more compliance costs only if we think there is a benefit that is larger than those costs. It may be possible to track every single so-called foreign buyer, although a lot of them who look foreign are actually New Zealand residents. A lot of New Zealand citizens actually live offshore. It would be a fairly large, complex exercise. The Government’s view is that in light of the fact that somewhere around maybe 2 to 4 percent of our housing stock is owned by foreigners and around 2 to 4 percent of housing sales are likely to go to foreigners, including expat Kiwis, it is not a large influence on house prices. A much bigger influence is the decisions made by councils to restrict supply, driving up house prices, particularly in our larger cities.

 

So if I have the facts straight, it’s the following:

* The New Zealand economy is on fire and with a high utilization rate
* Headline inflation took a dip in the last 6 months
* Housing inflation is above acceptable levels and the proposed measures will likely not make a dent on the numbers. 2-4% on 18% is marginal and the foreign buying stuff is a smoke screen.

And with all that, the RBNZ is going to cut rates by 50bps in June and July (according to ANZ)? Or it’s going to cut by 25bps in July (according to OIS market)? I know Wheeler wants a lower currency, but does he think that two cuts (now almost priced in) will drive the currency that much lower? And is it worth the risk when he knows that housing inflation will not be contained by these “macro-prudential” measures? He’ll do that in the midst of a commodity rebound? (We don’t know if it’s a dead cat bounce yet)

As of right now, I’ll be taking tactical longs at key support levels and getting out as needed. Targets would likely be in the .7600 handle. I’m fully aware that the NZD/USD could go to .7100 on rumors/expectations of rate cuts – especially with the RBNZ and goverment happy to push its lower currency agenda.

Thus, as price is king, I’ll have to manage my risk appropriately. Good entries are key. And look, Wheeler may be crazy enough to cut rates.

At some point, I think the market will sniff the bluff on these June and July rate cuts and the NZD will react accordingly. Screams bear trap.

Australian Dollar – Up, Up, and away ?

Last Saturday, I came out as “EXTRA” bullish the AUD/USD for the week. I even got more bullish after the NZD/USD debacle: (Am I Dead Wrong on AUD/USD?). I initially bought the Aussie at .7910s and then added when it dipped into the .78 handle. After that, it was smooth sailing into the .8100 handle where I closed out the position. Even before that, I had been buying short-term AUD/USD positions since the .7680s or so (see Stevens is a Smart Chap; April 21st). Thus, it’s nothing new that I’ve been eyeing longs on the AUD/USD.

I don’t know of a single sell-side bank that’s bullish the Aussie right now. Heck, Morgan Stanley even has the courage to say that everything except the AUD is likely to gain against the USD in the coming weeks:

“While we expect USD to retrace against most G10 currencies over coming weeks, AUD is an exception where we see room for continued USD strength, due to idiosyncratic AUD events. The market is only pricing in a 50% chance of a cut by year end, and we think this is likely to rise – the upcoming RBA minutes will be important for this view. As a result, we see scope for AUD to weaken.”

Of course they do! Let’s see what they are predicting for the end of 2Q 2015: .7400. I could post these forecasts of all the major banks and you would see similar results.

Morgan Stanley Currency Forecasts

When such “divergences” in opinion occur, one must work extra hard to reconcile. You can’t dismiss these guys because they are generally smart. However, you have to challenge them because they’re also slow in reacting to market events and don’t change forecasts very often (who wants to be looked upon as a flip-flopper, right?). They also tend to herd together.

The Aussie runs two risks this week: RBA Assistant Governor Lowe is speaking on Sunday night (NYC time) and we have the RBA minutes on Monday. With the former, you can probably expect some jawboning that will likely get bought at some point.

Some market participants expect the minutes to create downside on the Aussie, which I can’t say is irrational. Given that the RBA cut rates last time, they expect some negative commentary. Sure, but the market bought on the rate cut and it seemed like the RBA went neutral, which means that there are some positive news in there too. I prefer to stick with the latter.

At the time of the RBA rate decision, my default plan was to buy anything.

I continue to hold the position that any big dip should be bought. As for technicals, I’m going to keep it pretty simple here with the AUD/USD. Let’s look at the daily chart:

Aussie Daily Chart

The Aussie stayed in that green box for 3 months. In that timeframe, you had an Australian rate cut, an expectation for another rate cut (which actually happened too), and you even had a Federal Reserve that was going to possibly hike in June (pre-March 18th, “Fed blinks”). Let me add a few more: Iron ore prices were also collapsing, oil hit a new marginal low, Chinese data came out poor.

I ask you this: What else could a short AUD/USD have asked for? Nothing.

All of that happened and AUD/USD held .7500 like a champ. It’s no surprise that we’re now rotating out of the range and net-positioning on the Aussie has gone positive. We just had a second week in which the net-long position grew. I’m not even slightly surprised.

Before calling for the end of the AUD/USD, let’s at least see that orange trendline break. Until then, here are few more positive technicals:

* Bullish engulfing candle on the monthly chart (April) which also closed above the 200 monthly moving average. And this is after an extended downtrend…
* The weekly chart has rotated out of the range (closed above .7920s)
* Daily chart shows higher highs and higher lows
* 4-Hour chart has a flag pattern right now that points to .8280s (see wedge/flag that was broken on Friday).

Now to some inter-market analysis. We all know that the Aussie tracks copper and iron ore pretty closely. We start with copper:

Aussie- Copper Overlay

Copper is leading here and one could argue that the Aussie has some catching up to do. Note how Copper has stalled at a key support/resistance level. If it breaks to the upside, then the AUD/USD bullish thesis becomes even stronger. This key level on copper also matches the 61% Fibonacci retracement of the 2014 high-2015 low. This is a make it or break it moment for the metal.

On to iron ore:

Aussie-Iron Ore overlay

This guy has been trailing but a few important technical breaks have happened: It managed to get above the trendline from the 2014 highs, it broke above the massive down candle, and we’re seeing a V-reversal off the lows. I don’t know about you, but I don’t bet against V-reversals after a super extended downtrend.

All in all, both copper and iron ore support this AUD/USD rotation from the range. Lastly, let’s get to the China matter. Oh yes, China.

The China slowing down story is not new. Anyone selling this narrative would have sold AUD/USD at .90 and .80, and will continue to peddle that story at .70 and .60. In my view, that story is already priced-in for now and the risks are for upside. How about we sell at .8500 as a compromise ? :). Anyone looking at the Bloomberg China GDP tracker is already looking for bad news – it won’t be a surprise.

China GDP

Take a peak at this week’s expectation for the HSBC Manufacturing PMI.

HSBC Manu

Surprise! We’re expecting it to climb. What if it beats? This is the positive risk for the Aussie as we enter the new week.

In the end, I’m not “extra bullish” the Aussie right now like last week; however, I’m looking to bet for more upside (regular bullish). Until that orange trendline breaks, I’m looking to buy dips.

I will turn neutral AUD/USD if it breaks the following levels on a daily closing basis: .7926 and .7830.

 

Coming soon: The Battle of 1.15 (EUR/USD)

Since mid April, long the Euro is the trade that just keeps giving. The currency has been on fire and demolishing anyone trying to call a short-term top. Sell-side banks are perplexed and, at this point, I believe Euro shorts have to be getting slightly worried day by day. Net-positioning has not changed much since the lows, so there’s reason to believe that the shorts are still confident about their positions.

So far, it’s been all fun and games; however, a major test is likely about to happen on the EUR/USD.

There has been lot of chatter about a squeeze on the Euro in the last few weeks (especially from the sell-side and TV media). I’ve been chirping on Twitter that I do not believe this narrative. In my view, the Euro bounce has been a legitimate one – following better yield differentials.

May 17 - Euro Differentials

We have yet to see a real position squeeze (if it even happens). Most of the Euro shorts are still in-the-money for now.

So why is this 1.1500/30s so important and a test for the Euro? From a technical perspective, there is a cluster of resistance here: a trendline from the high 1.30s, the 50% Fibonacci retracement of the 1.25-1.05 run, the top of the old range before cracking below 1.1200, and it’s also the measured move of the double bottom from the lows).

May 17 - Euro - Weekly Chart - Resistance

I really can’t see how the EUR/USD would make it this far and not probe that market resistance. You know, test it out to make sure the sellers are going to come in strong. It’s likely that the first strike will be sold – however, what if there is a second, third, etc?

Let’s be clear, this is a huge battle zone. Thus, my conviction as to what will happen is small. At this point, I prefer to watch before making calls for either 1.1875 or 1.10. The easy trade is already done. This daily chart shows the probable scenarios I’m looking for:

May 17 - Euro - Daily Chart

The best case scenario for the Euro bulls is a strong break (green line) which then gets supported at the trendline and key level (a very dovish FOMC minutes in the upcoming week could do this). This would put the other major resistance zone, 1.1875, in sight. The worst case scenario for bulls is a fast sell-off that breaks the 1.1260-1.1300 zone with conviction (orange line; an escalation of Greece could do this).

For some reason though, the blue line (descending triangle) seems the most plausible to me. It’s the line of least resistance (i.e. bouncing between big levels for a little bit). It means that we challenge the 1.1530s but then go into a range. Euro bears would then notice how this is a continuation pattern and up their conviction. I have no idea what happens after, but as you can see from the chart, my general primary view is that it’s not a pretty one for Euro bears. That would be too easy.

As a result, I see a failure of the triangle as the likely scenario which then would really get Euro bears into fear-mode. For this to happen, of course, we would need to see some of the following: continued weakness in USD data, steady data out of Europe, or yield differentials moving in favor of the Euro. This is something that we can monitor daily.

I’ve gotten some push back in the last few weeks for having this bullish bias on the Euro. Most of the arguments revolve around how the “ECB is buying $60 billion every month“. The thing is, I could care less if the ECB was buying $600 billion. Until European rates start moving lower again (and trailing US yields), it doesn’t matter.

Additionally, what matters is the market expectation – that’s where the real money is at. The 10-year yield on the Bund did not go from  2.0% to 4bps on ECB buying (it was already at 40bps when the ECB came into the market – see a chart I had posted on Twitter below). It was the market’s expectation that did the moving. Unless these expectations revert to that of early 2015 (I don’t think it will – writing a different post on the subject), the ECB argument is very weak.

ECB

The other side of the equation is the USD. On this matter, let’s call a spade a spade – US data has not been good. USD bulls are in “hope mode” right now and getting pinched with a dagger every week. Until the data actually reverts (i.e. not just one good data point), hoping can only do so much. Trading against a group that is heavily positioned one way (i.e. 179K net-short on the Euro) and “hoping” is usually a good bet.

Let’s also not forget about this monthly chart of the EUR/USD. In April, it left a bullish engulfing candle. The Euro has a pretty good track record of following through with a bit more upside (when it happens after an extended downtrend). No wonder bullish the Euro in May has worked.

May 17 - Euro - Monthly - Bullish Engulfing

In sum, there’s no reason to believe the Euro upside move is done (i.e. the short-term counter-trend bias has not yet changed). However, I can’t advocate for starting long positions at such levels. We need to get clues from the price action here in the 1.14/1.15 handles.

My current plan

Sell 1.1530s on first strike – this is a high probability trade. It’s no brain surgery that heavy sell-orders are scattered at those levels. I would look to buy dips to big support though unless the things I’ve mentioned here change substantially. I watch the dynamics on a daily basis. If they change, my opinion changes. For now, the Euro technicals are positive and supported by better data and yield differentials. As long as the EUR/USD holds above 1.1050/96, this counter-trend move is still in play.

The elephant in the room is Greece. If that matter flares up to a serious level, of course you can’t be long the Euro.

 

 

 

Charts from May 15th, 2015

AUD/CAD is the slowest pair in the world. I don’t know a single soul that has ever said “I love trading the AUD/CAD!”. Nevertheless, it had a pretty clean break of the triangle and held the re-test for now. If anything, this could be a signal that in the near-term CAD will generally underperform while AUD will outperform. If yields tick lower and oil stalls, that makes sense. No wonder I like AUD/USD these days…

May 15 - AUDCAD - Triangle

Great setup from the morning. I took a long at .7446 which I generally covered in the 80s. Once again, while yields ticking lower, NZD has an advantage.

May 15 - NZDUSD - Wedge

I dislike GBP right now and like AUD – if you follow me on Twitter, I’ve been preaching AUD for some time now. I think we have a great technical setup to execute on that idea here. 1.5800/90 has a lot of confluence resistance in GBP/USD. On the other hand, AUD/USD is about to close the week above .8000. Sounds good enough for me!

May 15 - GBPAUD - Wedge

I had a bad trade with EUR/AUD today, but I think this is still worth considering next week.

May 15 - EURAUD - Wedge

I think GBP is overstretched, but I like CHF even less. This ugly inverse H&S is something I’m watching.

May 15 - GBPCHF - Inverse HnS

Charts from May 14th, 2015

Quick recap from yesterday’s charts:

* US Dollar Index has stayed below the 94.00 broken support. No challenge yet.
* Bullish Bat on USD/CHF failed as we saw broad USD weakness.
* NZD/USD made new highs at .7550s on good retail sales data. Currently consolidating above .7480.
* EUR/USD made new highs reaching the 1.14 handle. (Sidenote: I’ve covered all Euro longs). I still think we may see 1.15 handle, but a retracement may be at hand.
* Oil is having a hard time getting above $61. It’s also breaking a key trendline on the daily chart (bearish). We’ll have to evaluate daily for direction.
* USD/TRY moved further down today (really seems like we have a double top there).
* AUD/JPY re-tested the broken trendline of the ascending triangle. We’ll have to see if it can follow through to the upside.

Today’s charts:

AUD/USD currently has a bearish butterfly harmonic pattern in play. Assuming we slide to .8000, we’ll have a bullish bat harmonic pattern. Given that .8000 should act as solid support, I’ll probably play this if it happens.

Sidenote: All my AUD/USD longs have been closed ( @ .8110 and .8130).

May 14 - AUDUSD - Bullish Bat

Two USD/CHF charts. The first was posted when we got an hourly bullish engulfing candle off key support. US PPI was also already out (below expectations and it was still bought!). Given the higher low and these other factors, I took a long. Second chart shows a V-reversal, which made me extend the target zone from .9140/50s to .9200.

May 14 - USDCHF - At lowMay 14 - USDCHF - V reversal

Oil broke this key trendline on the daily chart. For now, I’ll keep a bearish bias.

May 14 - Oil - TL

This ascending triangle on the Bund has failed for now, but something to keep in mind.

May14 - Bund - hourly

This 1.1420s is a key level on the EUR/USD. As a result, I expected (and still do) for it to put some pressure on the Euro. I took a short at 1.1425 which was covered at 1.1375 before Mario Draghi’s press conference.

May 14 - EURUSD - Resistance

GBP/USD is reaching some key resistance levels on the weekly chart. If we make it to those 1.5850-70s, I’ll be plunging in with some shorts.

May 14 - GBPUSD - Weekly Chart

 

I did take a short today at 1.5788 based on this wedge. The pair is a bit stretched and the wedge was prime for breaking. The USD Dollar Index being at support was also a plus.

May 14 - Wedge break

 

Charts from May 13th, 2015

Bullish Bat-like harmonic pattern on USD/CHF. I took a long @ .9165 risking 30 pips for 50 pips. Target is below the .9215 support that was broken and will now act as resistance.

May 13 - USDCHF - Bullish Bat

NZD/USD trade from Monday and Tuesday played out beautifully. Even before US retail sales, NZD/USD was already at .7450s. It then closed the gap with the data. I’m looking to buy dips. However, these are lower probability trades than the gap close one.

May 13 - NZDUSD chart - .7535

I posted this chart earlier on Twitter and asked people to guess what it was. It’s the EUR/USD monthly chart. The whole point: After extended downtrends, bullish engulfing candles tend to perform pretty well for some upside. It’s the same case right now. I would say 1.14 is around the corner and likely 1.15. At this point, I’m even considering 1.18.

May 13 - EUR Monthly

Oil continues to trend higher. It’s currently at the 161% extension of the range. I think we may have more upside as the range measured move completes. It’s also plausible that it could challenge the 200 daily moving average.

May 13 - Oil - 200 DMA

The AUD/JPY has broken to the upside of an ascending triangle on the 4-hour chart.

MAy 13  - AUDJPY - Ascending triangle

USD/TRY has broken to the downside.  When even the Lira is winning against the US Dollar, it tells you something.

My 13 - USDTRY - Double top

US Index Futures broke the key 94.00/20s support. Any challenge here should be sold.

May 13 - DX - Resistance