DRAGHI PULLS NO PUNCHES

 

  1. THE FX MARKET PLACE:

LOOKING BACKWARDS, FORWARDS & SIDEWAYS (FOR GOOD MEASURE) AT THE FX MARKET:

1.1: LOOKING BACKWARDS:

What a strange week we had last week, it seemed to just drift by, we had news, some of which gave a predictable market response, the rest did nothing really and we seemed to just plod along. Personally, I found it a little weird; I just cannot put my finger directly on the issue for some reason.

Not to worry, moving on…

We had the FOMC minutes released from the last meeting. I think that I have fallen into the trap of powering down 24-36 hours ahead of data releases. The markets seem to go on hold eagerly awaiting any snippet of news from the FED to dissect, and to scrutinize every vowel, consonant and exclamation mark that is forthcoming. I am falling into the same pattern. I schedule myself around the FED announcements and psychologically I am probably disciplined subconsciously not to even think of trading 24-36 hours ahead of any announcement.

The FOMC minutes were so-so. You could argue both dovish and bearish. I think the fact that the dovish members of the committee were talking about the language to be used when talking about interest rates, tells me that the hawks are in control and that a hike is looming barring any catastrophes. Not that it could ever be that cut and dried but those are my thoughts.

On the other hand, Mario Draghi comes out pulling no punches at all. He spoke on both Monday and Friday last week, if you thought he was acting on Monday, on Friday it was the real deal. My main article this week is about the ECB, so I shall refrain from commenting further in this section.

Other news of interest last week:

  • The BOJ announced no more Quantitative easing (QE)…. for now.
  • The Australian monetary policy meeting minutes were neutral.
  • The GDT dairy prices were lower.
  • U.S. CPi data was in line.
  • Oil prices once again came under real pressure, as it appears storage is once again an issue, plus the rules of basic supply and demand are back in play.
  • Metal prices were hit really hard in the middle of the week and by the end of the week were attempting a bounce.

I think the continual state of flux hanging over the markets surrounding the FED rate hike is starting to have an effect. The reality of a rate hike is starting to resonate more with the markets in general and as a result trading volumes are reducing creating thinner markets with jumpy chop-chop moves.

Just remember the dates below that I had in last week’s blog.

3rd December 2015: ECB meeting in Frankfurt with press conference.
16th December 2015: FOMC meeting with press conference. 

At these meetings I am expecting: –

ECB:

Confirmation of more Quantitative Easing (QE) to be added to the existing program.
A formal announcement of an extension of the existing program beyond September 2016.
Details of an extension to the types of bonds to be purchased.
A revision to the overnight deposit rate for central banks within the Eurozone.
Revisions of Eurozone growth targets to lower levels for 2016-2017.

FOMC:

Confirmation of an initial rate increase, probably 0.25%.
Details from the economic projections “the dots” will be amended.
Information regarding when future rate increases could be introduced.
A revision of 2016-2017 growth objectives.

In addition to the above dates it was announced on Friday November 19th that the FED would make a special announcement on Monday the 23rd. I think the last times they did this type of announcement was in 2012.

We could be raising rates in November and NOT December, but the announcement could be something else, nothing to do with interest rates. However a quick meeting arranged and an announcement the same day, it sounds like preparing the statement that’s all.

Perhaps, the most likely reason for a FED announcement is more to do with the “Discount Rate” and only the “Discount Rate”, but wouldn’t it be something if they pulled the trigger now and did not wait. Why wait to raise rates if the conditions are right now?

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility – the discount window. www.federalreserve.gov/monetarypolicy/discountrate.htm

It is rather a misleading term. The discount rate is the rate above the FED funds rate that banks and large institutions use. It is currently 0.75% above what is now refereed to as zirp!

If the FED removes the “Discount Rate”, this could be seen as a market mover, in my opinion, this all but confirms a December rate hike, but as stated earlier would the FOMC consider both on the same day?

This is some real food for thought.

1.2: LOOKING FORWARD:

MAJOR FOREX NEWS THIS WEEK THAT INTERESTS ME:

(There are many more news items related to the Forex Market other than the ones listed below. These are the ones that interest me. You can go to www.forexfactory.com and www.tradingeconomics.com for a more comprehensive lists of all news events that are Forex related).
SUNDAY: N/A.

MONDAY: EUR – French and German Flash Manufacturing PMi.
MONDAY: USD – FED ANNOUNCEMENT.

TUESDAY: AUD – Words of wisdom from Glenn Stevens (RBA) .
TUESDAY: USD – GDP and Consumer Confidence.

WEDNESDAY: NZD – Trade Balance.

THURSDAY: N/A.

FRIDAY: N/A.

MY THOUGHTS ON THE NEWS ITEMS THIS COMING WEEK:

I am pre-occupied with the FED announcement on Monday. The meeting was hastily arranged last Thursday.

As I said it is probably the removal of the “Discount Rate” but you never know.

It is a very light week on news, we also have the U.S. Thanksgiving holiday, which falls on Thursday. However, as you may know we have Black Friday sales, Cyber Monday the following week and basically people in the U.S. make longer weekends out these days. There are so many people driving and flying around we literally start to shut down from around lunchtime Tuesday for the week.

I plan to complete my 2016 TRADE and MARKETING PLAN this week, whilst it’s quiet. About 3 years ago, I found myself caught up in a couple of trades that caused real pain to my broker account at this time.

Therefore, in the words of the song by Ian Hunter “Once bitten twice shy”. I will be very light with regards to trading.

MY KEY SUPPORT & RESISTANCE LEVELS THIS WEEK FOR USD MAJORS:
In this section I have as usual kept my charts as minimalist as possible. All readers regardless of level of experience should be able to follow my thoughts from my comments to the levels on the charts with ease.

All of my thoughts, ideas and relevant comments are contained on the charts.

EUR/USD – Weekly Closing Price: 1.646

EURUSD M 21112015

GBP/USD – Weekly Closing Price: 1.5193

GBPUSD D 21112015

AUD/USD – Weekly Closing Price: 0.7236

AUDUSD 3D 21112015

NZD/USD – Weekly Closing Price: 0.6568

NZDUSD D 21112015

USD/CAD – Weekly Closing Price: 1.3345

USDCAD D 21112015

USD/CHF – Weekly Closing Price: 1.0186

USDCHF D 21112015

USD/JPY – Weekly Closing Price: 122.90

USDJPY D 21112015

1.3: LOOKING SIDEWAYS (FOR GOOD MEASURE):

As mentioned recently, in this section of the blog, I will answer questions and look at various aspects of trading

I was asked last week by one of my subscribers, how do I manage with 10-15 live trades and sometimes up to the same number again with limit orders waiting to trigger, bearing in mind I can have multiple trades open with the same currency pair.

My initial answer was plenty of Jack Daniels or Knob Creek.

Moving on…

The question emanated from last weeks article in this section of the blog about divergent FUNDAMENTAL trades that I am now providing.

I raised the issue with my subscribers, that if they traded all types of my trade set-ups, RADAR, FLASH and FUNDAMENTAL, given the fact that I expect the number of FUNDAMENTAL trades could reach 10-15 live with 5-10 limit orders waiting, would this just swamp their existing account? Maybe it would be a good idea to open a fresh broker account to handle just FUNDAMENTAL trades.

Personally, I trade several accounts to manage all my trade set-ups, and by doing this it makes accounting very manageable from my perspective.

If I have all my FUNDAMENTAL trades in one broker account, not only are my screens easier to follow, but more importantly, I do not need to look at trades to see are they FLASH or FUNDAMENTAL. In addition it also gives me an instant measurement of performance. I have key objectives to achieve that I have set myself and separation gives me immediate clarification.

I have three other broker accounts that contain my FLASH and RADAR trades broken down into two categories USD majors and the rest.

By doing this it allows me to concentrate on the FLASH trades, which are opportunist trades looking for 10-30 pips. Again through separation I can see the wood from the trees.

RADAR trades based off limit order entries tend to have a longer life span and can therefore be left alone for a while as the price targets are usually between Fibonacci levels / Horizontal supports. As you know though, of late, all trades have required micro-management to some degree; as it has become a day traders market.

Therefore, managing multiple trades is made much easier through segregation in my opinion. I have no super-power skills. This approach works for me and I find that it compliments my way of trading.

  1. WHAT’S ON MY MIND:

DRAGHI PULLS NO PUNCHES

Regular followers of my blogs since 2012 will be aware that on numerous occasions I have called out the EUROZONE and ECB for basic incompetence, inept management, poor leadership, reactive policies and avoidance of management of specific problems.

I do not think that the elected Eurozone leaders have done anything at all to change any of my long felt thoughts and beliefs about the way they leap from problem to problem not fixing anything, hoping the problem goes away or is fixed by someone else aka “kicking the can down the road”.

Behind all of this Mario Draghi, I must admit not averse to a little “can kicking” himself from time to time, carries on trying to keep together another Eurozone blunder called the European Central Bank (ECB).

The ECB was designed when times were good, by Germany and France and never modeled to test multiple members pushing and pulling within the constraints of a currency union.

The Euro the official currency of the Eurozone, is used by 19 of the 28 member states: –
Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

There are 19 countries with 19 different tax regimes, 19 different growth expectations based upon their industries and services, 19 different population sizes, ages and country by country differences of unemployment problems from youth to permanently unemployed, and the biggest issue of 19 different countries using effectively the same cheque-book with 19 completely different cultures.

A recipe for disaster, if ever there was one.

For his sins, to get by Mario Draghi has to operate within a very tight mandate to manage a central bank. To add to the complexity of his job profile, beneath him lie 19 elected country finance ministers focused on their own country’s requirements and needs. Mario Draghi has to manage these individual countries from a distance, or I prefer from so high up where the air is thin, that it’s difficult to breathe and try to keep the ECB monetary policy fair to all member states. This he has to do whilst at the same doing what Germany says without it looking that way.

With this as my brief backdrop to the Eurozone and ECB you would not be surprised if Mario Draghi drank a bit and you would, well at least I would, cut him some slack.

God help him, he has the likes of Wolfgang Scheauble (German Finance Minister), Jens Weidmann (President of the Bundesbank), the guy responsible for all the German dosh and members of the ECB committee like Ewald Nowotny (President of the National Bank of Austria) all loving the sound of their own voices so much they love speaking to the media and undermine much of the good work that Mario Draghi is trying to lead through the ECB and Eurozone with ECB monetary policy. You can forgive Draghi the odd can-kick when you consider the environment he has to work within.

An objective of 2% inflation hangs like a ball and chain around Draghi’s neck. He is dealing with DEFLATION for almost two years, if not longer depending upon how you want to interpret statistics. No central banker in the history of the world has the cure for DEFLATION.

In an attempt to deflect away from the dreaded “D” word, many central bankers started by Ben Bernanke (Ex FED Chairman) started calling DEFLATION disinflation… yeah right that sounds better and not as tragic.

If a single country cannot cure DEFLATION – what chance does Draghi have with 19 countries rolled into 1? The answer = bugger all.

Inside the Eurozone since the financial crisis in 2008 there continues to be unprecedented levels of unemployment (in particular youth), failing social support (health, social and family benefits), lack of infrastructure investment, and most of the 19 countries have a reduced tax income due to massive unemployment and austerity measures which were pushed onto them that they could not afford. In addition, Greece was granted bailouts that have little chance of repayment. Add all of these together and they form the contents of the cauldron that the Eurozone witch Angela Merkel and her sidekick Wolfgang “the pit-bull” Schaeuble have concocted.

Most of these issues should be dealt with and managed by local central governments but many of these with hands tied look to the ECB for assistance. I have often called Draghi, Angela Merkel’s puppet. I still believe to a large extent he is, but every now and then he comes out fighting and delivers a speech to make matters 100% clear without ambiguity. He made such a speech last Friday at the European Banking Congress in Frankfurt.

Fair play to Mario Draghi, with all of the issues that he has to deal with and manage, he has now left the markets in no uncertain terms about how the cookie is going to crumble. There is for once in the Eurozone no can kicking and no ambiguity, even the dumbest commentator or analyst are left without doubt.

Here are the key points he referenced: –

  • Inflation in the Eurozone is slipping fast.
  • There is too much slack in the Eurozone economy.
  • The effect of lower oil process is keeping inflation low.
  • He is looking to increase / expand the current €1.1 trillion QE program.
  • The ECB is thinking of moving the overnight deposit rate paid by the ECB further below zero in an attempt to force central banks to place more money into the economy.
  • Core inflation excluding energy and food is still too weak.
  • No real wage growth.

It’s a great read and a very sad reflection that since the financial crash of 2008, almost 8 years later following the German failed policy of austerity the Eurozone is still deep in the sh*t. Yes there are green shoots dotted about but in general it reflects a complete disaster of policy that has failed.

Draghi will have QE for at least another two years in my opinion and then he has to taper.

Merkel and the Pit-bull who have been against QE (they favour the f**k up called austerity) are probably more onside now given the VW scandal and the fact that exports are under pressure as a world slowdown is in play. The world is in slowdown mode, so who will the German manufacturers sell finished goods to if there are no buyers? At least if it is cheaper to buy German products due to lower exchange rates via QE polices the German exporters have a chance of selling in a depressed market.

Yup… central bank policy divergence is coming to a trade desk and computer screen near you very soon, in fact it has started.

The markets tried to bounce the oversold EUR/USD off 1.0630 lows after the FOMC meeting minutes were released. Even the grossly oversold at that point EUR/USD couldn’t bounce to more than 1.7050. After Draghi’s speech and the reality of what he had said resonated, it took a few hours to sink in, there is defiance in the markets, but when it finally sank in, the EUR/USD fell back to its lows once again below 1.0650. 

  1. MY FINAL THOUGHTS:

OVERVIEW OF TRADING TIPS & THOUGHTS FOR THE WEEK AHEAD:

This will be a strange week.

We have a FED announcement on Monday that could be a pre-cursor to the rate hike next month. This week could be the week that sets the tone for the next two years. Mario Draghi has already played his hand, it is just a case of how much more and until when with regards to QE in the Eurozone.

I am expecting very thin markets this coming week so I would trade smaller to allow for increased volatility.

As usual trade within your means, use your TRADE PLAN manage RISK with correct POSITION SIZING and STOP PLACEMENT.

Longevity in trading is paramount to success. Success in trading is based mainly trading high probability trades with your RISKS MANAGED.

Take care,

Scott Pickering
The Pip Accumulator
http://weeklyfxdrivethru.com/disclaimer/

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