EUROPE IN DANGEROUS TERRITORY

THE WEEKLY FX DRIVE THRU

INTRODUCTION:

Back again from my surprise birthday break on Prince Edward Island, as far as I am concerned the Canadian home of great Lobster, Oysters, Mussels etc. and some great Halibut, Salmon and Haddock for good measure and variety. If you also play golf the ideal place to visit… enough of PEI tourism promotion.

Moving on…

Although a shortened trading week for me due to traveling it was a fascinating week for trading or NOT trading if that was what you decided to do. We are still incredibly range bound. The EUR/USD has been basically held captive in a range of 1.1180 to 1.1280 at extremes however most of the week it traded between 1.1195 and 1.1255, a 60 pip trading range. This created a rather frustrating trading environment, as this tight range and lack of direction had a knock-on effect through most currencies. Even with major concerns of another Lehman event in Germany with Deutsche Bank the single currency did not crash through 1.1200 on Thursday last week as the DB stock tumbled once again…. strange days.

As I mentioned in my blog of the 17th September my trading so far this late summer / early fall has been very light. I closed a couple of GBP/USD trades totaling 600 pip losses at the start of the month only for the cable to collapse a week later… argh!!  I closed the month with a loss of 215 pips. Whilst a little disappointed I am still in good shape to achieve my annual objective of 10,000 pips profit for my PREMIUM SERVICE subscribers.

Not that I am looking for excuses, I do not need them or want them but trading Forex at the moment is really challenging. Range bound currency pairs and choppy markets lacking in real direction offer nothing but a pain in the neck and a hankering for Jack Daniels Fire with Diet Coke in my particular case. It is totally frustrating and as I have said in numerous emails, FaceTime and SKYPE video calls, just to keep one’s head above water right now and trade in the black is a great achievement as it is so easy to get chopped up and spat out by the Forex market that is not in any way shape or form forgiving. It is a lethal market and takes NO prisoners at all. You really need to exercise great patience at the moment and wait for the trades to come to you.

I have written the following few words so many times, in many different formats in the past four years of blogs, and yet they are still as true today as they were the first time I wrote them….

“Trading Forex requires patience otherwise you will not achieve longevity in trading. Capital preservation is paramount to success in trading Forex. You must set your objectives and trades in the full knowledge that you will miss many trading opportunities, but by waiting for trades to come to you rather than chasing trades, your longevity in the markets will be enhanced tremendously”

 

THE FX MARKET PLACE:

LAST WEEK’S NEWS – MY THOUGHTS:

Where to start.

There were three events that stuck in my mind from last week and had you asked me last Monday morning at 4AM what would I remember most from the week, none of the events listed below would have featured.

THE FIRST 2016 PRESIDENTIAL DEBATE:

My wife often asks me am I going to talk about “Little Hands and Crooked Hillary” and I nearly always reply its politics not FX.  However, leaving the politics out of my blog I want to mention this debate for the effect it had on the forex markets.

Basically, the market was set up expecting Trump to get straight at Hillary and battle it out with insults to get her rocking. What happened was the opposite; the markets rallied hard for three sessions on the back of a very accomplished performance from Clinton. She took it to Trump on policy and facts. Whether you believe the facts quoted or not is up to you but she also rattled his cage by what has to be said attacking his weak spots in his character makeup. Excellent preparation and knowing which subjects to touch exploited Trumps weakness of being too thin skinned. He was done over by a professional politician in a way none of his previous Republican challengers were able to achieve. This weakness I think will be hard for Trump to master moving forwards.

If anyone was in any doubt, let me point out the U.S. Presidential election will be a major and probably a very volatile event next month.

OPEC AGREED PRODUCTION CUT:

In my opinion, this is total bullsh*t.

A 700,000 barrel per day cut in production. By whom? We have to wait until the 30th November this year to find out who is cutting production and by how much…yeah right my ar*e.

If by a miracle a cut is announced, it is NOT measurable and the simple facts are that RUSSIA and possibly shale producers in the U.S. will see this as an opportunity to increase production.

In 2016 in a free market society, how on earth the markets rejoice as a Cartel tries to manipulate price beggar’s belief.

In the history of OPEC, cuts and freezes in production are seldom adhered to and frankly should there be a written press release it will not be worth the price of the paper it is written on. OPEC treats us a suckers. Are we supposed to jump up and down getting hit for an increase in pump prices? It’s like turkeys voting for Christmas!

 

DEUTSCHE BANK:

This story has legs. I am waiting for Mario Draghi to be blamed for this as is the want of politicians. German politicians such as the “Pitbull” aka Wolfgang Schaeuble (Finance Minister) is already starting a sound byte attack questioning the ECB policy of low / negative interest rates saying this is a hard environment for banks.

Basically, Deutsche bank has been naughty in the past and has been caught out with U.S. regulators looking to fine them $14billion which, will more than take a huge dent out the banks’ balance sheet. On Friday to try and stem a bear run on the share price they released a statement stating that the settlement would be much less.

Basically, financial regulators have caught up with the banks actions and it does not look good moving forward. It is so dire that many commentators are liking it to another Lehman event in the making. Whether this is accurate or not is debatable but it certainly adds fuel to the fire driving the share price lower with increased uncertainty. Angela Merkel is now on the spot. Will she bail Deutsche Bank out with a rescue package or not?

On Friday last week we had market rumours, speculation and squeezes just to keep us on our toes. Deutsche Bank released a statement saying that the initial settlement of $14 billion with the U.S. regulators was now being negotiated down to circa $5 Billion… let’s see.

Add BREXIT uncertainty to this news story and this coming week could be fascinating as the story continues to unfold. I am sure that there will be many twists and turns ahead. If there was a bailout we would need to see the stock price at the precipice first sub €4.00 in my opinion. Since the statement it has bounced higher.

The trade off this is the EUR/CHF to the long side. Given the statement last Friday from Deutsche Bank my hopes of a 1.1130 re-test have been dashed, although this pair should regain some of its recent losses.

 

MARKET OPINION:

(FORWARDS, BACKWARDS and SIDEWAYS) – WHAT IS FLOATING MY BOAT AT THE MOMENT:

EUROPE IN DANGEROUS TERRITORY

Over the last 216 WEEKLY FX DRIVE THRU blogs, I think I have written as much about the EUROZONE as any other subject. I am back at the well once again!!

I really enjoy trading Forex because even allowing for the odd moan and whine here and there over market trading conditions, I feel that learning to trade the currency market has kept me very well abreast of what is happening in the world politically and economically.

Over the past few weeks the markets have been obsessed with central banks and what is happening with monetary policies around the globe. This is hugely important to Forex traders, if not, the most important data to take note of. However, all the time we read and listen to central bank presidents, governors whatever… life goes on.

The political and economic stability of the world is at a crossroads and nowhere serves as a better example of this than the EUROZONE.

Let me just put out a few pointers as to why I think that EUROPE is in dangerous territory.

BREXIT:

The EUROPEAN UNION, the EUROZONE has been thrown a curve ball by the UK referendum vote last June 23rd, voting in favour of leaving the EUROPEAN UNION. 90 days or so on from the vote we are still awaiting the Lisbon treaty article 50 to be triggered by the UK government to start the exit procedure. The pen pushing, desk sucking jotter blotters in Brussels state it could take as long as two years for the UK to exit. Dream on baby… it took Greenland two years to exit and they were no way near as entangled in the EUROPEAN UNION as the UK. This exit is a bureaucrats dream to milk it for as much as possible, time and cash wise. If Theresa May triggers article 50 in March 2017, I think it could be 2021 before the exit is confirmed.

My gut tells me that negotiations will take place and the UK government will take what they have managed to agree to the population again for a further referendum to ask “Do you really want us to proceed and exit”. Only then will the procedure begin.

My timeline is negotiations though to the end of March / April with a possible referendum May / June 2017, resulting in either a “hello we are back again” or article 50 being triggered within 90 days of the referendum.

I know I am bit out there with my theory. We are in unchartered waters so never say never.

The cost of a UK BREXIT to the EUROPEAN UNION should not be under estimated. The mere fact that the UK is a financial net contributor will automatically mean that money in the coffers to be spent by the EUROPEAN UNION will be significantly reduced.

The BREXIT is just one of the major worries ahead for EUROPE.

GREECE:

The Bailout III started last week. This time it is the EUROZONE alone bailing out GREECE. The IMF is not involved in the latest monies of €86 billion. The package if you recall was needed to avert a complete financial collapse in GREECE.

I have long written that debt relief is the only sensible way forward for GREECE. The IMF also cites this as the correct way forward and because the EUROZONE decided against debt relief as the policy moving forward the IMF did not get involved in bailout III. But don’t worry they will be back for Act IV.

This move by the EUROZONE shows how fearful the politicians are of their positions, especially in Germany where Angela Merkel is under a real threat of losing power so to give GREECE more money was the better option than giving them debt relief.

You can just imagine Jeroen Dijsselbloem’s (President of the EUROGROUP, in charge of the bailout procedure) meeting coming to the following conclusion;

“OK chaps, we have political instabilities all over the EUROZONE therefore we cannot offer debt relief but let’s throw good money after bad and kick the can down the road for a year or so!”

Alexis Tsipras, Prime Minister and leader of the Syriza party is walking a very thin line with the EUROGROUP. Promises on reforms are not being kept, nevertheless the Bailout III has been approved. In my opinion, this is nothing more than sweeping dirt under the carpet.

The Greek government are claiming that the economy is on target for growth between 0.2 and 0.4 percent this year, yet the European Commission themselves claim it is still shrinking. This time by 0.3 percent. 25% of the adult population are out of work. Debt as a proportion to GDP will rise to 182.8% this year.

Yup…all nice a peachy.

The Greek people must be totally pist off. All they are doing is paying off debt and adding to debt. The time will come very soon when the index finger is raised by GREECE and they default.

At that point in my opinion the EUROZONE is at breaking point and exits will be voted on in numerous countries and the CONTAGION FEAR and EFFECT grips the EUROPEAN UNION.

Something to look forward to…. I guess.

ITALIAN REFERENDUM ON CONSTITUTIONAL REFORMS:

This is fast becoming a referendum on Prime Minister Renzi.

A “No” vote and we have another crisis in the EUROZONE to manage through. The Italian economy is teetering on the brink as it is with the banking sector never more than a column width away from breaking news on the negative side.

There are plenty of headwinds in ITALY. Apart from the financial sector instability, BREXIT will hit the Italian economy quite hard and they also face the unstable domestic political position and the slowdown of investment in the economy which has been a feature this year so far only expected to get worse. These factors are bound to have a serious negative effect on Italian consumption numbers.

The referendum is scheduled for early November 2016.

GERMAN PARLIAMENTARY ELECTIONS 2017:

A little way off at the moment, but keep these events in your mind.

The German election will probably be in September 2017. Whilst this is almost a year way, look at what Angela Merkel is doing now.

Politicians are “can-kickers” and “vote junkies” due to their basic survival instincts. Merkel has been losing support in regional elections, once strongholds and she knows she has to be populist with domestic voters to keep her slender Bundestag working majority alive. Her party, the CDU (Christian Democratic Union) and coalition partner with the CSU (Christian Social Union) are in power by the skin on their teeth.

Merkel is adopting a no nonsense approach of no conciliations so that she appears strong to potential voters. However, her victory in 2017 no matter how strong she appears to voters, is by no means guaranteed. Her approach with the Syrian refugees has created law and order issues across Germany and opposition parties are ready to pounce. Giving more to GREECE was the less of two evils approach, as German savers with zero interest rates in return are already up in arms because they are effectively losing money. Had debt relief been granted to GREECE, I think that would have been the straw that broke the camel’s back for the popular vote. Hence the EUROGROUP effectively “Kicked the can further down the road” to save Merkel; for now, that is.

FRANCE PARLIAMENTARY ELECTIONS 2017:

These will be a hoot next year. The anti-European parties have always been bubbling under in the French media.

The French economy has been suffering, not helped by the present economy minister looking to project his own political movement called “Forward” … forward!! There are structural reforms scheduled in France and employment rules are to be changed.

No matter what, general elections always mean potential uncertainties ahead and with the political situation with Marie Le Penn and Hollands bound to heart up with Nicolas Sarkozy looking to get back into this race, the media will be fully engaged in the run up to decision day.

THE REFUGEE CRISIS:

Sad to write this like it is but it is a crisis. The numbers that I read about here in Canada and it’s not on Canadian news every day like it is in Europe are staggering.

TURKEY and GREECE take the brunt of first landings. When it comes to paperwork and clearance being undertaken effectively, neither of these countries would be in your top 20 countries for efficiencies or accuracy. They appear to move people forward very quickly; I am pretty certain this is done to avoid their countries looking like huge 2016 versions of concentration camps.

I have already mentioned issues such as law and order in Germany. But more serious is the terrorist threats that fast clearances afford and we have seen evidence of this in FRANCE and BELGIUM.

The refugee crisis places not just a massive humanitarian responsibility on the EUROZONE to manage effectively but security of the EUROZONE is thrown into chaos as those who perpetrate violence want to create instability and fear into the population.

This is in my opinion the biggest threat to EUROPE moving forward and the full ramifications of what is going on now and for the past 12-18 months or so has yet to be felt.

 

Moving on…

With all of the above I am astonished that the EUR/USD is not trading closer to parity than where it currently languishes around 1.1200. Moving forward, I cannot see anything EUR positive. The ECB is totally dovish and will remain so for as long as required or until hell actually does freeze over.

I have started, as PREMIUM SERVICE subscribers are aware to build short trades with the EUR moving forward. As with everything EUR nothing is simple or straightforward. The cross-rates will always have their say. The EUR/GBP and EUR/CHF in particular are powerful currencies in their own right.

There is nothing much else that Mario Draghi can do via ECB monetary policy it is up to member states to make structural changes. This will be ad hoc if actually nothing at all, so sadly whilst I think the direction of the EUR/USD is lower, this will be achieved on the back of headline geopolitical events more than anything else. The only outside factor that could kick start the single currency weaker would be the FED normalizing rates. A FED rate hike should strengthen the USD versus the EUR.

So, I think if you entered the EUR/USD short today and closed your eyes and then opened them up in June 2017, you may not be disappointed.

However, the FX move lower will be a two-way affair with buyers and sellers fighting for control along the way. There will be plenty of confusion along the way and as you should know by now, in my book;

CONFUSION = UNCERTAINTY

 

ON THE HORIZON… WHATS COMING UP THIS WEEK:

THIS WEEK’S FOREX NEWS 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: GBP – Manufacturing PMi.
MONDAY: AUD – RBA Rate Statement.

TUESDAY: GBP – Construction PMi.
TUESDAY: NZD – GDT Price (Dairy Auction Prices).
TUESDAY: AUD – Retail Sales.

WEDNESDAY: GBP – Services PMi.
WEDNESDAY: USD – ADP Non-Farm Employment Change.
WEDNESDAY: USD – ISM Non-Manufacturing PMi.

THURSDAY: N/A.

FRIDAY: USD – Non-Farm Employment Data & Unemployment Rate.
FRIDAY: CAD – Unemployment Data.

 

THE USD MAJORS – MY THOUGHTS (A REVIEW):

(In this section I have as usual kept my charts as minimalist as possible. With regards to charting in my opinion less is more!! I hope that they are clear. 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)

My comments are contained on the charts.

EUR/USD – Weekly Closing Price: 1.1240

eurusd-daily-30092016

GBP/USD – Weekly Closing Price: 1.2976

gbpusd-daily-30092016

AUD/USD – Weekly Closing Price: 0.7655

audusd-daily-30092016

NZD/USD – Weekly Closing Price: 0.7282

nzdusd-daily-30092016

USD/CAD – Weekly Closing Price: 1.3126

usdcad-daily-30092016

USD/CHF – Weekly Closing Price: 0.9711

usdchf-daily-30092016

USD/JPY – Weekly Closing Price: 101.32

usdjpy-daily-30092016

 

MY CLOSING THOUGHTS:

This week the UK Purchasing Managers Indexes will be notable events along with the U.S. and Canadian employment data. In addition, we have an interest rate announcement and Retail Sales from Australia. I am not expecting a change in interest rates.

Hopefully this will be the week that we break out of the tight trading ranges that have been a feature with so many pairs. One must remember breaking out of these ranges always has its excitement as we usually see false breakouts and false breakdowns. We need to be ready for these should they occur. However, if we do break free, personally I think that this will be good for the markets overall. If we stall, I hate to write this but It could be chop fest all the way through to the FOMC in December. The only thing that could break this view is a major geopolitical event such as GREECE, THE U.S. PRESIDENTIAL ELECTION, BREXIT, DEUTSCHE BANK COLLAPSE and a collapse in OIL to sub $30.00.

As usual…

Always remember longevity in Forex trading can only be achieved through trading with good RISK and MONEY MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility.

Take care,

Scott Pickering
The Pip Accumulator
http://weeklyfxdrivethru.com/disclaimer/
DATE: 1st October 2016
BLOG VERSION: #37 FOREXTELL VERSION

 

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