1. THE FX MARKET PLACE:
1.1: LAST WEEK’S NEWS – MY THOUGHTS:
Obviously the big news from last week was based around China. It makes me laugh. Like many traders, I believe that the economic data released by China may as well be compiled by one of my Labradors (Ozzy or Aoife). What gets me is that for a country that many people believe everything it does with data and its markets in general is “fixed”, it sure does hold the rest of the worlds markets in panic mode… fascinating.
It stands to reason that China data should be suffering; for God’s sake no one is buying anything, so what is the point of manufacturing finished goods that people aren’t buying.
Add to that the restrictions in the equity markets that the Chinese authorities are trying to modify. The circuit breakers in Shanghai created havoc earlier last week but were removed, as they were inappropriate for the swings in the China equity markets. This fact alone created sell-offs worldwide.
China is trying to accommodate, integrate and facilitate changes in many, many areas. If you want to blame someone for the Chinese volatility blame the IMF. Since “on her way to court” IMF president Christine Lagarde decided to include the Yuan in the SDR basket, it was the green light for the Chinese government to further weaken the Yuan. The reason for this is very simple they a shi**ing bricks because of the economic slowdown. The Yuan like every other currency around the world is a government policy tool. Monetary easing (manipulation) is here to stay, at least for the medium–term, many would argue longer.
After the PBOC consistently weakened the reference rate early in the week, on Thursday it set the rate a fraction stronger. They are playing games with us!!
It remains to be seen what effect all of this will have on the FED tightening but for now the PBOC / Chinese government are creating tsunami style waves in the financial markets.
Last week we also witnessed the cable continue to move lower, 8 days in a row about 400 pips or so being the range over that timeframe. As regular readers know, I hate trading the GBP currency. The only GBP trades I like are the cross-rates. However, the GBP sell off created a monumental move higher in the EUR/GBP that broke through a 3-year trend line resistance. This is a big market breakout and should not be ignored. I have now gone from bearish to bullish on the EUR/GBP as a result.
There are big issues this year for the UK to cope with, not just with the economy but also with the merry-go-round “circus” of a potential rate increase plus all the “Brexit” debates. All of this creates uncertainty and the markets do not like uncertainty. As a result the GBP is pressured at multi year lows against the USD.
Finally last week we had the US Non-Farm Payrolls.
Great numbers were posted 292,000 jobs against the consensus of 203,000.
However wages aren’t going up; I think that the introduction of the increased minimum wage levels that many states have introduced, if going to have a positive effect may take some time to filter through.
I think had the average hourly rate increased in line with the 0.2% prediction this would have given the FED a very positive light on inflation. It however, remained unchanged.
However, the “blow-out” numbers themselves could be the factor that makes it “real to the markets” that 4 x FED rate hikes are on the way in 2016. Interesting times ahead.
1.2: THIS WEEK’S NEWS:
1.2.1: THIS WEEK’S FOREX NEWS THAT INTERESTS ME AND WHY:
(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).
TUESDAY: CNY – Trade Balance.
WEDNESDAY: AUD – Employment Data.
THURSDAY: GBP – BOE Bank Rate and Monetary Policy Summary.
FRIDAY: USD – Retail Sales and PPi.
1.2.2: THE USD MAJORS SUPPORT & RESISTANCE LEVELS:
(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).
EUR/USD – Weekly Closing Price: 1.0928
From the chart below, you can see that we are testing the first of two trend lines, the first is at 1.0940. This level has held prices before but the closing candle is very bullish and I think that we test 1.1060 (previous highs) before a move higher is capped. The second trend line is at 1.1100. This pair is a tough read at the moment. The strength in the single currency as we see it now could be easily and instantly reversed by a good old kick in the nuts if Draghi or Nowotny make one of their famous sound-bytes to a European journalist. I am sure that they are watching this latest squeeze move higher with interest. So be careful and do not rule this out.
Holy Crap. Oversold, Relative Strength and Stochastic issues are chart analysts delight. This pair is in trouble. I could not get an effective Fibonacci extension to work. Horizontal support is the best that I can muster. 1.4235, 1.4040 and then 1.4000 is all I can say.
Now let me add a few lines of caution. Regular followers will know my thoughts on the cable. Basically it is the mistress of false breakdowns and breakouts. We have the BOE meeting this week and with Carney at the helm, be prepared for the bounce. Carney is great at misleading the markets. He loves the term forward guidance but hasn’t got a fecking clue what it means. We could get a handsome bounce followed by a massive sell-off to 1.4000.
China and the commodity sell-off are weighing heavily on the Aussie. This is a target currency for me this coming week for a short trade on a small bounce. I see a move lower to test the lows on the chart below 0.6885 as very doable.
This pair is very similar to the Aussie in my eyes. Like the Aussie the Kiwi relies on China, in fact I think probably more as China is the largest trading partner of New Zealand. I see a test of the November 2015 lows of 0.6428 as a target in the coming weeks. In addition, because unlike the Aussie the China effect may not be factored in as much as it is to the NZD currency, the move lower with this pair could be exacerbated. September 2015 lows of 0.6240 could be the equivalent of the star trek tractor beam for this pair.
On the chart below I have attempted to draw out the measured move for the cup and handle formation that is evident on the monthly chart. The measured move target is about 1.6000.
This pair stopped on its last move higher just short of 1.4500. It will try again as I believe that Oil still has further to fall, plus the Canadian economy is NOT as good as “Head in the sand” BOC governor Stephen Poloz would have us all believe. I see rate cuts coming. Oil plus rate cuts places this pair within the target area of completing the cup and handle formation.
There is a PART-TIME TRADER trade on the horizon this week. Plus other trades based on pullbacks.
I am still very bullish this pair. Which means, bearish the CHF. I expect SNB intervention soon with regards to the EUR/CHF. The chart below shows clearly what the risks are with long side trades. We have an upward sloping trend line at 0.9900 and good Fibonacci and horizontal support at 0.9850. Longer-term this year I see this pair above 1.1000, maybe up to 1.1350-1.1400.
From the chart below the double top / double bottom measured move highlights a potential A+B target of 116.50. This pair looks very bearish. It represents a true flight to safety on the back of the China headlines.
From nearly all the charts this week there are lots of opportunities. However, it is not just a case of jumping straight in and shorting or going long. Set your entry and exit levels and patiently wait, let the trades come to you.
1.3: WHAT’S ON MY MIND:
NOTHING LIKE GENTLY EASING YOURSELF BACK
INTO A NEW YEAR OF TRADING!
GEOPOLITICAL NEWS DOMINATES
Holy Mother God. I notified my subscribers that I would ease my way back in last week, as this weekend’s blog is the official 2016 start. I placed limit orders (2 x PART-TIME TRADER and 2 x RADAR trades) and after the FOMC minutes I took 2 x FLASH trades to add to an existing one making 3 FLASH trades in total.
As always, hindsight trading is the best… woulda, coulda, shoulda trades don’t you just love them? Yes, if you trade you have probably been here before, the 3 FLASH trades were all profitable and I did not take profits. Then, overnight, I checked in on the 3 FLASH trades – all was good. I went back to sleep woke up after a blood bath had erupted in Asia, the two RADAR trades had triggered, two of the FLASH trades had already hit stop losses, the third and the two RADAR trades moved like crazy and together they all hit stop loss levels, before I could catch up on the news. My first five trades of 2016 were all loss making trades, what a great start.
So that was my easing back into matters Forex!
I am basically a fundamental trader first then a technical trader, therefore, the geopolitical events that have dominated the markets recently I have found interesting to follow.
During my Christmas break, I spent a lot of time looking at central bank divergence and charting levels to enter trades with the following pairs AUD/USD, NZD/USD, GBP/USD and EUR/GBP. In addition, I am expecting a stock market pullback so I was looking across the JPY pairs for nice entries. I believe that buying the JPY currency could be an interesting trade this year. My plan was to write about all of these thoughts in my first blog of 2016, and at the same time use these trades as the catalyst to launch my PART-TIME TRADER trade set-ups.
Well, as you can imagine all of those thoughts and levels have gone out of the window given the events of the past week and now I am looking at bounces to sell into and my launch of my new trade set-ups will be more of a drip-feed rather than a David Bowie “Suffragette City – Wham bam, thank you man”.
China I have spoken about earlier in the blog and I feel that this will remain a news item as the Chinese Government through the PBOC uses the Yuan as an economic tool. I read last Friday that several analysts more familiar with how China operates are looking for a further weakness of the Yuan by as high as an additional 15%. As mentioned earlier no one really has a handle on exactly what the Chinese economy looks like. What we do know is that the Chinese are worried given their actions.
After China we have a worry about Oil. Saudi Arabia and Iran are in the middle of a huge diplomatic squabble. Tensions are high and Middle East stability is important for oil. Right now however, there is so much of the black stuff knocking around tankers and storage facilities worldwide, that the West Texas and Brent Crude prices are continuing to fall, this despite the Middle East unrest. Nevertheless, we should not let this news disappear, as tensions are so high it could escalate. Remember the Saudis are still active in Yemen and there are rumours that the UK are working alongside them in that location. This could escalate very quickly and potentially could be about more than oil.
Middle East stability is vital. The west really screwed up on handling Iraq, Afghanistan, Syria, Libya and ISIS. Right now we have the ostrich approach in operation, because of the wests consistent inability to respect cultures amongst other factors. All we need is Israel dragged into this dispute somehow and off we go!
Next, we have North Korea, was it an A-bomb or an H-bomb? (At the time of writing I had not seen confirmation of one or the other).
Yer man, Kim Jong-un couldn’t give a rats a** about the United Nations, China, The USA, South Korea, or Japan. In fact, people were dancing in the streets following the bomb test! Unbelievable.
The threat of increased sanctions is like water off a ducks back to the North Korean regime. A change in approach is required, and frankly I am just not sure that the world’s leaders have the stomach for dealing with this regime. My big fear looking forward is, could you imagine the response if the “Donald” was the U.S. president?
All the above really places the whether the FED will hike 2 or 4 times in 2016 into perspective.
So what are the trades?
Safety trades is the answer in my opinion; the USD and JPY in particular. Over the next 48 hours I have quite a number of LIMIT ORDER (RADAR, FUNDAMENTAL and PART-TIME TRADER) trades to post for my subscribers.
- TIME OUT – “AT THE END OF THE DAY”:
Not much front-line economic data this coming week. What news there is are all market movers, but there is just not the volume of news items.
As a Forex trader I think we will be held captive to geopolitical events and the equity markets. Whilst, it would be correct to say that liquidity should be improving day by day, I still think that we have to remain vigilant at all times especially in the Asian market time zone. At the best of times Asia is a little starved of participants and a large order can really create havoc.
There is only one solution in my opinion, trade lean and remain keen – that means trade with smaller positions with wider stops and be alert to moves.
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.
The Pip Accumulator