“Jaws of death – Megaphone Top in US equities”

One school of trading estimates one in a four chance of a stock market decline by March 2017’.

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AUD/USD 2017 forecast: Monthly chart screams ‘sell on rise’

2016 recap

The Aussie dollar was hammered in the first half of January 2016 on broad based USD strength and Yuan weakness. Fed, in its Dec 2015 policy, had signaled the possibility of four rate hikes in 2016. Thus, markets were buying US dollars.

PBOC’s devaluation of Yuan in early January also weighed over the Aussie dollar. The pair thus dropped to 0.6827 (Jan 15 low), which till date stands as the 2016 low.

In subsequent month, oil price recovery and the rally in gold helped the Aussie dollar regain poise. The spot clocked a high of 0.7835 (Apr 21 high), which is the 2016 high. The pair then dropped to 0.7148 (May 30 low) and from then on revisited area around 0.7750 on multiple occasions, before the bears made their presence felt and pushed the spot lower to current level of 0.7170.

The sell-off in November/December was triggered by ‘Trumpflation’. Fed has signaled scope for three rate hikes in 2017, while Trump is widely seen delivering on the ‘promises’ he made during the Presidential campaign.

2017 outlook – Monthly chart suggests ‘sell on rise’

aususd.jpg

Source: Netstation (www.netdania.com)

The current month candle has failed to hold above the rising trend line drawn from 2001 low and 2008 low.

Take note of the fact that the spot retook the trend line in March 2016, but repeatedly failed to take out the monthly 200-MA as seen on the chart below. We also see a bearish 50-MA and 100-MA crossover on the monthly. The 50-MA is falling fast.

Furthermore, we also see that the descending trend line is intact. The spot has also breached 0.7208 levels (61.8% Fib retracement of 2001 low – 2011 high).

audusdm.jpg

Source: Netstation (www.netdania.com)

Conclusion-

  • The spot appears on track to test/breach support at 0.6827 (2016 low) and drop to 0.63 (76.4% Fib retracement of 2001 low – 2011 high).
  • The long-term bearish view is at risk of a bullish break above 0.77 handle.
  • The area between 0.77 to 0.7913 (monthly 200-MA) is a no man’s land for me.
  • I would turn bullish only above the monthly 200-MA (currently seen at 0.7913).

Trade Setup: Sell on the rise is the preferred trading strategy as long as the spot does not breach resistance at 0.77 levels.

ECB Review: EUR/USD drops on ‘dovish QE taper’

ECB kept key rates unchanged today, but announced following changes to extra ordinary/unconventional measures –

  • The maturity of the QE program has been extended to end 2017
  • Bank would trim monthly bond purchases by EUR 20 billion to EUR 60 billion from April 2017 till end 2017
  • Will continue to buy EUR 80 billion worth of bonds per month till April 2017
  • Will buy bonds below the deposit rate

Dovish Taper

The EUR/USD pair rose to a high of 1.0873 in a knee jerk reaction to trimming of bond purchases.

However, the currency quickly surrendered gains and was last seen trading 1% lower on the day around 1.0646.

This is because – the central bank has merely made the QE ‘thinner for longevity’. What it essentially means is that the ECB balance sheet would continue expand throughout 2017… a time when the Fed is seen raising rates faster than previously expected.

No wonder, the EUR/USD dropped 1%.

QE till infinity

Furthermore, the bank is now ready to buy bonds yielding less than the deposit rate which means the QE could effectively run till infinity.

Also note that with this style of spreading purchases over the longer period of time, the QE program could run for years to come.

In my opinion, this is a ‘Dovish Taper’ and has effectively opened the doors for a sell-off in the EUR/USD pair to parity levels by Q1/Q2 2017. The only thing that can support EUR going forward is massive risk aversion in the financial markets.

EUR/USD – Falling tops formation remains intact on the daily chart

eurusd-daily

Source: Netstation (www.netdania.com)

Today’s candle is highly bearish; although I would want to see a bearish follow through and a break below March 2015 low of 1.0463.

On the weekly chart

eurusd weekly.jpg

Source: Netstation (www.netdania.com)

Watch for a close below the Flag support (floor)… Bearish flag is a continuation pattern and a close below the flag support (floor) would signal that the retreat from the May 2014 high of 1.3993 has resumed.

USD/CAD drops to key support as BOC keeps rates unchanged

The Bank of Canada kept its key overnight rate unchanged at 0.5%, while the USD/CAD pair fell to a key rising trend line support despite the drop in the oil prices.

The EUR is at the center stage of the FX markets

Majors are largely being guided by the action in the common currency as the Monday’s sharp reversal in the EUR/USD pair triggered speculation that the greenback could have bottomed out.

Moreover, the EUR/USD is a classic yield differential play. Hence, rebound/signs of strength in the EUR/USD are being read as an indication that Fed tightening has been priced-in.

This could be the reason behind the strength in the Canadian dollar. BOC was expected to keep the rates unchanged; hence the status quo policy statement is unlikely to be the reason behind the strength in the CAD.

If anything the bank sounded a little bit dovish… It said, “The strong third quarter growth is expected to shift to more moderate growth in the fourth quarter”.

Nevertheless, continued strength in the EUR/USD could eventually trigger a breach of the rising trend line support on the USD/CAD pair.

Daily chart

usdcad daily.jpg

Source: Netstation (www.netdania.com)

Back-to-back day end closes below the rising trend line support would open doors for a completion of the upward sloping head and shoulder formation seen on the weekly chart below

The weekly chart shows upward sloping head and shoulder

usdcad.jpg

Source: Netstation (www.netdania.com)

The neckline support stands around 1.2820.

Bullish scenario – Rebound from the rising trend line followed by a daily close above 1.3590 could translate into 300-400 pip rally to 1.38-1.39 levels.

Should we trust the rebound in EUR/USD?

Monday’s sharp reversal in EUR/USD following Renzi’s defeat in the Italian referendum may have caught many by surprise. Pundits are wondering whether the EUR has bottomed out (and the USD has topped out) at least for the near-term.

Chart experts say Monday’s candlestick is the exact opposite to the one seen on November 9.

Daily chart

eurusd.jpg

Source: Netstation (www.netdania.com)

  1. The pair dropped 400 pips or so following the November 9 candle.
  2. Given, the Monday’s candle is the exact opposite of the November 9 candle… should we expect the pair to rally to 1.12 (400 pips or so from Monday’s close of 1.0756).
  3. Sell the rally… as Monthly chart looks bearish
  4. Looking at the monthly chart (line chart), I feel the common currency is heading lower to parity by Q1-Q2 2017.

Monthly chart – Line chart: Bearish flag pattern

eurusd weekly.jpg

Source: Netstation (www.netdania.com)

  • The chart above shows falling tops (from 2008 high) followed by a bearish flag pattern.
  • We also have a falling channel which is seen offering support around 0.9950 and 0.95 levels.
  • We already have a bearish break from the bearish flag pattern, which suggests the doors are open for a sell-off to parity… unless the bird closes back inside the flag on Dec 31st.
  • DAX on the verge of a bullish breakout…  signals that EUR could be heading to parity.

Weekly – DAX and EUR/USD comparison

dax and eur.jpg

Source: Netstation (www.netdania.com)

  • DAX and EUR/USD have been inversely correlated since early/mid-2014. From mid-2012 to early 2014… rising EUR/USD was a sign of Eurozone stability… hence the direct correlation.
  • However, on a broader time frame – from 2008 – the correlation is largely negative/inverse.
  • As of now, the DAX is trading above the key resistance if 10,800. We have had the breach of the falling trend line followed by a rising lows and now a break above 10,800. Thus the index looks set to rally.
  • The bullish DAX technicals only suggest that the bounce in the EUR could be a trap.

Bearish view is at risk only if the EUR/USD reenters the flag on Dec 31st.

EUR/USD rallies as expected, Massive bullish outside day candle

The EUR / USD pair dropped to a low of 1.0505 in early Asia in response to Renzi’s humiliating defeat in the referendum. Renzi announced his resignation, which heightened the political uncertainty cross the Eurozone.

However, a ‘no vote’ victory was largely priced-in as mentioned in my report titled “Italian referendum and the case for EUR/USD parity.

The 2-year German yield suffered moderate loss to -0.747% before recovering to trade largely unchanged on the day around -0.711%. The record low of -0.769% was hit on November 29. This is clear indication that Renzi’s defeat is no surprise to the markets.

The daily chart says today’s rally could be extended to 50-DMA over the next few days-

eurusd.jpg

Source: Netstation (www.netdania.com)
The daily candle is now a “bullish outside day candle”. Today’s candle has engulfed every candle since November 18.
This suggests the pair has bottomed out at least for the short-term and the common currency could test 50-DMA seen at 1.0913.

Italian Referendum and a case for parity in EUR/USD

Italian referendum is no Brexit saga, but could eventually lead to ‘Italeave’ or ‘Italexit’

European leaders will be glued to their screens this Sunday as Italy heads to referendum. Retail crowd does not really understand what the referendum is all about. For them, things are pretty straight forward – A ‘no vote’ victory would be bad for EUR and Eurozone and vice versa.

However, things are not as straightforward as they appear.

What is the referendum all about?

Italian PM Matteo Renzi has been lobbying aggressively for a package of reforms that would drastically shrink the size and power of one of Italy’s two houses of parliament. These reforms are expected to end corruption, red tape and delay in government work.

So a ‘Yes’ victory in the referendum would be good, right… That is a common sense. The real issue is if the ‘No’ vote wins i.e. if the voters reject the reforms, Renzi would resign and that would open the doors for the Five Star Movement, an insurgent populist party led by a former comedian who wants Italy to abandon the Euro.

So as you can see, a ‘No vote’ victory could end up in ‘Italeave’ or ‘Italexit’.

Now the question arises is – if the reforms are expected to put an end to corruption, red tape and delay, why would Italians reject it.

The simple reason is that a ‘no vote’ victory would open doors for anti-EU Five Star movement. There is wave of anti establishment across the globe. Trump victory is probably a biggest evidence of the anti establishment wave.

Now that we know the purpose of the referendum, let us look at the possible impact on the EUR/USD pair.

We have two scenarios – no vote victory or yes vote victory.

No vote victory has been priced-in…but the contagion is yet to be priced-in

This may come as a surprise, but yes, a ‘No vote’ victory has been priced-in. In the previous two mega events – Brexit and US elections – both Brexit and Trump were distant dreams and were not priced-in at all. Furthermore, Pundits were totally wrong about the market reaction on Brexit and Trump victory.

This time the market is prepared for a ‘no vote’ victory. Take a look at the German 2-year yield, it is trading -0.738%, i.e. at least 33 basis points lower than the ECB deposit rate of -0.30%. The recent low stands at -0.769%.

Note, that the 2-year yield has declined at a time when the global bond yields are on rampage… led by the Trump Bump and the treasury yields. This clearly states that a ‘no vote’ victory has been priced-in.

However, what’s not priced-in is an eventual threat of ‘Italeave’/’Italexit’. Moreover, a no vote victory in Italy would also force markets to begin pricing-in the rise and eventual victory of anti-EU parties in Germany and France in the 2017 elections.

To cut the long story short, EUR/USD may see a minor spike to 1.0850 on ‘sell the rumor, buy the fact’ trade, but eventually would begin its journey to parity.

Yes vote victory would be a surprise

‘Yes vote’ win will be a surprise and that could boost the EUR/USD to 1.10 and may be to 1.12 in the short-run. However, the overall trend still remains bearish and the currency is more likely to head towards parity than not on account of the widening yield differential (higher US rates). Only, a serious risk-off triggered by a major sell-off in the US stocks would help the EUR/USD get back to 1.15 levels.

Technical Charts scream sell-off to parity!

Monthly chart

eurusdmonthly

Source: Netstation (www.netdania.com)

  • The rising trend line support is seen around just above parity. Also note the 61.8% Fib level stands at 1.01158.

Monthly chart – Zoom-In on 2008-2016 – Bearish flag

eurusdm.jpg

Source: Netstation (www.netdania.com)

  • We see falling tops formation, followed by a sharp, almost 90 degree sell-off since mid 2014 to March 2015.
  • From March 2015, the pair has been restricted to a sideways trading range.
  • To cut the long story short, we have a bearish flag, which, if breached would open doors for a sell-off to 0.95-0.96 levels!
  • Given the falling top formation and the macro-political picture, it is safer to say that the odds of a bearish break from the bearish flag formation are high.
  • Only a monthly close on the higher side would signal bearish invalidation and shall put the parity calls to rest.

USD/CAD Analysis: CAD bulls beware… Oil has run into a major trend line hurdle

The Canadian dollar strengthened today in a delayed reaction to yesterday’s oil price rally. The rally was set in motion during the Asian session, where the US dollar was having a breather.

In my USD/CAD analysis yesterday, I had noted that the Canadian dollar would rally once the US dollar shows signs of exhaustion.

Caution is the word for CAD bulls!

Canadian dollar bulls are advised not to get carried away by the rally seen today. This could very well be the short-term top (short-term bottom in USD/CAD)… unless the Fed rate hike bets drop significantly. This is because –

  • Oil has run into a major resistance level

Brent monthly chart

brentoil

Source: Netstation (www.netdania.com)

Prices have run into the resistance offered by the rising trend line coming from the December 1998 low and November 2001 low.

CAD bulls should wait for at least two consecutive daily close in oil above the trend line hurdle or at least a weekly close above the trend line.

A repeated failure at the trend line would open doors for a drop to $50.00 levels.

  • Trumponomics has yet to have its full effect on CAD

The Dollar-Yen pair rallied more than 1000 pips since November 9. The EUR/USD  shed more than 700 pips since November 9. AUD/USD and NZD/USD dropped 400 pips.

USD/CAD went from 1.3265 to 1.3589 (300 pips or so) and quickly fell back to 1.35.

To cut the long story short… The CAD remained relatively resilient during the “Trump Bump” mania. Clearly, it was speculation about OPEC deal that kept the CAD resilient.

In case, the oil fails at the trend line hurdle, the doors would be opened for the markets to price-in Trump Bump in the USD/CAD pair.

USD/CAD chart analysis: Dips below 50-DMA could find fresh bids

Daily Chart

usdcad.jpg

Source: Netstation (www.netdania.com)

  • The sharp drop seen today certainly adds credence to the topping formation seen around 1.3573 (50% Fib retracement), however, a failure to dip below 1.3310 (38.2% Fib retracement) amid rising 50-DMA and 100-DMA suggests the dips below the 50-DMA level of 1.3322 could be bought into.
  • We also have a bullish 5-MA and 10-DMA crossover on the monthly chart. The 5-DMA support on the monthly is seen at 1.3277.
  • A dip below 1.3322 (50-DMA) and towards 1.3277 could find fresh bids.
  • On the higher side, a rebound from 1.3310 followed by a break above 1.3433 would open doors for a re-test of 1.3573 (50% Fib retracement).

For in depth fundamentals… check out the well know Oil Analyst Gaurav Sharma’s take on the OPEC deal here – Sharma doesn’t buy the oil rally… something the CAD traders should take note of