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Trading Week, News, Analysis & Trade Plan

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Trading Week, News, Analysis & Trade Plan

Trading Week, News, Analysis & Trade Plan

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Another excellent piece of analysis by new student Rune. He has been trading with us at for years but recently joined our pro traders course to learn how to plan and trade like a professional, using a global macro/top down approach, here is his analysis for the week, written on Sunday 22nd March:

USD US Consumer Price Index (February) It has been pretty brutal in the inflation department for the US of late with last month’s – 0.1% being the first time the yearly figure has fallen in to negative territory since October 2009. Back then, the next month shot back up to nearly 2%, but that isn’t expected to happen now. If it can get back to positive, the Fed may be more encouraged and could help set the stage for a data-driven increase in interest rates at the June meeting.

US Durable Goods Orders (February) While this did return back to positive last month for the first time in five months with a 0.3% increase, it failed to live up to expectations for the fifth consecutive month. Since it has been so depressed of late, there is the chance of a snap back to good as pent up orders get processed, so watch for an abnormally large figure with this news release.

US Final Gross Domestic Product (Q4) This will be the final say on how growth for Q4 came out despite there being two other indications of how it fared, and it is expected to be slightly better than the second release. Typically, the final GDP figure doesn’t get too much attention, but since the Q3 figure was revised so strongly from the 1st to the 3rd releases, all eyes will be on this release to see if something similar will happen.

A negative revision could push investors in to thinking the Fed will wait longer than anticipated to finally raise interest rates. EUR Markit Eurozone Flash Manufacturing, Services, and Composite PMIs (March) While it may appear that Eurozone is like a slow-motion car wreck with all the Grexit talk, QE, and abnormally high unemployment, many of the other economic numbers aren’t all that bad.

PMIs in particular have been steadily rising with Manufacturing moving higher off of the 50 level and Services approaching the mid-50s. If that momentum can be sustained perhaps a pause in EUR selling could be seen, and the much anticipated run to parity in the EURUSD will not eventuate anytime soon. German IFO – Expectations, Business Climate, and Currency Assessment (March) The weakening EUR has made it a bit easier for German industry to make a profit and that seems to be leaking over to the confidence that they have for the future.

As much as German politicians fought the introduction of QE, it appears to be benefitting the nation greatly. That being the case, confidence is expected to continue to rise which really isn’t surprising. However Grexit concerns could play a role, so there may be another QE assisted move lower for the EUR on the cards.

GBP UK Consumer Price Index (February) The GBP has been punished severely of late thanks to some correlation with the EUR and perhaps some outsized expectations from the consensus, but lack of inflation has been a contributing factor as well. Since mid-2014, CPI has been on a steady decline from around 2% and fell all the way to 0.3% last month. This month isn’t expected to help matters with a 0.1% consensus, but we may be on the threshold of flipping the switch of expectations.

Since UK data hasn’t been living up to the hype lately, consensus tends to under shoot as they expect less, which can lead to surprise beats. Considering inflation has been better in a variety of other regions (including Canada last week), perhaps that momentum could carry over to the British Isles. UK Retail Sales (February) The CPI print will be very important for GBP this week.

Price rises remain low in the retail sector and with wages not rising as much as expected, there are risks that CPI undershoots, affecting rate expectations. There is a strange coincidence happening with this release this month that needs to be pointed out, even if it means absolutely nothing…. Back in October 2014, this release was expected to come out at -0.1%, but it disappointed by printing at – 0.3% and the previous release was 0.4%.

Last month, this release was expected to come out at -0.1%, but it disappointed by printing at -0.3% and the previous release was 0.4%. Notice that those two lines are exactly the same. Spooky, isn’t it? Well, the next month after the October 2014 miss, it was expected to come out at 0.4%; care to take a guess where forecasts are for this release? If you guessed 0.4%, then you are right on target.

If this deja vu continues, watch for a 0.8% on this release because… that happened in November 2014. JPY Japanese Household Spending (February) This release has been pretty dismal over the past year as it has strung together ten straight declining months in a row. Ever since the tax increase of last year went in to effect, the Japanese public has been spending less and less, and it isn’t expected to stop this time around.

Consensus is calling for a 3.1% decline which would be pretty much in line with what it has been over those last 10 depressing releases. If it continues the streak, the Bank of Japan’s outlook for the future might get a little more dim which would open the possibility of more stimulus and a return to broad JPY devaluation. AUD HSBC Chinese Flash Manufacturing PMI (March) In a bit of good news out of China, last month’s HSBC Manufacturing PMI edged back above the 50 level which indicates growth from contraction.

The previous two months were in contraction territory which was adding to the doom and gloom seeking for China. Expectations are for this figure to maintain growth, but not too aggressively; consensus is merely at 50.4. If it falls back below the 50 line watch for weakness in currencies like AUD and NZD as the week starts. Reserve Bank of Australia’s Assistant Governor Malcolm Edey Speech The usual RBA member to move his currency is Governor Glenn Stevens, who gave a speech last week.

Stevens didn’t really say too much about the value of the AUD and mainly commented on slower Chinese growth, the broad effect of Federal Reserve tightening, and his confidence in the strength of the Australian economy. That leaves potential talk of the currency to Edey who may try to talk it down, particularly after witnessing the strength in it after the Fed’s meeting last week.

NZD HSBC Chinese Flash Manufacturing PMI (March) Consensus is merely at 50.4. If it falls back below the 50 line watch for weakness in currencies like AUD and NZD as the week starts. New Zealand Trade Balance (February) After spending the previous six releases in deficit, NZ trade turned back to surplus last month. Admittedly, it wasn’t that extreme with only a 56M read, but this time around it is expected to be 355M.

If that is achieved, it would be the best result since early last year and would help explain the recent increases in milk prices as demand for the important NZ product has increased. Preferred pairs this week EURGBP is my preferred pair this week due to the number of high-impact economic reports out of both the Eurozone and UK. Last week, EURGBP rallied consistently, breaking above its 3-month bearish trend line in the mid-.7100s. See Daily Chart.

The MACD has turned higher for the first time this year, maybe a shift toward bullish momentum, while the Slow Stochastics indicator is at its highest level in four months. There could be a bounce in EURGBP this week, with bulls potentially looking at the 38.2% Fibonacci retracement and previous support turned resistance at 0.7400, where I would like to look for a short trading with the trend. EURAUD has been ranging between the weekly pivot points not being able to break over the whole number of 1.40 (except for the FOMC spike).

The market is in balance, but for how long? The EURAUD exchange rate is likely to remain volatile in the short-term as the quantitative easing continues throughout the Euro-Zone. The forecast is that the QE will place continued downward pressure on the Euro, providing the opportunity for the EURAUD exchange rate to push south toward a 2 year low. On the other side of the fence, the Australian Dollar has been undergoing a period of devaluation against most currencies due to the recent interest rate cut by the RBA and the prospect of another cut to follow later this year.

The upcoming Rate Decision by the Reserve Bank of Australia (RBA) next month, and the market’s reaction to the ongoing QE in the Euro-Zone, will both play key roles in determining the trend of the EURAUD exchange rate. Fundamentally I believe that the Aussie economy is in better shape than the Eurozone ditto – even though iron ore and coal exports to China have slumped.

Trading the QE and rate differential as discussed last week. EURUSD There are some strong fundamental reasons to be cautious when it comes to the dollar rally towards the end of the first quarter this year: Positioning: The market has moved to an extremely long dollar position. When this happens it can be negative for dollar bulls for two reasons: 1), people start to take profit before their luck runs out, and 2), contra-trend traders (contrarians) may move towards the exit, which could be a precursor of the rush.

Economic data: In the next few weeks we will get a clearer picture of Q1 growth and the impact of some very bad weather in the US. Last year there was a lot of bad weather which had a strong impact on the economy. We have seen labor market data hold up, however other indicators including construction, retail sales, industrial production and consumer confidence have all deteriorated in the first couple of months of this year.

Q1 GDP forecasts have been cut to 2% and below in some cases, but there is a chance that growth may have stalled in the first quarter, which could weigh on the economic outlook for the rest of the year, further delay Fed rate hikes and hurt the dollar. The debt ceiling: Last week the US hit its debt ceiling. Although the Treasury has enough money to cover itself until October, a weakening economic outlook could bring the US’s debt situation front and center, which could dent sentiment towards the dollar. However, there is still one great factor in the USD favor: The Yield.

Even if the Fed is stepping back from hiking rates, it is unlikely to add more QE to the economy, while the ECB has just embarked on its first ever QE program. This still makes the dollar attractive from a yield perspective. BUT, this could also be the USD’s biggest weakness. The dollar index continues to benefit from a strong yield differential with Germany.

In this yield-starved environment, this differential is one major benefits of holding the dollar. EURUSD skyrocketed higher in the wake of the Fed’s less-hawkish-than-expected statement and press conference on Wednesday. At one point, the world’s most widely traded currency pair rose a staggering 200 pips in less than three minutes! However, dollar bulls regained their footing on Thursday, suggesting that the short squeeze may be short-lived. Slow Stochastics have bounced from oversold territory, and bears could look to press EURUSD back down toward previous support at 1.0460 or the 1.0400 handle this week. One to look out for.

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