Special Consultant to the FPA
EUROPEAN FOREX PROFESSIONAL WEEKLY
Analysis and Signals
November 19, 2009
Analysis and Signals
November 19, 2009
The current week was just a continuation of the previous one. My assumptions concerning doubtful growth euphoria looks like they have found confirmations gradually. First, economic numbers have been trending softer during the week – most data was below expectations. Retail sales ex. auto 0.2% vs 0.4% expected; Core PPI -0.6% vs. 0.2%; Industrial Production 0.1% vs. 0.2%. Just CPI was a bit higher, but it was distorted by the Cash for clunkers program. The real estate sector also anemic – Housing starts and permits also declined. Surplus to this was Non-farm Payrolls of last week (-190K). That is what I expected – the recovery is loosing momentum.
Besides, during the current week we’ve receive an official confirmation of our thoughts during Bernanke, Fisher and Kohn's testimony – it has been said that rates can stay low even until 2012. That is what we’ve spoken of in previous research.
We see additional confirmation from the markets – gold buying, low US Treasuries yields that had tightened significantly during the month (for example 2-year Note yield is 0.77% currently. Feb 2009 low was 0.6%). I’ve spoken about the equity market in the previous week - investors judge the current situation too optimistically. Now there are some signs of possible reversion in stock markets that have appeared. I do not know how deep it could be, but we can not exclude the possibility of a deep retracement. Th Banking Index (BKX) shows divergence with the S&P500 and does not confirm that it grows. As a rule, the banking sector is a predictor of the equity market because banks are more sensitive to rate policy and faster to react to changes in it. Also worth noting is that the equity index is just near the strong resistance level that is in agreement with the target of ABC’s move (look at chart of S&P500 below) and 0.618 Fib resistance. So, I think that 1140-1160 of S&P 500 is a level when we have to be extra careful. And circumstances are turn so, that now is a very possible moment to see risk aversion movement. How will it influence the USD? Just look at our “Basic macroeconomic issues” below points 3 and 6.
What else can we tell… A very interesting moment now is with US debt ceiling. The last extension was in February to 12.1 trillion. USD. But during the current month, the Treasury should issue an additional ~120 billion USD and the deficit should reach 12.132, excluding Bonds that should be matured. So, if Congress will not approve an extension, yields will become even lower and we can see the lowest levels. From the other side if they extend the 12.1 debt ceiling - rates should rise. It can add volatility to currency market.
Result: Macro data and Fed’s authorities confirm our thoughts about growth perspectives. Absence of inflation, anemic IP, labor market, retail sales and slowing in real estate sphere enlarge the possibility of W-shape of recovery. Stocks are at a breakeven point – the great resistance is near, we see interindex divergence. We see gold buying and demand on Treasuries that push yields lower. Taking into consideration Year End and tighting all together I expect retracement on the equity market and possible bearish trend on EUR/USD even before the year's end. We should expect reassessment of the current situation by investors.
BKX Index Weekly
S&P 500 Index Weekly
Basic macroeconomic issues:
1. Investors basically pay attention only to the nearest perspective. Since FED rate tightening is too blurring, we should not to expect meaningful USD strengthening until next year (or till first signs of a rate hike possibility);
2. USD will become stronger when investors see these signs, so the expectations concerning EUR/USD rates parity will change;
3. We can expect growth in the USD, if the possibility of second leg of recession will grow, and if investors will have large borrowing positions in USD;
4. EU economic recovery will have a time lag about 1-2 quarters compared to the US recovering;
5. When EU rate hike expectations will appear, the dollar will turn to weakeness;
6. We can see temporary USD strengthening from time to time due some technical movements (risk aversion, stocks buying etc) until the first signs of a rate hike possibility appear.
7. The primary US economic data that will be under scrutiny are personal credit, spending, wages and employment, inflation. This is a final segment in the chain, and it’s very important.
Monthly (EURO FX all sessions CME futures)
Not much changes… The market is still near COP level, we see it appreciation now. Trends remain bullish, no overbought level still.
Current oscillator number allows us estimate EUR/USD overbought level for November - 1.5474 area. If the market will reach it in November, then we can expect consolidation or even retracement. The market will feel a pressure in this area.
Weekly (EURO FX all sessions CME futures)
Its look like the trend turns bearish on the weekly chart. But we have to wait some time still, because the angle of crossing is a bit flat. If situation will develop on down side, we should be able to estimate possible levels of retracement. But for now it is early a bit.
Daily (EURO FX all sessions CME futures)
The daily trends turn bearish and that increases a probability of a downward move (remember that the weekly trend also has turned bearish). The levels for a down move are the same. Two of them are very strong. COP=1.4777 coincides with 0.382 Fib support and OP=1.4610 with coincidence of Fib support levels. We do not see any oversold yet, so there is nothing to block possible move to 1.4780. Just want you to pay attention that we are trying to break 25x5 SMA support for now. XOP=1.4339 is also near the support level. If we will see that a weekly down trend begins to fast all of daily targets are possible to reach…
Hourly(EURO FX all sessions CME futures)
The hourly trend is bearish. The market already has reached an OP of ABC move. Taking into account that the daily trend is bearish also, I think that we will reach XOP=1.4783 that is in agreement with 0.618 Fib support level. Besides, if market will reach it, we will see a solid oversold. That’s why I think that we will have an upper retracement then. Also note, that this level is very close to daily COP=1.4777. There are some others LPO’s (Logic Profit objectives) exist, but I didn’t point to them, otherwise the picture will be too difficult to analyze. Here they are:
XOP=1.4876; OP=1.4861 and XOP=1.4820.
Trade EUR/USD possibilities (1):
Fundamentals are still not in favor of the USD. In the long-term, an up move should continue. But for nearest 1-2 months we can see a technical retracement if investors reassess the current economic situation and begin to run to quality. The weekly trend turned bearish technically, but not much time has passed after that moment, and I want to wait a bit to see if there is a continuation of this turning.
The daily trend is bearish. The nearest target is COP =1.4777. If the weekly bearish trend is confirmed, then moving to OP=1.4610 very probable. Besides, this scenario coincides with fundamental thoughts.
For now the market reached OP=1.4840. We have no oversold yet, we can see some not deep retracement higher, but then, I think the down move will continue to 1.4770-1.4780 area – there is strong hourly support (agreement XOP=1.4783 and Fib support) and daily COP and agreement. We definitely will see upper retracement from there. Besides, in 1.4820-1.4800 area there should be a great amount of stop orders. If they will be touched by market makers, the market surely will reach 1.4770 just because of orders fills. And I think that the market should break 1.4800, because daily trends are bearish and there is no oversold yet.
(1) “Trade possibilities” are not detailed trade signals with specific entries and exits. They are expectations about possible moves of the market during the week based on market analysis.
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