Previous week: 12 December – 16 December 2016
US Retail Sales m/m—Wednesday 14 December 2016
I noticed that the retail sales for November was +0.1% on expectation of +0.3%. October’s figure was revised down from +0.8% to +0.6%. Is this an anomaly or a start of a new trend for the US economy?
FOMC Federal Funds Rate—Thursday 15 December 2016 3am
As expected, the Federal Reserve raised their interest rate by 25 basis points from 0.25%–0.50% to 0.50%–0.75%. However, the highlight was the Fed dot plot. In September, the dot plot implied 2 rate hikes in 2017. However in the December meeting, the Fed now sees 3 rate hikes which is an increase of 1 rate hike. Further details regarding the Fed’s future economic projections could be found here.
UK Official Bank Rate—Thursday 15 December 2016
The Bank of England kept its asset purchases program and interest rate unchanged at 0.50%. It was a non-event.
Coming week: 19 December – 23 December 2016
Bank of Japan (BOJ) monetary policy decision—Tuesday 20 December 2016
With the rise of global bond yield in the past months and the FED tightening monetary policy by 0.25%, the BOJ may be pressured to loosen its monetary policy further to keep its yield curve under control. In October, Japan’s CPI turned back up into positive territory (+0.1%) after 6 consecutive months of negative inflation (deflation). Has the most recent loosening of monetary policy (29th July) worked to artificially create inflation? It seems that it might have because we observe that inflation has started to rotate back up in the direction favourable to the BOJ. We also have to note that a CPI figure of +0.1% is far from the BOJ’s target of 2.0% sustained inflation. The last time the BOJ adjusted (loosened) their monetary policy was 3 meetings ago on 29th July 2016.
Will the BOJ do more to help reach its 2.0% inflation target? With the Federal Reserve raising interest rates by 0.25% and global bond yields rising, will the BOJ do more to ensure 10 year JGBs remain under 0% as promised? With the BOJ, it is not easy to guess what they will do and when. They provide little forward guidance to the market on their policy changes unlike the Fed which basically announces to the world what they plan to do before their official announcement.
USD/CAD has recently broken out of its ascending triangle and now retesting broken resistance turned support at around 1.3180. From the chart, we see that 1.3180 is a price where the horizontal support comes in. Previously broken resistance should now turn into support. The upward sloping trend-line also converges at around 1.3180 as seen by the diagram.
Now that the Fed has hiked interest by a quarter of a point with the dot plots indicating 3 rate hikes (December meeting) in 2017 instead of 2 (September meeting), continued US Dollar strength is more likely. Also if more positive economic data points continue to show an improving US economy, it bodes well for continued strength in the greenback.
We have seen that oil has been unable to break through the resistance zone of $50 a barrel even with OPEC’s production cut agreement and current non-OPEC production cut talks. This shows that the oil market lacks strength.
A retest of 1.32 area on USD/CAD is a good spot to go long with no strong resistance up to 1.46. Patience and timing is important when determining when to execute this trade to go long.
The market concluded that the recent ECB’s change in ECB’s monetary policy being a net loosening. (€80 billion down to € 60 billion monthly asset purchases, and extending from March 2017 to December 2017) Well, doing simple math indicates a net increase in purchases.
The Federal Reserve just last week tightened their monetary policy by raising interest by a quarter point. They also indicated that they foresee 3 quarter-point rate hikes in 2017 instead of their previous forecast made in September of 2.
There is a currently a divergence in monetary policy between Eurozone and the United States of America whereby the ECB is loosening their monetary policy while the FED is tightening theirs. This divergence points towards a weakening EUR/USD.
Looking at the daily chart, we observe that support zone at around 1.0500 has been broken to the downside. A retest of broken support now turned resistance at 1.05 area would be a good area to go short.
By looking at the monthly chart since the inception of the Euro, we see that next support comes in at 0.95. This would be a move of 0.1000 (1000 pips from 1.05 to 0.95) which is the same size of the consolidation pattern in the past 2 years (range bound between 1.05 and 1.15). After 0.95 support the next support comes in at 0.85.
By scrolling through the news feed, I noticed much bickering among OPEC nations and also among non-OPEC nations with regards to levels of production. Everyone wants higher oil prices (and reminiscences of the good old days of 100 dollar oil). Now that oil prices are have halved in price, oil producing nations want to maintain their old level of oil revenue and to jostle for increased market share. They do this by pumping more oil out of the Earth’s crust. When the OPEC agreed on a cut in production, the non-OPEC nations, seeing a potential opportunity to chip away at OPEC’s (not too dominant) market share decided to crack up their oil production. This is called the “tragedy of the commons”. In the end, all the oil producing nations lose because no one wants to be worse off to benefit the rest.
Looking at the weekly chart of WTI, we see 2 consecutive weekly doji’s at around $50. The last candlestick is a bearish pin-bar at $50 resistance. Selling WTI at this resistance would be favourable.
Disclaimer: The trade idea(s) explained above is/are proprietary and is/are my own opinion. I take no responsibility for any gains or losses made in the capital markets from idea(s) shared. Please take due diligence (when trading on leverage and use a stop loss). Credits to www.tradingview.com for the charts used.