Previous week: 19 December – 23 December 2016
Bank of Japan (BOJ) monetary policy decision—Tuesday 20 December 2016
The Bank of Japan kept their policies the same as the previous meeting. I suppose the BOJ thinks that their current policies are effective in creating inflation in Japan because CPI has turned positive (+0.1%) in October after 6 consecutive months of deflation. Also, the Japanese economy had not significantly deteriorated much during the period after the policy loosening on the 29th of July to warrant further loosening of monetary policy. This BOJ meeting was a non event since there was no change in policy.
Coming week: 26 December – 30 December 2016
On 27th December 2013, EUR/USD, the most liquid currency pair, made a 400 pip round trip in a single day on no news. During this festive period, the market will be illiquid and stop hunts may be an easy operation.
FTSE 100 at strong resistance
When looking at the monthly chart of UK’s FTSE 100 since 1988 (chart of the past 28 years), we see that the FTSE has oscillated between 3500 points to around 7000 points. October 2016’s candlestick is a bearish pin bar at strong resistance. However, we see a very bullish candlestick for the month of December (The candle has not closed yet. There is still one more illiquid Christmas week before the December monthly candle closes though.)
When I added the Relative Strength Indicator (RSI is an indicator that oscillates between 0 and 100), we see a bearish divergence. The FTSE’s RSI has been making lower highs (88, 78, 69) as seen by the downward sloping trend line while price does not make lower highs.
Some questions that we need to ask ourselves when thinking about this trade. How negatively or positively has the British economy been impacted with Brexit? How long more will the bull run in equities globally last? (Equities bottomed in March 2009. That would be almost 8 years of bullish stock market. Mainstream media has been shouting at the top of their lungs that the DOW is about to touch 20,000 points.) Will the 25 basis points interest rate hike in United States have any material impact to the upward momentum of the US stock market?
**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 asset purchases.
**The Federal Reserve tightened their monetary policy in December by raising interest rate 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 hikes.
**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 long term fundamental weakening of 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.
Libya says they intend to increase their production.
Whilst the OPEC nations agree to cut production which led to a rise in oil prices to $53 a barrel, the American opportunists decided to repay the compliments by restarting their oil rigs.
**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 o’ days of 100 dollar oil). Now that oil prices had halved in price, oil producing nations still intend to maintain their old level of oil revenue and 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 crank 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 dojis at around $50. The second last candlestick is a bearish pinbar at $50 resistance. Selling WTI at this resistance would be favourable.