Previous week: 26 December – 30 December 2016
EUR/USD stop hunt operation—Friday 30 December 2016
On the last trading session during the Asian session on an illiquid Friday morning, the most liquid currency pair, EUR/USD, made a large round trip (around 132 pips) move on no news. As stated in previous weeks’ commentary, 1.05 is an area of strong resistance for the EUR/USD, and hence a good area to go short. More is written below.
Coming week: 02 January – 06 January 2017
FOMC Minutes—Thursday 5th January 2017 3am Singapore time
In the recent December Fed meeting, the FOMC decided to raise the Fed Funds rate by 25 basis points. Although the market had the probability of the rate hike close to 100% before the Fed announcement, it is always informative to understand what factors went into the Fed’s decision making process to hike. Did the Fed concern themselves with the “surprise” victory by The Donald when deciding to hike? How hawkish/dovish is the Fed on the US economy (inflation, growth, labour)? What geopolitical uncertainties do the Fed see as significant (China?, oil?, Brexit?)?
Non-Farm Employment Change—Friday 3rd January 2017
It is again the first Friday of the month which means it is non-farm payrolls day. Non-farm employment change is expected to come in at 175k for the month of December. The previous month (November) was 178k. Employment rate is expected to be 4.7%, a tenth of a point higher than November’s figure of 4.6%.
This will be President Barack Hussein Obama’s final full month jobs report to prove (to himself and the left) that he did a good job in getting the economy up and running. In my opinion, if he actually did a good job, the traditionally left-leaning democratic rust-belt states would not have voted for The Donald and would have given their support to Hillary. In that sense, Obama’s abandonment of the manufacturing industry caused democrats to lose the November election from the top of the ballot to the bottom.
On Friday during an illiquid Asian session during the festive week, we see a stop hunt operation on the EUR/USD. This event was not random. There were many stop orders placed above 1.05 and this week was the perfect time for a big player to take out the stops and use them as liquidity to execute their own short postion. Looking at the daily chart, we see a large bearish pinbar that closed at 1.05174, which is right at the strong resistance zone which acted previously as support. With this sell signal, selling EUR/USD next week at 1.05 zone would be favourable.
**The market concluded that the recent ECB’s change in ECB’s monetary policy being a net loosening. (€80 billion 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.
**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.
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. This week, the Baker Hughes US rig count continued to increase. It increased by 2 from 523 to 525.
**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 reminsinces the good ol’ days of 100 dollar oil). Now that oil prices had halved, oil producing nations would still be interested in maintaining 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 1 large bearish pinbar at around $50. The last two candlestick are two small inside candlesticks, which may indicate distribution. Selling WTI at this resistance zone around $53 would be favourable.
From the chart of silver, we see that it has been heavily sold from a high of $20.50 down to $16, mostly due to the strong US dollar in the second half of 2016. However, $16 seem to be an area of strong resistance in the past and may now turn to an area of support. When comparing against its substitutes, it is observed that silver has been lagging behind and does have room to catch up to the upside.
Gold, the closest substitute to silver, had also been selling off strongly for the past six months. However, gold seemed to have turned bullish just last week. We got to see if this short term bullish momentum in gold will carry on into the new year.
Bitcoin, just like precious metals (gold, silver), is a good barometer for the strength and confidence in fiat currencies (USD, EUR, JPY, GBP, etc). Bitcoin had proven the naysayers wrong and had been very strong ever since it bottomed out in the middle of 2015 at $200 and is currently testing $1000 and its all time high after that.
When thinking about going long on silver, other than thinking about its under performance against its peers (gold, bitcoin, and even copper), we would also have to grapple with the argument about the current strength of the US dollar. As stated earlier, EUR/USD is bearish and that does not bode well for the argument for a strong silver. Timing this trade is also an important factor.