GBP/USD Rally Next Week?

GBP/USD Rally Next Week?

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Next week is a big one for The Bank of England has a monetary policy announcement on the calendar and the market is pricing in an 89% chance of a rate hike. We’re not so sure that the BoE is ready to move especially given the recent weakness in retail sales, slowdown in CPI growth and larger trade deficit but investors clearly feel differently. They believe that even if the BoE stands pat in November, they’ll hike in December with yearend rate hike expectations hovering just over 90%. These hawkish views were driven by the minutes from last month’s BoE meeting, which revealed that a majority of MPC members see “scope for stimulus reduction in the coming months.” On that same day, BoE Governor Carney confirmed that not only have the odds of a hike have increased but he is among the majority on the MPC who see the need to change stimulus. While a hike could wait until December, many investors anticipate the move happening in November because it will be accompanied by a Quarterly Inflation Report and press conference that would give Carney the opportunity to explain the change and manage the market’s future expectations.

Technically, GBP/USD is basically range bound going into BoE. There’s support between 1.30 (100-day SMA) and 1.3050 (38.2% Fib retracement of the September 2016 to September 2017) rally and resistance below 1.33.

USDCAD – Will the Rally Continue?

USDCAD – Will the Rally Continue?

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USDCAD remains well bid at the 1.2600 figure as oil struggles with the $50/bbl handle. The pair appears to have made a major bottom last week and any decline in crude is likely to take it towards the 1.2800 figure.

To that end, tomorrow crude inventory figures could be key. If the number shows a disappointing draw in inventories, it will drag crude below the $47/bbl level and propel USDCAD higher. There are good reasons to suspect that crude number will miss, Seasonally July has represented peak demand for crude and August demand is likely to wane in comparison. Furthermore, although OPEC continues to make noises about capping supply, new production from Lybia will likely offset any OPEC agreements and should keep a lid on the price.

All of this creates the prospect of further gains for USDCAD. Even if the numbers prove bullish, the loonie is unlikely to manage much of a pop as 1.2500 remains solid support in USDCAD.

Sell EUR/CAD Rally

Sell EUR/CAD Rally

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Sell EUR/CAD Rally

There were a number of big takeaways from central bankers today. The first is that the ECB is not happy with the latest jump in the euro. They came straight out and said the market misjudged Draghi’s comments – he is not talking about raising interest rates and probably won’t edge the currency higher by discussing taper until the euro eases lower. It should be no surprise that the central bank of an export dependent region with low inflation would try to prevent excessive strength in their currency. So while euro could hit 1.14, we think it will start to retreat from there. Meanwhile Bank of Canada Governor Poloz said nothing to refute the optimism of his peers at today’s central bank conference. In many ways this could be interpreted as Poloz giving his blessing to the rise in the currency. BoC Deputy Governor Patterson helped explain why the central bank is growing less dovish, because they feel that the economic shock from oil is largely behind them. For this reason, we think CAD will hold onto its gains against the Euro and we want to sell into a rally.

Technically, there’s a lot of resistance in EUR/CAD between 1.4930-1.4950. Not only does the 20-SMA cross down into the 50-day SMA near that zone but the 38.2% Fib retracement of the 2015 to 2016 rally and the 50% Fib retracement of the 2016 to 2017 decline also converge near those levels. As such we believe this resistance will hold, with EUR/CAD eventually making its way back down to its June lows.

The Greatest Rally of All Time? The Day of 1987 Crash

Boris Schlossberg

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Howard Marks, the famed investor who runs more that 100 Billion at Oaktree Capital, tells a story of a phone call that changed his life. He had a conversation with Michael Milken who was just starting out as the king of junk bonds at the time. Milken told him that, “If you buy AAA or AA bonds they only have direction. If you buy single B bonds, and they survive, all the surprise will be on the upside.”

Out of that brief encounter Marks took away the lesson that all investments are about price. As he tells Business Insider, “There’s no such thing as a good investment idea, until you’ve discussed price.

Investing well is not a matter of buying good things, it’s about buying things well. And people have to understand the difference. And if you don’t understand the difference you are in big trouble.”

Mark’s observation made me think about the great stock market crash of 1987. I am embarrassed to admit that I am old enough to remember it. And ironically enough I was at Drexel Burnham Lambert, the very firm that Milken made infamous, when the crash occurred.

What very few people realize is that the 1987 crash was also the day of one of the greatest stock market rallies of all time. At around noon, after a vicious sell-off in the morning, stock staged a massive rally that brought the indices almost to breakeven. All in all, the move from the bottom to its apex was more that 200 Dow points or greater than 10% gain in matter or hours. Trader who bought the bottom and exited midday made a fortune. Of course, equities then faded into the afternoon and ended up down more than 500 points on the day or more than a 22% drop -- still the biggest one-day decline in US stock market history. But if you were a trader, there was almost as much money to be made from the long side as there was from the short side. All of which leads me to conclude that in trading just as in investing price entry is everything.

So as traders, we should banish the concept of oversold or overbought. We should stop worrying if we are aligned with trend or not. The only real question to ask whenever you make a trade is -- did I get a good entry or not? The answer to that query will determine your chance of success far more than any strategy you use.

USDCAD Rally Halted?

USDCAD Rally Halted?

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USDCAD Rally Halted?

USD/CAD experienced its strongest one-day decline in 8 trading days. The currency pair is finally waking up to fundamentals after trading erratically on Friday. Oil prices rose another 2.67% on Monday after increasing sharply on Friday. At the end of last week we learned that Canada added 67k jobs in the month of September, the largest increase since April 2012. There was a decent mix between full and part time work, which helped to lift the participation rate to 65.7%. Manufacturing activity also accelerated quickly with the IVEY PMI index jumping to 58.4 from 52.3, the highest level since January. Given these reports USD/CAD should have traded sharply lower particularly in light of the softer non-farm payrolls report.

Technically, the currency pair has fallen back below the 200-day SMA and now appears posed for a move down to the 50-day SMA near 1.3060. If it rises back above 1.3250, then a run to 1.33 becomes possible.

USD/CAD Will 1.3200 – Stop the Rally?

USD/CAD Will 1.3200 – Stop the Rally?

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It’s be a remarkable rally for USDCAD as the pair is up almost 700 points in the month of May despite the fact that Crude is closing in $50/bbl level. The run in the pair is partly due short covering and partly to a more bullish outlook on the US dollar as the FOMC meeting minutes yesterday suggested that a hike may be coming in June. Such a move would widen the rate differentials between the two currencies and could push the pair towards the 1.3500 level.

But before that can happen -- USDCAD needs to overcome serious resistance as the 1.3200 mark. Tomorrow’s Retail Sales could do the trick if they miss forecasts. Markets are already anticipating a decline of -0.6% from 0.4% the month prior but a bigger miss of more than 1% could push the pair well through the 1.3200 figure and open the way to a run towards 1.3500.

Fade USD/CAD Rally

Fade USD/CAD Rally

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Fade USD/CAD Rally

Wild swings were seen in USD/CAD today, which broke below 1.2900 and hit a 5-month low before recovering quickly and aggressively to end the day near 1.3000. The intraday reversal in the currency pair caught everyone by surprise because there was no news or catalyst. Canada’s economy grew 2 times faster than anticipated in the month of January and this helped lift year over year GDP growth to 1.5% from 0.6%. Oil prices also edged higher while the U.S.-Canadian 2 year yield spread moved in favor of losses in USD/CAD. Policymakers don’t appear alarmed with the rise in the loonie with Bank of Canada Deputy Governor Patteron even citing loonie weakness as a source of strength for exports this morning. As such, we believe that the latest USD/CAD rally should be faded as the pair is likely to make another run for its 5 month lows.

Technically, as long as USD/CAD remains below 1.32, the downtrend is intact. In fact as long as it holds below its former support level of 1.3000, the next stop should be the October low near 1.2830.

AUD/NZD – Can the Rally Last?

AUD/NZD – Can the Rally Last?

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AUD/NZD has been on a tear lately -- up nearly three big figures in the past two days alone. Part of the rally has been due to better risk appetite and better Chinese equity which favors Aussie disproportionally over the kiwi. Part of the gains have been due to selling pressure on the kiwi which continues to suffer as Dairy Auction prices lose ground every month.

However, tomorrow the market may get the data that will determine if the rally will last. Over the past year the one key indicator that has propped up the Australian economy has been jobs. Despite all the slow down in China Australian labor markets have been remarkably resilient keeping the RBA away from easing further. This month the market is once again looking at Australia to pump up jobs, however if the number fizzles fresh concerns should flood the market and AUD/NZD could see a sell off back towards the 1.0600 mark.

USD/JPY Chart – Sell into the Rally

USD/JPY Chart – Sell into the Rally

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USD/JPY Chart – Sell into the Rally

USD/JPY has been on a wild ride this month. Having dropped over 1000 pips in 2 weeks, the currency pair rebounded more than 400 pips in 3 trading days but fundamentally we believe there’s another round of weakness before stabilization. In the last 24 hours, we’ve seen a strong recovery in risk appetite because investors were relieved that Chinese markets did not open sharply lower. Although China’s trade surplus increased, imports and exports fell significantly, pointing to continued weakness in China’s economy. Japan’s economy also contracted in the fourth quarter, making the rally in the Nikkei overnight undeserved. We believe that Wednesday’s FOMC minutes will remind investors how low the chances are for a rate hike from the Fed next month and this could be just the catalyst that the dollar needs to make another move lower.

Technically, we view the recent rally in USD/JPY as a correction within a broader downtrend. We expect the bounce to exhaust near 115. Not only is this an important psychological level but it is also right at the 100-week SMA. If this level is broken, the spike lows near 115.50 still needs to be broken for a stronger move back towards 117. However if the currency pair resumes its slide, support will found at the 50% Fibonnaci retracement of 1998-2011 move near 111.75.

USD/JPY – Sell the Rally

Chart Of The Day

USD/JPY – Sell the Rally

Don’t be fooled by the fragile recovery in currencies because China is still in trouble and poised to bring greater pain for USD/JPY. Investors completely ignored the decline in Chinese stocks overnight – the Shanghai Composite Index dropped 5.3% while the Shenzhen Composite fell 6.6% with both indices closing at their lows and we think that is a big mistake. The China story is not over and chances are there could be renewed weakness in the currency this week as the government struggles to control market moves. Chinese trade numbers are scheduled for release and it should be weak as long as the data is not manipulated. As for data, lower oil prices and weaker wages should weigh on Friday’s retail sales report while market volatility will most likely hamper consumer confidence. Also the latest CFTC report from the shortened Jan 5 trading week showed speculators turning net long yen (or short USD/JPY) for the first time in 3 years. Position adjustment such as these are typically consistent with major turns in the currency. We anticipate renewed weakness in USD/JPY this week.

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Technically USD/JPY is oversold and we see the currency pair potentially bouncing towards resistance, which is between 118.50 and 119. However it should fail near that level and make a move towards the August low of 116.20. There’s also a major head and shoulders pattern forming in USD/JPY with 116 as the neckline.

GBP/USD – 10 Days Without a Rally

GBP/USD – 10 Days Without a Rally

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GBP/USD – 10 Days Without a Rally

Ten trading days have past without a rally for GBP/USD. This is the longest stretch of weakness for the pair since September. U.K. data has been weak and while the trade deficit narrowed in November, the improvement was less than the market anticipated with falling exports reflecting weaker demand from Europe and China. The Bank of England meets next week and given the recent trend of U.K. data and market volatility, they will be less inclined to raise interest rates in the near future, which could accelerate losses for the British pound.

Technically such a long and exhaustive move begs for a relief rally and that may happen near 1.45, the next psychologically significant support level for GBP/USD. However if 1.45 does not hold then there is no major support for the pair until the May 2010 low of 1.4230. Should GBP/USD rebound, it will find resistance at 1.4650 and 1.4800.