Inflection Point – EURUSD

BarroMetrics Views: Inflection Point – EURUSD

Firstly, a note to say I am going for eye surgery today. If all goes well, my next blog will be Monday.

Turning to the EURUSD -it’s at an inflection point.

  1. Figure 1, a 13-week swing chart (quarterly trend), shows that a bullish-conviction close above 1.0652 will trigger a buy signal.
  2. Figure 1 also shows we are currently seeing a retest of the breakout that the form of a weekly sideways pattern bounded by 1.0652 and 1.0339. Acceptance below 1.0339 will confirm the downside breakout.
  3. If the downside target is confirmed, the first target is 50% of the width of the sideways pattern, 0.9836.
  4. Figure 2 shows a 5-period, 290-min chart (1-day trend) that may have formed an Expanding Terminal. It’s not perfect. I’d prefer to see a move above the ‘ac’ line and then a bearish-conviction close below 1.0612 (290-min bar) without a bullish conviction close above 1.0683.
  5. Note that the 290-min extends the buy trigger to 1.0683 from the 1.0652 suggested by Figure 1.
  6. I would be a buyer only on a daily bullish conviction above 1.0683 that is then confirmed by a weekly bar.

FIGURE 1: 13w EURUSD

FIGURE 2: 290-min, 5-p EURUSD

Welcome to 2017 – Denouement

BarroMetrics Views: Welcome to 2017 – Denouement 

Well, I was wrong about the Non-Farm number. It came in at 156K (just above the lower end of consensus {151k to 210k}). But, then why did the USD rally?

For the second month in a row, rather than raise the Non-Farm Payroll number, the US Bureau of Labour Statistics reported a massive 4% rise in average hourly rates.

This was the second consecutive “outsized 0.4 percent rise in average hourly earnings….. The year-on-year rate is now at 2.9 percent which is a cycle high. A 3 percent rate and above is widely seen as feeding overall inflation.” (NASDAQ Economic Calendar).

So, the 4% had the same effect as an above average consensus Non-Farm number.

Let’s see if we see a continued USD rise today.

The S&P gave a clue to the answer I am seeking. We saw a strong rally. If we see another rally today, I’ll have to put aside my long-term misgivings and go with the price action.  The upmove on Friday, in the face of a Non-Farm suggesting an interest rate hike, indicates we are in the initial phase of a growth cycle rather than in a terminal phase – the Trump election was an ‘unexpected event’ rather than a ‘surprise’.

ADP Meet Nonfarm Payrolls

BarroMetrics Views: ADP Meet Nonfarm Payrolls

Yesterday, in the EURUSD, I was looking for a below average true range day. The scenario was looking spot on until the ADP came out below expectations. The EURUSD promptly put on more than a 100 pips following the news.  That was quite a response.

Presumably, the EUR buyers came in because they believed that the Nonfarm number tonight would reflect the ADP. The question is how accurate is the assumption.

The only work I could find is a study done by Forex4you, “Can ADP Be Used to Gauge Non-Farm Payrolls?

The author drew two conclusions:

  1. There is no statistical correlation between ADP strength or weakness and the NFP. A strong ADP may or may not result in a strong NFP.
  2. There is a statistical correlation between two consecutive months. For example, if we have two consecutive months of rising ADP, we’ll probably see two two consecutive months of rising NFP. Note that the correlation relates to direction, not magnitude. So, last night we saw a week ADP following a strong prior month. The prior NFP was a so-so number, so we should be seeing a weaker NFP. Last month’s NFP was 178K, so this month, based on this idea, we should have a number weaker than 178k.

Or should we?

The study merely states there is a correlation of statistical significance i.e. the correlation is greater than chance. But, as a trader, I’d like to know how great a chance.

In the study we saw 47 from a sample of 77 that showed correlation i.e. a 61% probability. That sounds impressive until you consider that a normal return (what I consider a 50-50 bet), is 67% to 33%. Viewed in this light, the chances of a weak number based on this study is still no more than 50-50 bet.

Is there a better way to assess what the NFP will be?

Long-term readers know that guess at the number by asking: “what would suit the FED – a better, consensus or below consensus?”.

Given that the FED has just raised rates, I doubt if it would like to see below consensus number. It would probably like to see a number near the higher end of consensus range. The range for tonight is 151k to 210k with consensus at 175k.

My guess, the number will come in above 175k, nearer 210k.

How to trade NFP?

I certainly would not have taken positions this week ahead of NFP. Instead, I’ll wait for the number and sell (or buy) any retracement on stronger (or weaker) than consensus range.

Welcome 2017 – US Stocks!

BarroMetrics Views: Welcome 2017 – US Stocks!

Summary: Is the Trump election an unexpected event or a surprise event? If an unexpected event, then the business cycle suggests that the price action before the elections will prove to be accumulation; if a surprise event, the price action before the elections will be the terminal phase of a bull market that begin in the 1980s.

The question is not an academic one.

Rates will rise in the US next year. The pace at which they will rise is the question. If Trump’s election was an unexpected event, the rate rise will not derail the upward momentum. If it is a surprise event, the rate will rise will cause a bear market.

In turn, I think the question will depend on whether Trump’s policies will create economic growth that will outpace an increase in the deficit, In short, the inflationary infrastructure spending will need to be paid for without increasing the deficit  More, Trump needs to find a way to reduce the deficit. Research has shown that Government spending multiplier slows economic growth while a reduction in Government spending tends to have a positive impact on growth.

The price action since Nov 2 has been equivocal.

From Jan 2016 to Nov 2016, the DJIA saw a 7% rise. After Nov 2, we saw a rise of another 7%. That’s great, right? Well, the problem is range and volume have been below normal. Usually, this is a sign of internal weakness.

Tomorrow’s Non-Farm may give us a clue. If we can see a strong rally in the face of a strong number, then we may have seen an unexpected event.

We’ll see.

Welcome to 2017 – EURUSD

BarroMetrics Views: Welcome to 2017 – EURUSD

I was asked to give an example of how to apply yesterday’s ideas. I have chosen the EURUSD.

Let’s summarise the main points of yesterday’s blog:

  1. The USD is an uptrend.
  2. The Xmas and New Year period usually show a contrary trend move as institutional traders take profits for their bonus.
  3. The USD pairs tended to have sideways corrections rather than simple, deeper corrections – showing the USD strength.
  4. I expected to see yesterday, the other time zones follow the US example and drive the EIRUSD down.
  5. I expect to see, today, a sideways price action.
  6. On Thursday I expect to see a small range day ahead of Non-Farm Payrolls.
  7. Friday’s price action would be determined by the Non-Farm number.

OK, let’s have a look at the EURUSD.

Firstly some context….

Figure 1 is the 13-week swing chart showing a downside breakout of a sideways pattern that started in March 2015. Under normal conditions, I’d say we have yet to see confirmation – there is no bearish conviction bar. But, under the present conditions, I am happy to assume that the EURUSD has broken out to the downside.  A weekly bullish conviction-bar close above 1.0620 would negate my assumption. A bearish conviction below 1.021 would confirm my assumption especially if accompanied by seven bars whose highs do not exceed 1.0618.

Turning now to the Xmas and New Year Period – Figure 2, Daily……

I’m going to separate the analysis into two.

Firstly, the pre-Xmas period that commenced on Dec 19. Note the sharp drop in true range from Jan 19. From Jan 21 to Jan 23, the EURUSD moved north.

Secondly, the pre-New Year, commencing on Dec 28 and ending Jan 30. Here we see a classic short squeeze. The instos were able to drive prices beyond 1,.0524 to trigger stops. Finding there was no continuation buying, the EURUSD sold off.

Figure 2 does not show it. But, the US was open for trading on Jan 2 and US traders drove prices down as they reinstated their short EUR positions. The other time zones followed suit on Jan 3.

Turning to today’s price action…Figures 3 &4, 60-mins

There are two possible resistance points where the high of today might form. From Figure 3, the current high 1.0433. But, for me, the more likely resistance that will hold, ahead of Non-Farm, is the Figure 4 zone, 1.0452 to 1.0490.

I believe the low at 1.0339 will hold until after Non-Farm.

I’ll post my Non-Farm view on Friday.

FIGURE 1 13w EURUSD

FIGURE 2 18d EURUSD

FIGURE 3 5d & 3d 60-min

FIGURE 3 5d & 3d 60-min

Welcome to 2017 – USD!

BarroMetrics Views: Welcome to 2017 – USD!

Summary: I expect to see USD strength to continue to at least end February.

The question is what effect will Trump’s election have on the USD? Before his victory, we saw a strong USD.  The initial reaction to the Trump victory was as USD sell-off followed by, on the same day, a reversal of the USD weakness for the USD to end strongly. This strength was especially notable in the USDJPY.

The pre-Xmas and New Year showed profit taking as institutional traders squared positions to take their bonuses. But, even here, we saw USD strength displayed: a sideways correction rather than a deep retracement.

Then yesterday, in the US time zone, (Asia and UK closed for holidays), we saw a resumption of the USD uptrend. I expect to see USD strength in the UK zone followed by some squaring of positions in the US ahead of Friday’s Non-Farm payrolls. That number will have an impact, but my expectations for it will be the subject of a blog on Friday morning (AEST).

For me, the key chart is the Asset Monetary Base (Figure 1). We are seeing a breakdown suggesting that the funds presently deposited with the FED are making their way to Main Street. If I am correct, we should see inflationary pressures by end February 2017. An inflationary increase normally means that US rates will rise (USD up).

But, will that be true on this occasion?

At this time (Feb 2017), the question will be whether we’ll see:

  • the expected inflationary pressures due to Trump’s proposed infrastructure proposals, (USD strength) or
  • will Trump’s trade policies send the US economy into reverse? (USD weakness). If this scenario occurs, we may see the FED return to QE.

We’ll see

FIGURE 1 Asset Monetary Base

EU At Risk

eu-at-risk

BarroMetrics Views: EU At Risk

The terrorist attack in Germany has increased the risk of the EU ending.

Merkel allowed a wave of refugees into Germany. She is now at risk. If Merkel exits, it increases an EU exit.

It’s important to recognize that in 2015 Merkel took an unpopular decision to allow 1M refugees into Germany. The reaction to the decision was immediate. Her approval rating dropped from 67% August 2015 to 49%

And, since then there have been a series of terrorist attacks weakening her further. (For a list of attacks see Terrorism in Germany).

A sign of the threats on the horizon is the call for an EU exit by far-right German parties e.g. AfD called for a referendum to exit EU once they were in 2017. (See Merkel’s Worst Nightmare).

Now here’s the interesting thing for traders. The most recent attack produced a ho-hum response in the EURUSD. Perhaps that’s because of Xmas hols or perhaps it’s because of the threat to Merkel is a Steidlmayer ‘unexpected event’.

An unexpected event is one which changes the underlying value that is not recognized by traders.

If my view is correct, any rally in the EURUSD is a shorting opportunity.

 

All Hands on Deck

all-hands-on-deck

BarroMetrics Views: All Hands on Deck

In “New Era? 2“, I articulated my doubts on the resilience of the US Stock Market. But, given the directional move since Trump, I said I was unwilling to short this market.

A new clue has come in that deserves consideration: The St Louis Fed Reserve’s Asset Monetary Base.

Figure 1 shows the chart. You will notice we are seeing a possible break in the “topping pattern”. If the chart breaks down, it means that we’ll be seeing money flood into Main Street. In the past, within two to three months of surplus funds hitting the US economy, we have seen inflation rise (and thus interest rates) rise.

The problem for the FED is that, given the excesses of QE, it will find it hard to put a cap on inflation. At the moment it is looking for 2%; but if we see a surge above that number, the spectre of an unwanted inflation level will raise its head.

This is why it’s important to assess the stage of the business cycle the US: if it is at an early phase, interest rises will be a catalyst for further rises (on the basis, growth is back!); on the other hand, if in the latter stages, interest rate rises will awaken the bear (on the basis, OMG interest rising!). And, if we are seeing the latter case, it will be a case of “all hands on deck” to manage the bear.

The good thing is we have time. The sell signal is triggered on seeing two consecutive closes down to confirm the break. Then, there is usually a two to three month buffer from the break to a stock market reaction. So, there is no need urgency to act – we can assume the bull will continue unless the sell signal is triggered.

The next AMB is due Dec 30.

blog-12-19-slfr-amb

FIGURE 1 AMB

A New Era 2?

new-era

BarroMetrics Views: A New Era 2?

Xmas came early courtesy of the FED.

As expected, it raised rates 0.25 bp. What was unexpected was the comment that, in 2017, the FED would probably raise rates three times. Even more unexpected, the markets’ (USD and US stocks) was relatively muted until the news conference. At that point, the USD accelerated to the upside and stocks moved South.

The muted response gave a trader time to go long the USD against a host of currencies. For me, the EUR and JPY are especially vulnerable.

Given that response, I am unsure that we are on the cusp of a new era. For that to be, we should be seeing price action akin to the early bull stages for the US economy i.e.:

  • Interest rates up.
  • Stocks up and USD up.

The response we saw last night

  1. rates up,
  2. USD up, and
  3. stocks down

usually signifies the end of a bull market in stocks. But, that is not how I’d interpret the stock market’s price action since Trump’s election. In yesterday’s blog, I opted for the latter option because I had not seen enough bullish action in stocks to jump on the bull bandwagon. On the other hand, given the solid up move, I was not prepared to go short. Hence my comment in an earlier blog – “I’d be either long or out when trading US stocks”.

What then to do, given the dichotomy?

For the moment, I’ll focus on buying the USD and stand aside from stocks.

A New Era?

new-era

BarroMetrics Views: A New Era?

Finally getting to my feet. The hip replacement has gone exceptionally well. The only issue now is to repair the mistake the HK specialist made when implementing the new lens in my left eye. That’s set down for Jan 5. I’m hoping all will go well.

Turning to the markets….

By far the most important event will be the FOMC decision at 14:00 EST today.

In my view, the FED will raise rates. The rate decision won’t be the only thing I’ll be focusing on. The others?

  1. Whether the FED is likely to raise rates more than twice in 2017? The post FOMC news conference will provide a guide.
  2. Trump’s tweet (if any) on the FED decision.

If the FED hints at no more than two rises, I’d see the stock market rallying and the USD not continuing its upmove (especially against the JPY and EUR) in the short term.

A suggestion of more than two rises will have the opposite effect: USD up and stock down.

Let’s see what happens.