My last two blog introductions have been Europe focused.
May 19th: ITALY – THE DOOMSDAY SCENARIO?
May 5th: ARE BOTH EUROPE & UK AT THE PRECIPICE?
I find myself once again looking across the Atlantic Ocean at Europe this week, despite having “a pick” of topics that I could choose from the U.S. relating to the “antics and goings on” at 1600 Pennsylvania Avenue. Lord knows there will be plenty of books written about the TRUMP Presidency and if I am struggling for content or require inspiration for a page or two all I have to do is “Google TRUMP” and I get pages of ideas!
I am keeping these next few paragraphs at a high level, so as not to get bogged down in the micro level detail.
Here we go...
Europe, the EUROPEAN UNION in principle as a “FREE TRADE ZONE” is a concept that came out of the EEC (European Economic Community), which, we all remember from our political and economic European history backgrounds, was a competitor to EFTA (European Free Trade Association), which, back in the day was referred to as the “Outer 7” as it consisted of 7 countries as members, basically with the UK and Scandinavian countries at the core. The 6 x EEC founding members were, France, Germany, Belgium, Italy, Luxembourg and The Netherlands.
Life was so simple then, it was all about “TRADE”. Trade as I have grown up to understand along with housing is the bedrock to a sound economy. These are the two solid bases upon which a strong economy is formed (I can complicate this with other factors, but I want to keep this really simple).
It started to get complicated, when for good reasons, the EEC united to add “The European Judicial Space”, this binding ruling was designed not to allow or give safe haven to terrorists in the what then was called a “UNION”. At that time there was the Red Brigade in Italy, ETA in Spain, Action Direct in France and the IRA in the UK. The stance taken by the “UNION” was a success, if only this “UNION” concept stopped there.
However, politicians who love to be associated with success just can’t leave well alone, they just cannot bask in the glory, they always have to keep looking for more. The UNION became known as the EUROPEAN UNION and it expanded, especially with a bureaucratic hierarchy un-elected known as the EU commission based in Brussels. It was still at this stage fundamentally only a “FREE TRADE” area.
In walks, Jacque Delores and Jacques Santer who were ex. EU Presidents, ex. French Presidents Francois Mitterrand and Jacques Chirac and ex. German Chancellor Helmut Kohl. (If you want to attribute blame for what follows this paragraph has the names, these were the architects of the EU and EUROZONE).
For good reasons they felt that “UNITED” they could secure long lasting peace and prosperity.
They took the big picture view. If you simply get nations to trade together and share their institutions, war is less likely. Cooperation rather than confrontation, it was a valid principle, as many areas of Western Europe had been at peace for many, many years. This was built on the back of the work done in the 1960’s, 70’s and 80’s via the EEC that broke down trade and cultural barriers.
The big move was in the 1990’s, following the collapse of Communism, it was a straight choice. Just a “FREE TRADE ZONE” or a “POLITICAL & ECONOMIC INTEGRATION”.
As we know, in 1999, the single currency was introduced as the EU member states opted for integration.
Since it was decided to adopt a single currency a rushed set of mainly economic conditions were tabled for countries to achieve in order to be accepted in the EUROZONE. The headline being that to be accepted into the “CLUB” a country could not have a deficit of over 3% of GDP.
It was rushed and boxes that should have been ticked weren’t even there to be ticked such as a plan to cope and integrate maybe the following:
- Cultural differences to economics over such a broad spectrum of countries with diverse heritage and ancestry.
- Population reactions to losing their own currency.
- Sovereignty issues over controls of money flows and borders.
The one box that was there the 3% GDP box, was ignored for GREECE, PORTUGAL and SPAIN. The “Treaty of Rome” was broken. No single member state can endanger by its economic development level the welfare of the other member states.
So, the EU as a “TRADE ZONE” was a success, even with layers and layers of autocracy, but the step further with the single currency was doomed from the outset because the EU which is high and mighty on rules, ignored their own.
Basically, do as we say NOT as we do.
The EU and EUROZONE was meant to create economic stability to match the powerhouse across the Atlantic being the U.S. .... but it has failed.
THE ECB is no match for the FED. It has multiple failings, but simply put how can the ECB run effectively with 16 countries still having use of its own cheque book? Do not underestimate the cultural differences. The culture of Mediterranean countries is totally different from those in Northern Europe.
There are 27 countries in the EU,19 of them use the single currency. If it was so good and stable, why did the other countries not take advantage of the alleged stability.
Culture, Sovereignty, Control, Independence and Flexibility to manage etc. etc.
Sweden, Denmark, Norway, Switzerland, Poland and the UK seem to have survived outside maintaining monetary controls on their own. They all meet the 3% GDP criteria for acceptance!
Enough with this history, there is a picture of failure no matter how positive a spin you use. Banking unions, Economic and taxation unions, Political unions, Defence and Intelligence unions are all dreams.
Today, with a UNION formed for stability and prosperity, ignoring for this blog the ECB, we have major geopolitical issues with:
It would be very easy to claim that these are all failures of the concept of the EU. They are really, but it has been the continued failure of the EU to grow, integrate and strengthen its union economically and politically over the years that has EURO skeptics frothing at the mouth.
- GERMANY: I get it, no one in living memory could accommodate the mood swings, uncertainties and bizarre “drain the swamp” approach by TRUMP, but as a TRADE ZONE the EU must have known that the chickens would eventually come home to roost. Upon first glance the Trade agreements at a high-level look very imbalanced in favour of the EU vis-à-vis the U.S.
As the powerhouse of the EU, the failure of the EU to sort this out has to be concerning. German vehicle exports are crucial not just to the German economy but also the overall EU performance.
The proposed tariff of 25% from TRUMP on imports makes this equal. This is rumoured to have, according to the German IFO data, cost Germany about €5 Billion, or about 0.16% from German Economic output.
Until we hit 23:59:59 on the clock, I just cannot see any serious intentions to fix this being undertaken. Trade has to be fair. The EU has taken a negotiating stance of deciding not to discuss tariffs with the U.S. when the U.S. is in a threatening mode. Here’s some breaking news for the EU; under TRUMP the U.S. is always confrontational and threatening. So, it is tough shit on the EU negotiators. The EU needs to roll up its sleeves and deal.
- SPAIN: We saw dreadful scenes of police brutality on TV, dragging senior citizens out of polling stations during the Catalan elections. Brussels said nothing and did nothing other than it was a Spanish issue. In a civilized society and having lived in Spain for many years it was a disgrace.
In true EU style, it was “huff ‘n puff” with prison sentences threatened for Catalan leaders exiled in Belgium.Parliament in Madrid never really addresses the issue. It was a “Franco style” approach to quell a rebellion, nothing had been learned from Spain’s past and it was hushed up and brushed under the carpet.
Lo and behold a few months later PM Rajoy is now facing a vote of no confidence. Issues in true EU style are not addressed, a “can is kicked down the road” total 100% ineffective leadership. A multimillion-euro racket has been in place in Rajoy’s party. Just to add to his woes and to cement the problems that he faces, evidence provided by Rajoy to Spanish judges was deemed not credible. A liar to boot as well.
The centrist party Ciudadanos has tabled the no confidence vote. There will be a snap election. For now, Rajoy has refused, but he will never be able to see it through.
Catalan independence will be back, because it was never really addressed, just swiped away.
As you can imagine on this news the Spanish bond market is getting hammered.
- ITALY: I wrote extensively about Italy last week. Populist parties have formed a government and as a compromise they have agreed on a Prime Minister with zero political experience.
No plans on how to fix Italian Bank debt, aggressive tax plans for both individuals and companies have been tabled, pension rights and retirement age changes are also on the agenda, plus a parallel Italian currency to the Euro.
Happy days... if that list of plans does NOT cause waves of concern in Brussels and uncertainty for the single currency, we may as well switch off the lights and just close the door.
Whilst the populist parties to the coalition (The 5 star movement and the Northern league) became more electable by removing much of the anti-EU and anti- Euro rhetoric. As with most political parties, they are a broad church and elements of these parties will still be anti-EU etc. It is just a matter of time before comments on these matters emerge.
ITALY is the third largest economy in the EU, if there was to be either a referendum on the EU membership or leaving the single currency, imagine the initial reactions, never mind the consequences.
Just on populist parties being in charge the Italian bond market is getting hammered.
- GREECE: We are now at EXIT time of the bailout programme. How clear this will be and what happens for Greece vis-à-vis access to ECB funding is a huge issue. For all EU members this is seen as a valuable backstop solution, especially for Greece given that its growth potential is really an unknown.
Not as big news as it has been in the past but economically inside the EU it is big news.
- BREXIT: Always viewed more as an issue for the UK, because the UK initiated the exit via a referendum.
It is well documented that the NORTHERN IRELAND / IRELAND border is a massive sticking issue. Neither IRELAND or the UK want a hard border because of the “Good Friday” agreement.
The UK government is struggling to find a solution for a soft border that will sit well with the EU. The EU proposal of customs partnerships crosses “Red lines” that Theresa May (UK PM) and government are committed not to cross.
We have stalemate and last Friday comments emerged from the EU saying that the UK’s proposals on BREXIT so far were fantasy land ideas.
This is a page from the TRUMP book of diplomatic quotations. I fear the worst. This type of comment only fuels the skeptics inside the UK government to call for a “walk away” no deal solution. It is a dangerous game and whilst it is no doubt political suicide for Theresa May, what about the effects on IRELAND on the broader EU.
Without doubt higher running costs of the EU as the UK is one of the few net contributors to Brussels of the member states. Border confusion, Trade confusion, Financial confusion etc.
Not good for the UK but equally not good for the EU. Uncertainty is an understatement.
In my opinion, the EU has never been closer to imploding as it is now. It is a fragmented deal at best for the EU27 or the EZ19, whichever way you break this down. The EU has NOT moved forward, avoided the tough issues and is now getting very close to paying the ultimate price.
I could write as much on the monetary union, or lack of it via the ECB, but I am really just looking at the EU.
Am I going too far here with the 5 geopolitical issues I have raised? Maybe, but it's a pattern and not a good one. I reiterate my views that the EU simply has never moved forward. So many cans on change have been kicked down the road the re-cycling fees you could claim from collecting these cans could give you a nice new car!
From an FX perspective.
My longer-term thoughts on the EUR/USD based on the chart above are as follows: -
- The weekly close below the 38% retracement at 1.1700, is bearish. As you can see from the chart we are in a longer-term down-sloping channel.
- EUROZONE sentiment is poor. Which means buyers will be few and when added to the fact that the USD (DXY) is on a tear, this can be described as a “Double Whammy”.
- The 2017 low comes in at 1.0327. Fair value given the present set of circumstances is not at that level in my opinion.
- We have seen a 900 pip move lower from the highs of 1.2540 in January / February this year. By any stretch of the imagination this has been quite a strong pullback already.
- I always say that the 38% level of retracement is where buyers would congregate. They did, and the sellers after some 48 hours took control.
- Therefore, the 61.8% high-profile retracement level at 1.1170 is where I think buyers will start to congregate. They will place buy orders ahead of this level and put supporting stops below the retracement level.
- FX - FORWARDS, BACKWARDS & SIDEWAYS:
1.1. THIS WEEKS TRADE INFORMATION: ECONOMIC DATA:
NOTE: Only the items that interest me are listed here.
1.2. THIS WEEKS TRADE INFORMATION: GEOPOLITICAL EVENTS:
1.3. BIAS CHART - USD MAJORS SUPPORT and RESISTANCE:
1.4. USD INDEX (DXY) OVERVIEW – MY THOUGHTS:
Looking at the chart below: -
- We broke through my Pivot Point line at 94.14, which I thought may have held the upward move.
- We are now breaking higher as relentless USD strength to some extent fueled by EUR weakness bring a full retracement of the last move from 95.19 in November 2017 to the 88.26 lows seen in February this year.
There is so much USD momentum at the moment and we have seen a sentiment shift. I tweeted earlier in the week, with the U.S. 10 YR below 3% most of the focus in the markets has been on the flattening yield curve of the U.S. Treasuries.
There are very little to no consolidation periods as the DXY keeps moving higher which, leads me to believe that 95.19 is a workable target for USD bulls. My Elliot Wave buddy sees a much higher move in the DXY back into triple digit. That move alone would place the EUR/USD approaching parity!
1.5. USD MAJORS - TRADING CHARTS:
Geopolitical events are starting to take their toll on the single currency. ITALY, SPAIN, GERMANY and BREXIT all have serious ramifications for not just the EUROZONE but also the EUROPEAN UNION.
I don't want to be over dramatic about the issues involved but to be honest I was surprised a while back how strong the EUR/USD was in avoiding a run to parity. I am not saying that this is on now, but the issues the area faces are not simple to fix and given the history of not fixing issues we could see much lower levels.
From my perspective this is simply a SELL THE RIPS trade.
1.1750 would be a great price and above it if you are lucky, the way things are at the moment would seem like a bargain.
No change in thoughts from last week.
My DOUBLE TOP pattern is in play as you can see on the chart below. The 200 DAY SMA (Green line) should now act as resistance and the downside move should see an attack on 1.3300 and if the double top plays out the measured move is to 1.3030.
As you can see from the chart below there is an inverted Head and Shoulders pattern that triggers at the neckline, 0.7585.
It triggered on Friday last week and then with USD strength fell back again. The AUD has though been over performing based upon other USD majors of late. We are consolidating in a minor uptrend since hitting lows of 0.7400. Whether or not we see a measured move to 0.7760 remains to be seen.
Is that a BEAR FLAG with a measured move to 0.6420?
I think it is, but it does not really take effect until we break 0.6880. Breaking 0.6900 has been a bit of an ordeal of late, so one has to be patient with this pair. It has held up quite well and consolidated its position. Having said that, I do see the consolidation as only temporary and expect the move to resume sooner rather than later.
The pair is very hard to read and since being taken for 200 pips recently, I decided to adopt a wait and see approach.
The NAFTA deadline has come and gone without incident. The next deadline is June 1ston tariffs for Mexico and Canada that TRUMP has threatened. We have the BOC this week with an interest rate decision. I just cannot see Stephen Poloz and his gang of merrymakers doing anything ahead of a NAFTA agreement in principle having been reached.
I do not know what to do. I want to be short. But where?
When I look at the chart below, trend line resistance at 1.3030-50 looks the place. I am therefore waiting.
Looks like a nice potential BULL FLAG being formed.
The issue with this pair is that even with the EUR/USD falling and this pair having an inverse relationship to the EUR/USD, that is NOT in play at the moment. All of the geopolitical issues are weighing in on the CHF as a FLIGHT TO SAFETY trade.
Given its bullish run of late a good pullback would not go amiss given the longer-term opportunities that possibly lie with this pair should the EUR/USD continue to fall.
Last week I wrote.... I am waiting for circa.112.00 before I think of shorting this pair. The three-year trend line comes in around 112.50 and this can be used to sell against.
This week looking at the DAILY Chart below, I am looking at a nice up trending move that looks like it may retrace to the 38% level before resuming its move higher.
Technically this is what I see. However, fundamentally this does not sit with thoughts on correlations with this pair to Treasuries, S&P, Equities and GOLD.
Chart traders will look at this as a long trade circa.108.80. I will be waiting to see how the correlations work out.
- THE WEEKLY FX PREMIUM TRADING SUMMARY:
2.1. WEEKLY FX PREMIUM PERFORMANCE HIGHLIGHTS:
MAY 2018 (So far): 1,056 net profitable pips
2018 TOTAL (So far): 6,571 net profitable pips
2.2. WEEKLY FX PREMIUM PERFORMANCE SUMMARY:
(Incorporating the last 5 WEEKLY FX PREMIUM TRADES)
You can get on board and join my FX PREMIUM subscribers and subscribe to the “10,000 pips a year” group from as little as CAD$10 for the first 10 days and then CAD$150.00 per month, currency conversions for CAD$150 are roughly as follows: -
- GBP £90 per month
- EUR €100 per month
- USD $120 per month
- JPY 12,700 per month
- AUD $150 per month
Go to my website www.weeklyfxdrivethru.comfor more details under the TAB – “SUBSCRIBE”.
- TRADER EDUCATION:
No item this week.
- WEEKLY FX PREMIUM SUBSCRIBERS ONLY:
4.1. TRADING REVIEW:
4.2. OPEN TRADES... HOW WILL I TRADE THIS WEEK:
4.3. SENTIMENT,FUNDAMENTAL & MACRO THOUGHTS:
4.3.1. OVERVIEW OF MY MACRO THOUGHTS & IDEAS:
4.3.2. THE MARKET SENTIMENT CHART:
4.4. CURRENT LIVE TRADES & LIMIT ORDERS:
4.4.1. CURRENT LIVE TRADES:
4.4.2. CURRENT LIMIT ORDER TRADES:
4.5. FX BROKER NEWS:
- THE FINAL SHOT:
Nothing more to add here, I have said enough except,
Always remember longevity in Forex trading can only be achieved through trading with good RISK and MONEY MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility.
The Pip Accumulator
BLOG VERSION: #283 FREE NEWSLETTER
DATE: 26th May 2018