Watch the trendline (EURUSD)

The pair broke out of the channel displayed in the previous post. I'm still sitting short with my stop untouched at 1.371. I will be watching very closely whether we will break the trend line into the channel again or bounce from the trend line and find support. Depending on the outcome I will do one of the following.

If we were to enter the channel again I would consider this move as a head fake which would mean that we are looking much lower than the bottom of the channel, probably aiming for sub 1.33 and I will stay short until I find a proper target.

If we were to bounce on the trend line and enter the 1.368 area again I would have to suck it up and cover my short since It is likely that we target the long term monthly trend line above 1.38 which would be my next place to short.

Since I'm fundamentally negative towards EUR I will not long this pair for a longer hold. Here's the chart again with direction line pointing down which was posted earlier.

Tastes like short covering (euros)

Futures positioning data (http://www.cftc.gov/dea/futures/deacmesf.htm) revealed that non-commercial positioning changed during the week before 4th of February from net long 14k contracts to net short 13k contracts. This means that a lot of shorts were established in the range of 1.35-1.355. I bet the next futures positioning data on Friday reveals that a lot of those shorts were covered after ECB kept rates on hold. This would mean that the current rally is built on short covering, especially if you look at declining industrial output today in Italy and France while EURUSD is making new highs. I'm shorting this pair on the basis that this rally is mostly short covering, the outlook for the Eurozone is still glim and technical picture looks like there might be a reversal any moment now. Check the chart below for the trade. I have established my shorts with a 1.34 target and stop above 1.37.

The secret strategy of ECB

It was rather surprising that the ECB didn't sound as dovish as was expected due to the recent underperformance of inflation in the Eurozone. Mario Draghi pointed out that the situation is complicated and that the Eurozone is not threatened by deflation. I personally beg to differ but the actual question is why did the ECB decide against dovish rhetoric? They had to know that the euro would strengthen if they didn't sound dovish. They also know that weaker euro would support the economy of the Eurozone. This leads me to think that in ECB's mind there are much bigger threats currently out there than the threat of deflation. Another possibility is that dovish rhetoric might suggest a dim outlook for the Eurozone which would increase periphery rates again which would eventually lead to activation of OMT and a bigger mess than we are in currently economically. Whatever the reasoning might be I'm confident that Draghi has currently everything under control and they do have other measures available to hold the euro under control (reserves management of NCB-s for example).

This leads me to believe that the euro will be well supported right now and will be much more influenced by the dollar near term. I also believe that the possible upside in the euro is limited and I'm building my shorts in the area of 1.363-1.365.

Reloading €-shorts

Yesterday's FOMC minutes revealed that the Fed is much more dovish and ready to do more monetary stimulus if the economic situation would not improve. The logic behind QE (quantitative easing) is that Federal Reserve buys government debt or other assets from financial institutions hence bringing some fresh dollars to the market (again weakening the dollar since there are more dollars on the market now). This also sparks a rally in commodities and equities since the money can be invested with a higher return.

All this means that US dollars would be sold on the Forex market and other currencies would be bought against the dollar, causing a rally in all USD pairs.

So far so good, but.. There are some things to consider before we go all-in with our EUR/USD or any other currency bet. Some of the following arguments are non-specific to the euro.

1) The euro is not cured and the outlook looks grim
As I'm writing this we just got fresh PMI data from Europe which still points to contraction (under 50 = contraction, even though it was better than expected causing a stop flush) in Germany, France and the eurozone as a whole. It's a matter of time until we see negative GDP growth numbers, possibly in Q3 and onwards.

Contraction leads possibly to lower interest rates by the ECB (wow, it's still not 0!) which leads to weaker euro.

Also it's not a sin to discuss the debt crisis and the possibility of bond buying by the ECB. How is it different from Fed's QE again? ECB creating (read: printing) money and buying sovereign debt with it - why should its effect on the EUR/USD be much different from FOMC announcement (in the opposite direction of course).

Also don't underestimate the power of Europe's slow decision making. Even though the long term path of the euro is becoming clearer which is positive and the ECB is buying time for politicians we are far from a solution (a fiscal union?).

As history has shown things must go worse before they get better in Europe.

Also a food for thought - look at the historic EUR/USD chart and together with that look at the interest rate history in the world. You will notice that the ECB sparked the 2011 rally in euro by raising interest rates compared to all other central banks. Also take a look at the earlier PMI chart. You will notice that fall of euro from 1.6 to 1.25 was caused by recession in Europe (everyone diving into US treasuries). 2010 fall was caused by the beginning of debt crisis. 2011 rally was caused by raising interest rates and something called repatriation of euro (European banks selling foreign assets and buying euros). Currently Europe is in the midst of a recession, debt crisis might escalate and banks have solved most of their equity problems - how can anyone see euro going higher from here?

2) How much of this has been already priced in?
The street is expecting the companies of S&P500 to earn over 100 dollars per share as a whole so the P/E level of the market would be around 14 which doesn't sound too expensive. Some good calculations from this blog HERE provide some more data.

This Fact sheet provides a good overview of recent earnings and trends. While earnings have exceeded expectations for some time now Q2 2012 undershot the revenue projections in case of 58% of companies. What worries me is that under-performing sectors are among others consumer discretionary, industrials and materials. Consumer staples and information technology are barely in line. 

So I would speculate that earnings will fall sharply after further reduction in revenues (don't forget that part of the earnings growth is due to cost cutting). 

3) What would a negative shock do?
Slowing in China, war in Iran, US fiscal cliff, Greece exiting from eurozone or other major shock event (most of the are not unexpected) might possibly shake equity markets across the world causing investors to seek protection in US bonds causing upward pressure in USD. What are the odds?

Honestly, I don't see a medium-term bull case for EUR/USD and that's why I'm going short here with a target under 1.20. My stop-loss is currently above 1.26 after which I will re-evaluate situation and re-enter my short.

Euro-vision - some progress at last!

While Sweden has won the Eurovision song contest this year the winner of Eurozone or the winner of European Union in general remains to be seen. While all this political and populist discussion on whether we should bail out Greece or whether UK should remain in EU is taking place for a second year now jobs are lost and the people of Europe are suffering from worse economic conditions. It's no wonder that UK opposes all measures regarding their banks or Finns are getting tired of paying the bills of overspending Southeners - that's how it should be in an institution without vision that is focusing on details.

Imagine a company that has all the traditional departments like marketing, production, accounting etc. Imagine that all these departments are working for themselves. Production is keeping the costs low, marketing is advertising the product as the best there ever is etc. It doesn't take a genius to figure out that without common understanding of what kind of products we are selling and how to market these products best we can achieve some kind of goals.

Imagine a field of football players where there are only rules but no common goal! Everybody knows that the ball can't be touched by hands but some think that the ball needs to be kicked into the goal and some are convinced that all they need to do is dribble.

Now imagine Europe where everybody is fighting for themselves to look good for their supporters (voters). Imagine Europe where there is no common understanding where Europe is or should be heading. Imagine Europe where everyone's role in fixing things is up to their understanding of doing things together. Wow, that's what's happening now in Europe!

Europe needs a common vision and goals, Europe needs an understanding why we are doing the things we are doing. Right now countries have been rushing to join the EU just to get access to a huge market while they should have joined since they shared the same understanding of integration process.

You can't keep rescuing countries like Greece or Spain when you don't know why we need to do that. We can't have a banking union unless we understand that it is in our common interest. Maybe some principal arguments were dismissed long time ago if understanding as such existed.

That's why applaud to Herman Van Rompuy's proposal of a vision for Europe which can be accessed HERE. Even though it is not perfect and some countries (read: Germany) already oppose it, it is über-necessary to agree on a common vision.

Earlier thoughts on this HERE

Technical analysis is not a surgical process

Again and again I see people confusing technical analysis with rocket science or a surgery. Technical analysis is not an exact science like mathematics. There are no right or wrong places on the chart where the chart will turn. The price isn't moving cause it is supposed to. The price is moved by a great number of investors and traders doing their daily business.

So why on earth do we see people analyzing the charts and saying things like "the price turned because it hit the 43 EMA (exponential moving average)" or whatever the number is? The idea behind technical analysis is to spot trends and possible support and resistance levels. Moving averages (MA) are and will be a tool to predict trends, they spot possible changes in momentum (when short term MA approaches long term MA then the price is slowing down (either selling or buying pressure is decreasing)).

Use common sense, don't overdo it, you will be trapped by the scientist's fallacy.

Ireland votes, some serious arguments by Irish

Ireland being the only country to carry out a referendum on EU fiscal treaty will vote today and the Irish are likely to support the treaty. The treaty would regulate fiscal spending and make it tougher for governments to borrow their way out of reforms all across Europe. A "No" vote would make the country ineligible for possible financing aid in the future if ran into trouble.

It is in fact true that Brussels could veto a future budget if the country were planning to overspend. This has given some "hefty" arguments to the opposition of the treaty (below you'll find some examples). Fresh comments from Irish people have been delivered by Financial Times:
- “I voted no because I don’t want to be governed by a Nazi state,” said one No voter, who would not give his name.
- Marie, a middle aged woman, said she voted No to be “on the safe side”. “It’s a very complicated treaty but I think it was safer to vote no,” she said.
- Another woman said she voted No because of the huge debts Ireland had to pay.

As you can see the opposition has done a great job by washing the brains of some voters since arguments above don't actually say anything about the treaty or the problems Ireland is facing.