#1) A Euro Trade For All Seasons by Adam Button

Here is how I see the year unfolding in the United States: There will be a strong
first quarter and disappointment afterwards. For the past two years, US growth
has been skewed lower by poor weather in Q1. This year I expect the trend to
reverse.
The El Nino effect will be one of strongest on record and it will
bring waves of warm weather to the Northern half of the United States.
Consumers will be spending earlier in the year and businesses will run smoother.
For the past two years, the Federal Reserve has been quick to
blame bad weather and exclude poor Q1 data from its thinking. Yet this year when
GDP is exaggerated by Mother Nature, I expect them to be oblivious and ignore
the effects of warm weather. They want to see good US growth and will read
better economic numbers as a signal that the economy can withstand higher rates
and a strong dollar.

That dynamic will lead to an earlier Fed hike than expected in 2016 and
perhaps another hike around mid-year. It will underpin a continued strong
dollar and weigh heavily on the euro and commodity currencies.
At the same time, European growth will continue to disappoint in Q1.
Draghi may begin to mull more aggressive QE as low commodity prices drive inflation even
lower. Around that time, I believe euro selling will reach a crescendo. Parity is a magnet at
this point and I envision a break and squeeze.
In the second half of the year the story will be flipped on its head. The
major theme of the year will be the commodity collapse and the junk bond market will
take a beating. The financial risks are much more centralized in New York and London than
Paris or Frankfurt and that will spark USD selling after an inevitable flight to safety is
exhausted.
At the same time, the appetite for austerity in Europe is gone. Governments have been
woefully underspending on infrastructure since the Eurozone crisis. Expect the paymasters
in Berlin to loosen the purse strings to take advantage of ultra-low government borrowing
rates and provide some economic stimulus. That will lead to a stronger euro.
Later in the year, US growth will begin to disappoint as the seasonal effects
ebb, the strong dollar weighs and financial worries hit. Look for the euro to recover to
1.05 by year end.

THE TRADE:
Sell EUR/USD at 1.1150 with a target at parity. Stop at 1.1500.
Buy the euro at 0.9350 with a target at 1.05. Stop at 0.8900.
Alternatively: Go with a break of the 1.0463 to 1.1467 range with a 400 pip target and 200
pip stop.

#2) Commodity Crunch Time by Adam Button

The commodity super-cycle got underway in 1999. It was an epic run that reshaped the
global economy and coincided with the rise of emerging markets.
It survived the global financial crisis but couldnt last forever. Global
growth has hit a speedbump and commodities are over-extended.
The problem is that commodity busts are inevitable.
Five years ago investors and executives were making decisions about
developing mines that are just beginning production today. They couldn't have possibly
foreseen the way prices of commodities would collapse.
Now that the massive startup costs have been spent, there is no turning
back. The billions spent developing resources are gone and the only thing to do is
pull raw materials from the earth and try to recuperate as much as possible.

Operating costs are relatively low in mines once the holes are dug. The
all-in cost for building a copper mine might be $3-4 lb but the operating cost is $1-2.
So even at the current price of $2.05 it makes sense to keep operating.
Four reasons to keep producing
Even if prices go slightly below operating cost it still makes sense,1)
Prices could rebound 2) To restart production later requires re-hiring an entire
workforce 3) Miners gotta mine. If you're the CEO of a mining company, you don't get
paid for shutting the company down 4) If you hold out long enough, your competitors
will shut down and prices will rebound.
In oil its playing out in the headlines. OPEC is continuing to produce in
the hope that it will break US shale or curb investment elsewhere.
Where it's headed .
Miners will continue to extract raw materials and flood the market
below where operating costs match profits and until producers are starved out and
have to shut down. The economics are different in every commodity but years of
supply are still in the pipeline.
Canada is woefully oblivious to the pain on the horizon. Despite a new
government, new promised spending is minimal. The housing market is vulnerable
and the investment capital that cushioned Canada during the crisis wont arrive this
time.
Late in the year the Bank of Canada outlined a crisis playbook including
QE, forward guidance and negative rates. Expect them to dip into it in 2016 and
smash CAD lower in the process.
More broadly, the scope of the commodity carnage will catch markets
off guard and trigger a flight to safety that boost the yen as the BOJ grows
increasingly shy about deploying more stimulus.
THE TRADE:
Sell CAD/JPY at spot (half). Sell second half at 0.9000. Target 0.8000. Stop at 0.9400.

#3) EURGBP Trade for 2016 by Mike Paterson

Forecasts are a game of second-guessing that the market seems so keen on
nowadays but here a few thoughts on what might play out next year
Firstly I dont think interest rate differential is going to be so
crucial in 2016 as 2015 because the ECB has limited easing capacity and BOE
wont be putting up interest rates in a hurry any time soon. This will nullify
much of the pre-empted EURGBP plays of this year which we are starting to see
unwind currently with solid demand around 0.7000.

I may be the continuing rally-seller on GBPUSD but I have been a more cautious
pound bear on EURGBP given the ECBs action and rhetoric throughout the year.
The last ECB meeting and lack of action has given markets a bit more to think
about and rightly weve seen 2015s bearish trend reversing as the year comes
to a nervous close

US FOMC action or lack of it should have minimal impact on this pair in its
own right and I anticipate EURGBP making a steady return, albeit with a few wobbles, toward
0.7400 initially as this current demand continues. Thereafter we dont have a lot in its way
before testing 0.7600 and then 0.7800 but 0.8000 may prove a step too far, fundamentally
and psychologically
UK GDP has seen a disappointing end to the year that started full of optimism
( for the bulls at least ) with Q1 posting quarter-quarter gains of +0.4% then rising to +0.7% in
Q2. Q3 has seen a retreat to +0.5% with a similar reading anticipated for Q4. Rising imports
and falling exports highlight a problem for the UK, as others, with global slowdown and
uncertainty playing its part.
UK services PMI data is crucial given that sectors dominating impact on GDP in the UK and,
encouragingly, is ending the year with a November reading of 55.9 the highest since July.
Similarly the composite and new orders data offers further hope for the UK heading into
2016.
CONTINUED

CONTINUED

However disappointing construction and manufacturing data continues to weigh on the chances of
a sustainable economic recovery as both government and BOE would wish. November construction PMI came in
at 55.3, the lowest headline since April and the slowest pace of growth for over two years .There was slowing
growth seen across all three sectors, housing, commercial and civil engineering. Manufacturing PMI came in at
52.7 vs 55.2
Eurozone GDP has seen a similar end to 2015 posting +0.3% in Q3 versus +0.4% in Q2 but we
should see some improvement in 2016 if the effects of the ECB monetary easing are kicking in as hoped for by
Draghi & Co. In any event the pressure from Germany not to ease further is plain to see and that should help to
stabilise the euro relatively speaking.
Newly found funding currency status for the euro could be a blessing or curse depending on the Fed
interest rate hike impact on equity markets, but if we see further falls then a flight back into the euro will be
definitely in play. Of course the reverse is true but my gut feeling still tells me to sell equity rallies
So in conclusion EURGBP to remain underpinned above 0.7000 at the very least with a good chance
of making solid gains with the obvious all bets are off rider should a) ECB ease again or b) BOE hikes earlier than
anticipated. Even so I see limited downside potential.

#4) Cables Road to Travel in 2016 by Mike Paterson

Longer-term readers of ForexLive will know Im not one for
making forecasts, or pre-empting the fact when it comes to data or central
bank decisions. Not because Im scared of falling flat on my face (Ive done
that enough times in my career) but because essentially my Interbank,
market-making, background has given me a shorter-term bias in my trading
and strategies and guess work has never been part of that.
Thats not to say though that I dont take a longer term core
view albeit with reduced position size and the price action in 2015 has more
than suited my on-going bearish mantra of Keep Calm, Sell Rallies given the
rise to 1.5930 and fall to 1.4895 after a solid 7 months of decline to 1.4567
during which I was also bearish.
Fundamentally, which is always at the heart of my trading
view, we have a few unknowns on the horizon each of which could play its
part in undermining GBPUSD in the months ahead.
First up in the immediate mix is of course the widely expected
US interest rate hike from the FOMC this week. In my usual contrarian
manner though I have not completely ruled out Yellen & Co having a few cold
feet again as that pressing of the start button for lift-off brings with it so
many unknowns.
As and when they do hike I dont see pressure on the BOE to
follow any time soon. Indeed Carney and other members of the MPC have
made it clear they will be making their own decision based on the UKs
economic performance and the ability of its population to withstand the
after-shock. I have long held the view that a) the BOE are in no rush to hike
and b) the dangers of a hike are still entrenched.
The BOE has been noticeably coy about the pounds strength
of late and, although weve seen declines in GBPUSD, sterlings TWI has risen
strongly in 2015 and still remains very much underpinned. Expect that impact
on the UK economy to come back into focus next year.

The other big risk event is widely tipped to be hitting the markets next
Summer as the EU referendum rears its head, with the bookies currently pricing in a 40%
vote to leave. UK PM Cameron is still trying to seal a deal on reforms and is yet to present
his case but the rising amount of potential No voters presents a real threat to GBP
stability. Markets hate uncertainty and this event has the jury well and truly out right
now.
Data wise UK GDP is finishing 2015 in retreat posting quarter-quarter gains
in Q3 of +0.5% after +0.7% in Q2, while disappointing construction and manufacturing
data continues to weigh on the chances of a sustainable economic recovery as both
government and BOE would wish. November construction PMI came in at 55.3, the
lowest headline since April and the slowest pace of growth for over two years with
manufacturing PMI came in at 52.7 vs 55.2

CONTINUED
Above that we will need to review the subsequent price action but
should the UK catch a bullish wave then a test of the 2015 highs at 1.5930 cannot be
ruled out. I dont, however, see much more of rally above there with 1.6000 proving a
step too far
As ever, trade what you see. Therell be plenty to focus on as the year
unfolds.

UK services PMI data is crucial though given that sectors dominating

impact on GDP in the UK and, encouragingly, is ending the year with a November
reading of 55.9 the highest since July. Similarly the composite and new orders data
offers further hope for the UK heading into 2016
So where from here (1.5140)?
Well, theres undoubtedly less value to selling at current levels but thats not to say
we should rule out a test of this years lows below 1.4600 which could be triggered
by a break of technical support around 1.4890. At the risk of sounding myopic I
remain a seller of rallies with 1.5500-30 still very much providing a ceiling.

#5) Life after lift off by Ryan Littlestone

It will be going on for 10 years since the last time the Fed hiked rates. Theres
probably more than a few of you who wont have seen a US hike in your trading
lifetime

Its taken nearly 2 years to get to this point from when the Fed
started tapering and QE is going to stay in the financial system for many years yet,
and thus an accommodative will remain
An increase in rates is usually a signal of an economy heating up. In
this case the economy is lukewarm at best.
What is going to happen to the dollar?
My proxy for dollar trading is always USDJPY. Have no doubt that
the bull run in the dollar has been very strong. 2015 will mark the fourth yearly
gain on the trot and that hasnt happened ever in the last 50 years.

One of the reasons has been trading the Fed getting back to this very point.
For a lot of the market this IS mission complete, and the Fed should be entering a period
when the economy is ticking along nicely and rates are used to keep things steady
Will this mean the run is over? Not at all, as the Fed will want to raise a few
more times. The economy will need to oblige though, and thats where we get our trading
opportunities in the year ahead. If we look at the economy over the last couple of years, and
the state of play globally, right now the US economy is unlikely to go into overheat mode
anytime soon. In most cases it will do well to stay in lukewarm mode.

CONTINUED
The path of the dollar will go in lockstep with the path of rates,
and that will mean that any further rises in the dollar will be gradual. That will
mean that we will see some prolonged periods of consolidation. Only if we see a
real pick up in the economy will we see the type of explosive moves in the dollar
that match some of those over last four years
If the script for the dollar is going to change then we as traders
have to change with it. Weve been spoilt for volatility over the crisis and after 7
years things will settle down. Jumping into a dip and waiting for a 300/400/500
pip jump may be a thing of the past, unless you fancy waiting a long time. The
great thing about this pair though, is that when it ranges, it ranges very well, and
for long periods. Finding those edges early will give us the best returns
For other dollar related pairs the main millstone of Fed rate hikes
will be removed and currencies will start adjusting more to their own
fundamentals, rather than with one eye on the Fed. That will bring us
opportunities to see some big gains in other currencies
The theme for 2016 will be waiting for the next hike, and trading
the data that may cause the Fed to go again. This year wont all be one way
traffic. More attention will be paid to worse numbers and they wont be brushed
off as easily by the market as they were in 2014/15. The higher the Fed rate
goes, the greater the margin grows for the Fed to act if the economy turns
south, and so the greater the emphasis grows on the dollar moving in both
directions equally.
Cut to the chase Ryan, Whats the trade?
You know picking currency levels or targets out of the hat is not my game, and is
pure folly, so here are some scenarios to look out for in 2016 that can bring us
the bigger bangs in the buck

For the bulls;

Look for the economy to gather pace
Listen to the Fed if they grow more hawkish
Be on guard for increased talk of draining the excess liquidity and reducing the
balance sheet. This will be a big vote of confidence in the economy and financial
system that it can stand on its own two feet without the help from the Fed
Watch for a pick up in global growth and key countries like Japan and China
For the bears;
If the economy stutters or turns lower
Pay attention if the Fed remains dovish between hikes
If it rises, be alert for greater moaning about the strength of the dollar
Watch for global growth remaining weak
Be on the look out for Japan if they start going backwards. Theyre up to their necks in
QQQQQQE and doing more may scare the market more than soothe it
One USD trade Im going to look at in 2016 is shorting USDCAD.
While its been in the whipsaw of oil prices it will benefit from any decent
economic pick up in the US. A stabilising oil market and a pick up in growth and inflation
at home could quickly turn the BOC hawkish, and they tend to turn in shorter circles
than the Fed
Overall Im going to be looking from the short side in the dollar, at least
early next year. Right now I see no reason why the Fed will jump to 3% rates anytime
soon and the economy doesnt warrant it
The dollar is king and may still show signs of its regality, just dont expect
it to break any land speed records in 2016
.

#6) Draghi to remain King of Europe in 2016

but which one? by Ryan Littlestone
Theres no point in doing QE if it doesnt work. Draghi and the ECB say it has been
and that could put them in a tough position through 2016. If the European economy
picks up further then the market is going to start thinking that QE wont go the
distance. A lot still needs to happen, most importantly inflation rising, but if it does
then the ECB faces a big fight in keeping market expectations on their side
So which King will Draghi be in 2016?
King Midas

Everything he touched turned to

gold, the myth states. Draghi could be the man
whose policies turned the Eurozone economy to
gold 2016
By virtue of its nature, its
unsurprising that the 19 headed beast that is the
Eurozone has lagged other single headed
creatures in turning around its economic woes.
While one major central bank is tightening the
ECB are still going hell for leather on easing.
Compared to others they are behind in their
recovery but Draghi will hope that the green
shoots theyve seen over the last year or so
develop further and faster as QE makes its way
into the economy. Weve already heard Draghi
mention that the economy is doing better so the
and thats a big shiny yellow signal

King Canute
Often misinterpreted as
a story of a King trying to show power
by challenging the tide of the sea, it was
actually the other way around and the
real message was that no man, no
matter what his perceived power, had
no real power at all.
If Draghi starts off as
King Midas, at some point hes going to
face the possibility of turning into King
Canute (or Cnut the Great for the
pedantic out there). If the Eurozone
recovery picks up speed then Draghi
has a big job on his hands managing the
market reaction.
Weve had the perfect blueprint from the Fed on how a market reacts when a central bank
starts to tighten after big easing. Inflation is the number one mandate but the ECB wont be
able to ignore the rest of the economy if it outperforms prices next year, and the market will
start making up its own mind. The Euro may have fallen over 3000 pips from the 2014 highs,
but I always get the feeling that if given a proper opportunity, it would rip back higher in an
instant. With the market heavily short, that risk is even greater.
If the Fed projects itself well for 2016 then ECB will become the big game in
town, and that means the risk to shorts will increase tenfold. If the economy is on the
markets side then thats a tide that Draghi will try to hold back for as long as possible, but
might still end up with wet feet
CONTINUED

CONTINUED
King Henry VIII
Not known for being easily satisfied was
the former King of England. The ECB are rotating through
their QE tool box like Henry went through wives. The
promise to do more if necessary casts its shadow across
almost every governing council members speeches. Are
they really ready to do more?
The move in Dec 2015 was more tinkering
around the edges than sticking another mortar in the
tube. For all the talk at the meeting the ECB arent adding
a single cent extra to QE and, while moving the goalpost
to 2017 could add 360bn onto the balance sheet,
actually getting there is a different ball game altogether.
The ECB may promise to pump until 2017, or whatever it
takes but in reality they would want to see some reward
for their efforts. If we get six months into 2016 with no
real improvement then the ECB are going to be facing
some stiff questions like; Why isnt QE working? Will the
ECB need to extend again? Have they run out of tools?
Draghi will be walking another very fine line
between QE success and QE failure. Despite forecast
predicting mild growth, if it doesnt pick up to at least
close to the 2-2.5% range before the end of 2016 then the
market will get nervous that QE isnt working. What will
be even more dangerous will be if inflation expectations
start falling as that would put the deflation fears back
front and centre.

Everyone has skirted around the deflation issue but if the

water (QE) isnt putting out the fire (low prices) then Eurozone could be
in real deflation trouble. In those terms the Euro might find the fabled
parity but by then it wont be good news for the ECB
What will we get to eat at the Draghi Royal banquet in
2016?
Different gloves fit different hands and the same goes for
QE in Japan, the US, the UK and Europe. The end result is supposed to be
the same, that prices stabilise and the economy heals itself and grows.
Thats the end game, not building balance sheets. The Fed got scared
when Bernankes unlimited looked like it might need to be unlimited
and while Draghi & Co face that prospect also, in a heartbeat they would
rather be talking about tapering towards the end of 2016, than doing
more QE. 2016 for the euro its going to be all about the data, whereas in
2015 its been all about what the ECB would or wouldnt do, almost
irrespective of the data. Europe has lagged the US and UK for recoveries
but now is the time it needs to play catch up, and the direction of the
euro will depend on it.
The euro trade looks to be a simple one for 2016
Shorts are still heavy
The Fed rate trade is out in the open
The ECB have made the next QE play and acknowledged the pick up in
the economy
On those simple factors I dont see any reasons to short
the euro so Im going to look at the long side in 2016. Im still short
EURGBP and Im still looking for the BOE to hike to take profit in that
move, and then Im going to be looking for longs. The trade isnt yet
screaming BUY ME! BUY ME! but the fact its not screaming sell me
anymore means its time to change direction and look for the
opportunities and levels to go long

#7/8) Year of the Yen by Eamonn Sheridan

The great thing about 12 month trade-ideas are they give
everyone something to laugh at in 12 months time.
The worst thing about 12-month trade ideas; where do I
start?
The year is about to tick over from 2015 to 2016. If that has
significance for your trade ideas, who am I to argue with you? But for me,
nope, my trading doesnt run along calendar dates (except where they
might coincide with an important data release or central bank meeting).
And a trade idea good for 12 months? I can see the benefit
of having a theme, or a roughly sketched out view of where something
might go, but a solid, unchanging trade idea for the next 12 months,
disregarding the possibility of change and developments? Nope, not my
cup of tea at all.
But hey, I dont wanna be the Christmas (or New Year)
Grinch, nor do I want to deny anyone the joy of looking back at this in 12
months time and having a good belly-laugh. So, let's make the best of it!
YEN Strength
Ill start with a theme first, and then move on to a specific
trade idea; bear with me.
Yen strength. Yep. For 2016 I am looking for net yen
strength. Check out this chart of (for example) USD/JPY, and the huge
We all know the story, PM Abe promised big changes (the
currency started moving prior to Abes election, yes, markets discount the
future; we knew what was coming), which manifested most quickly and
easily as very aggressive Bank of Japan easing, leading to yen weakness.
move from 2012.
So, why am I picking a top now? I was hoping you wouldnt ask that, at
least not in so many words as I hate the idea of picking a top, or a bottom
for that matter. I much prefer going with a trend than trying to select the
turning point. But, well, here we are with me trying to pick a turning point.

Its the Year of the Yen by Eamonn Sheridan

CONTINUED

But why?
The news and views flow out of Japan in the final quarter of 2015 or so
has turned to an improvement (on balance) in both the inflation trend (inflation is
picking up) and economic data generally (yes, not all of it, I agree, but on balance its
improving).
Also, political pressure is mounting to halt the yens slide. Check out the
chart to the left (from November 2014 to December 2015), at least against the USD the
yen has indeed stopped falling, its been sideways (116-125.50, give or take a few points)
this year and more.
Furthermore, remarks from Bank of Japan Governor Kuroda and other
members of the policy board have been moving away from further easing, which is
another point in favour of the yen.
OK, I know right now you are nodding along and saying Right on,
Eamonn (OK, maybe youre not ... but lets just go with that for a moment). But where
might I be wrong?
This is me hedging this idea ... saying I might be wrong if. I know a lot of
people object to the ifs and buts. For example, I think that if China keeps weakening as
it has been doing in recent months it will be a big negative for Japan (and its exports)
and that could very well prompt further BOJ easing and hence a weaker yen still.
Some readers will be saying, right now, Aha, Eamonn is just giving himself
an out on his view! And, you know what, they are right! I am.
Remember how I said having a firm view for 12 months (hey, this applies
to any time frame) does not allow any change or development? The whole point of being
at somewhere like ForexLive is monitoring markets for change and development, not to
set something in concrete and go away. Its why we are here 24 hours a day during
market hours!
So, yes, watch out for developments that can nullify this view.
Yen strength then, thats the theme. Now for the specific trade idea, for
which I am going to flip that them on its head. ... I am looking for at a long USD/JPY idea.
Yes, while I am looking for general yen strength to unfold over the coming year, I reckon
there is an opportunity to counter-trade that setting up, specifically in USD/JPY.

Its the Year of the Yen by Eamonn Sheridan

CONTINUED
Its to do with the so-called Kuroda line (see chart on previous page),
which is an idea that the Japanese administration and the Bank of Japan have a level in
mind beyond which they dont want the USD/JPY to climb. To be honest, I dont think
there is a firm (or even a non-firm) line, and there will certainly not be intervention to
defend a level. But there is an idea out there that 125 and thereabouts is the line, that if
USD/JPY goes above 125 we can expect jawboning to increase to push it back down (that
would be the plan, anyway).
The line is around the 125 big figure, say 125.50. There are going to be a
lot of sellers around 125.00 looking to get short USD/JPY to lean against the line, which,
for me, sets up a huge target for a stop loss run above 125.50.
So, specifically ...
#7 - Sell USD/JPY around 125.00 for a quick short play, and
#8 - Get long for (at least) a spike move higher if we breach 125.50.
The test of the level could come as early as the FOMC meeting in December ... so it may
not be a 2016 idea at all (damn, I might have to write up something else!).

My Top Trade Ideas for 2016 by Greg Michalowski

Going into 2016, it is hard to ignore the US dollar once again as the
currency to beat. The Fed will be leaning more toward tightening after 9 plus years since
the last action higher. That alone, should put the greenback ahead of all the other major
central banks including the ECB, Swiss National Bank, Bank of Japan, Reserve Bank of
Australia and Reserve Bank of New Zealand and the Peoples Bank of China The Bank of
England, once thought to be right behind the Fed, is not looking like it is in a hurry
anymore either.
Having said that the long dollar trade has gonewell a long way already.
In 2014 it was the strongest of the majors. In 2015, it was once again strong like bull but
with most of the gains coming against the commodity currencies. Nevertheless, it still
rallied another 9.59% against the EUR.
Even so if we are finally getting a tightening, I will give the benefit of the
doubt to the greenback, but understand, it could easily go the other way if it is a buy the
rumor, sell the fact year.
So where might the dollar benefit the most? Lets dig in.

#9) Three years is a charm. Sell the EURUSD

The EURUSD could head down to as low as 0.9600 in 2016
from the current level of 1.1000 if all the right moves play out. If not look
for the 1.0175-1.0200 area to limit the fall.
The main catalyst would be the divergent central bank paths
for the Fed and the ECB. Simply put, the Fed is expecting to continue
tightening in 2016 while the ECB is still thought to be a long way off, and in
fact may enact further easing measures to help stimulate inflation toward
the 2% target.
In the US, I do not believe the market is expecting a more
active liftoff. However, if the data in particular the US employment data
continues to show job gains in the magnitude of >150K, the market will be
forced to think the Fed will need to tighten sooner rather than later. In
fact, the Fed might feel obligated to do so, especially after they:
Started the liftoff from abnormally low rates. Rates will continue to be
abnormal even at 1% and perhaps even to 2%,
Expressed the opinion that inflation was likely to increase once the
transitory effects from lower oil prices started to ebb. That can keep the
Fed tightening even if inflation and transitory effects are not rising, or
lead to more tightening if oil does bottom, and
Said a further delay might require quicker tightening down the
road. How do you judge when that idea is no longer relevant?
If those reasons were good enough for a rate rise in
December, they should remain good enough reasons for another rate rise
in March (there is no February meeting). That path should/might
surprise the market and keep the EURUSD pressured. Who knows, if the
employment numbers come out at 250K in January, with lower
employment rate and higher wages, the market might even think the
January 27 meeting is a live one. Now wouldnt that be an interesting
beginning to the liftoff that no one expects?

What about the ECB?

While the Fed has chosen to ignore inflation and instead focus on employment, the ECB
will still mainly be focused on inflation and in particular, getting the inflation rate to 2%. There was
already one period in 2015, where the market felt that EU inflation might swing to deflation. That threat
was avoided.
However, if there is another dip in inflation from lower oil/commodity prices, it will likely
keep the pressure on the ECB to keep doing all it can to stimulate inflation (NOTE: the ECB will do all
they can to not say avoid deflation, but the market might use those words for them).
Is the path going to be a smooth one? It never really is - especially after the pair has already had a pretty
good run from a May 2014 high near 1.4000.
As we have seen in December, the path lower in the EURUSD could be mired with potholes
that could derail the trade. What might hurt a smooth run to parity and below?
Stock market sell off. The Fed has given in to shaky stock markets in the past, and so we can assume,
they would do it again.
Wage inflation does not materialize. The thinking is that the steady downward trajectory in the
unemployment rate, will eventually lead to wage inflation and with it increased inflation
expectations and inflation. What if it does not show? What if it is all about the highly technical getting
raises but the lower end mired in wage stagnation. Or jobs are just low paying ones.
Jobs growth slows. If the job gains start to fall below 100K or if the unemployment rate ticks up to 5.3%
or higher, that would derail EURUSD weakness.
Global concerns. China, emerging economies getting too weak and starting a domino effect that slows or
stops the Fed. The IMF is not so keen on Fed tightening. The Fed have already been swayed by
international headwinds, in the past. Can it happen again (especially if debt markets start to show big
cracks with more defaults)?
The effects of the depreciation of the EUR, lower oil prices, EU QE stimulus lead
to above consensus European growth. The economies are off the lows. If that momentum
continues and the picture gets rosier, the EURUSD can rise from the surprise.
Republicans are forced to nominate Donald Trump as their candidate. I get the feeling the international
markets might not look at that too favorably. China tariffs might be job one for President Trump. What a
mess that would be.
More terrorism. More fear = lower consumer sentiment
Unwinding of the EUR carry trade

CONTINUED
Those are a lot of things that can go wrong.
Nevertheless, a market that is not surprised should not have a
problem getting to parity (why not?). A break of that level will have traders
thinking 0.9600. It is the surprises that surprise and cause the markets to not do
what you expect. So although this may be one trade that is popular, proceed with
caution. The train can get derailed especially when too many traders are on it.
So what do the charts show? Technically, a drive to parity and beyond
in 2016 will actually need to get below a key area near the 1.0175-1.1200 first (see
red horizontal line in the chart). In fact, this area may be the extent of the selling, if
it cannot be broken and stay broken. So put a big fat line in the sand there.
What is the significance? The area corresponds with swing highs from
2002 before the surge higher near the end of the year. It is also where a lower trend
line connects lows from 2008. This may stop the pair, especially if the one of the
potential surprises arises. A break below will help to drive the price to parity and
beyond.
Are we going lower right away?
Be aware that the current market may potentially have a 1st Fed rise hangover that
could see more of a squeeze higher. A move above the 200 and 100 hour moving
average at the 1.1035 and 1.1057 level respectively, should not be ignored. There
should be a move higher to the topside trend line at 1.1225-50 on the daily chart
(connects highs from August, and October 2015 see lower chart). Patient sellers
should wait for the this area. If it goes above, get out. Let it get the shorts out, but
look to sell on a break below again. Alternatively, wait for the rebreak of the 100 and
200 day Mas. They will play a key role on any downside move.

#10) The China transition is not over by Greg

Michalowski
Buy USDCNH. Current Price: 6.54
This next trade is more of a fundamental play. Buy USDCNH.
The China economic transition should continue in 2016 and lead to
slower economic growth. This dynamic along with a freer flowing yuan should lead
to a steady increase in the USDCNH (offshore).
It is hard to suddenly put on the brakes from one type of economy
focused on building infrastructure and exporting, to one based more on domestic
purchases and a more service based economy. There will likely be job dislocation
and retraining that needs to be done. That does not happen overnight. In addition,
it is my guess, that the environmental issues within China are a major reason for the
transition and that is a multi year problem, that will require lots more transitioning
in the way things are done. That will likely include more regulation that will have a
further slowing impact on the economy. As I result, I expect the overall transition
will take longer than expected and should lead to the Peoples Bank of China (PBOC)
continuing to stimulate in 2016 and depreciate the yuan.
Also of importance is a freer floating yuan. With the US economy
moving in the opposite direction vs. China, and the Fed looking to tighten, the PBOC
would need to intervene if it were to maintain a peg. In other words, it would
need to buy yuan which is a drain of reserves from their economic system. That runs
counter to what they are trying to do i.e. stimulate.
As a result, allowing the yuan to float more freely and lower - would
allow the stimulus to work more efficiently. This should help to weaken the yuan
over time and seems to be what the PBOC has started to implement in November
and into December. I would look for that to continue in 2016.
It is tough to apply technicals to a currency that is quasi influenced by
the central bank. Also, you can expect the process to be slow. However, in 2015,
the pair moved higher by about 6%. A similar 5-6% move would take the price from
6.54 to 6.88-6.93. Is that doable? Sure.

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