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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.
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.
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.
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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.
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.
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
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
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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.
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.
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.
Thank you to
Dukascopy for
sponsoring the
2016 ForexLive
Trades of the Year.