Technical Analysis Ahead

August 11, 2016

Technical Analysis Time

The end of July left us with a relatively mixed picture when it comes to major currency pairs – euro gained some ground against the dollar, while pound sank further, meanwhile Aussie and Kiwi both managed to close higher against the USD but in the same time, Canadian dollar failed to do so and last but not least, Japanese Yen too managed to inch further but was never able to close below the all important 100.00 level, not even on daily bases. While some would call it an absolute mess, I’d say it is more or less a typical summer trading environment, where there’s little consistency across the market and correlations are things that simply don’t exist. What makes the whole situation even more interesting is the fact that majority of high impact data releases from the U.S for example, are already behind us which means that August may turn out to be a perfect month for those who rely heavily on technical analyses.

Europe’s Non-Performing Loans

While the mixed direction in the major pairs may last for quite some time, there are plenty of “developing situations” that could essentially clear the air a bit. First of all, the problem of non-performing loans in the Euro area hasn’t gone anywhere and the fun part is that it’s not going disappear itself, regardless of how much or how little media coverage it gets. The fact that a decent number of Italy’s, Spain’s and Portugal’s banks are in deep trouble, starting with Monte dei Paschi, is not going to change unless the source of the problem is eliminated. However, getting rid of that much bad debt without using taxpayer’s money is relatively tricky which means that sooner or later the ECB is going to have to deal with it one or in another way.

monte paschi

Strength in Commodity Currencies

From the commodity bloc, Aussie and Kiwi are both worth tracking ahead of September. RBA already made its move by cutting the Cash Rate by another 25bps but it had an opposite effect on the currency as Aussie has been very well bid against the USD since the cut. RBNZ on the other hand is preparing to lower the rates once again but the question is how desperately do the need a lower exchange rate because they are also watching the markets and can see it very well, that a 25bps cut by RBA had no effect at all. Previous meeting’s statement issued by the RBNZ was pretty clear regarding the NZDUSD exchange rate, hence there is a very good chance that another cut in the Official Cash Rate is well priced-in and the outcome may turn out to be very similar to the situation we can see in AUDUSD today. Of course, everything changes when the RBNZ decides to be a bit more aggressive than we currently expect.


FED Still Insisting on Higher Rates

Meanwhile we shouldn’t forget the Federal Reserve. As we all know, they are still planning (or at least they are trying to leave such an impression) to increase the Federal Funds Rate at least once in 2016 and judging by the recent Meeting Minutes, September is again a “live meeting”, meaning that the members of the FOMC may actually increase the FED’s fund rate. Although, they’ve been telling the same story for the better part of the year now and the number of market participants who actually believe them is close to zero, we cannot exclude a rate hike scenario entirely but of course we have to keep in mind that the chances for that are relatively low. In general, as the FOMC meeting gets closer, rumors regarding rates should become louder and hence we could see rather abnormal price action as a result.

All in all, it looks like August is going to be a classical “warm up” month before the real events start to shape the trends that should take us all the way to the end of the year.

Capital Properties FX